CESTAT: Sub-Contractors Liable for Service Tax If Main Construction Work Is Taxable, Regardless of Tax Paid by Main Contractor
Pranav B Prem
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Principal Bench at New Delhi, comprising Ms. Binu Tamta (Judicial Member) and Ms. Hemambika R. Priya (Technical Member), has held that sub-contractors involved in the construction of residential complexes cannot claim exemption from service tax liability merely because the main contractor has discharged the tax. Where the primary service is taxable, the sub-contractor is equally liable under the service tax law.
Background
The matter involved two appeals filed by Shri Rahul Agarwal and Shri Sandeep Jain, both of whom were sub-contractors providing construction services for M/s Agarwal Builders & Developers, Damoh. The appellants had received consideration for services rendered during the period 2012–2017 but had neither obtained service tax registration nor paid service tax. A Show Cause Notice was issued demanding service tax, along with interest and penalties under Sections 75, 77, and 78 of the Finance Act, 1994.
The adjudicating authority initially dropped the substantial portion of the demand, accepting the appellants’ claim that the main contractor had already paid service tax on the total contract value. However, this finding was reversed by the Commissioner (Appeals), who confirmed the demand of ₹12,03,538 against Shri Rahul Agarwal and ₹14,15,826 against Shri Sandeep Jain, along with penalties and interest.
Appellants' Contentions
The appellants argued that they acted merely as agents of the main contractor, and the property in goods passed directly from them to the ultimate buyer. Therefore, only one taxable event existed under the legal fiction created by Article 366(29A) of the Constitution. It was submitted that there was no need for separate service tax payment by the sub-contractor when the main contractor had discharged the entire tax liability on the gross contract value.
They also contended that the impugned services were exempt under Notification No. 25/2012-ST dated 20.06.2012, as they were providing declared services after 01.07.2012. It was further argued that the Board Circular dated 23.08.2007 had clarified that services by sub-contractors are in the nature of input services, and tax paid by the main contractor would suffice.
Reliance was placed on judgments including DNS Contractor [2015 (37) S.T.R 848 (Tri. Del.)], Urvi Construction [2010 (17) S.T.R. 302 (Tri. Ahmd.)], Visesh Engineering Co [2016 (43) S.T.R. 232 (Tri. Hyd.)], and others to support the position that the liability should not be imposed on sub-contractors when tax has been discharged by the main contractor.
Department's Position
The Department, on the other hand, maintained that the sub-contractors were independent service providers under the statutory framework. Referring to the Larger Bench decision in Melange Developers Pvt. Ltd [Service Tax Appeal No.50399 of 2014 decided on 23.05.2019], it was argued that service tax is payable by a sub-contractor even if the main contractor has paid tax on the same work, as there is no provision in the Finance Act exempting sub-contractors from service tax liability.
Tribunal’s Observations
The Tribunal extensively relied on the ruling in Melange Developers Pvt. Ltd., where the Larger Bench of CESTAT had held that sub-contractors are independently liable for service tax regardless of the tax paid by the main contractor. The decision emphasized that the mechanism of CENVAT credit ensures that there is no double taxation, as the main contractor can claim credit for the tax paid by the sub-contractor.
The Tribunal also dismissed the appellants’ reliance on the 2007 Board Circular, clarifying that while the circular was applicable to the pre-2012 regime, the post-2012 legal framework under Section 66B of the Finance Act imposes tax on every person providing taxable service.
It was noted that construction of residential complexes is not exempt from service tax under the law applicable during the relevant period. Consequently, both the sub-contractors, having rendered taxable services to the main contractor, were liable to pay service tax under Section 68 of the Act.
Holding that the service tax liability of a sub-contractor is independent of the main contractor’s liability, the Tribunal found no infirmity in the Commissioner (Appeals)’s order. It dismissed both appeals and upheld the demand of service tax, interest, and penalties imposed on Shri Rahul Agarwal and Shri Sandeep Jain for the period 2012–2017.
Appearance
Counsel for Appellant/Assessee: Pradumna Singh
Counsel for Respondent/Department: Anand Narayan
Cause Title: Shri Rahul Agarwal V. Commissioner CGST, Customs & Central Excise, Jabalpur
Case No: Service Tax Appeal No.50395 Of 2019
Coram: Binu Tamta [Judicial Member], Hemambika R. Priya [Technical Member]
