Composite works contracts were not taxable under service tax before 1 June 2007.

The appellant executed civil and construction contracts, including construction of BSNL exchange buildings, towers and tower foundations, a Rubber Board building, and a meditation centre for the Marthoma Sabha. The Department alleged non-payment of service tax under the taxable categories of Commercial or Industrial Construction Service, Erection, Commissioning or Installation Service, and Works Contract Service for the period 2004–05 to 2007–08.

A show-cause notice dated 18 December 2008 was issued invoking the extended limitation period under Section 73(1) of the Finance Act, 1994. The adjudicating authority confirmed the demand and imposed penalties; the Commissioner (Appeals) upheld the demand, set aside the penalty under Section 76 subject to payment of penalty under Section 78, and upheld the remaining penalties.

The appellant contended that the contracts were composite contracts involving supply of materials and therefore constituted works contracts.

Whether service tax could be demanded for the period prior to 1 June 2007 on composite contracts involving both provision of services and supply of materials, by classifying them under Commercial or Industrial Construction Service or Erection, Commissioning or Installation Service.

Whether the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994, and the penalties imposed under the Act, were sustainable.

Whether the service tax and interest paid by the appellant for the period from 1 June 2007 to March 2008 were liable to be appropriated.

The Tribunal applied the principle laid down by the Supreme Court in Commissioner of Customs v. Larsen & Toubro Ltd., 2015 (39) S.T.R. 913 (S.C.), that a composite contract involving transfer of property in goods and provision of services is a works contract and could not be vivisected and taxed under other taxable-service categories for the period preceding the specific introduction of Works Contract Service.

Works Contract Service became taxable with effect from 1 June 2007.

The Tribunal also considered the statutory framework concerning Commercial or Industrial Construction Service, Erection, Commissioning or Installation Service, the extended limitation provision under the proviso to Section 73(1), and penalties under Sections 77 and 78 of the Finance Act, 1994.

The departmental Circular No. 80/10/2004-ST dated 17 September 2004 indicated that construction for non-commercial governmental, religious, charitable, educational, health, sanitation, or philanthropic purposes would generally not be taxable, although the final decision principally rested on the works-contract issue.

The Tribunal found, on the evidence, that the appellant’s activities were composite contracts involving supply of materials and therefore fell within the category of works contracts.

Applying Larsen & Toubro, it held that such contracts could not be retrospectively vivisected to extract a service component and tax it under Commercial or Industrial Construction Service or Erection, Commissioning or Installation Service before the statutory introduction of Works Contract Service on 1 June 2007.

Consequently, the demand covering the period before 1 June 2007 was unsustainable.

Since the principal demand for the pre-1 June 2007 period failed on merits, the penalties imposed under the impugned orders were also set aside.

However, the amount of service tax and interest already paid by the appellant for the period from 1 June 2007 to March 2008 was properly payable and was therefore upheld for appropriation.

The Tribunal set aside the service-tax demand relating to the period prior to 1 June 2007, and also set aside the penalties imposed under the impugned orders.

The appropriation of the service tax and interest paid by the appellant for the period from 1 June 2007 to March 2008 was upheld.

Consequential relief, if any, was directed to follow in accordance with law.