Works Contract: Why It Is Not a Composite Supply Question

Works Contract explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

A contractor supplies steel, cement and labour to build a warehouse. Two elements, one contract, one price. The instinct is to run the composite supply test — is it naturally bundled, what is the principal supply?

Do not. Section 2(119) settles it by definition, and the bundling analysis never starts.

But the definition is narrower than most people assume, and everything outside it goes straight back to the ordinary analysis.

Section 2(119) defines a works contract as a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any IMMOVABLE PROPERTY, wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution. Schedule II paragraph 6(a) then declares a works contract to be a composite supply of services. Where the property is movable, it is not a works contract at all — and the composite or mixed supply analysis applies in the ordinary way.

The definition, element by element

Four conditions, all of which must be present.

1. One of the listed activities. Building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning. The list is exhaustive.

2. In relation to immovable property. This is the limiting condition and the one that decides most disputes.

3. Transfer of property in goods involved in execution — whether as goods or in some other form (that is, in an accreted or transformed state).

4. A single contract covering both.

Miss any one, and s.2(119) does not apply.

Why immovable property is the whole fight

The CGST Act does not define immovable property. Section 3(26) of the General Clauses Act, 1897 applies: land, benefits arising out of land, and things attached to the earth or permanently fastened to anything attached to the earth. Section 3 of the Transfer of Property Act, 1882 defines "attached to the earth" as rooted in the earth, imbedded in the earth, or attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached.

The working test the courts have applied:

• Degree and permanence of annexation — is it fixed, and how firmly?
• Object of annexation — was it fixed to make it a permanent part of the land, or only to steady it for use?
• Whether it can be dismantled and moved without destroying its character.
• Marketability after removal — can it be sold as a chattel once detached?

A plant bolted to a foundation for stability, dismantlable and re-erectable elsewhere, is generally movable. A structure built into the land, incapable of relocation without demolition, is immovable.

What follows from each answer

Immovable property → works contract. Schedule II paragraph 6(a) makes it a composite supply of services, whatever the material-to-labour ratio. There is no splitting, no VAT-era 70:30 deemed sale apportionment, and no argument that a materials-heavy contract is really a supply of goods.

The ITC consequence is severe. Section 17(5)(c) blocks credit on works contract services for construction of an immovable property, other than plant and machinery, except where the input service is used for the further supply of works contract service. So a contractor takes credit on its sub-contractors; the building owner does not. Blocked credit on construction →

Movable property → ordinary analysis. Fabrication of a machine, erection of a movable plant, repair of equipment. Run the composite supply test: is it naturally bundled, what is the principal supply? The answer might be a supply of goods, which changes both the rate and the place of supply. Identifying the principal supply →

Where the boundary actually gets litigated

• Erection of plant on a foundation — the classic case; turns on permanence and dismantlability.
• Lifts, escalators and HVAC installation — installed into a building, generally immovable.
• Pipelines and transmission lines — laid into the earth, generally immovable.
• Solar power plants — heavily litigated, with rulings on both sides; the mounting structure and the grid connection matter.
• Telecom towers — turns on the foundation and the ability to relocate.
• Modular or prefabricated structures — designed to be relocated, pointing to movable.
• Painting, waterproofing and repairs to a building — repair and maintenance of immovable property, so a works contract even without significant goods, provided property in goods passes.

Practical notes

• The place of supply for a works contract on immovable property is the location of the property — s.12(3) of the IGST Act — regardless of where the contractor or customer is registered. This alone often decides which State's tax applies.
• A contractor with sites in multiple States may need registration in each.
• Distinguish works contract from construction services in Schedule II paragraph 5(b), which covers sale of an under-construction unit by a builder to a buyer — different entry, different rate, different ITC regime.
• Where goods are supplied and installed under two separate contracts, the characterisation depends on whether the contracts are genuinely independent or artificially split.

Key takeaways

• s.2(119) applies only to immovable property — that is the gate.
• Schedule II paragraph 6(a) makes a works contract a composite supply of services by declaration.
• Where the property is movable, run the ordinary composite or mixed supply analysis.
• Immovable property takes its meaning from the General Clauses Act and the degree and object of annexation tests.
• s.17(5)(c) blocks credit except where used for further supply of works contract service.
• Place of supply is the location of the immovable property under s.12(3) IGST.

Read next

• GST on Works Contract: Rate, ITC and Classification
• Identifying the Principal Supply
• ITC on Construction and Real Estate: Restricted Credit
• Schedule II: Activities Treated as Goods or Services

Disclaimer: Positions stated as on 5 September 2026, based on ICAI Background Material on GST, Volume I (2026 edition).