Goods Supplied in Composite Air‑Conditioning Contracts Cannot Be Taxed as Service: CESTAT Chandigarh

CESTAT Chandigarh set aside service tax demands on an air-conditioning contractor’s government supplies, holding that goods subjected to sales tax must be excluded and that unsettled law on composite contracts barred the extended period.

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh, has allowed five appeals of an air-conditioning contractor. It held that, under composite contracts, service tax could not be demanded on the value of goods supplied, particularly where that value was recorded and had suffered sales tax [National Refrigeration & Air Conditioning Engg. v. Commissioner of Central Excise & ST, Ludhiana & Ors., 2026-juristway.com-3333-CESTAT(Chandigarh)-ST].

The Bench of Somesh Arora, Member (Judicial), and P. Anjani Kumar, Member (Technical), heard the appeals; the order was written by Mr. Arora. The appellant supplied air-conditioning plant, equipment and parts, with related services and civil work, to Defence, Railways, airport authorities and government hospitals under tenders that specified the goods. On a gross receipt of ₹19,90,42,973, the Commissioner had allowed 67% as the goods value, while the appellant claimed actual goods supplies of ₹16,35,58,494, supported by a chartered accountant’s certificate and contracts.

Relying on CCE vs. Larsen & Toubro Limited (2015), the Tribunal held that tax on the goods portion could not be demanded, especially when the goods value charged to sales tax was available. That value had to be deducted on actual basis, not notionally. It also noted that works contracts became taxable only from 1 Jun 2007.

The Tribunal accepted that, apart from ₹50,58,543 which the appellant itself declared as taxable service income and claimed to have paid tax on, the receipts related to work in Jammu and Kashmir, civil works or services to the Government, which were exempt or not taxable at the time. No Government recipient had paid any tax either.

On limitation, the show cause notice (SCN) dated 22 Apr 2009 for October 2003 to September 2008 invoked the extended period. The Tribunal held that the law on composite contracts was fluid until the Supreme Court settled it in Larsen & Toubro, so neither intent to evade nor suppression could be alleged. Supplies were mostly to Government bodies, and the appellant was not trying to enrich itself.

The demands were held unsustainable and all appeals were allowed with consequential relief.

2026-juristway.com-3333-CESTAT(Chandigarh)-ST