Service tax classification and abatement cannot be denied merely for capital goods credit, though wrongful credit attracts interest.

Service tax liability had to be determined on the actual nature of the contracts and billing records, because the record showed that different portions of work were separately classified and taxed under Site Formation Service, Commercial or Industrial Construction Service, and works contract service. Abatement under Notification No. 1/2006-ST could not be denied merely because Cenvat credit on capital goods had been taken, and the matter required fresh examination of service classification and tax payment. Wrong availment of excess Cenvat credit on capital goods, however, attracted interest for the period of wrongful availment until the credit became available or reversible. The dispute was remanded for reconsideration.

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Issues: (i) whether the demand of service tax was sustainable when the assessee had discharged tax on the value of services under different heads, including Site Formation Service and Commercial or Industrial Construction Service, and whether abatement under Notification No. 1/2006-ST was available; (ii) whether availing 100% Cenvat credit on capital goods, though only 50% was permissible in the initial year, disentitled the assessee from the abatement and attracted interest.

Issue (i): whether the demand of service tax was sustainable when the assessee had discharged tax on the value of services under different heads, including Site Formation Service and Commercial or Industrial Construction Service, and whether abatement under Notification No. 1/2006-ST was available.

Analysis: The contract documents and invoices showed that part of the work related to Site Formation Service, on which tax had been paid under that head, while other contracts and bills related to Commercial or Industrial Construction Service and works contract service, on which tax had also been discharged. The record indicated that the adjudicating authority had treated the entire activity as Site Formation Service without properly examining the underlying contracts and billing pattern. The abatement notification was available for the taxable construction service, and the reasoning also noted that the assessee had not availed credit on inputs or input services. The circular relied upon clarified that credit on capital goods did not by itself defeat the abatement claim under the notification.

Conclusion: The demand required reconsideration and the assessee's claim to abatement could not be rejected on the stated ground.

Issue (ii): whether availing 100% Cenvat credit on capital goods, though only 50% was permissible in the initial year, disentitled the assessee from the abatement and attracted interest.

Analysis: The excess credit on capital goods was treated as wrongly taken for the period until the next financial year, even though the balance credit became available subsequently. The record did not support denial of the abatement on this ground alone, but the wrong availment of credit during the relevant period gave rise to liability for interest for the interval between availment and the date on which the balance credit became available or was reversible.

Conclusion: The assessee was liable to pay interest on the wrongly availed portion of Cenvat credit, while the abatement issue was not finally decided against the assessee.

Final Conclusion: The matter was remanded for fresh adjudication after proper examination of the contracts, billing records, service classification, and tax payments, with the interest consequence on wrongly availed capital goods credit remaining against the assessee.

Ratio Decidendi: Abatement under a service-tax exemption notification cannot be denied merely because Cenvat credit on capital goods was taken, and service tax liability must be determined on the actual nature of the contracts and services rendered; however, wrongly availed Cenvat credit attracts interest for the period of wrongful availment.

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