Service Tax Not Leviable on Composite Works Contracts Prior to 1 June 2007: Telangana High Court

The Telangana High Court has held that service tax could not be levied on composite works contracts prior to the introduction of specific statutory provisions in 2007. The bench of Justice P.Sam Koshy and Justice Narsing Rao Nandikonda has observed that prior to 1 June 2007, the Finance Act, 1994 did not contain provisions enabling the taxation of indivisible composite works contracts. Only after the 2007 amendment was the service component of such contracts specifically brought under the service tax regime. The Department issued a show cause notice alleging that Blue Star Limited had short-paid service tax on services relating to supply, installation and commissioning of air-conditioning systems. According to the Department, the company issued consolidated invoices for supply and installation and failed to properly disclose the value attributable to taxable services. The tax authorities alleged that the company had determined the value of taxable services as a small percentage—between 2% and 9% of the gross invoice value—without any verifiable basis. Consequently, the Department demanded ₹6.71 crore in service tax along with interest and penalties, including a penalty exceeding ₹13.69 crore under Section 78 of the Finance Act, 1994. The Commissioner confirmed the demand and imposed penalties, prompting Blue Star Limited to challenge the order before CESTAT. The Tribunal allowed the company’s appeal and set aside the demand. It observed that the contracts in question were composite works contracts involving both supply of goods and provision of services, and a substantial portion of the contract value represented the value of goods supplied. CESTAT noted that 80–90% of the contract value related to the supply of equipment, and therefore taxing the entire contract value as a service was unjustified. Relying on earlier tribunal decisions, including cases involving Larsen & Toubro and Daelim Industrial Co., the Tribunal concluded that the demand raised by the Department was unsustainable. Before the High Court, the Revenue contended that Blue Star’s activities—designing, supplying, installing, and commissioning air-conditioning systems—clearly fell under the category of “erection, commissioning and installation services” under the Finance Act, 1994. The Department argued that even in composite contracts, the service element could be identified and taxed, relying on the Supreme Court’s decision in Bharat Sanchar Nigam Ltd. v. Union of India. It further referred to a CBEC circular stating that where consolidated charges are billed, service tax may be levied on the consolidated amount unless a clear break-up of goods and service components is provided. Blue Star Limited argued that the contracts were indivisible works contracts, and therefore service tax could not be levied on them prior to the statutory recognition of works contracts as a taxable service. The company relied on the Supreme Court’s landmark ruling in Commissioner of Central Excise & Customs v. Larsen & Toubro Ltd., which held that service tax on works contracts became leviable only from 1 June 2007, when Section 65(105)(zzzza) was introduced in the Finance Act, 1994. Since the disputed period in the present case was 2004–2005, the company contended that no service tax could be demanded on such composite contracts. The High Court agreed with Blue Star Limited and held that the issue was squarely covered by the Supreme Court’s rulings in Larsen & Toubro Ltd. and Total Environment Building Systems Pvt. Ltd. v. Deputy Commissioner of Commercial Taxes. Since the demand related to a period before the amendment, the Court concluded that the Department’s attempt to levy service tax on the entire contract value was legally untenable. Holding that the Tribunal had correctly applied the law, the High Court answered the substantial questions of law in favour of Blue Star Limited and against the department. Consequently, it upheld the CESTAT order and dismissed the department’s appeal. Case Details Case Title: The Commissioner of Central Excise & Customs, Hyderabad Versus M/S.Blue Star Limited Citation: JURISHOUR-357-HC-2026(TEL) Case No.: Central Excise Appeal No.327 Of 2010 Date: 11.02.2026 Counsel For Appellant: A.Rama Krishna Reddy Counsel For Respondent: Karan Talwar Click Here To Read Order Read More: S. 74 SCN Valid Even If Based on Material Collected by Another Officer: Karnataka HC

Service Tax Not Leviable on Composite Works Contracts Prior to 1 June 2007: Telangana High Court

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