Separate materials paid with VAT are excluded from service value; VAT paid goods incorporated in work attract works contract abatement.

Where invoices clearly bifurcate materials and labour and VAT is charged on the materials, the value of such separately billed materials must be excluded from the taxable value of the service; outcome: exclusion affirmed. Where paints purchased on payment of VAT are incorporated in painting work performed by the service provider's workforce, the transaction meets the works contract characteristics and valuation provisions enabling abatement under the Service Tax (Determination of Value) Rules, 2006; outcome: works contract classification and abatement applicable. The contested service tax demands and penalties based on contrary valuation are unsustainable on these grounds.

---

---

Issues: (i) Whether the value of spare parts separately billed and on which VAT was paid forms part of the value of taxable service for levy of service tax; (ii) Whether painting services involving paints purchased on payment of VAT and executed using appellant's workforce qualify as works contract service and are entitled to abatement under the Service Tax (Determination of Value) Rules, 2006.

Issue (i): Whether separately invoiced spare parts, on which VAT was discharged, must be included in the gross invoice value for determination of service tax liability.

Analysis: Invoices before the authority show separate line items for spare parts (with VAT charged) and a distinct labour/service component (with service tax charged). Where such clear price breakup exists, the material component constitutes a sale of goods on which VAT has been paid and is not part of the value of the taxable service. Precedent of a coordinate bench addressing identical factual pattern supports exclusion of the material value from the service tax base when the invoice and taxation treatment indicate separate transactions.

Conclusion: The value of spare parts separately billed and on which VAT was paid is not includible in the value of taxable service for service tax purposes; conclusion in favour of the appellant.

Issue (ii): Whether painting services, where paints were procured on payment of VAT and the appellant used its labour, constitute works contract service and attract abatement under Rule 2A of the Service Tax (Determination of Value) Rules, 2006.

Analysis: The facts record that paints used in vehicle painting were purchased by the appellant on payment of VAT and the appellant employed its workforce to perform the painting. Under the established three-part test for works contract taxation, goods must be involved in execution of the contract and property in such goods must be transferred in some form in the execution of the works. Where goods (paints) are incorporated in the performance and VAT has been paid, the transaction aligns with works contract characteristics and the valuation provisions and abatement under the 2006 Rules apply. Authorities that reclassify such transactions as mere repair without accounting for the purchased materials and VAT-paid treatment cannot sustain denial of abatement.

Conclusion: Painting services involving paints purchased on payment of VAT and executed by the appellant qualify as works contract service and are entitled to the abatement under Rule 2A of the Service Tax (Determination of Value) Rules, 2006; conclusion in favour of the appellant.

Final Conclusion: The adjudged service tax demands and consequential penalties confirmed by the original authority are unsustainable on the decided issues; the impugned order is set aside and the appeal is allowed in favour of the appellant.

Ratio Decidendi: Where invoices clearly bifurcate material supplies (on which indirect tax such as VAT is charged) from the labour/service component, the value of such separately billed materials must be excluded from the taxable value of the service; where goods purchased and used in execution of a service are incorporated in the work and property in such goods is effectively transferred, the transaction may constitute a works contract and qualify for valuation rules and abatement under the Service Tax (Determination of Value) Rules, 2006.

---