Exemption to sub contractor from service tax

[Sudhir Kumar]

I am a sub contractor and were engaged to provide earth work to the main contractor who were engaged in road construction work for the government. As the road construction work is exempted from the liability of service tax. Will the work provided to the main contractor as earth work be also exempted from service tax. I have received a notice for the period 2016-17 by the department to pay the amount of service tax on the gross amount received from earth work.

[Shilpi Jain]

If the exemption entry reads as exemption for construction of road, exemption will not be applicable for the earthworks

However, if the exemption entry reads as 'services in relation to construction of road' exemption could be claimed as 'in relation to' has a wide meaining.

[Sudhir Kumar]

Exemption entry reads as "exemption for construction if sub-contractor providing services by way of work contract to another contractor providing work contract service which are exempted, in that case exemption is allowed for sub-contractor. please clear it.

[KASTURI SETHI]

Sh.Sudhir Kumar Ji,

First of all you are to ensure whether service provided by you is classified under the category of ,'Works Contract Service' or not. Therefore, you should talk of exemption. Go through the definition of 'works contract service' in pre-GST era.

Are you sure about classification/nomenclature of your service ?

[Ganeshan Kalyani]

Yes, "works contract service" was the correct term prevailing in pre-GST time. Sri Kasturi Sir has correctly mentioned the word.

[KASTURI SETHI]

Earth work is included in 'Works Contract Service'.

[Sudhir Kumar]

Yes, all the conditions laid down to define work contact service is with the I.e supply of material, supply of labour for compaction etc... But definition mention the crucial line for getting exemption is ' by way of' "not in relation to" so service provided by the me as earth work for road construction to the main contractor will be exempted?

[KASTURI SETHI]

Extract from Budget 19-20

(a) Works contract services supplied to the Government, Government entities where such works contract involves predominantly earth work.

This proves earth work is part of Works Contract Service.

[KASTURI SETHI]

The following case law proves that earth is covered under the category of construction of road :-

R. BALARAMI REDDY Versus COMMR. OF S.T., HYDERABAD 2018 (8) TMI 627 - CESTAT HYDERABAD

Site Formation and Clearance, Excavation and Earthmoving and Demolition service - Preparation/earth work for roads at thermal power plant - Assessee pleading that activity amounting to construction of road and eligible for benefit of Notification No. 17/2005-S.T. - HELD : Bill of quantities enclosed in said contract talks about tree cutting, site clearing and grubbing, earth work in excavation, earth work in filling, mechanical carriage and earth work for roads - Clarity of work in contract executed indicates that assessee carrying out earth work and site formation - Activity covered under category of construction of road - Demand along with interest upheld - Section 65(97A) of Finance Act, 1994. [para 7]

[KASTURI SETHI]

Q. "Yes, all the conditions laid down to define work contact service is with the I.e supply of material, supply of labour for compaction etc... But definition mention the crucial line for getting exemption is ' by way of' "not in relation to" so service provided by the me as earth work for road construction to the main contractor will be exempted ? "

Ans. If the above information is true (supply of service with material and there is transfer properly in goods, your activity is covered by Works Contract Service and you are entitled to exemption from ST vide serial no.29(h) of Notification No.25/12-ST dated as amended.

Although the following decision of AAR is applicable to the applicant specifically, yet you can take help from this decision to fight your case, if you receive any notice from the department. This decision is under GST but based on pre-GST era i.e. Service Tax

2018 (11) TMI 1265 - AUTHORITY FOR ADVANCE RULINGS, UTTARAKHAND IN RE : NHPC LIMITED

There is another school of thought on this very issue. That ground is i.e. Main contractor is providing service to Govt. (hence eligible for exemption) but sub-contractor is not providing to Govt. Sub-contractor is providing service to the main contractor. Hence sub-contractor is not eligible. I do not agree with this view.

In my view, exemption is available to your activity falls under Works Contract Service from all angles.

[KASTURI SETHI]

Pl.read 'IF your activity falls under works contract service from all angles."

AI Summary

Works contract service exemption may cover subcontractor earthwork for road projects when the activity qualifies as works contract.
Exemption turns on whether the subcontracted earthwork qualifies as Works Contract Service (notably involving supply of materials and transfer of property in goods) and on the exemption's wording-whether it covers construction generally or only services directly constituting construction of roads. Authorities and rulings cited treat earthwork, excavation and site formation as construction-related; if the subcontractor's activity meets works contract criteria and the exemption's scope, exemption may be available, though an alternative view denies relief where the subcontractor's contract is with the main contractor rather than the exempt principal.