2026 (3) TMI 1449 - AT - Service Tax

Composite works contracts cannot be taxed as service contracts before works contract taxation, and a demand cannot exceed the show cause notice.

Composite electrical contracts involving supply of materials and execution of wiring and related work in Government buildings were held not taxable as ... Composite works contracts - Taxability prior to introduction of works contract service - Show cause notice as foundation of demand - extended period of limitation - Whether the appellant’s activity undertaken as a composite contract for supply and laying of electrical wiring and related works in Government Buildings can be classified under ‘Erection, Commissioning and Installation Services’ as proposed in the notice for the period prior to 01-07-2007? - HELD THAT: - The Tribunal found that the appellant's contracts were composite in nature, involving both supply of materials and labour, and were treated by the appellant as works contracts for VAT purposes. Applying the law declared in Larsen and Toubro Vs. CCE, Kerala [2015 (8) TMI 749 - SUPREME COURT], it held that the taxable entries relating to erection, commissioning or installation covered service contracts simpliciter and not composite works contracts. Since no machinery then existed to segregate the non-service element in such composite contracts, the levy under erection, commissioning or installation service for the period prior to 01.06.2007 was impermissible. [Paras 16] The demand under erection, commissioning or installation service for the period prior to 01.06.2007 was held untenable and set aside. Whether the demand upheld by the Appellate Authority by classifying the appellant’s work under works contract service for the period after 01-07-2007 when the proposal in the SCN itself was only for classification under the aforesaid ‘Erection, Commissioning and Installation Services’ was tenable? - HELD THAT:- It is well settled that the show cause notice is the foundation in the matter of levy and recovery of duty, penalty and interest and the Department cannot travel beyond the show cause notice. The Judgements of the Honourable Supreme Court in CCE, Bhubaneshwar0I v. Champdany Industries Ltd. [2009 (9) TMI 7 - SUPREME COURT], CCE Nagpur v. Ballarpur Industries [2007 (8) TMI 10 - SUPREME COURT] and CC, Mumbai v. Toyo Engineering India Limited [2006 (8) TMI 184 - SUPREME COURT] are authorities for the aforesaid propositions. We find that coordinate benches of this Tribunal has also held consistently that the narrow confines of the SCN do not permit confirmation of demand under any other category than what has been proposed and that Revenue cannot travel beyond the proposals in the SCN. The Tribunal held that the show cause notice proposed taxation only under erection, commissioning and installation service for the entire disputed period, and the adjudicating authority had also confirmed the demand on that basis. In those circumstances, the appellate authority could not travel beyond the notice and uphold the demand under a different taxable category. Relying on the settled principle that the show cause notice is the foundation for levy, recovery, interest and penalty, the Tribunal held that confirmation under works contract service was beyond the scope of the notice and therefore unsustainable. As the demand itself failed, the consequential interest and penalty also could not survive. [Paras 17] The appellate authority's classification of the post-01.06.2007 demand under works contract service was held unsustainable, and the related demand, interest and penalty were set aside. Final Conclusion: The Tribunal held that the appellant's composite electrical contracts were not taxable under erection, commissioning or installation service prior to 01.06.2007, and that the post-01.06.2007 demand could not be sustained under works contract service since that basis was not proposed in the show cause notice. The impugned order was therefore set aside and the appeal was allowed with consequential reliefs. Issues: (i) Whether a composite contract for supply and laying of electrical wiring and related works in Government buildings could be classified as 'Erection, Commissioning and Installation Service' for the period prior to 01.06.2007; (ii) Whether demand could be sustained under 'Works Contract Service' for the period after 01.06.2007 when the show cause notice proposed classification only under 'Erection, Commissioning and Installation Service'.Issue (i): Whether a composite contract for supply and laying of electrical wiring and related works in Government buildings could be classified as 'Erection, Commissioning and Installation Service' for the period prior to 01.06.2007Analysis: The charging scheme under the Finance Act, 1994 as it then stood covered service contracts simpliciter and did not extend to composite works contracts involving both supply of goods and labour. The activities in question were composite electrical contracts involving supply of materials and execution of wiring and related work, and therefore did not fall within the taxable category invoked for the pre-01.06.2007 period.Conclusion: The classification under 'Erection, Commissioning and Installation Service' for the period prior to 01.06.2007 was not sustainable and the assessee succeeded on this issue.Issue (ii): Whether demand could be sustained under 'Works Contract Service' for the period after 01.06.2007 when the show cause notice proposed classification only under 'Erection, Commissioning and Installation Service'Analysis: The show cause notice formed the foundation of the demand and confined the proposal to classification under 'Erection, Commissioning and Installation Service'. A demand cannot be confirmed under a different taxable category not proposed in the notice. The consequential levy of interest and penalty could not survive once the demand itself failed on this ground.Conclusion: The demand under 'Works Contract Service' for the later period was beyond the scope of the show cause notice and was not sustainable, with the assessee succeeding on this issue.Final Conclusion: The impugned order was set aside and the appeal was allowed with consequential reliefs in law.Ratio Decidendi: Composite contracts involving both supply of goods and execution of work cannot be taxed as service contracts simpliciter for the period before works contract taxation was introduced, and a demand cannot be sustained under a taxable entry not proposed in the show cause notice.