By TIOL News Service

MUMBAI, JAN 31, 2014: THERE are two appeals filed against the orders passed by the CCE, Nagpur.

The issues involved in the first appeal are:-

(a) Inclusion of value of materials sold on payment of VAT in the taxable value of services rendered to M/s National Thermal Power Corporation by denying the benefit of exemption under Notification No. 12/2003-ST. The service tax demand in this case is Rs.16,26,300/-.

(b) Non-payment of service tax to the extent of Rs.52,59,773/- for the period from 1-3-2006 to 31-12-2006 for the works done as a sub-contractor to the main contractor M/s Punj Lloyd Limited who was awarded the contract by M/s Jindal Power Ltd. where M/s Punj Lloyd was paying service tax as the main contractor.

The second appeal involves non-payment of service tax by the appellant as a sub-contractor in respect of various main contractors such as M/s Tata Projects Ltd., M/s Hindustan Steelworks Construction Ltd. wherein service tax demand of Rs.3,05,45,211/- was demanded for the period March 2006 to December 2007, which is similar to the issue at (b) above.

This is the second time the matter is come before the Tribunal.

++ In the first round, both the above issues were held in favour of the appellant [2009-TIOL-1867-CESTAT-MUM] wherein it was held that if the main contractor has paid service tax on the full value of the contract, then the sub-contractor need not pay service tax on the value of services rendered by him, provided the appellant proves the payment of service tax by the main contractor. As regards the inclusion of value of materials sold, it was held that the appellant's claim for abatement under notification No.1/2006-ST should be considered. Therefore, the matter was remanded back to the adjudicating authority for de novo consideration.

++ The said decision of the Tribunal was challenged by the Revenue and the High Court set aside the order of the Tribunal [2010-TIOL-836-HC-MUM-ST], and remanded the matter back to the Tribunal for fresh consideration.

++ On such remand, the Tribunal remitted the matter back to the adjudicating authority for fresh decision as per the High Court's directions [2011-TIOL-592-CESTAT-MUM].

Accordingly, the impugned orders have been passed in denovo adjudication proceedings confirming the demands and imposing penalties.

Aggrieved, the appellant is before the Tribunal and makes the following point-wise submissions -

++ all the information required for determination of eligibility to exemption under Notification No. 12/2003-ST was available with the department which the adjudicating authority has failed to take into account.

++ As regards the non-payment of service tax as a sub-contractor, the CBEC had issued circulars from time to time with respect to various other services that there is no requirement for payment of service tax by the sub-contractors and the Tribunal also in a the following decisions, namely, BBR India Ltd. 2006-TIOL-1455-CESTAT-BANG, Semac (P) Ltd . 2006-TIOL-1546-CESTAT-BANG, RanaUdyog (P) Ltd. = 2007-TIOL-569-CESTAT-KOL, Oikos 2006-TIOL-1760-CESTAT-BANG , Foto Flash 2008-TIOL-351-CESTAT-BANG and Evergreen Suppliers 2007-TIOL-2115-CESTAT-BANG had held that sub-contractor need not pay service tax in case the main contractor had paid the tax. Therefore, the appellant was under the bona fide belief that they were not required to pay service tax. That only vide Master Circular dated 23/08/2007, the CBEC clarified that every service provider, whether be a sub-contractor or contractor, should discharge service tax liability on the services provided by him and this circular can have only prospective effect .

++ The adjudicating authority has not granted the benefit of abatement of 67% under Notification No. 1/2006-ST and which they are entitled to as benefit of CENVAT credit on inputs, capital goods or input services has not been availed.

++ ++ As the issues involved are highly interpretative in nature and therefore, there is no reason for invoking the extended period of limitation and imposition of various penalties.

The Revenue representative submitted -

++ as the appellant has failed to produce the documentary evidences before the adjudicating authority, the benefit of Notification No. 12/2003-ST has been rightly denied.

++ The CBEC circular dated 23/08/2007 has clarified that service tax is leviable on any taxable service provided whether or not the services are provided by a person in the capacity of sub-contractor and whether or not such services are used as input services. The Circulars referred by appellant pertained to services of CHA, Consulting Engineer, Rent-a-cab and Architect's services and since the appellant was not providing any of these services, the benefit of those circulars cannot be extended and the circulars lost relevance after 16/08/2002 when CENVAT credit was extended.

++ The two SCNs were issued in respect of contracts awarded to different parties as and when the same was detected by the department. The appellant had in fact suppressed the information of contracts given by other parties from the department at the time of investigation in the case of first show cause notice. Therefore, the extended period of time has been rightly invoked and imposition of penalties is also justified.

The Member (Technical) segregated the three issues that formed the core of the demands and observed thus -

(a) Whether the appellant is eligible for the benefit of notification No. 12/2003-ST which provides for exclusion of cost of materials sold from the taxable value of the services rendered?

Para 4 of the show cause notice indicates that the appellant had submitted to the investigating agency vide letters dated 22 nd and 29 th September, 2006, 17 th September, 2006 and 9 th March, 2007, details of the contracts awarded to the appellant, the bills raised by the appellant, payment of service tax made and other details. Therefore, the adjudicating authority should have examined these documents and given a finding thereon; in the interest of justice, the matter needs to go back to the adjudicating authority for considering this issue afresh.

(b) Whether sub-contractor is exempt from payment of service tax when the main contractor has discharged the service tax liability on the value inclusive of the value of services rendered by the sub-contractor?

Argument that since the main contractor has discharged the service tax and, therefore, the sub-contractor need not pay service tax is without any legal basis and is quite contrary to the concept and practice of CENVAT Credit Scheme. The Larger Bench prevails over the other decisions of the Tribunal in this regard. Accordingly, this contention is rejected.Vijay Sharma & Co. 2010-TIOL-1215-CESTAT-DEL-LB; Sew Construction Ltd. 2011-TIOL-61-CESTAT-DEL

(c) Whether extended period of time could have been invoked for confirmation of service tax demand and whether the imposition of penalties is justified?

Liability to pay service tax arises not from the Board's circulars but from the provisions of Chapter V of the Finance Act, 1994, namely, section 65(105) which defines the taxable service, section 66 which provides for charge of service tax and section 68 which defines the person liable to pay service tax. Therefore, whosoever provides the taxable service is the person liable to pay service tax, irrespective of the capacity in which he renders the service. Thus the argument adopted by the appellant is one of convenience and has no legal basis and therefore, merits to be rejected outright.

There is no mensrea required to be proved for imposition of penalty under Section 76 as held by the Hon'ble High Court of Kerala in the case of Krishna Poduval 2006-TIOL-77-HC-KERALA-ST, hence penalty imposed u/s 76 upheld. Similarly, penalty under Section 77 is for non-compliance of the statutory provisions of filing of returns, the same is also liable to be upheld. As regards the penalty under section 78, as the appellant has suppressed facts the extended period of time, penalty under section 78 is imposable since it is mandatory.

The Member(Judicial) recorded a separate order.

He held as follows -

++ I agree with the finding on 1 st issue (a). I further add that the work done/executed is essentially in the nature of works contact. No works contract can be completed without use of materials. Even in no accounts case under the sales tax (VAT) Rules of several states 30% (approx) rebate is given for the service component. Thus both material plus service are the essential components of works contract. Thus, I direct the adjudicating authority to allow 67% rebate for material component, as no accounts case .

++ With regard to the second issue (b), as regards liability of sub-contractor, when main contractor have discharged the tax liability, I differ. As the position was clarified by Revenue vide master circular No. 96/7/2007 dated 23.08.2007, that a sub-contractor is obligated to pay Service Tax, irrespective of whether the main contractor have paid, it is categorically held that the appellant will be liable to pay Service Tax as a sub-contractor, w.e.f. 23.08.2007.

++ On the third issue (c), regarding invocation of extended period of limitation, I agree. However, as the appellant had paid tax with interest before issue of SCN, it is held that no case of alleged violation is made out as provided in the Sections 76 & 78 of the Finance Act. Hence the penalty imposed under Section 76 & 78 is set aside. Penalty under Section 77 is confirmed.

The following difference of opinion is therefore referred to the Third Member -

(1) Whether the sub-contractor of a main contractor is liable to discharge the service tax liability on the services provided by him as held by the Ld. Member (Technical) relying on the decision of the Larger Bench of this Tribunal in the case of Vijay Sharma & Co. 2010-TIOL-1215-CESTAT-DEL-LB and the decision of this Tribunal in the case of Sew Construction Ltd. 2011-TIOL-61-CESTAT-DEL

OR

The appellant being a sub-contractor is not liable to pay service tax prior to 23/08/2007 in view of the clarification issued by the Revenue vide Master Circular No. 96/7/2007 dated 23/08/2007.

(2) Whether the appellant is liable to penalty under the provisions of Section 76 & 78 of the Finance Act, 1994 as held by the Ld. Member (Technical) relying on the decisions of the Hon'ble High Court of Kerala in the case of Krishna Poduval 2006-TIOL-77-HC-KERALA-ST, and of the Hon'ble Apex Court in the case of ChairmanSEBI Vs. Shriram Mutual Fund & Another [2006-TIOL-72-SC-SEBI] and Rajasthan Spinning & Weaving Mills 2009-TIOL-63-SC-CX

OR

The appellant is not liable to penalty under Section 76 & 78 of the Finance Act, inasmuch as the appellant had paid the tax with interest before issue of show-cause notice as held by the Ld. Member (Judicial).