2009 (2) TMI 202 - AT - Service Tax

Sub-contractor Liability to pay service tax refund of service tax paid by the sub contractor circular dated 23.8.2007 and 7.10.1998 held that - where the sub-contractors were given to understand by the Board in terms of the Circular placed before us by the ld. Counsel that they shall have no liability while they serve the principal service provider - We are of the clear opinion that on the given facts and circumstances, the ld. Appellate authority himself felt that the respondent should get refund but he failed to discharge his duty as a public servant to render complete justice as the circumstances warranted since the case is under pre-master Circular era. We do appreciate his difficulties. The appellate order was passed on 21st August, 2007 that is just 2 days before the master Circular was issued. We also appreciate that the respondent should get the double taxation relief which is granted in a different manner through the Cenvat Credit Rules, 2004 refund to be allowed subject to verification

Issues:
1. Interpretation of provisions of law regarding tax liability.
2. Distinction between contractor and sub-contractor.
3. Liability of sub-contractor to pay service tax.
4. Impact of Circulars issued by the Board.
5. Double taxation issue and refund application.
6. Application of Cenvat Credit Rules, 2004.
7. Duty of the Adjudicating Authority to avoid cascading effects.

Analysis:
1. The appeal involved a dispute regarding the interpretation of the law on tax liability. The Revenue appealed against an amount exempted by the ld. Commissioner (Appeals) from tax, arguing that the Respondent should not escape tax liability. The Respondent, in Cross Objection, argued that the service provider, being a contractor, should bear the tax liability, citing Tribunal decisions and CBEC Circular supporting the view that sub-contractors should not be taxed, and liability rests with the principal contractor.

2. The Respondent contended that there is a clear distinction between a contractor and a sub-contractor, with the real service being provided by the contractor. The Tribunal's consistent view in previous cases supported the argument that sub-contractors should not be taxed, and the liability lies with the principal contractor. The Respondent relied on the absence of a definition of a service provider and emphasized that the sub-contractor serves the service provider and should not be taxed.

3. The Master Circular issued in 2007 changed the view on taxing sub-contractors, but the Respondent's case pertained to a period before this circular. The Respondent argued that the Tribunal's decisions were based on Circulars applicable at the material time, and the principal contractor had already discharged the tax liability, so the sub-contractor should not be doubly taxed.

4. The Tribunal noted that sub-contractors were initially informed through Circulars that they would not be liable for tax while serving the principal contractor, leading to decisions in favor of sub-contractors. The Tribunal acknowledged the need to avoid double taxation and ensure justice, especially considering the pre-Master Circular era.

5. The Tribunal directed the Adjudicating Authority to verify if the principal contractor had already discharged the tax liability, to prevent cascading effects and grant refunds if necessary. The Respondent was entitled to relief from double taxation, subject to meeting the unjust enrichment test, without claiming interest from the department.

6. The Tribunal emphasized the importance of implementing the law without causing harassment to the Respondent and instructed the Adjudicating Authority to ensure no double taxation occurs. The Revenue's appeal was dismissed, and the Cross Objection was allowed under specific terms to address the issue of double taxation and refund application effectively.

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