The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that the extended period of limitation could not be invoked to demand service tax from a sub-contractor when conflicting judicial views existed during the relevant period regarding the taxability of services provided by sub-contractors.

The Bench of Dr. Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member) has observed that the Larger Bench had held that a sub-contractor is liable to pay service tax on the taxable services supplied to the main contractor, even if the main contractor has paid service tax on the complete service rendered to the ultimate client.

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The dispute related to the period from April 2015 to June 2017, while the show cause notice demanding service tax was issued on October 7, 2020. The notice was, therefore, issued beyond the normal limitation period.

The principal question before the Tribunal was whether a sub-contractor was independently liable to pay service tax when the main contractor had already discharged service tax on the services supplied to the ultimate recipient.

During the hearing, both parties acknowledged that this issue had been settled by a Larger Bench of the Tribunal in Commissioner of Service Tax v. Melange Developers Private Limited.

According to the Larger Bench ruling, services supplied by a sub-contractor to the main contractor and services subsequently supplied by the main contractor to the customer constitute separate taxable transactions. Payment of service tax by the main contractor does not, by itself, extinguish the independent tax liability of the sub-contractor.

At the same time, the service tax paid by the sub-contractor can be taken as CENVAT credit by the main contractor, subject to the applicable statutory conditions. This credit mechanism is intended to prevent the cascading of taxes while preserving the independent taxability of each transaction in the supply chain.

The appellant did not primarily contest the legal position subsequently settled by the Larger Bench. Instead, the appellant’s counsel argued that the extended limitation period could not be invoked because conflicting views existed on the issue during the period covered by the demand.

Counsel submitted that the existence of conflicting decisions was itself evident from the fact that the question had to be referred to a Larger Bench. Until the Larger Bench delivered its ruling, there was uncertainty over whether a sub-contractor was required to pay service tax when the main contractor had already discharged the tax on the entire service.

It was contended that, in such circumstances, the appellant could not be accused of deliberately suppressing material facts or intentionally evading payment of service tax so as to justify the invocation of the extended limitation period.

The disputed period ended in June 2017, whereas the show cause notice was issued only on October 7, 2020. Since the notice had been issued beyond the normal limitation period, the appellant argued that the entire demand was time-barred.

The Tribunal accepted the appellant’s limitation plea. It allowed the appeal exclusively on the ground that the demand had been raised beyond the permissible limitation period.

“In view of the above, the appeal is allowed only on the ground of limitation and the impugned order is set aside with consequential relief to the appellant,” the Bench ordered.

The Tribunal, however, did not disturb the substantive legal principle settled in Melange Developers. Accordingly, the decision does not exempt sub-contractors from service tax merely because the main contractor has paid tax on the final services.

Instead, the relief granted in the present case arose from the timing of the show cause notice and the conflicting legal views prevailing during the disputed period.

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