Works contract classification prevails where composite construction activity involves materials and execution, defeating a commercial construction demand.

A composite activity of digging pits and fitting oil tanks with materials was treated as Works Contract Service because the contracts and surrounding facts showed a mixed supply of materials and execution of work. The Tribunal found that the department had proceeded on a presumption without determining the true nature of the transaction, and it noted VAT payment on the value received as consistent with works contract treatment. On that basis, demand under Commercial or Industrial Construction Service was not sustainable; the consequential penalty under Section 78 was set aside, while the Section 77 penalty for non-filing of returns was retained.

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Issues: (i) Whether the activity of digging pits and fitting oil tanks with materials was classifiable as Commercial or Industrial Construction Service or as Works Contract Service, and whether the demand raised under the former category could be sustained.

Analysis: The activity was examined on the basis of the contracts and the surrounding facts, which showed a composite arrangement involving material as well as execution of work. The Tribunal noted that the department proceeded on a presumption without ascertaining the true nature of the service. It further noted that VAT had been paid on the value received, indicating treatment of the transaction as works contract. Following the earlier co-ordinate Bench view on identical facts, the Tribunal accepted that where the real nature of the transaction is works contract, a demand cannot be sustained under Commercial or Industrial Construction Service.

Conclusion: The activity was held to be Works Contract Service and the demand under Commercial or Industrial Construction Service was not sustainable. The appeal was partly allowed, with the demand and the consequential penalty under Section 78 set aside, while the penalty under Section 77 for non-filing of returns remained.

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