Composite contracts as Works Contract Service: taxation under another head and penalties were unsustainable without proper notice.

A composite contract involving both material and labour is classifiable as Works Contract Service, and taxation under another head is unsustainable when that classification was not proposed in the show-cause notice. The assessee was also held entitled to abatement of the material component, either on actual basis or at the prescribed percentage under the relevant notifications, with the tax computation requiring fresh determination accordingly. On that basis, the demand was set aside for de novo computation and the penalties were held not to survive.

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Issues: (i) whether a composite contract involving both material and labour is classifiable under Works Contract Service, and whether it can be taxed under other heads in the absence of such proposal in the show-cause notice; (ii) whether the assessee is entitled to abatement of the material component and consequential relief from penalties.

Issue (i): whether a composite contract involving both material and labour is classifiable under Works Contract Service, and whether it can be taxed under other heads in the absence of such proposal in the show-cause notice.

Analysis: A composite contract containing both material and labour is to be treated as Works Contract Service. Where the show-cause notice did not propose classification under Works Contract Service, taxation under some other head is not sustainable. The settled position of law on composite contracts was applied, and the demand required reconsideration in the light of that legal position.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): whether the assessee is entitled to abatement of the material component and consequential relief from penalties.

Analysis: The assessee was held entitled to abatement of the material component either on actual basis or at the prescribed percentage under the relevant notifications. In view of the unsettled legal position and the need for recalculation, the matter was remitted for de novo computation of tax, and the penalties were set aside.

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The demand was set aside for fresh determination on the correct tax basis, with abatement to be granted as applicable, and the penalties did not survive.

Ratio Decidendi: A composite contract involving material and labour is classifiable as Works Contract Service, and in the absence of such classification being proposed in the notice, taxation under another head is unsustainable; abatement of the material component must be allowed where legally applicable.

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