2019 (6) TMI 518 - AT - Service Tax

Liability of service tax on Sub-contractor when the main contractor has discharged Service Tax liability on the activity undertaken by the sub-contractor - Construction services - Commercial or Industrial Construction services - Works Contract services - Transport of Goods by Road in a Goods Carriage services - matter was placed before the Larger Bench for decision. HELD THAT - In the scheme of Service Tax, the concept of CENVAT Credit enables every service provider in a supply chain to take input credit of the tax paid by him which can be utilized for the purpose of discharge of taxes on his output service. The conditions for allowing CENVAT Credit have been provided for in Rule 4. The mechanism under the CENVAT Credit Rules also ensures that there is no scope for double taxation - In the face of various provisions, it may not be open to a sub-contractor to contend that he should not be subjected to discharge the Service Tax liability in respect of a taxable service when the main contractor has paid Service Tax on the gross amount, more particularly when there is no provision granting exemption to him from payment of Service Tax. It is not in dispute that a sub-contractor renders a taxable service to a main contractor. Section 68 of the Act provides that every person, which would include a sub-contractor, providing taxable service to any person shall pay Service Tax at the rate specified. Therefore, in the absence of any exemption granted, a sub-contractor has to discharge the tax liability. The service recipient i.e. the main contractor can, however, avail the benefit of the provisions of the CENVAT Rules. When such a mechanism has been provided under the Act and the Rules framed thereunder, there is no reason as to why a sub-contractor should not pay Service Tax merely because the main contractor has discharged the tax liability - there can be no possibility of double taxation because the CENVAT Rules allow a provider of output service to take credit of the Service Tax paid at the preceding stage. It would also be useful to refer to a larger Bench decision of the Tribunal in VIJAY SHARMA CO. VERSUS. COMMISSIONER OF CENTRAL EXCISE, CHANDIGARH 2010 (4) TMI 570 - CESTAT, NEW DELHI . The issue that arose before the larger Bench was as to whether service provided by a sub-broker are covered under the ambit of Service Tax and taxable or not. After noticing that a sub-contractor is liable to pay Service Tax, the larger Bench examined as to whether this would result in double taxation if the main contractor has also paid Service Tax and observed that if service tax is paid by a sub-broker in respect of same taxable service provided by the stock broker, the stock broker is entitled to the credit of the tax so paid in view of the provisions of the CENVAT Credit Rules. It is not possible to accept the contention of the learned Counsel for the Respondent that a sub-contractor is not required to discharge Service Tax liability if the main contractor has discharged liability on the work assigned to the sub-contractor - All decisions, including those referred to in this order, taking a contrary view stand overruled. Thus, A sub-contractor would be liable to pay Service Tax even if the main contractor has discharged Service Tax liability on the activity undertaken by the sub-contractor in pursuance of the contract.

Issues Involved:

1. Liability of sub-contractor to pay Service Tax when the main contractor has already discharged the Service Tax liability.
2. Double taxation concerns.
3. Revenue neutrality.

Issue-wise Detailed Analysis:

1. Liability of Sub-contractor to Pay Service Tax:

A Division Bench of the Tribunal noted conflicting decisions regarding whether a sub-contractor is liable to pay Service Tax if the main contractor has discharged the Service Tax liability on the gross amount. The Larger Bench was constituted to resolve this issue.

The Respondent, registered under various service categories, provided "Works Contract" services as a sub-contractor but did not pay Service Tax, arguing that the main contractors had already discharged the Service Tax liability. The Commissioner dropped the Service Tax demand but imposed a penalty for procedural lapses, referencing various Circulars and the Master Circular dated 23 August 2007, which clarified that a sub-contractor is a taxable service provider and must pay Service Tax, though this would result in revenue neutrality due to CENVAT Credit availability.

The Tribunal examined the statutory provisions, particularly Section 66 and 68 of the Finance Act, 1994, and the CENVAT Credit Rules, 2004, which allow a provider of output service to take credit for input services. The Tribunal concluded that every service provider, including sub-contractors, must discharge Service Tax liability, and there is no provision exempting sub-contractors from this obligation.

2. Double Taxation Concerns:

The Tribunal addressed the contention that requiring sub-contractors to pay Service Tax when the main contractor has already paid it would result in double taxation. The Tribunal noted that the CENVAT Credit mechanism ensures that there is no double taxation, as the main contractor can take credit for the Service Tax paid by the sub-contractor.

The Tribunal reviewed prior decisions, such as Urvi Construction and BCC Developers, which suggested that double taxation would occur if sub-contractors were also required to pay Service Tax. However, these decisions did not consider the impact of the CENVAT Credit Rules. The Tribunal emphasized that double taxation does not occur under the CENVAT Scheme, as the credit of the earlier tax paid is available at a subsequent stage.

3. Revenue Neutrality:

The Tribunal rejected the argument that revenue neutrality should exempt sub-contractors from paying Service Tax. The Tribunal clarified that the statutory provisions require every service provider to discharge their Service Tax liability, and the availability of CENVAT Credit to the main contractor ensures that there is no revenue loss to the government.

The Tribunal also distinguished the case from the Supreme Court decision in Larsen and Toubro Ltd. v. Additional Deputy Commissioner of Commercial Taxes, noting that the Service Tax law and the CENVAT Credit Rules specifically address the issue of tax liability and credit, unlike the provisions of the Karnataka Sales Tax Act discussed in the Supreme Court case.

Conclusion:

The Tribunal concluded that a sub-contractor is liable to pay Service Tax even if the main contractor has discharged the Service Tax liability on the activity undertaken by the sub-contractor. This decision overruled previous contrary decisions and clarified that the CENVAT Credit mechanism prevents double taxation and ensures proper tax compliance.

Order:

The reference was answered in the affirmative, stating that a sub-contractor must pay Service Tax even if the main contractor has already discharged the Service Tax liability. The appeal was to be placed before the Division Bench for further hearing.

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