Separate service and material bifurcation defeats further service tax demand on reclassification as works contract

Where a contract separately disclosed service and material values, and tax was paid on the service component while VAT was paid on materials, a further service tax demand could not be sustained by reclassifying the activity as works contract service. The Department had not disputed the assessee's entitlement to the material exemption or the factual bifurcation reflected in the invoices, so the demand based on a different classification proceeded on an erroneous appreciation of the transaction. The impugned order was therefore set aside and consequential relief followed.

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Issues: Whether the differential service tax demand could be sustained by treating the appellant's activity as Works Contract Service instead of Erection, Commissioning or Installation Service, despite separate disclosure of service and material value and availment of exemption on the value of materials.

Analysis: The appellant had executed the work under a consortium arrangement and raised invoices showing bifurcation of the taxable service portion and the material portion. VAT was paid on the value of materials and service tax was discharged on the service element after claiming the benefit of Notification No. 12/2003-ST. The Department did not dispute the availability of the exemption notification on the ground of non-fulfilment of its conditions. On the facts, the demand under Works Contract Service by invoking Notification No. 07/2008-ST proceeded on an erroneous appreciation of the contractual arrangement and the invoices, and the service tax already paid on the service component could not be supplemented by a differential demand on the same transaction.

Conclusion: The differential service tax demand was not sustainable and the issue was decided in favour of the assessee.

Final Conclusion: The impugned order was set aside and the appeal succeeded with consequential relief according to law.

Ratio Decidendi: Where a transaction is supported by a clear bifurcation of service and material values and the assessee has discharged tax on the service component while availing lawful exemption on the material component, a further demand by reclassifying the activity as works contract cannot be sustained absent a valid challenge to the exemption or the underlying factual segregation.

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