The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that the extended period of limitation cannot be invoked against a subcontractor where conflicting judicial decisions had created uncertainty over service tax liability when the main contractor had already paid tax. 

The bench of Ajay Sharma (Judicial Member) and Hemambika R. Priya (Technical Member) upheld the demand falling within the normal limitation period but set aside the demand for the extended period and the penalty imposed under Section 78 of the Finance Act, 1994.

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The appellant/assessee was registered with the Service Tax Department and provided works contract services as a subcontractor. The work involved whitewashing, distempering and painting residential and public buildings at the RAPS Colony of Nuclear Power Corporation of India in Rawatbhata.

The work order had been awarded by M/s Manju Singh, proprietor of M/s Win Tech Engineers & Contractors. The department alleged that the appellant had failed to discharge service tax on these services.

Following an investigation, a show cause notice dated September 5, 2018, proposed a demand of ₹11,60,128, together with interest and penalties. The adjudicating authority subsequently confirmed ₹3,20,054. According to the factual account in the tribunal’s order, the Commissioner (Appeals) upheld a demand of ₹2,82,561, along with applicable interest and penalties.

The appellant challenged the appellate order before CESTAT.

The appellant argued that she had believed no separate service tax was payable by the subcontractor once the main contractor had paid tax. Counsel submitted that several tribunal decisions prevailing during the relevant period supported this position.

The issue was subsequently settled by the Larger Bench in Commissioner of Service Tax, New Delhi v. Melange Developers Private Limited, which held that a subcontractor remained liable to pay service tax even where the main contractor had paid tax.

The appellant therefore contested the invocation of the extended limitation period, relying on the earlier judicial uncertainty to explain the non-payment. Counsel also cited tribunal decisions involving similar disputes in which demands for the extended period had been set aside.

The department maintained that the appellant had suppressed material facts by failing to pay service tax and file correct ST-3 returns. It argued that the contravention came to light only through investigation, justifying the five-year extended period under the proviso to Section 73(1) of the Finance Act, 1994.

The Revenue also sought to sustain the penalties, contending that the appellant’s non-disclosure and failure to comply with statutory obligations amounted to deliberate evasion.

CESTAT observed that both sides accepted the subcontractor’s tax liability on merits following the Larger Bench ruling in Melange Developers. The question before it was whether the demand covering the extended limitation period could survive.

The tribunal found that there had been confusion over the levy of service tax on subcontractors. In these circumstances, it held that the extended period could not have been invoked and that only the demand within the normal limitation period could be sustained.

It drew support from decisions including S Gupta & Contracts India, Essem Erectors, Synergy Engineers Group, M.K. Ghori & Associates and Rigtech Power.

The tribunal modified the impugned order and partly allowed the appeal. The extended-period demand and Section 78 penalty were set aside, while the normal-period demand was upheld. The operative paragraph also records retention of a penalty described in the judgment as being under “section 72.” 

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