Composite contracts and service tax apply only to the service element after excluding goods value already taxed under VAT.

Service tax was considered in two contract categories: pure sale contracts and composite contracts involving supply of goods with installation activity. Where the entire contract value had already suffered VAT or sales tax, the goods component was treated as outside service tax. For composite contracts, only the ascertainable service element was taxable, after excluding the value attributable to goods; where VAT had been paid on the full contract value and no separate taxable service value remained, no service tax could be levied on erection, commissioning or installation. A demand reduction under management, maintenance or repair service was also upheld because it was recalculated from the contracts and the department's own reconciliation statement on a verified basis.

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Issues: (i) Whether service tax was payable on contracts treated as pure sale contracts or composite contracts involving supply of goods and installation activity under erection, commissioning or installation service; (ii) Whether the reduction of the demand under management, maintenance or repair service on the basis of the department's reconciliation statement was sustainable.

Issue (i): Whether service tax was payable on contracts treated as pure sale contracts or composite contracts involving supply of goods and installation activity under erection, commissioning or installation service.

Analysis: The contracts were found to fall into two categories. In the case of pure sale contracts, the entire value had suffered VAT or sales tax, and service tax and sales tax were treated as mutually exclusive. In the case of composite contracts, the adjudicating authority held that the contracts were in substance works contract services, with the service element to be determined after excluding the value of goods. It was also recorded that VAT had been paid on the full contract value, and the CBEC circular indicated that where the goods component is so evidenced and taxed, the balance alone represents service value. On that basis, no taxable value for service tax remained.

Conclusion: The demand under erection, commissioning or installation service was not sustainable.

Issue (ii): Whether the reduction of the demand under management, maintenance or repair service on the basis of the department's reconciliation statement was sustainable.

Analysis: The reduced demand was arrived at after scrutiny of the contracts and the department's own reconciliation statement. The adjudicating authority excluded the value attributable to goods where VAT or works contract tax had been paid and also accounted for service tax already discharged under another category. The reduced figure was therefore supported by the record and the demand was recalculated on a verified basis.

Conclusion: The reduction of the demand under management, maintenance or repair service was sustainable.

Final Conclusion: The revenue challenge failed in entirety, and the adjudicating order was upheld.

Ratio Decidendi: In composite contracts, service tax is chargeable only on the ascertainable service component, and where the value of goods has already been subjected to VAT on the full contract value, no separate taxable service value can be assumed without a discernible service portion.

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