Composite repair contracts: separately identified goods with VAT paid were excluded from service tax valuation.

In a composite repair contract for transformers, the value of goods separately identified in the invoices and contract, and on which VAT was paid, was held excludible from service tax valuation under Notification No. 12/2003-ST. The record showed that transformer oil and other materials were supplied and sold in the course of the repair arrangement, so their value could not form part of the taxable service component. The absence of detailed specifications in the contract did not prevent recognition of the sale of goods. The service tax demand computed on that value therefore could not survive.

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Issues: Whether the value of goods supplied during repair of transformers under a composite contract was excludible from the assessable value so as to deny service tax demand under Notification No. 12/2003-ST.

Analysis: The invoices and contract separately indicated the value of labour and the value of goods such as transformer oil and other items supplied during repair. VAT had been paid on the goods, and the record supported that the materials were separately identifiable and sold in the course of execution of the repair arrangement. Relying on the principle that goods used in execution of a works contract are deemed to be sold and do not enter the service tax levy, the exclusion claimed by the appellant was held to be legally sustainable. The reasoning of the adjudicating authority that absence of detailed specifications in the contract prevented recognition of sale was rejected.

Conclusion: The appellant was entitled to deduction of the value of goods supplied during repair, and the service tax demand computed on that value could not survive.

Ratio Decidendi: Where a composite repair contract separately identifies the value of goods supplied and VAT is paid on such goods, their value is excludible from service tax valuation and cannot be taxed as part of the service component.

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