Composite construction service, free supplies and prior credit reversal defeated the service tax demand and preserved abatement relief.

Composite construction activity involving supply of material was held not taxable under Construction Service for the pre-01.06.2007 period, and such activity was to be examined, where applicable, under Works Contract Service rather than the head adopted in the demand. The value of free material supplied by the service recipient was held not includible in the assessable value because it did not constitute consideration received by the service provider. Reversal of inadmissible Cenvat credit on input services before issue of the show cause notice did not defeat entitlement to Notification No. 01/2006-ST, so the abatement was available. On these grounds, the demand could not survive and the adverse order was set aside.

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Issues: (i) Whether construction services involving supply of material were liable to service tax under Construction Service or were classifiable as Works Contract Service. (ii) Whether the value of free material supplied by the service recipient was includible in the assessable value. (iii) Whether reversal of Cenvat credit on input services before issuance of the show cause notice entitled the appellant to the benefit of Notification No. 01/2006-ST dated 01.03.2006.

Issue (i): Whether construction services involving supply of material were liable to service tax under Construction Service or were classifiable as Works Contract Service.

Analysis: The dispute turned on the correct taxable category for composite construction activities carried out along with supply of material. For the period prior to 01.06.2007, composite works of this nature were not exigible to service tax under Construction Service. For the period after 01.06.2007, such activity was required to be examined under Works Contract Service, and the demand was not made under that head.

Conclusion: The appellant was not liable to service tax under Construction Service, and the activity merited classification as Works Contract Service.

Issue (ii): Whether the value of free material supplied by the service recipient was includible in the assessable value.

Analysis: Free supplies made by the service recipient do not constitute consideration received by the service provider in the manner contemplated for inclusion in gross amount charged. Such supplies are not reflected through debit notes, credit notes, or book adjustments, and therefore do not form part of the taxable value.

Conclusion: The value of free material supplied by the service recipient was not includible in the assessable value.

Issue (iii): Whether reversal of Cenvat credit on input services before issuance of the show cause notice entitled the appellant to the benefit of Notification No. 01/2006-ST dated 01.03.2006.

Analysis: The record showed that the credit taken on telecom services had been reversed along with interest before issuance of the notice. In such circumstances, the condition relied upon for denial of the abatement was not attracted.

Conclusion: The appellant was entitled to the benefit of Notification No. 01/2006-ST dated 01.03.2006.

Final Conclusion: The demand could not survive on any of the issues decided, and the impugned order was set aside with consequential relief.

Ratio Decidendi: A composite construction contract involving supply of material, for the relevant pre-01.06.2007 period, cannot be taxed under Construction Service, free supplies by the recipient are not part of the taxable value, and prior reversal of ineligible Cenvat credit does not by itself defeat the prescribed abatement.

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