Conflicting Views On Subcontractor Tax Liability Bar Extended Limitation: CESTAT New Delhi

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi, on 5 November held that the extended period of limitation cannot be invoked to demand service tax from a subcontractor when conflicting judicial decisions existed on whether subcontractors were independently liable to pay tax if the main contractor had already discharged the liability.

A Bench of Judicial Member Ajay Sharma and Technical Member P.V. Subba Rao considered appeals filed by EMM AAR EL Constructions Pvt. Ltd. and its directors, Anil Lohchab and Rajinder Singh Lohchab, against the service tax demands and penalties imposed on them. It observed:

“However, the ground taken before us is a serious legal ground and it goes to the very core question as to whether any taxable event exigible to service tax had taken place at all. If the activity amounted to manufacture, it cannot be called a service either during the pre-negative list (before 1.7.2012) or after that date.”

EMM AAR EL Constructions had undertaken work as a subcontractor for Steel Authority of India Limited (SAIL) and National Thermal Power Corporation (NTPC).

The Service Tax Department alleged that the company had provided taxable services without obtaining registration or paying service tax. It consequently raised tax demands and imposed penalties on the company, along with personal penalties on its two directors.

Before the Tribunal, the company argued that the main contractors had already paid service tax on the entire value of the work, including the portion executed by the company.

It pointed out that conflicting judicial decisions existed on whether subcontractors were independently liable to pay service tax in such circumstances. It also contended that its activities involved fabrication at the site and amounted to manufacturing rather than provision of a taxable service.

The Tribunal observed that although the manufacturing argument had not been raised before the Commissioner, it involved an important legal question going to the root of the tax liability and therefore required examination.

It held that in view of conflicting decisions on the service tax liability of subcontractors, the Department could not invoke the extended period of limitation. It also found that the personal penalties imposed on the two directors were unsustainable.

The Bench directed that any service tax demand confirmed upon reconsideration would be restricted to the normal period of limitation. It also allowed the directors' appeals and set aside their personal penalties.

Accordingly, the CESTAT set aside the Commissioner's order and remanded the company's case for fresh examination of whether its activities amounted to manufacturing.

For Appellants: Advocate Abhas Mishra

For the Department: Rajiv Kapoor, Authorised Representative