Works Contract Service classification and exclusion of free supplies from taxable value were applied to reject the service tax demand.

A turnkey construction activity executed with materials, and on which VAT was discharged under the composition scheme, was treated as Works Contract Service rather than Commercial or Industrial Construction Service because the more specific classification applied for the relevant period. Free supplies of material by the service recipient were excluded from the taxable value, in line with settled valuation law. On both classification and valuation, the demand was found unsustainable and the impugned order was set aside.

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Issues: (i) Whether the construction activity undertaken as a turnkey project during the relevant period was classifiable under Commercial or Industrial Construction Service or under Works Contract Service; (ii) Whether the value of free supplies of material by the service recipient was includible in the taxable value of the works contract service.

Issue (i): Whether the construction activity undertaken as a turnkey project during the relevant period was classifiable under Commercial or Industrial Construction Service or under Works Contract Service.

Analysis: The service was rendered along with material and the recipient records showed execution of the construction work with materials. The appellant had also discharged VAT on the works contract under the composition scheme. In these circumstances, the activity satisfied the characteristics of works contract service, and the more specific classification had to apply for the relevant period.

Conclusion: The construction activity was correctly classifiable as Works Contract Service and the demand under Commercial or Industrial Construction Service was not sustainable.

Issue (ii): Whether the value of free supplies of material by the service recipient was includible in the taxable value of the works contract service.

Analysis: The point stood covered by the settled law that free supplies made by the service recipient are not to be added to the gross value for valuation of the taxable service. The same principle had already been applied in the appellant's own earlier matter.

Conclusion: The value of free supplies was not includible in the taxable value.

Final Conclusion: The demand was held unsustainable on both classification and valuation, and the impugned order was set aside in its entirety.

Ratio Decidendi: Where a construction activity is executed as a works contract with materials and VAT has been discharged, it is to be classified as works contract service, and free supplies by the service recipient are excluded from the taxable value.

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