The Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that although a sub-contractor is independently liable to pay service tax even where the principal contractor has already discharged the tax liability, the Revenue cannot invoke the extended period of limitation in the absence of evidence of suppression or fraud. Consequently, the Tribunal set aside the service tax demand as being time-barred and allowed the appeal. 

The bench of Binu Tamta (Judicial Member) quashed the service tax demand as being time-barred and allowed the appeal. 

The appellant was engaged in the business of trading goods as well as providing repair and maintenance services. The dispute arose after the Service Tax Department received information from the Income Tax Department indicating discrepancies in the appellant’s reported activities across different financial years.

Buy Now: Service Tax Judgement E-Compilation : June 2026

Based on the information, the Department issued a Show Cause Notice dated October 22, 2019, alleging non-payment of service tax for Financial Years 2015–16 and 2016–17. According to the Department, while the appellant had rendered taxable services during FY 2014–15, the subsequent years reflected only sales transactions. 

The adjudicating authority, by order dated February 6, 2023, dropped the proceedings after accepting the appellant’s contentions. However, the Revenue challenged this order before the Commissioner (Appeals), who allowed the Department’s appeal and restored the demand, prompting the assessee to approach CESTAT. 

The Tribunal was called upon to determine two significant legal issues: Whether a sub-contractor is required to pay service tax independently even when the principal contractor has already discharged the service tax liability; and Whether the Department was justified in invoking the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994. 

On the substantive issue of taxability, the Tribunal relied upon the Larger Bench decision in CST, New Delhi v. Melange Developers Pvt. Ltd., which had conclusively settled that payment of service tax by the principal contractor does not absolve the sub-contractor of its independent statutory obligation.

The Tribunal observed that a sub-contractor renders taxable services to the principal contractor and is liable to discharge service tax on the consideration received by it. Therefore, the appellant’s contention that tax paid by the principal contractor extinguished its own liability could not be accepted. 

The Tribunal, however, took a different view on the question of limitation.

The appellant argued that prior to the Larger Bench ruling, conflicting decisions existed regarding the taxability of sub-contractors. Since the law itself was unsettled, there could be no allegation of deliberate suppression or intention to evade tax warranting invocation of the extended limitation period.

The Revenue relied upon CBEC Master Circular No. 96/7/2007-ST dated August 23, 2007, which clarified that sub-contractors are independently liable to service tax and that payment by the principal contractor does not amount to double taxation. 

After examining the Show Cause Notice and the record, the Tribunal found that the Department had failed to produce any substantive evidence demonstrating wilful suppression of facts, fraud, collusion, or deliberate intent to evade tax.

The Bench further observed that before the Larger Bench decision in Melange Developers, there were contradictory judicial views on the issue, making it a genuine interpretational dispute. In such circumstances, invocation of the extended period of limitation was legally unsustainable.

The Tribunal also noted that several earlier decisions had consistently held that the extended period could not be invoked in identical factual situations. 

While affirming that the Larger Bench ruling established the appellant’s substantive liability to service tax as a sub-contractor, the Tribunal held that the Show Cause Notice itself was barred by limitation.

Since the demand had been raised only by invoking the extended period without establishing the statutory ingredients necessary for doing so, the demand could not survive in law.

The Tribunal modified the impugned appellate order, held the demand to be time-barred, and allowed the appeal. 

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: Client Code Modification Allegations Can’t Stand Without Independent Evidence: ITAT