67% Abatement Confirmed for Composite Construction Services Involving Material Supply: Analysis of P & H Associates Vs Commissioner of Central Excise & ST (CESTAT Ahmedabad)

1. Background and Dispute

The matter in P & H Associates Vs Commissioner of Central Excise & ST (CESTAT Ahmedabad) arose from a dispute over the availability of 67% abatement of service tax under Notification No. 1/2006-ST dated 01.03.2006 for the period April 2008 to June 2012.

The assessee:

  • Was registered for:
    • Commercial and Industrial Construction Service (CICS)
    • Architecture service
    • Interior Decorator service
  • Had been paying service tax only on 33% of the gross contract value, claiming 67% abatement under Notification No. 1/2006-ST.
  • Its activities, as seen from invoices and contracts, included:
    • False ceilings
    • Partitions
    • Flooring
    • Modular systems
    • Painting and carpeting
    • Electrical-related works
    • Wall panelling
    • Supply and installation of furniture
    • Brick work and related civil items

The department treated these activities as “completion and finishing services” under Section 65(25b)(c) of the Finance Act, 1994, and hence outside the scope of abatement as per Notification No. 1/2006-ST. It also alleged non-compliance with the conditions of Notification No. 12/2003-ST dated 20.06.2003 regarding proof of material value.

A show cause notice dated 04.07.2013 proposed:

  • Recovery of differential service tax
  • Interest
  • Penalties

The original adjudicating authority, by order dated 04.10.2013, confirmed the demand and penalties.

The assessee appealed to the Tribunal.

2. First Round Before CESTAT and Remand

In Appeal No. ST/13894/2013, the assessee argued that:

  • It had produced adequate records to show purchase and use of materials in execution of works.
  • The adjudicating authority had rejected its abatement claims without properly examining those documents.

The Tribunal, by Final Order No. A/11167/2014 dated 02.07.2014, did not decide the merits, but:

  • Set aside the earlier order, and
  • Remanded the case to the adjudicating authority with a specific direction:

To verify and scrutinize the documents furnished by the assessee in support of its claim under Notification No. 12/2003-ST and then decide the issue afresh, keeping all questions open and adhering to principles of natural justice.

3. Denovo Adjudication and Second Appeal

In the denovo proceedings, the adjudicating authority again:

  • Confirmed the service tax demand
  • Denied abatement under Notification No. 1/2006-ST and Notification No. 12/2003-ST
  • Imposed penalties

The assessee once more approached the Tribunal against this fresh order.

4. Assessee’s Stand Before the Tribunal

4.1 Nature of Contracts – Composite Works Involving Materials

The assessee’s counsel submitted that:

  • The contracts were composite in nature, involving both:
    • Supply and use of materials, and
    • Provision of services (labour, design, execution, finishing, etc.)
  • The activities actually involved substantial construction, renovation, restoration and modification of civil structures, not merely cosmetic finishing.
  • Approximately 78–80% of the total contract value represented:
    • Purchase cost of materials used in execution of works
  • The remaining 20–30% constituted:
    • Labour charges, overheads, and profit

The assessee had also paid VAT on the material portion, and this VAT payment was not disputed by the department.

Accordingly, it was argued that:

  • The contracts were properly treated as “Works Contract Service” post 01.06.2007, which is taxed differently from pure service.
  • It would not be legally permissible to levy service tax on the entire gross amount, which included a significant element already subjected to VAT as sale of goods.
  • Even under CICS, abatement under Notification No. 1/2006-ST was available where goods and materials formed part of the contract.

4.2 Claim Under Notification No. 12/2003-ST

The assessee contended:

  • It had sold goods and materials in the course of providing taxable services.
  • Notification No. 12/2003-ST allowed exclusion of the value of goods and materials sold, subject to documentary proof.
  • It had produced relevant documents and VAT records to demonstrate:
    • Purchase and consumption of goods
    • Payment of VAT on such materials

The grievance was that, contrary to the specific direction of the Tribunal in the earlier remand, the adjudicating authority again rejected the claim by insisting on site-wise and bill-wise linking of every material item to each contract, and by overlooking the broader documentary record.

4.3 Reliance on Case Law

The assessee placed particular emphasis on: