Works contracts escaped service tax before 1.6.2007, and abatement could not be denied for excluding recipient free supplies.

Works contracts were treated as not liable to service tax for the period before 1.6.2007, with composite contracts covered by that settled principle; only pure sweat contracts required separate examination. The benefit of abatement could not be denied merely because the value of free supplies made by the service recipient was excluded from the assessable value, as assessable value had to be determined on the basis recognised in law for such contracts. The demand was therefore unsustainable for works contracts during the relevant period, subject only to fresh scrutiny of any contracts found to be pure sweat contracts.

---

---

Issues: (i) whether works contracts were liable to service tax for the period prior to 1.6.2007; (ii) whether abatement could be denied merely because the value of free supplies made by the service recipient was not included in the assessable value.

Issue (i): whether works contracts were liable to service tax for the period prior to 1.6.2007

Analysis: The legal position was treated as settled that works contracts were not exigible to service tax before 1.6.2007. The contracts described as composite contracts fell within that principle, and only a distinct category of contracts that were pure sweat contracts and did not involve supply of goods required separate examination.

Conclusion: No service tax was leviable on works contracts for the period prior to 1.6.2007.

Issue (ii): whether abatement could be denied merely because the value of free supplies made by the service recipient was not included in the assessable value

Analysis: The benefit of abatement was held to remain available where goods were supplied free by the service recipient, and denial of abatement solely on the ground that such free supplies were not included in the value was not sustainable. The assessable value could still be determined on the basis recognized in law for such contracts.

Conclusion: Abatement could not be denied merely because the value of free supplies was excluded from the assessable value.

Final Conclusion: The demand was unsustainable in relation to works contracts for the relevant period, but the matter required fresh examination only for any contracts found to be pure sweat contracts.

Ratio Decidendi: Works contracts were not liable to service tax for the period prior to 1.6.2007, and abatement could not be denied solely because the recipient's free supplies were not included in the taxable value.

---