Service tax on works contracts is confined to the service component, irrespective of VAT payment.

The appellant, an unregistered individual service provider, carried out civil works for three companies during 2012–2013.

Following information received from Income Tax Form 26AS, the Department demanded service tax on the gross receipts.

After remand, the Assistant Commissioner confirmed service tax of ₹46,838, with interest, and imposed penalties under Sections 78 and 77 of the Finance Act, 1994.

The Commissioner (Appeals) upheld that decision, rejecting the appellant’s contention that the value of materials used in the works contracts should be excluded because he had not established payment of VAT on those goods.

The appellant appealed to the Tribunal.

Whether, for service-tax purposes, the value of goods used in the appellant’s works contracts had to be excluded from the taxable value, on an actual or presumptive basis.

Whether the absence of VAT payment on the goods justified including their value in the service-tax base.

The Tribunal applied the principle that, in a works contract, service tax is chargeable only on the service component; the value of goods must be excluded on an actual or presumptive basis.

It also held that whether VAT was paid on those goods is not determinative of the service-tax component: any VAT liability or non-payment is for the competent State authority to address and does not make the goods component liable to service tax.

The order refers to Sections 77 and 78 of the Finance Act, 1994 as the bases for the penalties imposed below, but does not cite any statutory valuation provision or precedent.

The Tribunal accepted that the appellant’s activities were works contracts and treated the exclusion of the goods component as necessary to determine the taxable service value.

The Commissioner (Appeals)’ reliance on the absence of VAT payment did not answer that valuation question: VAT payment or non-payment could not convert the value of goods into consideration for services.

Accordingly, the Tribunal rejected the basis on which the demand had been sustained.

It allowed the appeal and set aside the impugned order.