Value under CAI Service

A service provider is rendering Commissioning and Installation of furnaces.   He has opted for Works contract services from June 2007.   His costing is as follows :  Cost of Furnace Rs.1 lakh. Commissioning and Installation charges Rs.1000 Total 101000.  He has paid Works Contract Tax (WCT - A State Govt. levy) at 4 percent on the TOTAL value of 101000.  But paid service tax (WCS) at 4.12% on Rs.1000 only.  Is that correct.  The department aruges that in as much as he has paid WCT (A composite contract wherein material value and labour CANNOT be seggregated) the Service tax is payable on the whole value of Rs.101000.  So the total tax liability would 4 + 4.12.  Alternatively, if he pays VAT at 12.5 (or applicable rate) on the material cost then he can pay service tax only on the labour portion without availing the abatement.  Is the view of the department is correct.