Sub-contractor not liable for service tax if main contractor paid tax on full contract value during 2008-2012.

Case Name:

Service Tax Appeal No. 10486 of 2014- DB: Pramukh Earth Movers vs. C.C.E. & S.T.-Vapi

Key Takeaways:

- Sub-contractors were not clearly liable for service tax if the main contractor paid tax on the full contract value during 2008-2012. - The law on this issue was ambiguous and subject to conflicting judgments until a larger bench settled it in 2019. - In such cases of legal ambiguity, the extended period for demanding service tax cannot be invoked against the sub-contractor. **Issue:** Can the demand for service tax from the appellant sub-contractor be sustained by invoking the extended period of limitation under Section 73(1) of the Finance Act, 1994? **Facts:** During 2008-2012, the appellant provided services as a sub-contractor to main contractors who obtained contracts. The appellant did not pay service tax, believing the main contractors had discharged the tax liability on the full contract value. A show cause notice was issued in 2012, demanding service tax of Rs. 86,57,392/- for 2007-2011 by invoking the extended period under Section 73(1). **Arguments:** - Appellant: The law on sub-contractor's service tax liability was ambiguous during 2008-2012 due to conflicting judgments. The extended period cannot be invoked as there was no intent to evade tax. - Revenue: Reiterated the findings of the impugned order. **Key Legal Precedents:** - M/s Melange Developers Pvt. Ltd. (2019) 60 TMI 518 (CESTAT New Delhi) - M/s. Synergy Engineers Group Pvt. Ltd. (2023) 5 CENTAX 158 (Tri.-Del) - M/s. Vinoth Shipping Services (2021) 55 GSTL 313 (Tri. Chennai) - M/s. Vishal Engineering Company vs. Commissioner (2023) 7 TMI 260 (CESTAT Chandigarh) **Judgement:** The court ruled that the extended period demand cannot be sustained against the appellant. The law on sub-contractor's service tax liability was ambiguous during 2008-2012 due to conflicting judgments. In such cases of legal ambiguity, the extended period under Section 73(1) cannot be invoked as there was no intent to evade tax. The court set aside the impugned order and allowed the appeal. **FAQs:** Q: What was the main issue in this case? A: The main issue was whether the extended period for demanding service tax from the appellant sub-contractor could be invoked under Section 73(1) of the Finance Act, 1994. Q: Why did the court rule in favor of the appellant? A: The court ruled in favor of the appellant because the law on sub-contractor's service tax liability was ambiguous during 2008-2012 due to conflicting judgments. In such cases of legal ambiguity, the extended period cannot be invoked as there was no intent to evade tax. Q: What was the significance of the larger bench judgment in M/s Melange Developers Pvt. Ltd.? A: The larger bench judgment in M/s Melange Developers Pvt. Ltd. (2019) settled the issue of sub-contractor's service tax liability, clarifying that they are liable to pay service tax even if the main contractor has paid tax on the full contract value. Q: What was the court's direction regarding the demand for service tax? A: The court set aside the impugned order and allowed the appeal, effectively quashing the demand for service tax from the appellant for the extended period.

The brief facts of the case are that during the period 16.05.2008 to 31.03.2012 the appellant was engaged in providing services of “Supply of Tangible Goods, Site Formation/Leveling of Land and Construction Service in the capacity of Sub-contractor. The main contractors obtained the contracts out of which only partial of work was assigned to the appellant in respect of which appellant provided the aforesaid services. The appellant under the beliefthat main contract is discharging the service tax liability on the contracts awarded to them, they are not liable to pay Service Tax on the works/Services rendered by him. Therefore the appellant did not take service tax registration and also not paid the service Tax on the aforesaid service provided by him in the capacity of Sub-contractor. Therefore, a show cause notice dated 07.06.2012 was issued to the appellant covering the period 13.11.2007 to 31.03.2011 by invoking the extended period of 5 years as per the first Proviso to Subsection(1) of Section 73 of Finance Act, 1994 for demanding Service Tax amounting to Rs 86,57,392/- by the Order-inOriginal dated 03.09.2013. The commissioner confirmed the demand holding that Master Circular No. 96/7/2007- Service Tax dated 23.08.2007 covers the issue of liability of sub-contractor.

1.1 As per the said circular, sub-contractor is liable to pay Service Tax is not absolved even when the main contractor discharge the service tax on the total value of the Service tax. The demand of service tax was confirmed invoking extended period of limitation under proviso to section 73(1) of Finance Act, 1994. The penalty under section 78 and 77 of the Finance Act, 1994 were also imposed therefore, the present appeal filed by the appellant.

2. A letter dated 03.08.2023 given by the Chartered Accountant Shri Hardik P. Shah and Company is placed on record, according to which it was requested to decide the present appeal considering submissions placed on record and in the light of the judgments, the same is taken on record.

2.1 As per the submission of the appellant, it was submitted that it is not in dispute that the appellant has provided the services ofsupply of tangible goods, site formation and clearance on construction service in the capacity of sub-contractor,where the main contractors have discharged their liability of Service Tax on the total contract value.

2.2 It was submitted by the appellant that the only issue that remains for consideration before this Hon’ble Tribunal is whether service tax demand can be sustained invoking extended period of limitation, where appellant has provided the aforesaid services in the capacity of sub-contractor and main contractor has discharged the service tax on the total contract value. It is submitted that the issue in no longer res-Integra in view of the following decision of this Tribunal wherein it was held that during the period of dispute the liability of sub-contractor for the payment of Service Tax was not free from doubt and which was only settled by the larger bench of Tribunal in the case of M/s Melange developers Pvt. Ltd reported in 2019(60) TMI 518 CESTAT (New Delhi), M/s. Synergy Engineers Group Pvt. Ltd. Reported in (2023) 5 CENTAX 158 (Tri.-Del), M/s. Vinoth Shipping Services reported in 2021 (55) GSTL 313 (Tri. Chennai), M/s. Vishal Engineering Company Vs. Commissioner of Central Excise and Service Tax Commissionerate, Panchkula reported in 2023 (7) TMI 260- CESTAT (Chandigarh).

2.3 It is further submitted that during the period under dispute because of conflicting decisions and ambiguity of the law the matter was not clear and finally it got settled in the year 2019 by the Larger Bench hence the benefit of this must be extended to the appellant having no established malafide intention. Since the entire demand is for extended period the same is liable to be set aside as it is beyond normal period of one year.

3. Shri Rajesh Nathan Learned Assistant commissioner (AR) appearing on behalf of the revenue reiterates the findings of the impugned order.

4. We have carefully considered the submission made by both the sides and perused the records. We find that only issue to be decided in the present case is whether the demand is hit by limitation or otherwise. We find that the period involved in the present case is 01.11.2007 to 31.03.2011 and the show cause notice was issued after one year i.e. 07.06.2012 therefore the entire demand is under extended period.

4.1 In the present case the appellant have submitted that the appellant was admittedly working as sub-contractor. They were under bonafide belief that since the main contractor has discharged the service Tax on the entire value including the value of the appellant’s service they are not liable to pay the service Tax. In this regard we find that the issue was not free from doubt and the matter was referred to the Larger Bench and due to conflicting judgments the larger bench has finally decided thatin case of service provided by sub-contractor even though the main contractor have paid the service tax on total value the sub-contractor is liable to pay service tax.Since there was serious doubt about the taxability of the sub-contractor and also due to conflicting judgment, which subsequently resolved by the larger bench in the case of M/s Melange developers Pvt. Ltd (Supra), the bonafide belief of the appellant that they are not liability to pay service tax cannot be doubted, questioned.In such situation the extended period which can be invoked only on the ingredient such as suppuration of fact, misstatement, fraud, collusion with intent to evadepayment of Service Tax, cannot be invoked.

4.2 On the identical fact this Tribunal has consistently taken a view that on the issue of taxability on sub-contractor the extended period cannot be invoked this has been considered in the following Judgments:

In the case of M/s. Synergy Engineers Group Pvt. Ltd. Delhi Tribunal passed the following order:

“15. The issue as to whether the extended period of limitation could be invoked in such a situation when there are conflicting views of the Tribunal on a particular issue has been considered by the Supreme Court in various decisions.

16. In Jaiprakash Industries Ltd. vs. Commissioner of Central Excise, Chandigarh, the Supreme Court held that when there are divergent views of High Courts, there can be a bona fide doubt as to whether the activity would amount to manufacture andin such circumstances it cannot be urged that there was mis-statement or suppression of facts with intent to evade payment of duty.

17. In Commissioner of Central Excise, Vapi vs. Kolety Gum Industries', the Supreme Court held that when there are conflicting judgments of the Tribunal, the assessee may have a bona fide belief that service tax is not payable and in such a situation, the extended period of limitation cannot be invoked by the Department.

18. In Continental Foundation Joint Venture vs. Commissioner of Central Excise, Chandigarh, the Supreme Court held that when there is a scope for entertaining a doubt about the view to be taken, the extended period of limitation cannot be invoked.

19. The finding, therefore, that has been recorded by the Principal Commissioner for denying the invocation of the extended period of limitation does not suffer from any illegality.

20. in this view of the matter, the appeals filed by the assessee and the Department deserve to be dismissed and are dismissed.”

In the case of M/s. Vinoth Shipping Services Chennai Tribunal passed the following decision:

“9.1 The Learned Counsel for the appellant has argued on the ground of limitation also. It can also be seen that during the relevant period, the issue as to whether a subcontractor has to pay Service Tax separately even when the main contractor had discharged Service Tax on the very same services was subject matter of litigation before various fora. In the decisions of M/s. Semac Pvt. Ltd. (supra), M/s. Shivhare Roadlines (supra) and M/s. Urvi Construction (supra), the Tribunal had held that sub-contractors are not liable to pay Service Tax. There were conflicting views and the issue was referred to Larger Bench. In M/s. Max Logistics Ltd. v. Commissioner of Central Excise, Jaipur reported in 2017 (47) S.T.R. 41 (Tri. - Del.), the question as to whether extended period of limitation can be invoked on the above issue has been analysed as below : Considering the above discussion and analysis the service tax “

11. liability on the appellant cannot be contested as invalid. We uphold the findings in the impugned order regarding tax liability. However, the appellants contested the demand on the question of time bar also. It is their case that the full amount collected by RSIC from the importers and exports has been subjected to service tax. Even if the appellant is held liable on their share of Revenue received from RSIC the said tax is eligible for credit to RSIC. Further, the issue involved is interpretation of law and there is no intend to evade payment of duty in such situation. The appellants relied on various case laws to reiterate their views. We find that the appellant is having a strong ground regarding the question of timebar. It is to be noted that all invoices, for full consideration, have been raised by RSIC and the amount collected from the clients [importers and exports] were subjected to service tax which was deposited to the Government. RSIC in turn are paying certain amount to the appellants to get the services in these ICDs. In such situation, there is a clear possibility for a bona fide belief that as the whole amount has been subjected to service tax the amount received by the appellant may not be liable to service tax in connection with the services rendered by them. The issue involved has been a subject matter of interpretation by the Tribunal and High Courts. In fact the earlier Circular issued by the Board, covering the period prior to the introduction of Cenvat Credit Rules gave an impression that when the main service provider discharged the service tax on gross value there may not be tax liability on the sub-contractor rendering similar service to the main contractor. The Tribunal in various cases held in such a case involving interpretation of law and also a bona fide belief regarding service tax liability, will not attract the demand for extended period. We also take note that service tax liability on the appellant when discharged will be available as a credit to RSIC which can be used by RSIC for discharging their overall service tax liability. As such, to impute motivation to the appellant for intention to evade payment of duty is not sustainable. A reference can be made to the Tribunal’s decisions in British Airways v. CCE (Adjn.), Delhi reported in 2014 (36) S.T.R. 598 (Tri. - Del.), Atul Ltd. v. CCE, Surat-II reported in 2009 (237) E.L.T. 287 (Tri. - Ahmd.). In the facts and circumstances of this case, we find that the demand for extended period is not sustainable. We have also perused the reasons recorded by the Original Authority for invoking extended period of demand. He recorded that but for the Department’s investigation the non-payment of tax would not have come to the notice. Further, the balance sheet for certain years have not been furnished in time by the appellant which was obtained from Registrar of Companies. As such, it was held that the appellants wilfully suppressed material facts. We find that the service tax demand against the appellant was sought to be confirmed mainly on the basis of the terms of agreement between the appellant and RSIC. The gross receipt of RSIC and service tax payment thereupon is available with the Department. A portion of that receipt is now being taxed under BIS at the hands of the appellant. The service tax liability is as such on the arrangement based on agreement which is also the basis for payment of full service tax by RSIC. In other words, the service tax liability of both RSIC and the appellant has common source agreement. As such, we find the demand for extended period is not sustainable in the present case.”

9.2.1 On perusal of the Show Cause Notice, there is no positive act of wilful suppression/mis-statement alleged on the part of the assessee. In the last part of paragraph 3 of the Show Cause Notice, it is merely stated as under:

“...As the non-payment/non-registration came to the notice of the department only after gathering intelligence and discreet investigation conducted by the headquarters preventive unit, it appears that extended period of limitation is applicable to the facts of the case for recovery of service tax.”

9.2.2 Even in the Order-in-Original, the only finding for invoking the extended period is noted in paragraph 19, as under :

“As regards penal action, M/s. Vinoth Shipping Services, Tuticorin have contravened the Act by suppressing the fact of rendering services and not paying the Tax due during the year 2006-07 and by not obtaining registration certificate for service rendered. Hence penalty is imposable under Sections 76, 77 & 78 of the Act.”

9.2.3 There is no clear allegation that the appellants have wilfully suppressed facts with the intention to evade payment of Service Tax. In the present case, the main contractor M/s. ACL collected the full consideration including Service Tax from the clients, which is clear from the records. Appellants from the very beginning have raised the contention that they were instructed by M/s. ACL that they are not required to pay the Service Tax. We cannot find any factual basis for invoking the extended period.

9.3 We therefore hold that the demand raised by invoking the extended period cannot be sustained and requires to be set aside, which we hereby do.

10. From the discussions, we hold that the appeal fails on merits. However, we hold that the demand for the extended period of limitation, if any, cannot sustain and the impugned order to this extent is set aside, without disturbing any demand that falls within the normal period. For the same reasons, we find that the penalties cannot sustain. We set aside the same. The appellant succeeds on the ground of limitation only.

11. The appeal is disposed of on above terms.”

In the case of M/s. Vishal Engineering Company (Supra) Chandigarh Tribunal has passed the following order:

“11. Further, we find that the issue whether in such cases extended period of limitation can be invoked or not was also considered by various benches of Tribunal and in this regard the Delhi Tribunal in the case of Max Logistics Ltd. Vs. Commissioner of Central Excise, Jaipur, 2017 (47) S.T.R. 41 (Tri-Del.). In para 11 has held as under:

“11. Considering the above discussion and analysis the service tax liability on the appellant cannot be contested as invalid. We uphold the findings in the impugned order regarding tax liability. However, the appellants contested the demand on the question of time bar also. It is their case that the full amount collected by RSIC from the importers and exports has been subjected to service tax. Even if the appellant is held liable on their share of Revenue received from RSIC the said tax is eligible for credit to RSIC. Further, the issue involved is interpretation of law and there is no intend to evade payment of duty in such situation. The appellants relied on various case laws to reiterate their views. We find that the appellant is having a strong ground regarding the question of time-bar. It is to be noted that all invoices, for full consideration, have been raised by RSIC and the amount collected from the clients [importers and exports) were subjected to service tax which was deposited to the Government. RSIC in turn are paying certain amount to the appellants to get the services in these ICDs. In such situation, there is a clear possibility for a bona fide belief that as the whole amount has been subjected to service tax the amount received by the appellant may not be liable to service tax in connection with the services rendered by them.

The issue involved has been a subject matter of interpretation by the Tribunal and High Courts. In fact the earlier Circular issued by the Board, covering the period prior to the introduction of Cenvat Credit Rules gave an impression that when the main service provider discharged the service tax on gross value there may not be tax liability on the sub-contractor rendering similar service to the main contractor The Tribunal in various cases held in such a case involving interpretation of law and also a bona fide belief regarding service tax liability, will not attract the demand for extended period. We also take note that service tax liability on the appellant when discharged will be available as a credit to RSIC which can be used by RSIC for discharging their overall service tax liability. As such, to impute motivation to the appellant for intention to evade payment of duty is not sustainable. A reference can be made to the Tribunal's decisions in British Airways v. CCE (Adjn.), Delhi reported in 2014 (36) STR. 598 (Tri. - Del.). Atul Ltd. v. CCE. Surat-Il reported in 2009 (237) E.LT. 287 (Tri- Ahmd.). In the facts and circumstances of this case, we find that the demand for extended period is not sustainable. We have also perused the reasons recorded by the Original Authority for invoking extended period of demand. He recorded that but for the Department's investigation the nonpayment of tax would not have come to the notice. Further, the balance sheet for certain years have not been furnished in time by the appellant which was obtained from Registrar of Companies. As such, it was held that the appellants wilfully suppressed material facts. We find that the service tax demand against the appellant was sought to be confirmed mainly on the basis of the terms of agreement between the appellant and RSIC. The gross receipt of RSIC and service tax payment thereupon is available with the Department. A portion of that receipt is now being taxed under BIS at the hands of the appellant. The service, tax liability is as such on the arrangement based on agreement which is also the basis for payment of full service tax by RSIC. In other words, the service tax liability of both RSIC and the appellant has common source agreement. As such, we find the demand for extended period is not sustainable in the present case."

12. The said findings on limitation has also been approved by the Larger Bench of the Tribunal in the case of Melange Developers Pvt. Ltd. cited (Supra). Further, we find that this issue has also been considered recently by the Division Bench of the Ahmadabad Tribunal in the case of Shanti Construction Company Vs. CCE & S.T., Gujarat reported in 2023-TIOL-223-CESTAT-AHM wherein the Hon'ble Tribunal has considered various circulars issued by the department from time to time and also considered various decisions given by the Tribunal and thereafter held that extended period of limitation cannot be invoked to demand service tax in such cases.

13. In this regard, it is relevant to reproduce the said findings of the Tribunal in para 5.2 as under:

"On limitation also we agree with the argument of Ld, Counsel. We find that during the relevant period there were various Circulars and trade notices by the Commissionerate clarifying that where the principle service provider discharged his service tax liability on the entire value of the services, a separate liability cannot be imposed against the sub-contractor. The said Circulars stands taken note of by the Tribunal in various judgments and its stand held that where the entire service tax has been paid on the full consideration of the services, the sub-contractors' liability would not arise to pay service tax again on the part of principle service. One such reference can be made by following circulars: TRU letter F. No. 341/18/2004-TRU (PI) dated 17-12-2004 -Circular No. 23/3/97-5.7, dated 13-10-1997-Master Circular No. 96/7/2007-ST dated 23-8-2007 In fact, also from various following decisions of the Tribunal:-

- Urvi Construction v. CST, Ahmedabad 2010 (17) S.TR. 302 (TH. Ahmd) 2009- TIOL1890- CESTAT-AHM

-CCE, Indore v. Shivhare Roadlines - 2009 (16) S.TR. 335 (Tri-Del.) -2009-TIOL-526-CESTAT- DEL

-Harshal & Company v. CCE, Vadodara - 2008 (12) S.TR. 574 (Tri-Ahmd.)

-Semac Pvt. Limited v. CCE, Bangalore-2006 (4) S.TR. 475 (Tr.- Bang) 2006-TIOL1546- CESTAT-BANG

-Shiva Industrial Security Agency v. CCE, Surat 2008 (12) S.T.R. 496 (Tri-Ahmd.)

-Synergy Audio Visual Workshop P. Ltd. v. CST, Bangalore 2008 (10) STR. 578 (TriBang)= 2008-TIOL-809-CESTAT-BANG

-OIKOS v. CCE, Bangalore 2007 (5) S.T.R. 229 (Tri-Bang)= 2006-TIOL-1760-CESTATBANG

In the Tribunal's decision in the case of OIKOS v. CCE. Bangalore - III reported in 2007 (5) S.T.R. 229 confirmed against the sub-contractor. To the similar effect the Tribunal decision in the case of Viral Builders v. CCE, Surat reported in 2011 (21) S.TR. 457 (Tri-Ahmd.) =2010-TIOL-1575- CESTAT- AHM observed that service stands provided only once and as such tax is not payable twice for the same service. Further in the case of Sunil Hi-Tech Engineers Ltd. v. CCE, Nagpur reported in 2010 (17) S.T.R. 121 (Tri-Mumbai) 2009-TIOL-1867-CESTAT-MUM, the service tax confirmed against the sub-contractor was set aside on the ground that the main contractor has already paid the Service Tax and the matter was remanded to verify the above effect. The same ratio was laid down by the Tribunal in the case of Newton Engg & Chemicals v. CCE, Vadodara reported in 2008 (12) S.TR. 378 (Tri- Ahmd.) and by the Larger Bench decision of the Tribunal in the case of Vijay Sharma & Co. v. CCE, Chandigarh reported in 2010 (20) STR. 309 (Tri-LB) 2010- TIOL-1215-CESTAT-DEL-LB.

14. In view of our discussion above by following the ratio of the above said decisions we hold that the appellant being sub-contractor is liable to pay service tax on 'Erection, Commissioning and Installation service' in view of the Larger Bench decision cited (Supra). But, extended period cannot be invoked to demand service tax from the appellant. In the present case, the period of dispute is from October, 2004 to March 2009 and as per the appellant the demand for the period April, 2004 to September 2008 amounting to Rs. 6019732/- is beyond limitation and is not sustainable and the demand for the normal period from October 2008 to March 2009 amounting to Rs. 11,53,446/- can be upheld. Hence for the purpose of computing the demand of service tax for the normal period along with interest, we remand the matter to the original authority with the direction to do this exercise within a period of two months after receiving the certified copy of this order.”

From the above catena of case laws, it is consistently held that in the case of Service Tax liability on the sub-contractor demand for the extended period cannot be sustained in the light of the larger bench judgment in the case of M/s Melange developers Pvt. Ltd (Supra). Therefore, following the aforesaid judgments in the present case also, we are of the view that the entire demand being issued for extended period i.e. beyond one year from the date of show cause notice shall not sustain on limitation alone.

5. Accordingly, we set aside the impugned order and allow the appeal with consequential relief if any in accordance with law.

(Pronounced in the open court on 17.08.2023)

(RAMESH NAIR)

MEMBER (JUDICIAL)

(C L MAHAR)

MEMBER (TECHNICAL)