Works contract treatment for blasting services excludes VAT-paid explosives from service tax valuation

Blasting activity performed at a customer's site using explosives procured under licence and separately billed, with VAT paid on the explosives, was treated as works contract service because the contract involved transfer of property in goods in execution of the work. Article 366(29A)(b) and the post-46th Amendment position require the goods element in a works contract to be treated as a deemed sale, so the dominant intention test does not govern classification where the contract otherwise answers that description. The value of explosives already subjected to VAT could not be included again in the service tax assessable value, and the demand was unsustainable.

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Issues: Whether the blasting activity carried out with explosives at the customer's site was a works contract service, and whether the value of the explosives on which VAT had been paid was liable to be excluded from the assessable value for service tax.

Analysis: The blasting activity involved procurement of explosives under licence, their use at the customer's site, separate billing for explosives and blasting services, and payment of VAT on the value of explosives. In light of Article 366(29A)(b) of the Constitution of India and the post-46th Amendment position, the transfer of property in goods involved in execution of a works contract is treated as a deemed sale. The dominant intention test no longer governs classification where the contract otherwise answers the description of a works contract. The services rendered by the assessee therefore fell within works contract service, and the value attributable to goods already subjected to VAT could not be added again for service tax valuation.

Conclusion: The blasting activity was correctly treated as works contract service, and the explosive value was rightly excluded from the taxable value. The demand could not be sustained.

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