Composite works contracts must be segregated from service tax demand, with exempt and non-taxable elements excluded before liability is computed.

Composite contracts involving supply of materials cannot be assessed as pure service contracts for service tax purposes; the service element must be separated from the value attributable to goods before any levy is determined. Services rendered to educational or non-commercial institutions also require independent examination for exemption, and any trading or sale component is outside service tax. The demand was therefore not sustainable on the departmental classification adopted and the matter required fresh determination of liability, if any, only on the taxable service component after excluding exempt and non-taxable elements.

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Issues: (i) Whether the demand of service tax on contracts executed with supply of materials could survive when the activity was in substance a works contract; (ii) Whether exemption was available in respect of services rendered to educational or non-commercial institutions and to the extent the activity involved sale or trading of goods.

Issue (i): Whether the demand of service tax on contracts executed with supply of materials could survive when the activity was in substance a works contract.

Analysis: The contracts reflected provision of services along with material in most cases. Where a contract is composite and includes supply of goods, the activity is not to be taxed under the standalone heads of erection, commissioning, installation, management, repair or maintenance when it is properly classifiable as a works contract. The presence of material supply also meant that the entire turnover could not be subjected to service tax under the departmental classification adopted in the impugned order.

Conclusion: The demand could not be sustained on the basis adopted in the impugned order and required reconsideration.

Issue (ii): Whether exemption was available in respect of services rendered to educational or non-commercial institutions and to the extent the activity involved sale or trading of goods.

Analysis: The record indicated that services were rendered for institutions and bodies treated as exempt or non-commercial for the relevant period. The order also accepted that part of the activity consisted of trading or sale of goods, which was not liable to service tax. The exemption aspect therefore required examination separately for the taxable portion, if any, after excluding the value attributable to material supply and exempt services.

Conclusion: Exemption was potentially available and the taxable value, if any, had to be reworked on remand.

Final Conclusion: The impugned demand was set aside and the matter was sent back for fresh determination of service tax liability, if any, on the service component alone after examining the available exemptions.

Ratio Decidendi: A composite contract involving supply of materials cannot be assessed as a pure service for service tax purposes, and exempt or non-taxable elements must be segregated before determining any liability.

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