Appellant wins service tax exemption on composite works contracts predating Works Contract Service provisions

CESTAT Bangalore allowed the appeal regarding service tax liability on works contract activities for periods 10.09.2004 to 30.09.2007 and 16.06.2005 to 30.09.2007. Following SC precedent in Larsen Toubro Ltd., the tribunal held that Finance Act provided no charge or machinery to levy service tax on indivisible composite works contracts. Since appellant's activities occurred before introduction of Works Contract Service provisions, and considering there was no subterfuge in entering composite contracts containing both goods transfer and services elements, service tax liability was not established.

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Issues:
Whether the appellant is liable to pay service tax for works contract activity carried out by them.

Analysis:
The appellant, a partnership firm, entered into construction agreements using material and labor, considering it falling under service tax. The appellant obtained registration, paid service tax on 33% of gross value, and availed abatement benefits. However, a show-cause notice alleged full service tax liability, treating the activity as Commercial or Residential Construction. The adjudication authority confirmed the demand, leading to the present appeal.

During the hearing, the appellant cited the Supreme Court decision in Commissioner of C.Ex. & Cus., Kerala Vs. Larsen & Toubro Ltd., emphasizing that service tax applies only to service contracts, not composite works contracts. The appellant also referred to the judgment in Commissioner of Service Tax Vs. Bhayana Builders (P) Ltd., highlighting that service tax is payable on the gross amount charged for the service provided, excluding the value of free goods/materials supplied by the recipient. The judgment clarified that the value for service tax must have a direct nexus with the taxable service provided.

Moreover, the appellant relied on the case of Sobha Developers Ltd. Vs. Commr. of C. Ex. & Service Tax, Bangalore, which discussed the conditions for exemption under works contract services. The Tribunal ruled that the value of goods consumed in providing services cannot be included in the taxable value for service tax levy. The AR for the Revenue acknowledged that the issue was conclusively addressed.

Considering that the appellant's activity predated the introduction of the 'Works Contract Service' and aligning with the Supreme Court's decision in Larsen & Toubro Ltd., the Tribunal allowed the appeal, emphasizing that service tax applies to taxable services, not composite works contracts. The judgment was pronounced on 30.09.2024.

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