Valuation of materials in works contracts: separate goods value excluded from taxable service; demand dropped and order upheld.

Valuation of materials in works contracts was contested: the Department allocated gross contract receipts equally across years due to missing contract-wise billing, but the tribunal found contracts expressly segregated values for goods and for erection, commissioning and installation services. Because the work orders specified the value of materials separately and the supplier discharged VAT on goods, the value of materials need not be included in the taxable value of works contract/service tax for erection and commissioning. The demand on the value of goods for the turnkey projects was therefore dropped and the impugned order upholding that decision was affirmed.

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Issues: Whether the value of materials supplied under turnkey/composite contracts must be included in the taxable value of works contract service when the contract documents specify separate values for supply of goods and for erection/commissioning services.

Analysis: The Tribunal examined the contract documents and the findings of the adjudicating authority which recorded that the work orders expressly specified the value of goods supplied and the value of erection, testing and commissioning services. The adjudicating authority also noted that the assessee was liable to pay VAT on the value of goods supplied. On this basis the Tribunal treated the separately identified supply value as not required to be added to the taxable value of the services. The Tribunal considered the legal characterisation of turnkey/composite contracts but accepted the factual segregation of values reflected in the contractual documents and accounts and the consequent tax treatment.

Conclusion: The demand to include the value of materials in the taxable value of works contract service is rejected and the impugned order dropping the demand in respect of the value of goods supplied is upheld, which is in favour of the assessee.

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