Works contract valuation under VAT apportionment barred further service tax demand and related CENVAT credit denial.

In a works contract for supply, erection and commissioning of lifts, the valuation adopted by the assessee-service tax on 15% and VAT on 85%-was held to be consistent with Rule 2A(ii) of the Service Tax (Determination of Value) Rules, 2006, which recognises the VAT-based value for works contract service. Because the goods portion had already suffered VAT and the service portion was taxed on the accepted apportionment, no differential service tax could be demanded on a higher notional value. The related denial of CENVAT credit also failed once the tax demand itself was unsustainable, and both were set aside in favour of the assessee.

---

---

Issues: Whether service tax could be demanded on a higher notional percentage of the contract value when VAT had already been paid on the balance value in respect of supply, erection and commissioning of lifts, and whether denial of CENVAT credit on that basis was sustainable.

Analysis: The contract value had been split for tax purposes in a manner consistently followed by the assessee, with service tax paid on 15% and VAT paid on 85%. The dispute was governed by Rule 2A(ii) of the Service Tax (Determination of Value) Rules, 2006, under which the value adopted for VAT is relevant for determining the value of works contract service. The same issue had already been decided in the assessee's own case for an earlier period, and the reasoning adopted there applied equally. Once the value attributable to goods had been subjected to VAT and the service portion had been taxed on the accepted basis, no differential service tax demand could survive. The connected denial of CENVAT credit also could not be sustained after the demand itself failed.

Conclusion: The demand for differential service tax and the denial of CENVAT credit were unsustainable and were set aside in favour of the assessee.

Ratio Decidendi: Where the value of a works contract has been taxed by apportioning the contract between VAT and service tax in accordance with the valuation rules, a further demand on a higher notional service value is not maintainable.

---