Composite construction contracts taxable under works contract regime; abatement and limitation objections also failed.

Composite construction contracts involving both service and transfer of property in goods were not taxable as pure Commercial or Industrial Construction Service or Construction of Complex Service; after 01.06.2007, such contracts fell under the Works Contract Service regime, so the earlier classification-based demand was unsustainable. Denial of 67% abatement on the ground that free-supplied cement and steel were not included in the gross amount charged was also unjustified, because the value of materials supplied free of cost by the recipient was not required to be added for abatement purposes. The extended limitation period could not be invoked, as the assessee had filed returns and paid tax amid unsettled service tax classification and no suppression or wilful misstatement was shown. The tax, interest, and penalties were set aside.

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Issues: (i) Whether composite construction contracts were liable to service tax under Commercial or Industrial Construction Service / Construction of Complex Service, and whether they could be brought under Works Contract Service after 01.06.2007; (ii) whether denial of 67% abatement on the ground that free-supplied materials were not included in the gross amount charged was sustainable; (iii) whether the demand for the period December 2005 to March 2009 was barred by limitation.

Issue (i): Whether composite construction contracts were liable to service tax under Commercial or Industrial Construction Service / Construction of Complex Service, and whether they could be brought under Works Contract Service after 01.06.2007.

Analysis: The dispute concerned construction contracts involving both service and transfer of property in goods. The legal position was governed by the introduction of Works Contract Service with effect from 01.06.2007 under the statutory definition of works contract. For composite contracts, service tax under the earlier construction categories could not be imposed as if the contracts were pure service contracts. The later regime recognised taxation of such composite contracts under Works Contract Service, and ongoing contracts could move to that category after the new levy came into force. The demand under the earlier categories for composite contracts was therefore inconsistent with the settled legal position.

Conclusion: The demand under Commercial or Industrial Construction Service / Construction of Complex Service on composite contracts was not sustainable, and the classification issue was decided in favour of the assessee.

Issue (ii): Whether denial of 67% abatement on the ground that free-supplied materials were not included in the gross amount charged was sustainable.

Analysis: The abatement benefit had been denied because cement and steel were supplied by customers and were not included in the amount charged. The settled principle, as applied in the decision relied on, is that for the purpose of the abatement notifications, the value of materials supplied free of cost by the recipient need not be added to the taxable value. The exclusion of such value could not be used to deny the exemption benefit. Once the contracts were treated as composite works contracts, the abatement dispute itself lost force, but even on the Department's own footing the denial of abatement was unsupportable.

Conclusion: Denial of abatement was unjustified, and this issue was decided in favour of the assessee.

Issue (iii): Whether the demand for the period December 2005 to March 2009 was barred by limitation.

Analysis: The show-cause notice was issued beyond the normal limitation period and rested on invocation of the extended period. The record showed that the assessee had been filing returns and paying tax under the then-understood categories during a period marked by shifting service tax classifications and significant legal uncertainty. In these circumstances, suppression or wilful misstatement was not established so as to justify the extended period. The demand for the relevant period therefore could not survive on limitation.

Conclusion: Invocation of the extended period was not justified, and the demand for the said period was time-barred.

Final Conclusion: The impugned order confirming tax, interest and penalties was set aside, and the appeal succeeded in full.

Ratio Decidendi: Composite construction contracts involving transfer of property in goods are exigible, after 01.06.2007, only under the works contract regime, and denial of abatement or invocation of the extended period cannot be sustained where the legal position was unsettled and no suppression is shown.

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