Turnkey contract cannot be split for service tax where procurement margin is part of a composite installation transaction.

A turnkey contract for installation of a total energy system could not be fragmented to levy service tax on the margin earned in procuring components. The activity alleged as Business Auxiliary Service formed only one part of a composite transaction executed at the client's site and, in substance, was rendered by the assessee to itself rather than to the client. On that characterisation, the tax demand and penalties had no legal basis, and the impugned activity was held not taxable as Business Auxiliary Service.

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Issues: Whether the margin earned in procurement of components for installing a total energy system under a turnkey contract was liable to service tax as Business Auxiliary Service under section 65(19) of the Finance Act, 1994, and whether the consequential demand and penalties were sustainable.

Analysis: A turnkey contract cannot be split up and one part subjected to service tax. The activity treated as Business Auxiliary Service was only one component of the composite transactions undertaken for installation of the system at the clients' sites. If characterised as a service, it was in substance rendered by the assessee to itself and not to the client. The demand and penalties founded on that characterisation therefore lacked legal support.

Conclusion: The impugned activity was not taxable as Business Auxiliary Service, and the demand with penalties was unsustainable. The appeal was allowed.

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