2024 (4) TMI 1326 - AT - Service Tax

Sub-contractor held liable for service tax; extended five-year limitation denied for absence of suppression or fraud

CESTAT (Allahabad)-AT held that the Larger Bench ruling that a sub-contractor remains liable for service tax even if the main contractor discharged tax on ... Exemption from payment of service tax - service provided as sub-contractor - services provided by the Appellant to MGI Infra in the nontaxable territory of Jammu & Kashmir - difference of opinion - question referred to Hon’ble President for referring to Third Member. Whether the decision of the Tribunal in the case of Commissioner of Customs & Central Excise, Indore Vs. Shivhare Roadlines [2009 (2) TMI 202 - CESTAT, NEW DELHI] and JAC Air Services Pvt. Ltd. Vs. Commissioner of Service Tax [2013 (5) TMI 697 - CESTAT NEW DELHI] would apply or the issue having been settled by the Larger Bench in the case of CST Vs. Melange Developers P.Ltd. [2019 (6) TMI 518 - CESTAT NEW DELHI-LB] would apply and, therefore, the demand needs to be confirmed, however, only for the normal period? HELD THAT:- The issue whether a sub-contractor is liable to pay service tax even if the main contractor has discharged the service tax liability on the gross amount was considered by the Larger Bench (Melange Developers) in view of the conflicting decisions of the various Division Benches of the Tribunal. The Larger Bench considering the earlier decisions and the provisions of the Act and also the Master Circular dated 23.08.2007 decided the reference that a sub-contractor would be liable to pay service tax even if the main contractor has discharged service tax liability on the activity undertaken by the sub-contractor in pursuance of the contract. Once the decision has been rendered by the Larger Bench, judicial discipline demands that the same shall be followed in all the subsequent cases - It is opined that the said decision is binding and has to be followed in the present case as well as in all the future cases unless a decision contrary to that is rendered by a higher forum. Since the issue on merits has been decided against the appellant holding them liable to pay service tax, it is necessary to examine the issue of limitation as referred to by the Member (Technical). The period in question for which the liability of the appellant has been fastened as a sub-contractor is from 20.10.2011 and 20.11.2012, for which the show cause notice has been issued on 30.09.2015. As per the provisions of Section 73(1), the normal period for issuance of the show cause notice is 18 months and, therefore, the submission of the learned counsel is that the show cause notice has been issued beyond the period of limitation. The extended period of 5 years is not invokable as it is not a case of suppression, fraud, collusion or wilful misstatement, which are necessary ingredients for justifying the invocation of the extended period of limitation in terms of proviso to Section 73(1). The law on invoking the extended period of limitation has been settled over the period by various decisions of the Apex Court and other forums. The principle of law enunciated by the Apex Court in Collector of Central Excise versus Chemphar Drugs & Liniments [1989 (2) TMI 116 - SUPREME COURT] subsequently followed in Pushpam Pharmaceuticals Company Vs. CCE, Bombay [1995 (3) TMI 100 - SUPREME COURT] & Easland Combines, Coimbatore Vs. CCE, Coimbatore [2003 (1) TMI 107 - SUPREME COURT] is that extended period of limitation is applicable only when something positive other than mere inaction or failure on the part of assessee is proved. Conscious or deliberate withholding of information by manufacturer is necessary to invoke larger limitation of five years. With reference to the concept of suppression which has been used in the proviso to Section 11A of the Act, the Supreme Court in Continental Foundation Joint Venture versus Commissioner of Central Excise, Chandigarh [2007 (8) TMI 11 - SUPREME COURT] observed that it has been accompanied by very strong words as “fraud” or “collusion” and therefore has to be construed strictly. Mere omission to give correct information is not suppression of facts, unless it was deliberate to stop the payment of duty. The principle that emerges from the aforesaid decision is that during the relevant period there was difference of opinion between the various Benches and also various Circulars and Trade Notices were issued by the Commissionerate. The issue being one of interpretation has been held to be a bonafide belief on the part of the assessee that there is no liability towards the service tax - In the present case also, there was divergence of opinion as to the liability of the sub-contractor to discharge the duty liability, even when the principal contractor had already discharged the same and in that view, the appellant bonafide believed that they were not liable to pay the duty as the principal contractor had already paid the same. It being an interpretational issue which was set at rest by the decision of the Larger Bench, no malafides can be attributed to the appellant. The invocation of the extended period of limitation is, therefore, devoid of any merits. Thus, no liability of service tax can be fastened on the appellant by invoking the extended period of limitation as the very ingredients for invoking the same in terms of Section 73(1) proviso are not satisfied. It is not a case of suppression, fraud or wilful mis-statement. In the circumstances, the demand in question for the period 2010-11 and 2011-12 is not sustainable. However, the liability needs to be ascertained for the remaining period and hence, the matter is remanded back to the Original Authority for re-computation of the service tax liability, if any. The demand towards service tax liability as sub-contractor cannot be quashed in terms of the decisions of the Tribunal in Shivhare Roadlines and JAC Air Services Pvt. Ltd. - On merits, the issue stands settled by the decision of the Larger Bench in the case of Melange Developers P. Ltd. and the appellant is liable to pay service tax in terms thereof - The extended period of limitation cannot be invoked in the present case and the liability has to be restricted to the normal period of limitation. The demand for the extended period of limitation is therefore, set aside and the demand for the normal period is upheld. The Appeal filed by the Appellant is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a sub-contractor is liable to pay service tax on consideration received from a main contractor when the main contractor has already discharged service tax on the gross value of the contract. 2. Whether the extended period of limitation (proviso to Section 73(1)) can be invoked to demand service tax from the sub-contractor in the absence of fraud, collusion, wilful mis-statement or intentional suppression of facts. 3. Whether services performed in the territory of Jammu & Kashmir for a principal (and claimed as non-taxable) should be treated as outside the taxable territory under the Place of Provision of Services Rules and relevant statutory territorial provisions. 4. Whether challan payments, certificates of payment by the main contractor, and documentary evidence submitted by the sub-contractor should be taken into account in recomputing liability (including allowance of payments credited and exemption claimed). ISSUE-WISE DETAILED ANALYSIS Issue 1: Liability of sub-contractor where main contractor paid service tax Legal framework: Sectional scheme requiring every person providing taxable service to pay service tax; Cenvat/credit mechanism permits recipient (main contractor) to take credit for service tax paid by input providers; Master Circulars and Rules govern treatment of subcontract arrangements and input credit. Precedent treatment: Conflicting Tribunal decisions exist. Some earlier Division Bench decisions held that where the principal contractor discharged tax on the whole contract the subcontractor should not be doubly taxed. A Larger Bench later considered conflicting precedents and took a contrary view that a sub-contractor is independently liable to pay service tax, subject to the main contractor availing credit under the Rules. Interpretation and reasoning: The Bench majority applied the Larger Bench ratio holding that a sub-contractor, being a person who provides taxable service, is required to discharge service tax on the consideration received from the main contractor; the statutory scheme (including Section 68 equivalent provisions and Cenvat Rules) contemplates separate liability at each stage with mechanisms to avoid double taxation through credit. The earlier decisions absolving subcontractors were explained as arising from peculiar facts or predating authoritative clarifications. Ratio vs. Obiter: Ratio - where the Larger Bench has held that sub-contractors must pay service tax even if the main contractor paid tax on the gross value, that ruling forms binding ratio for the Tribunal and must be followed; earlier contrary decisions are treated as no longer authoritative (overruled to the extent inconsistent). Conclusions: The sub-contractor is liable to pay service tax on services rendered to the main contractor; the demand for tax (on merits) cannot be quashed on the ground that the main contractor previously paid tax. However, the main contractor's tax payment may operate as credit at the main contractor's end and does not eliminate the sub-contractor's statutory obligation to pay. Issue 2: Invoking extended period of limitation (proviso to Section 73(1)) Legal framework: Proviso to Section 73(1) permits extended limitation period on proof of suppression, fraud, collusion or wilful mis-statement with intent to evade duty; normal limitation is 18 months; jurisprudence requires a positive prima facie finding of intentional concealment to invoke extended period. Precedent treatment: Apex Court and Tribunal authorities require something more than mere omission or non-payment - a deliberate act or positive suppression - before invoking extended period; bona fide disputes of law or interpretation generally preclude extended limitation invocation. Interpretation and reasoning: The Bench examined documentary record and payments. There was evidence that substantial service tax had been deposited by the appellant by challans and that the main contractor had discharged part of the liability (certificate). The record did not show intentional suppression, fraud, collusion or wilful mis-statement by the sub-contractor; the contested liability involved an interpretative issue on whether subcontractor was liable where main contractor paid. Given the bona fide nature of the dispute and the absence of positive material evidencing intent to evade, the extended period was held inapplicable. Ratio vs. Obiter: Ratio - extended period cannot be invoked in absence of evidence of suppression/fraud/collusion/wilful mis-statement; where the liability arises from an interpretational dispute among benches and the Larger Bench eventually settles the issue, earlier bona fide positions do not render a taxpayer subject to extended limitation. Conclusions: The demand for the extended period is not sustainable; any liability must be limited to the normal period of limitation and recomputed accordingly. Issue 3: Territorial (Jammu & Kashmir) characterisation of certain services as non-taxable Legal framework: Territorial extension of the Service Tax chapter excludes the State of Jammu & Kashmir during the relevant period; Place of Provision of Services Rules and the location of the service recipient determine whether service is provided in taxable territory. Precedent treatment: Authorities require cogent documentary evidence (work orders, invoices, agreements) to establish that services were actually provided in non-taxable territory; certificates alone may be insufficient absent supporting documents. Interpretation and reasoning: The Adjudicating Authority and Appellate Authority were sceptical of a lone certificate and required corroboration (work orders, bills, invoices) showing execution in Jammu & Kashmir; the Technical Member observed that a work order subsequently produced should be examined on remand when recomputing liability. The majority concluded that the matter should be remanded for verification of the claimed non-taxable activity and supporting documents. Ratio vs. Obiter: Ratio - claim of services being performed in non-taxable territory must be supported by adequate documentary evidence; certificate alone may not be clinching. Obiter - guidance to remit and verify specific documents on remand. Conclusions: The claim of non-taxability for services to the party in Jammu & Kashmir requires verification; the matter is remanded to the original authority to take the work order and other supporting documents into account in recomputing liability. Issue 4: Accounting for challans, payments by main contractor, and recomputation of liability Legal framework: Payments made by assessee by challan must be credited; payments by a main contractor may be relevant for establishing that part of liability has been discharged; recomputation requires adjustment for accepted payments and exemptions. Precedent treatment: Tribunal practice calls for recomputation on remand where there are contested credits, missed challans, or claims of exemption/non-taxable supply that were not fully examined below. Interpretation and reasoning: The Bench found substantial challan payments by the appellant and additional payments by the main contractor; given the differing findings on liability and limitation, and given incomplete appreciation of certain challans and the work order for the Jammu & Kashmir claim, the matter was remanded to the Original Authority to recompute demand after verifying challans, main contractor's payments, and the work order(s). Ratio vs. Obiter: Ratio - where payments or documentary evidence affecting liability are produced, adjudicating authorities must account for them on recomputation; remand is appropriate to effect recalculation consistent with legal conclusions (liability on merits but limited by limitation and accepted payments). Conclusions: The appeal is partly allowed - the extended period demand is set aside; the sub-contractor's liability on merits is sustained (following Larger Bench) but must be recomputed for the normal limitation period after allowing credited challans, verifying the main contractor's payments and any valid non-taxable work evidence; matter remanded to Original Authority for recomputation and consequential relief.