Separate contracts for goods supply and services cannot be classified as works contract service under tax law

CESTAT Ahmedabad allowed the appeal, ruling that separate contracts for goods supply and erection/commissioning/installation services should be treated distinctly. The tribunal held that where clear separate contracts exist for goods and services, with VAT paid on goods and service tax on services, the transaction cannot be classified as works contract service. Following SC precedents in BSNL v. Union of India and Imagic Creative cases, the tribunal confirmed that VAT and service tax are mutually exclusive, and splitting composite contracts is constitutionally permitted when distinct agreements are discernible.

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Issues Involved:
1. Incorrect provisions in show cause notices.
2. Classification of contracts as works contracts.
3. Inclusion of value of goods in taxable value of services.
4. Double taxation under VAT and service tax.
5. Service tax on trading of goods.
6. Limitation, penalties, and interest.

Summary:

Incorrect Provisions in Show Cause Notices:
The show cause notices issued for the period from October 2012 to December 2015 invoked incorrect provisions of the law, specifically Section 65(105)(zzzza) of the Finance Act, 1994, and Notification No. 29/2007-ST, which were repealed and rescinded respectively w.e.f. 01.07.2012. Therefore, the demand based on these notices is liable to be set aside.

Classification of Contracts as Works Contracts:
The subject contracts do not constitute works contracts as defined u/s 65(105)(zzzza) of the Act. Contract Type 1 involves pure sale of goods without any service element. Contract Type 2 involves separate orders for sale and installation services. Contract Type 3, though a single order, distinctly bifurcates the value of goods and services. The Appellant has discharged appropriate excise duties and sales tax/VAT on goods and service tax on services. The profit margin on goods cannot be taxed as part of the service element.

Inclusion of Value of Goods in Taxable Value of Services:
Even if the contracts are considered works contracts, Rule 2A of the Service Tax (Determination of Value) Rules, 2006, mandates that the value of goods transferred should be excluded from the taxable value of services. This is supported by the judgments in Commissioner of C. Ex. & Cus., Kerala v. Larsen & Toubro Ltd. and Total Environment Building Systems Pvt. Ltd. v. Commissioner of Commercial Taxes.

Double Taxation under VAT and Service Tax:
The Appellant has paid VAT/CST on the sale value of goods, and the same transaction cannot be subjected to service tax again. This principle is upheld in Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes and Commissioner of Service Tax-V, Mumbai v. UFO Moviez India Ltd.

Service Tax on Trading of Goods:
No service tax is payable on trading of goods. Prior to 01.07.2012, trading was considered an exempted service u/s 66D(e) of the Act. Post 01.07.2012, trading is specified under the negative list. The Appellant's transactions, involving the purchase and sale of goods, fall under this category and are not liable to service tax. This is supported by judgments in Commissioner of Service Tax, Ahmedabad v. Om Air Travels Pvt. Ltd., Orion Appliances v. CST, Ahmedabad, and Prem Motors Pvt. Ltd. v. Commissioner of C. Ex. & CGST, Jaipur.

Limitation, Penalties, and Interest:
The extended period of limitation u/s 73(1) of the Act cannot be invoked as there was no suppression of information by the Appellant. The demand is based on financial statements, and the issue is interpretational. Consequently, penalties u/s 76 and 77 of the Act and interest u/s 75 do not arise.

Conclusion:
The impugned orders are set aside, and the appeals are allowed with consequential relief. The Appellant correctly classified and paid service tax on erection, commissioning, and installation services, and no service tax can be demanded on the sale of goods.

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