Sub-contractor liable for service tax on excavation services as exemption requires construction course proof

The CESTAT NEW DELHI held that the respondent was liable to pay service tax on excavation services provided as a sub-contractor during Oct 2010 to Sept 2015. The exemption notification 17/2005-ST only applies to excavation activities "in the course of construction," which was not established here. The tribunal rejected the argument that sub-contractors are exempt from service tax liability when main contractors have discharged their obligations. However, the matter was remanded for recalculation of demand considering amounts already deposited and for correcting penalty calculation, as the 50% penalty rate was incorrectly applied to the pre-April 2011 period.

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Issues involved:
1. Whether the adjudicating authority was correct in dropping the demand of Rs 87,14,512/-Rs.
2. Whether the imposition of 50% penalty u/s 78 of the Finance Act, 1994 is correctRs.

Summary:

Issue 1: Dropping the Demand of Rs 87,14,512/-

The adjudicating authority dropped the demand of Rs 87,14,512/- on the ground that the services provided by the respondent were related to "site formation and clearance, excavation, earth moving, demolition" in relation to exempted services such as construction of roads, tunnels, and bridges. The authority examined work orders and certificates and concluded that these services were exempt from service tax under Notification No. 25/2012-ST w.e.f. 01.07.2012 and Notification No. 17/2005-ST for the period prior to 01.07.2012. However, the Tribunal noted that the exemption was only applicable if the services were provided in the course of construction, which was not the case here as the respondent's contracts were merely for excavation. The Tribunal cited previous judgments to support this interpretation and concluded that the respondent was liable to pay service tax for the period prior to 01.07.2012. The matter was remanded to the adjudicating authority for recalculation of the demand, taking into account the amount already paid.

Issue 2: Imposition of 50% Penalty u/s 78 of the Finance Act, 1994

The Tribunal observed that u/s 78(1) of the Finance Act, 1994, the penalty imposable is equal to 100% of the service tax evaded. The benefit of reduced penalty at 50% is available only w.e.f. 08.04.2011. The adjudicating authority had imposed a 50% penalty for the period prior to 08.04.2011, which was incorrect. The Tribunal agreed that the Commissioner erred in imposing a reduced penalty for the period prior to 08.04.2011 and directed recalculation of the penalty under section 78.

Conclusion:

The appeal was allowed by way of remand for recalculating the service tax liability for the period prior to 01.07.2012 and for recalculating the penalty under section 78.

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