Composite works contracts escaped service tax before 01.06.2007; classification as construction service could not sustain the demand.

Composite works contracts involving transfer of property in goods and labour could not be taxed as mere service contracts where deemed sale of materials and VAT payment were not disputed. Applying Larsen & Toubro, the Tribunal held that before 01.06.2007 the Finance Act, 1994 did not contain the charge or machinery to levy service tax on indivisible composite works contracts. The department's attempt to classify the activity as completion and finishing service under commercial or industrial construction service to deny abatement therefore failed, and the service tax demand was held unsustainable. The impugned order was set aside in favour of the assessee.

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Issues: Whether service tax demand was sustainable where the appellant's activity involved composite works contract with deemed sale of materials and VAT payment, but the department classified the service as completion and finishing service under commercial or industrial construction service to deny abatement.

Analysis: The services were found to involve transfer of property in goods as well as labour and services, with deemed sale of materials not disputed. The governing principle from the Supreme Court decision in Larsen & Toubro was applied, namely that prior to 01.06.2007 the Finance Act, 1994 did not provide a charge or machinery to levy service tax on indivisible composite works contracts, and such contracts could not be treated as mere service contracts simpliciter. Once the basic levy failed, the classification adopted to sustain the demand and deny the notification benefit could not survive. The Tribunal therefore did not examine limitation in detail.

Conclusion: The service tax demand was not sustainable and the impugned order was set aside in favour of the assessee.

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