2026 (4) TMI 64 - AT - Service Tax

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 ... Classification of composite construction contracts - Works contract service - payment of Service Tax under composition scheme in respect of 'Works Contract service' - demands raised under commercial or industrial construction service and construction of complex service - eligible abatement under Notification No. 01/2006-ST dated 01.03.2006 - Exclusion of free-supplied materials. Composite works contract - Wrong classification of taxable service - HELD THAT:- The Tribunal found that all the disputed periods were after introduction of works contract service and that the appellant had discharged service tax treating the activities as works contracts. Since the contracts involved execution of works contracts, the demands raised under commercial or industrial construction service and construction of complex service were held to be unsustainable. [Paras 23, 24] The classification adopted in the impugned orders was held untenable and the demands raised under the other construction service categories were set aside. Abatement - Free-supplied materials - Exclusion of VAT-paid goods value - HELD THAT: - The Tribunal held that the appellant was eligible for 67% abatement in respect of the works contracts. It further held, following Bhayana Builders, that the value of free-supplied materials was deductible from the taxable value. The further computation adopted by the Department by rejecting abatement on the entire receipts, including the value of goods on which VAT had been paid, was found not tenable in view of Sobha Developers Ltd.[2009 (9) TMI 342 - CESTAT, BANGALORE], [2017 (4) TMI 584 - SC ORDER], Bharat Sanchar Nigam Ltd. [2006 (3) TMI 1 - SUPREME COURT], Quick Heal Technologies Ltd. [2022 (8) TMI 283 - SUPREME COURT] and Ocean Interior Ltd.[2019 (11) TMI 124 - CESTAT CHENNAI], [2023 (9) TMI 818 - SC ORDER]. [Paras 23, 24] The valuation adopted by the Department was rejected and the resulting tax demands were held unsustainable. Final Conclusion: The Tribunal held that the impugned demands were unsustainable since the appellant's activities were taxable, if at all, as works contract service and the Department had also adopted an incorrect valuation by denying abatement and including non-taxable elements. The impugned orders were therefore set aside and the appeals were allowed with consequential relief. 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.