Sub-Contractors Liable to Pay Service Tax Even if Main Contractor Has Already Paid: CESTAT [Read Order]

United Fabricators and Technical Services Pvt Ltd, the appellant, was registered for “Erection, Commissioning or Installation Services” and was audited by the department for 2006–2011. The department found that the appellant was claiming abatement under Notification No. 1/2006-ST and paying service tax on 33% of the taxable value but had not properly shown this in its ST-3 returns. The department issued two show cause notices demanding a total of approximately Rs. 5 crore in service tax, interest, and penalties.

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The appellant’s counsel argued in the grounds of appeal that their services should be classified under “Works Contract Services” and not under “Erection, Commissioning or Installation Services,” which would entitle them to a different tax treatment. The counsel argued that the department’s denial of works contract classification solely because of non-amendment of the registration certificate was unjustified and that incorrect classification should result in dropping the demand.

The counsel further argued that the appellant, as a subcontractor, should not be liable for service tax since the main contractor had already paid the tax, and there would be no revenue loss. The counsel also argued that the extended period of limitation was not applicable and penalties under Sections 76 and 78 were not sustainable.

The revenue counsel argued that the appellant was liable to pay service tax under the declared category, and the issue of service tax liabilityon sub-contractors was settled law, requiring subcontractors to pay service tax even if the main contractor had paid tax on the same project.

The two-member bench comprising Binu Tamta (Judicial Member) and Hemambika R. Priya (Technical Member) observed that, as per the Larger Bench decision in the Melange Developers case, a subcontractor is liable to pay service tax even if the main contractor has discharged service tax liability. The tribunal further observed that the CENVAT credit mechanism ensures there is no double taxation, as the main contractor can claim credit for the tax paid by the sub-contractor.

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The tribunal explained that service tax is levied on the provision of taxable services by any person to another person, including sub-contractors, and there is no exemption from liability for sub-contractors under the law. The tribunal held that the classification under “Erection, Commissioning or Installation Services” was correct, the appellant was liable to pay service tax as a subcontractor, and the extended period and penalties were valid.

The appeal was dismissed.

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