Separate AC Supply and Installation Contracts Qualifies as Works Contract: CESTAT

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad Bench, has held that separate AC supply and installation contracts still qualify as works contracts. The Bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) has observed that installation and commissioning activities involving supply of materials such as piping, wiring and ducting cannot be treated as “pure services” merely because the main equipment was sold under a separate contract. The Department had challenged Order-in-Original by which the Commissioner dropped the show cause notice dated 20.10.2015 for the period 2010–11 to 2014–15. The respondent, Sri Comfort Air Products & Services, was engaged in providing various taxable services including Works Contract Service (WCS), Management, Maintenance or Repair Service, Erection, Commissioning & Installation Service, Business Auxiliary Service and Goods Transport Agency Service. During scrutiny of work orders, the Department observed that the assessee executed two broad categories of work: High Side Work – Supply of outdoor and indoor AC units, on which Excise duty/VAT was paid. Low Side Work/HVAC Work – Activities such as lifting, shifting, installation, commissioning, copper refrigerant piping, PVC drain piping, control wiring, ducting and pressure testing. While the supply of AC systems was not disputed, the controversy centered on the taxability of the “low side” and HVAC works. The Department argued that since the AC systems were sold separately under a distinct contract, the subsequent installation and commissioning contracts were in the nature of pure service. According to Revenue, materials like piping and wiring used in installation were only incidental and did not amount to transfer of property in goods. On this basis, it contended that the assessee was not entitled to avail abatement under Notification No. 01/2006-ST and ought to have paid service tax on the full value instead of on 33% (for 2010–2012) and 40% (for 2012–2015). Revenue relied heavily on the Supreme Court’s ruling in BSNL v. Union of India to argue that the dominant nature of the transaction was provision of service, not a composite works contract. The assessee countered that the installation and HVAC contracts involved substantial use of materials such as piping, ducting and wiring, without which execution of the contract was impossible. These materials were transferred to the client and VAT had been paid treating the transaction as deemed sale. The assessee relied upon a Board Circular dated 22.05.2007 clarifying that contracts treated as works contracts for VAT purposes would also qualify as works contracts for service tax. It also cited the Bombay High Court decision in Gammon India Ltd. v. CCE, Nagpur to contend that even where supply and service portions are separately contracted, the nature of the agreement must be determined from the terms and factual matrix, not merely from formal segregation. The Tribunal upheld the Commissioner’s reasoning that even in the low side and HVAC contracts, there was undeniable transfer of property in goods. It noted that materials such as piping, ducting and wiring formed an integral and substantial part of installation works. VAT had been paid on these materials, acknowledging deemed sale. The Department failed to substantiate its claim that such materials were merely incidental or insignificant. The Bench observed that in AC installation works, ducting and piping involve considerable expenditure and cannot be treated as trivial additions. Once transfer of property in goods is established and subjected to VAT, the contract cannot be classified as a pure service. The Tribunal also clarified that mere separation of supply and installation contracts does not automatically convert the latter into a labour-only contract. The true test is whether there is transfer of property in goods during execution. Finding no substantive grounds to interfere with the Commissioner’s order, the Tribunal dismissed the Department’s appeal and affirmed that the impugned contracts fell within the ambit of Works Contract Service. Case Details Case Title: Commissioner of Central Tax Secunderabad - GST Versus Sri Comfort Air Products and Services Citation: JURISHOUR-191-CESTAT-2026(HYD) Case No.: Service Tax Appeal No. 30372 of 2017 Date: 27.02.2026 Counsel For Appellant: B. Subhas Chandra Bose, AR Counsel For Respondent: R. Narasimha Murthy, Advocate Click Here To Read Order Read More: Freight on Explosives Deliveries Includible in Assessable Value: CESTAT

Separate AC Supply and Installation Contracts Qualifies as Works Contract: CESTAT

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