Service Tax Demand Time-Barred for Sub Contractor where Principal Contractor Paid Service Tax: CESTAT Sets Aside Demand, Interest & Penalty [Read Order]

Relying on Supreme Court precedents, the tribunal held that once a demand is found to be time-barred, there is no occasion to examine the merits of the case.

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a Service Tax demand against a sub-contractor and ruled that the demand was time-barred due to a lack of intent to evade tax and principal contractor paid service tax.

Sree Nandhees Technologies Pvt. Ltd. (appellant) acted as a dedicated sub-contractor for M/s. Emerson Network Power India Pvt. Ltd. (Principal), providing maintenance and repair services for UPS systems.

While the appellant paid service tax on commissions received, it did not pay tax on the main maintenance services, contending that the Principal had already discharged the full service tax liability.

The Revenue Department, following an audit, alleged that the appellant was liable for Service Tax under ‘Maintenance or Repair Service’ for the period 2004-05 to 2006-07. A Show Cause Notice was issued on 25.08.2009, invoking the extended period of limitation.

The Adjudicating Authority confirmed a demand of ₹13,18,116, along with interest and penalties. The order was also upheld by the Commissioner (Appeals). Aggrieved by the order, the appellant filed an appeal before the CESTAT.

The Counsel for the Appellant argued that the demand was barred by limitation as the appellant was a registered assessee regularly filing ST-3 returns. The Counsel further submitted that prior to the Master Circular of 2007, various Board Circulars clarified that sub-contractors were not required to pay service tax if the main contractor had already paid it.

The Revenue’s counsel relied on the Larger Bench decision in Melange Developers Pvt. Ltd., which settled that a sub-contractor is liable to pay service tax even if the main contractor has discharged the liability.

The bench comprising M. Ajit Kumar (Technical Member) and Ajayan T.V. (Judicial Member), observed that while the issue on merits was settled against the appellant by the Larger Bench, the demand in this specific case was unsustainable on the grounds of limitation.

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The tribunal noted that there was significant ambiguity and divergent legal views regarding sub-contractor liability prior to the 2007 Master Circular. It also observed that the Department failed to provide evidence of "intent to evade" or "wilful suppression," as the appellant's actions were based on a prevailing understanding of the law.

The tribunal noted that the appellant was consistently filing returns, and the income was not disclosed only due to the interpreted practice at the time. Relying on Supreme Court precedents, the tribunal held that once a demand is found to be time-barred, there is no occasion to examine the merits of the case.

The tribunal concluded that the order was legally unsustainable and set aside the demand, interest, and penalties. The appeal of the appellant was allowed.

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