Composite works contracts cannot be artificially split for service tax, and pre-01.07.2012 demands on that basis fail.

Composite and indivisible works contracts involving both supply of materials and execution of work could not be artificially split into separate material and service components for service tax purposes, particularly where VAT had already been paid on the sale element. For the relevant period before 01.07.2012, the demand on the service portion was held unsustainable in law on the basis adopted in the impugned order. The earlier view treating the contracts as divisible and taxable was not accepted, and the order was set aside with consequential reliefs.

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Issues: Whether the contracts in question were works contracts of a composite and indivisible nature, and if so, whether the service tax demand on the service portion was sustainable for the period prior to 01.07.2012.

Analysis: The contracts involved supply of materials as well as execution of work, and the record showed that VAT had been paid on the sale element. The attempt to separate the material component from the service component was held to be impermissible in the case of composite contracts. Works contract service was brought into the service tax net only from 01.06.2007, but for the relevant period the composite contracts were not amenable to service tax in the manner adopted in the impugned order. The earlier view that the contracts were divisible and taxable was not accepted.

Conclusion: The contracts were held to be composite and indivisible works contracts, and the service tax demand was held to be unsustainable in law.

Final Conclusion: The impugned order was set aside and the appeal was allowed with consequential reliefs.

Ratio Decidendi: A composite and indivisible works contract cannot be artificially vivisected into separate service and material components for service tax, and for the relevant pre-01.07.2012 period such contracts were not taxable on that basis.

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