Pre-2007 composite works contracts were not subject to service tax, making the demand unsustainable after denial of abatement.

Composite works contracts executed before 1 June 2007, involving both material supply and labour, were treated as outside service tax where VAT had been paid on the work orders. The dispute concerned whether such contracts remained taxable for the July 2005 to September 2006 period and whether denial of abatement under Notification No. 15/2004-ST could sustain the demand. Applying the Supreme Court position on the pre-1.6.2007 taxability of composite works contracts, the demand was found unsustainable because the contracts could not be subjected to service tax for that period.

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Issues: Whether composite works contracts executed during the period prior to 1.6.2007 were liable to service tax and whether the demand could survive after denial of abatement under Notification No. 15/2004-ST dated 10.06.2004.

Analysis: The contracts in dispute were composite in nature, involving supply of materials as well as labour, and the record showed payment of VAT on such work orders. Since the period involved was July 2005 to September 2006, i.e. prior to 1.6.2007, the legal position laid down by the Supreme Court on the taxability of composite works contracts governed the dispute. On that basis, such contracts could not be subjected to service tax for the relevant period, and the demand founded on denial of abatement was unsustainable.

Conclusion: The demand was not legally sustainable and the appeal was allowed with consequential relief.

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