Works contract classification governs composite construction contracts; free customer supplies and VAT-paid goods are excluded from service tax value.

Composite construction contracts involving both supply of goods and execution of construction work are to be classified as works contract service under the specific statutory entry, and not under the general heads of commercial or industrial construction service or construction of complex service. For such composite contracts, the specific classification prevails over the general description. Free supplies of cement and steel provided by customers do not constitute consideration and are excluded from the taxable value; likewise, valuation cannot include goods on which VAT has already been paid. Abatement under Notification No. 01/2006-ST was available, and the valuation adopted by the department was unsustainable.

---

---

Issues: (i) Whether the appellant's activity was classifiable as works contract service and whether the demands raised under commercial or industrial construction service and construction of complex service were sustainable. (ii) Whether the value of free supplies and the value of goods on which VAT was paid were includible in the taxable value, and whether abatement under Notification No. 01/2006-ST was available.

Issue (i): Whether the appellant's activity was classifiable as works contract service and whether the demands raised under commercial or industrial construction service and construction of complex service were sustainable.

Analysis: The activity involved execution of contracts comprising both supply of goods and provision of construction services. Such contracts fall within the statutory concept of works contract introduced in section 65(105)(zzzza) of the Finance Act, 1994. For composite contracts, classification is governed by section 65A of the Finance Act, 1994, and the specific taxable entry must prevail over a general service description. The demand was nevertheless raised under commercial or industrial construction and construction of complex despite the composite nature of the contracts and the introduction of works contract service during the relevant period.

Conclusion: The demand could not be sustained under the heads invoked by the department, and the appellant's activity was to be treated as works contract service.

Issue (ii): Whether the value of free supplies and the value of goods on which VAT was paid were includible in the taxable value, and whether abatement under Notification No. 01/2006-ST was available.

Analysis: The value of cement and steel supplied free of cost by customers was not consideration flowing to the service provider and was therefore outside the taxable value. The gross amount charged for service could not be expanded to include such free supplies. The appellant was also entitled to abatement under Notification No. 01/2006-ST, and the demand could not be computed by denying abatement on the entire receipt or by including the value of goods on which VAT had already been discharged. The valuation adopted by the department was inconsistent with the principles affirmed in the cited authorities on free supplies and on segregation of the service portion from the goods portion in composite contracts.

Conclusion: Free supplies were not includible in the taxable value, abatement was available, and the valuation adopted by the department was unsustainable.

Final Conclusion: The impugned demands and penalties could not survive, and the appeals succeeded with consequential relief.

Ratio Decidendi: A composite construction contract involving transfer of property in goods and provision of service is to be assessed as works contract service under the specific statutory entry, and free supplies by the customer do not form part of the taxable value or gross amount charged for service tax valuation.

---