Composite construction contracts must be taxed as works contracts; service tax demands on wrong heads were set aside.

Composite construction activity involving both materials and services was held taxable, after 01.06.2007, only as works contract service and not under commercial or industrial construction service or construction of complex service; the demand confirmed under those heads was therefore set aside. The consulting engineer service component was required to be computed on amounts actually received, not gross billing, and was remitted for fresh quantification. Where possession and effective control of goods had passed to the recipient, the supply of tangible goods demand was unsustainable because the transaction had the character of a deemed sale, and that demand was also set aside.

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Issues: (i) whether composite construction activities involving supply of materials could be classified and taxed under commercial or industrial construction service or construction of complex service for the period before and after 01.06.2007, when they were in substance works contract service; (ii) whether the demand under consulting engineer service could be sustained on gross billing instead of the amount actually realized, and whether that component required re-determination; (iii) whether the demand under supply of tangible goods service was sustainable where there was transfer of right of possession and effective control of the goods.

Issue (i): whether composite construction activities involving supply of materials could be classified and taxed under commercial or industrial construction service or construction of complex service for the period before and after 01.06.2007, when they were in substance works contract service.

Analysis: The construction activity was admittedly composite, involving both service and materials. Such activity, after the introduction of works contract service on 01.06.2007, could be taxed only under that category and not under commercial or industrial construction service or construction of complex service. For the period prior to 01.06.2007, the demand could not be sustained under those service categories in the manner adopted in the impugned order. A demand proposed under one category cannot be confirmed under a different category.

Conclusion: The confirmation of demand under commercial or industrial construction service and construction of complex service was unsustainable and was set aside.

Issue (ii): whether the demand under consulting engineer service could be sustained on gross billing instead of the amount actually realized, and whether that component required re-determination.

Analysis: Service tax on this component had to be computed on the amount actually received during the relevant period, not on gross billing. The demand therefore required recalculation on the basis of the realized amount.

Conclusion: The consulting engineer service demand was not finally upheld and was remitted for re-determination on the basis of actual receipts.

Issue (iii): whether the demand under supply of tangible goods service was sustainable where there was transfer of right of possession and effective control of the goods.

Analysis: Where possession and effective control of the goods stand transferred, the transaction partakes the character of a deemed sale and does not attract service tax under the stated head.

Conclusion: The demand under supply of tangible goods service was not sustainable and was set aside.

Final Conclusion: The impugned order was largely set aside, while the consulting engineer service component was kept open only for fresh quantification on the correct received amount.

Ratio Decidendi: A composite construction contract involving supply of materials must be classified under works contract and cannot be confirmed under a different taxable head, and service tax on other components must be computed on the legally relevant valuation basis.

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