Composite works contract and separate fit-out leasing escaped service tax before taxation of works contracts began.

Composite residential construction treated as a works contract was held not liable to service tax for the period before 01.06.2007, because works contract service became taxable only from that date and a composite contract could not be vivisected for earlier taxation. Separate leasing of fit-outs and other movable items under independent agreements was also held outside renting of immovable property service, as VAT had been paid on the movable goods and service tax and VAT operate in mutually exclusive fields. On these principles, the service tax demand on both components, together with interest and penalty, did not survive.

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Issues: (i) whether service tax was payable on construction of residential complexes treated as works contract for the period 01.04.2006 to 31.03.2008; and (ii) whether service tax was payable on lease rent received for fit-outs and other movable items rented under separate agreements during 01.06.2007 to 31.03.2008.

Issue (i): whether service tax was payable on construction of residential complexes treated as works contract for the period 01.04.2006 to 31.03.2008.

Analysis: Liability under works contract service commenced only from 01.06.2007. A composite works contract cannot be vivisected and subjected to service tax for the prior period. The Tribunal followed the settled position that, for residential construction undertaken as a composite contract, no service tax could be demanded before 01.06.2007, and the later period was also covered by the consistent line of decisions treating such construction as not taxable in the manner adopted in the impugned demand.

Conclusion: The demand for this issue was unsustainable and was set aside in favour of the assessee.

Issue (ii): whether service tax was payable on lease rent received for fit-outs and other movable items rented under separate agreements during 01.06.2007 to 31.03.2008.

Analysis: The fit-outs were leased under separate agreements and VAT had been paid on the consideration for movable goods. Service tax and VAT operate in mutually exclusive fields, and consideration for leasing movable property cannot be taxed as rent for immovable property merely because the items were located in the premises. Applying the settled view on separate leasing of fit-outs, the demand could not be sustained under renting of immovable property service.

Conclusion: The demand on fit-outs was set aside in favour of the assessee.

Final Conclusion: The impugned demand, interest, and penalty did not survive, and the assessee obtained complete relief on both substantive issues.

Ratio Decidendi: A composite works contract is not taxable as service for the period before works contract service was brought into force, and separate leasing of movable fit-outs under independent agreements, on which VAT is paid, cannot be taxed as renting of immovable property.

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