Composite works contract valuation allows deduction of identifiable material cost and defeats unsustainable service tax demand.

Separately identifiable material value supported by invoices, books of account, audited records and VAT returns could not be denied for service tax valuation where the recipient accepted the bifurcation and the department failed to disprove it. A contract involving supply of material and provision of service was treated as a composite works contract; on that basis, the activity was not taxable for the period before 01.06.2007, and for the later period the demand could not survive where tax had already been paid on a higher value than the composite-contract basis. The available abatements under the relevant notifications were also held inapplicable to sustain the demand, as tax had been paid on a value exceeding the concessional benchmark.

---

---

Issues: (i) whether the assessee was entitled to deduction of separately identifiable material cost under Notification No. 12/03-ST dated 20.06.2003; (ii) whether the composite contract was classifiable as works contract service so as to affect taxability for the relevant period; (iii) whether the assessee was alternatively entitled to abatement under Notification No. 15/2004-ST and Notification No. 1/2006-ST.

Issue (i): whether the assessee was entitled to deduction of separately identifiable material cost under Notification No. 12/03-ST dated 20.06.2003.

Analysis: The invoices showed the service component and the cost of material separately. The material value was supported by books of account, audited accounts, VAT returns and other records, and the recipient had accepted the bifurcation. Once the material cost was identifiable and not shown to be false by the department, the deduction could not be denied.

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

Issue (ii): whether the composite contract was classifiable as works contract service so as to affect taxability for the relevant period.

Analysis: The contract involved both supply of material and provision of service, and VAT had also been paid on the material portion. On that factual basis, the activity answered the description of a composite works contract. For the period prior to 01.06.2007, such service was not taxable, and for the subsequent period the tax demand could not survive when tax had already been discharged on a higher value than what would be payable on the composite works contract basis.

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

Issue (iii): whether the assessee was alternatively entitled to abatement under Notification No. 15/2004-ST and Notification No. 1/2006-ST.

Analysis: The assessee had provided service along with material, and the available abatement under the notifications was 67% of the gross value. The record showed that the abatement actually claimed ranged only between 30% and 48%, meaning service tax had been paid on a value higher than the concessional benchmark. The demand was therefore not sustainable on this alternative basis as well.

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

Final Conclusion: The demand could not be sustained on any of the examined grounds, and the assessee was entitled to the consequential relief flowing from the setting aside of the appellate order adverse to it.

Ratio Decidendi: Where a composite contract shows separately identifiable material value supported by contemporaneous records and VAT treatment, the value of material cannot be denied for service tax purposes and the available exemption or abatement must be applied consistently with the actual taxable value.

---