2025 (5) TMI 484 - AT - Service Tax

Sub-contractor liable for service tax on construction services despite main contractor exemption claim

The CESTAT Ahmedabad ruled on service tax liability for construction services from 2009-10 to December 2013. The appellant, a sub-contractor, argued ... Liability to pay service tax on the construction services provided during 2009-10 to December 2013 - services were rendered to government bodies, statutory authorities, as a sub-contractor to main contractors - HELD THAT:- The period of dispute in the case is from 2009-10 to 2013-14(up to December, 2013) which involves both pre and post negative list regime. As far as services provided to Surat Municipal Corporation and Government of Gujarat are concerned, the show cause notice has already considered them as non-taxable services. The proprietor of the appellant in his statement dated 25.06.2014 has accepted to have suppressed the Taxable value & non-filing of ST-3 returns. He provided details of exempted income and gross taxable income from the services which Revenue has taken in the show cause notice. The plea taken by the appellant for not taking service tax registration and non-payment of service tax is that the main contractor would be paying the service tax and he being a subcontractor, is not be liable to pay the service tax. The same argument he applied for construction services provided to M/s M D developer, space creators and Shyam Corporation and did not pay the service tax, thinking that the builder must have paid and even if, he pays the tax, the builder will be able to take Cenvat credit of the same and the whole exercise will be revenue neutral. The ingredients for invocation of extended period are available in this case. In the case of M/s. D H Patel vs. CCE & ST Surat-I [2023 (4) TMI 920 - CESTAT AHMEDABAD], this Tribunal has clearly brought out that M/s. GSPHCL is 100% owned by Government of Gujrat under Ministry of Home Affairs and therefore, the same was held to be a Government Organization. However, the appellant has not provided any service to M/s. GSPHCL directly and he has acted as subcontractor of M/s. D H Patel. Thus, they have provided service to M/s. D H Patel in this case and not to any government organization. As clarified by CBIC vide F No. 332/16/2010-TRU dated 24.05.2010, in the case of M/s NBCC that sub-contractor will have to pay service tax, plea of the appellant that they are not liable to pay service tax being a sub-contractor, is not acceptable. Regarding appellant is claim that service tax demand has been made from them without classifying the service. We find that the proprietor in his statements dated 25.06.2014 has clearly accepted to have provided Residential Complex Service and therefore, by their own admission, they are liable to pay service tax under the above category. Agreeing with the above proposition, in view of proprietor’s acceptance, it is deemed fit to remit the matter to the adjudicating authority to work out demand of service tax under Construction of Residential Complex Service from the date when service has been brought into tax net. Regarding allegation of wrong computation of Service Tax, it is found that the appellant have not clearly spelt out this allegation. Conclusion - i) Services provided directly to Government organizations such as Surat Municipal Corporation for non-commercial purposes are exempt from service tax. ii) The appellant's plea that being a sub-contractor, they are not liable to pay service tax is not acceptable in view of CBIC clarification and Tribunal precedents. iii) The adjudicating authority must re-compute the demand of service tax under Construction of Residential Complex Service from the date service was brought into the tax net and consider submissions on computation, interest, and penalties. The matter is remanded to the lower authority - appeal is partly allowed. The core legal questions considered by the Tribunal include:1. Whether the appellant is liable to pay service tax on the construction services provided during 2009-10 to December 2013, particularly when services were rendered to government bodies, statutory authorities, and as a sub-contractor to main contractors.2. Whether the extended period for adjudication under Section 11A(11) of the Central Excise Act, 1944 (as applicable to service tax) was validly invoked by the Revenue.3. Whether services provided to government organizations such as Gujarat State Police Housing Corporation Ltd. (GSPHCL) and Surat Municipal Corporation (SMC) are exempt from service tax.4. Whether the appellant, as a sub-contractor, is liable to pay service tax or whether the main contractor's payment of service tax absolves the sub-contractor from liability.5. Whether the demand of service tax, interest, and penalty was correctly calculated and imposed.Issue-wise Detailed Analysis:1. Liability to Pay Service Tax on Construction Services Rendered to Government Bodies and OthersThe legal framework involves the Finance Act, 1994, and relevant notifications and circulars exempting certain services rendered to government organizations from service tax. The appellant provided various services, including construction of police housing, heritage development, lake development, health and sanitation-related construction, irrigation works, and school construction. Some services were rendered directly to government entities (e.g., Surat Municipal Corporation, Government of Gujarat), while others were provided as a sub-contractor to M/s. D H Patel, who had contracts with government bodies such as GSPHCL and Tourism Corporation of Gujarat Ltd.The Court noted that services provided directly to government bodies such as SMC and Government of Gujarat (items d, e, f, g) were already considered non-taxable by the show cause notice. However, for services provided as a sub-contractor to M/s. D H Patel (items a, b, c), the appellant was liable to pay service tax. The Tribunal relied on prior decisions establishing that GSPHCL is a government organization and that services rendered directly to such entities are exempt. However, since the appellant acted as a sub-contractor to a private main contractor, the exemption did not extend to them.The Tribunal referred to the CBIC clarification (F No. 332/16/2010-TRU dated 24.05.2010) and prior Tribunal rulings (e.g., Melange Developers Private Ltd., Navnirman Construction Company, Pramukh Earth Movers) that sub-contractors must discharge service tax liability independently, even if the main contractor has paid service tax.Thus, the Court applied the law to facts, concluding that the appellant was liable for service tax on services rendered as a sub-contractor, while services directly provided to government entities were exempt.2. Validity of Invocation of Extended Period for AdjudicationThe appellant challenged the extended period invocation, citing precedents that require the adjudicating authority to record reasons for not completing adjudication within the statutory one-year period under Section 11A(11) of the Central Excise Act. The Tribunal referred to the Kopertek Metals Pvt. Ltd. case, which held that failure to record reasons invalidates the extended period adjudication.However, in the present case, the Tribunal found that the ingredients for invoking the extended period were present, supported by the proprietor's admission of suppression of taxable value, non-filing of returns, and non-payment of service tax. The statement under Section 14 of the Central Excise Act was relied upon to justify extended period invocation. The Court therefore upheld the extended period demand.3. Exemption of Services Rendered to Government OrganizationsThe appellant contended that services rendered to GSPHCL and SMC are exempt from service tax. The Tribunal acknowledged that GSPHCL is a government organization wholly owned by the Government of Gujarat, and prior rulings have held construction services for such entities exempt under the negative list or relevant notifications.Similarly, services provided to SMC for non-commercial purposes such as health, sanitation, school construction, and irrigation were recognized as exempt. The Tribunal thus confirmed the exemption for services directly provided to these government/statutory bodies.4. Liability of Sub-Contractor vs. Main ContractorThe appellant argued that as a sub-contractor, they were not liable to pay service tax since the main contractor would discharge the tax and claim Cenvat credit, rendering the matter revenue neutral. The Tribunal rejected this argument, citing the Larger Bench ruling in Melange Developers Private Ltd. and other precedents which clarified that sub-contractors must independently discharge service tax liability.The Tribunal emphasized that the appellant provided services to the main contractor (M/s. D H Patel), not directly to the government organization, and therefore could not claim exemption or avoid liability on this basis.5. Correctness of Service Tax Demand and ComputationThe appellant claimed the demand was mechanically confirmed and incorrectly calculated. The Tribunal noted that the proprietor admitted to providing Residential Complex Service, which is taxable. However, the appellant did not clearly specify the nature of errors in computation.The Tribunal remanded the matter to the adjudicating authority for re-computation of service tax liability under Construction of Residential Complex Service from the date it was brought under the tax net. The appellant was allowed to raise issues related to computation, interest, and penalty during remand proceedings for proper consideration.Significant Holdings:'The sub-contractor will be required to discharge service tax liability even if the main contractor has discharged liability on the work assigned to the sub-contractor.''M/s. GSPHCL is 100% owned by Government of Gujarat under Ministry of Home Affairs and therefore, the same was held to be a Government Organization.''Services provided directly to Government organizations such as Surat Municipal Corporation for non-commercial purposes are exempt from service tax.''The appellant's plea that being a sub-contractor, they are not liable to pay service tax is not acceptable in view of CBIC clarification and Tribunal precedents.''The ingredients for invocation of extended period are available where the appellant admitted suppression of taxable value and non-filing of returns.''The adjudicating authority must re-compute the demand of service tax under Construction of Residential Complex Service from the date service was brought into the tax net and consider submissions on computation, interest, and penalties.'The Tribunal partly allowed the appeal by remanding the matter for proper computation and assessment but upheld the liability of the appellant to pay service tax on services rendered as a sub-contractor and confirmed the validity of extended period invocation. Exemptions were recognized only for services directly provided to government/statutory bodies for non-commercial purposes.