Independent Services Cannot Be Clubbed as Ancillary to Composite Supply for Service Tax: Supreme Court dismisses Revenue's Appeal [Read Judgement]
In a transaction involving multiple supply of services, when an individual service is not merely a component ancillary to the overall supply but it is in itself distinct and independent supply, the same should not be classified as a component of single composite service
The Supreme Court has dismissed the Revenue’s appeal challenging the decision of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), which held that transportation and insurance services cannot be treated as incidental to installation services for the purpose of service tax and quashing the service tax demand.
Justices Manoj Misra and Ujjal Bhuyan dismissed the appeal both on the ground of delay of 172 days and on merits, affirming the Tribunal’s decision quashing the service tax demand.
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The Revenue alleged that the company, Kalpataru Projects, engaged in erection and installation of electricity transmission lines for Power Grid Corporation of India Ltd., had failed to include charges collected for arranging transportation and insurance in the taxable value of works contract services.
A service tax demand of over ₹14.42 crore was confirmed by the Commissioner after treating the transport and insurance charges as ancillary to installation services.
On appeal, the Ahmedabad Bench of CESTAT ruled in June 2024 that the Commissioner had erred in law. The Tribunal noted that the contracts clearly bifurcated charges for installation and for transportation/insurance, with separate invoices and independent consideration.
The tribunal said that “the demand of service tax confirmed on the facility of arranging for transportation/ insurance of goods offered by the appellant to their customer has been wrongly classified by the revenue as activity of incidental or ancillary to ”Installation Services”. It is well settled position that in a transaction involving multiple supply of services, when an individual service is not merely a component ancillary to the overall supply but it is in itself distinct and independent supply, the same should not be classified as a component of single composite service. In such circumstances, we find that the demand of service tax confirmed by the Ld. Commissioner in the present matter is legally not sustainable. Hence, the same is set aside.”
It said that under Section 66F of the Finance Act, 1994, bundled service classification applies only where one service is ancillary to another. Since transportation and insurance were completed before installation began and were independent in scope, they could not be subsumed into a single composite service. Accordingly, the tax demand was set aside in its entirety.
The Revenue challenged this decision before the Supreme Court, but the Court dismissed the appeal, thereby affirming the principle that independent services cannot be artificially clubbed as ancillary to a composite service for levy of tax.
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