No Extended Limitation Where Service Tax Liability Was Legally Debatable: CESTAT Chennai

Nandhees Technologies Pvt. Ltd. Vs Commissioner of GST & Central Excise (CESTAT Chennai)

The appeal challenged Order-in-Appeal No. 497/2016 (STA-I) dated 29.08.2016 passed by the Commissioner of Service Tax (Appeals-I), Chennai. The appellant, registered for Maintenance or Repair Service, had undertaken maintenance and repair of UPS systems as a sub-contractor for M/s. Emerson Network Power India Pvt. Ltd. During audit, it was noticed that the appellant had received ₹1,19,53,559 towards maintenance services during 2004-05 to 2006-07 but had not paid service tax. A show cause notice dated 25.08.2009 demanded ₹13,18,116 in service tax, invoked the extended period, and proposed interest and penalty. The adjudicating authority confirmed the demand with interest and imposed an equal penalty under Section 78 of the Finance Act, 1994. The Commissioner (Appeals) dismissed the appellant’s appeal, leading to the present appeal before the Tribunal.

The appellant submitted that it acted only as a dedicated sub-contractor carrying out maintenance and repair work for its Principal. It received commission for such work and had paid service tax on the commission, which was undisputed. Repair charges collected from customers were remitted to the Principal, who discharged service tax on the maintenance services. The appellant relied on various Board circulars and clarifications issued prior to Master Circular No. 96/7/2007-ST dated 23.08.2007, which had stated in certain situations that sub-contractors were not required to pay service tax where the principal service provider had discharged the tax. It further contended that the show cause notice was issued beyond the normal limitation period of one year, there was no suppression of facts as it was registered and regularly filing ST-3 returns, and that prior to 16.05.2008, Section 65(105)(zzg) covered services provided “to a customer”, whereas the appellant rendered services only to its Principal. It also relied upon several judicial decisions and pointed out that, for another sub-contractor rendering similar services to the same Principal during the same period, proceedings had been dropped.

The Revenue argued that the issue stood settled by judicial decisions, particularly the Larger Bench decision in Melange Developers Pvt. Ltd., holding that a sub-contractor was liable to pay service tax notwithstanding payment by the main contractor. It submitted that the earlier Board circulars related only to specified categories of services and not to Maintenance or Repair Service, and that the appellant had failed to establish that the Principal had rendered the same taxable service. The Revenue also relied upon several judicial decisions and Board Circular No. 138/7/2011-ST dated 06.05.2011.

The Tribunal identified two principal issues: whether a sub-contractor remained liable to pay service tax despite the principal having discharged service tax, and whether the appellant’s activity during 2004-05 to 2006-07 was taxable when Section 65(105)(zzg) referred to services rendered “to a customer.”

Referring to the Larger Bench decision in Commissioner of Service Tax, New Delhi v. Melange Developers Private Ltd., the Tribunal observed that the issue on merits stood settled in favour of the proposition that a sub-contractor is liable to pay service tax even if the main contractor has discharged service tax liability. At the same time, it noted that prior to issuance of the Master Circular dated 23.08.2007, earlier Board circulars had clarified that certain categories of sub-contractors were not required to pay service tax if the principal had paid tax. The Tribunal held that these earlier clarifications demonstrated ambiguity in the understanding of the law prior to 23.08.2007. It also observed that even in Sunil Hi-Tech Engineers, there had been divergent opinions before the matter was decided by majority, indicating differing legal interpretations.

The Tribunal found that the show cause notice did not contain material establishing any intention on the part of the appellant to evade service tax. Referring to Cosmic Dye Chemical v. Collector of Central Excise, it observed that suppression or misstatement must be wilful and accompanied by intent to evade duty. It held that non-disclosure of income in ST-3 returns, viewed in the context of the prevailing practice and the appellant’s understanding of the law, did not by itself establish such intent. Accordingly, it held that the demand was barred by limitation.

Having held the demand to be time-barred, the Tribunal relied upon the decisions in Commissioner Customs, Central Excise & Service Tax v. M/s. Monsanto Manufacturer Pvt. Ltd., State Bank of India v. B.S. Agricultural Industries (I) and Commissioner of Customs, Mumbai v. M/s. B.V. Jewels and Ors. to observe that once a demand is found barred by limitation, there is no occasion to examine the merits. It therefore declined to examine the issue relating to the taxability of services rendered before 16.05.2008, when the statutory expression changed from “to a customer” to “to any person”. The Tribunal also observed that the Principal’s letter dated 25.09.2009 had not been disproved by the Revenue and that the issue stood subsumed in the larger question of limitation.

The Tribunal set aside the impugned order along with the interest and penalty and allowed the appeal with consequential relief in accordance with law.

Cases Discussed

• Synergy Engineers Group Vs PC, CE & ST, Bhopal (CESTAT Delhi), 2023 (73) GSTL 546 (Tri-Del)
• Vinoth Shipping Services Vs. CCE, Tirunelveli (CESTAT Chennai), 2021 (55) GSTL 313 (Tri. Chennai)
• CST, New Delhi Vs. Melange Developers Pvt. Ltd. (CESTAT Larger Bench), 2020 (33) GSTL 116 (Tri. LB)
• DOT COM Advertising Vs CCE, Lucknow (CESTAT Allahabad), 2019 (27) GSTL 691 (Tri. All.)
• Max Logistics Ltd Vs CCE, Jaipur (CESTAT Delhi), 2017 (47) STR 41 (Tri-Del)
• Visesh Engg. Co. Vs CCE & ST, Guntur (CESTAT Hyderabad), 2016 (43) STR 232 (Tri. Hyd.)
• Furnace Fabrics (India) Ltd. Vs. Joint Commissioner of Central Excise, Kochi (Kerala HC), 2016 (43) STR 175 (Ker.)
• Sunil Hi-Tech Engineers Ltd Vs Commissioner of C. Ex., Nagpur (CESTAT Mumbai), 2014 (36) STR 408 (Tri.–Mumbai)
• Commissioner Customs, Central Excise & Service Tax Vs M/S Monsanto Manufacturer Pvt. Ltd. (Allahabad HC), 2014 (35) STR 177 (ALL)
• JAC Air Services Pvt. Ltd. Vs CCE (CESTAT Delhi), 2008 (11) STR 516 (Tri.Del.)
• OIKOS VS CCE, Bangalore III (CESTAT Bangalore), 2007 (5) STR 229 (Tri. Bang.)
• Semac Pvt. Ltd. Vs CST, Bangalore (CESTAT Bangalore), 2006 (4) STR 475 (Tri. Bang.)
• State Bank of India Vs. B.S. Agricultural Industries (I) (SC), AIR 2009 SUPREME COURT 2210
• Commissioner Of Customs, Mumbai Vs M/S B.V. Jewels And Ors. (SC), AIR 2005 SUPREME COURT 1231 / (2004) 172 ELT 3
• Cosmic Dye Chemical Vs Collector of Central Excise (SC), (1995) 6 SCC 117

Service Tax Demand Against UPS Maintenance Sub-Contractor Quashed on Limitation – CESTAT Chennai

FULL TEXT OF THE CESTAT CHENNAI ORDER

This appeal is filed by the appellant against Order in Appeal No. 497/2016 (STA – I) dated 29.8.2016 passed by the Commissioner of Service Tax (Appeals – I), Chennai (impugned order).

2. Brief facts of the case are that the appellant is registered as service providers for ‘Maintenance or Repair Service’. It was noticed during the audit that the appellant had received taxable value of Rs.1,19,53,559/-from M/s. Emerson Network Power India Pvt. Ltd. (Principal) during the period from 2004–05 to 2006–07 towards provision of maintenance of UPS. However, the appellant had not paid service tax. Hence Show Cause Notice dated 25.8.2009 was issued to demand Service Tax of Rs.13,18,116/- for the above period and for invoking extended period. After due process of law, the Ld. Adjudicating Authority confirmed the demand along with interest and imposed equal penalty under section 78 of the Finance Act, 1994. The appeal filed by the appellant was dismissed by the Ld. Commissioner (Appeals). Hence the present appeal.

3. The learned Advocate Shri V. Ravindran appeared for the appellant and Ld. Authorized Representative Smt. G. Kripa appeared for the respondent.

3.1 Learned Counsel Shri V. Ravindran, representing the appellant, stated that the appellant acts as dedicated sub-contractor, undertaking maintenance and repair of UPS systems for their Principal. The appellant receives commission for this work, on which service tax has been duly paid, with no dispute arising in this regard. Additionally, the appellant collects repair charges from customers on behalf of the Principal and remit these amounts to the Principal. The central issue in the present appeal pertains to whether the appellant is also liable to pay service tax on the aforementioned ‘Maintenance or Repair Service’ as classifiable under Section 65(105)(zzg) of the Finance Act, 1994, given that the Principal has already discharged the relevant service tax. The Ld. Counsel referred to the letter of the Principal dated 25.09.2009, submitted along with their reply to the SCN. He stated that their action of not paying Service Tax was consistent with the prevailing legal position as seen from the Boards Circular issued during that time which were prior to the issue of Master Circular No 96/7/2007-ST, dated 23-8-2007, reversing the earlier clarification. He presented a summary of the Circulars in a Tabulated form which is reproduced below:

Ld. Counsel further submitted that the demand relates to the financial years 2004-05 to 2006-07; however, the show cause notice was issued only on 25.08.2009, after the lapse of the normal period of one year. The appellant during this period was registered with the department and consistently filed ST-3 returns. It is evident that there was no suppression of facts, and therefore, the notice issued beyond one year is barred by limitation. The impugned order is thus unsustainable in law. Furthermore, the expression “to a customer” in Section 65(105)(zzg) of the Finance Act, 1994, was replaced by “to any person” only with effect from 16.05.2008. Prior to this date, the appellant provided services only on behalf of the Principal and such services were not rendered directly to the appellant’s own customers, precluding taxation of this activity. The record confirms that all consideration received for “Repair Services” was forwarded to the Principal, who discharged the applicable service tax. Service tax on commission received by the appellants from the Principal was also paid, and there are no disputes regarding these facts. The Ld. Counsel stated that the following case laws support their position:-

a. Semac Pvt. Ltd. Vs CST, Bangalore-2006 (4) STR 475 (Tri. Bang.)

b. JAC Air Services Pvt. Ltd. Vs CCE [2008 (11) STR 516 (Tri.Del.)

c. OIKOS VS CCE, Bangalore III [2007 (5) STR 229 (Tri. Bang.)

d. Visesh Engg. Co. Vs CCE & ST, Guntur [2016 (43) STR 232 (Tri. Hyd.)]

e. DOT COM Advertising Vs CCE, Lucknow [2019 (27) GSTL 691 (Tri. All.)]

Further the Ld. Counsel stated that for the very same set of facts and for the same period of dispute, in the case of another sub-contractor rendering maintenance and repair services to the Principal, the demand has been dropped, vide Order-in-Original No. 04/ADC/ST/BPL-1/09 dated 13.02.2009.

3.2 The Ld. Authorized Representative Smt. G. Kripa stated that the issue of payment of tax by the sub-contractor is no more res integra and stands unequivocally settled by different judgments of appellate authorities and especially by the Mumbai Bench of this Tribunal in Sunil Hi-Tech Engineers Ltd Vs Commissioner of C. Ex., Nagpur [2014 (36) STR 408 (Tri.–Mumbai)]. She stated that the Boards Circulars referred to by the appellant pertain to specific services like ‘Architects and Interior Decorators’, ‘Market Research Agencies’, ‘CHA’ etc and do not cover ‘Maintenance or Repair Service’. Further it has been noted in the OIO that the assessee had not stated anything or furnished any proof as evidence to show that their principal contractor had also provided the same service i.e. ‘Maintenance and repair services’ as stated under heading ‘C. Market Research Agencies’, of Boards Circular No. B11/3/98 dated 07.10.1998. In the absence of any such evidence reliance placed on the Boards circular are not sustainable. Apart from the above judgment the Ld. A.R. relied upon the following judgments/ Circular.

a. Synergy Engineers Group Vs PC, CE & ST, Bhopal [2023 (73) GSTL 546 (Tri-Del)]

b. Max Logistics Ltd Vs CCE, Jaipur [2017 (47) STR 41 (Tri-Del)]

c. CST, New Delhi Vs. Melange Developers Pvt. Ltd. – 2020 (33) GSTL 116 (Tri. LB)

d. Vinoth Shipping Services Vs. CCE, Tirunelveli – 2021 (55) GSTL 313 (Tri. Chennai)

e. Vishal Engineering Company Vs. CCE, Panchkula – 2023 (9) CENTAX 154 (Tri. Chan.)

f. Furnace Fabrics (India) Ltd. Vs. Joint Commissioner of Central Excise, Kochi – 2016 (43) STR 175 (Ker.)

g. Board’s Circular No. 138/7/2011-ST dated 06.05.2011

4. We have heard the rival parties and perused the appeals. We find that the main dispute relates to:

i. Whether a sub-contractor would be liable to pay Service Tax even if the main contractor has discharged Service Tax liability.

ii. The expression “to a customer” in Section 65(105)(zzg) of the Finance Act, 1994, was replaced by “to any person” only with effect from 16.05.2008. Hence whether the activity of the appellant, during the period from 2004–05 to 2006–07, for having provided services to the Principal and not ‘to a customer’, was classifiable under the said section.

5. We find that a Larger Bench of this Tribunal in COMMR. OF S.T., NEW DELHI Vs MELANGE DEVELOPERS PRIVATE LTD. [2020 (33) G.S.T.L. 116 (Tri. – LB)]., had examined the issue of duty payable by sub-contractors for services rendered to the Principal. It had also examined the practice being followed prior to the issue of Master Circular No 96/7/2007-ST, dated 23-8-2007 and held as under:

“12. It is true that prior to 2007, various Service Tax, Trade Notices/ Instructions/ Circulars/ Communications had been issued exempting certain category of persons from payment of Service Tax. A sub-contracting Customs House Agent was exempted from payment of Service Tax on the bills raised on the main Customs House Agent. When an architect or interior decorator sub-contracted part/whole of its work to another architect or interior decorator, then no Service Tax was required to be paid by the sub-contractor, provided the principal architect or interior decorator had paid the Service Tax. However, all these Trade Notices/ Instructions/ Circulars/ Communications were superseded by the Master Circular dated 23 August, 2007 issued by the Government of India, Ministry of Finance. The Circular noticed that when Service Tax was introduced in the year 1994 there were only three taxable services, but later 100 services had been specified as taxable services and that since the introduction of Service Tax, number of clarifications had been issued, but it had become necessary to take a comprehensive review of all the clarifications keeping in view the changes that had been made in the statutory provisions, judicial pronouncements and other relevant factors. The relevant portion of the Master Circular, insofar as it relates to sub-contractors, is reproduced below:

13. The Master Circular clarifies that the services provided by sub-contractors are in the nature of input services and since a sub-contractor is a essentially taxable service provider, Service Tax would be leviable on the taxable services provided. It has also been clarified that even if a taxable service is intended for use as an input service by another service provider, it would still continue to be a taxable service.

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31. The reference is, accordingly, answered in the following terms :

“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.”

(emphasis added)

6. Hence while the issue on merits, that the sub-contractor would be liable to pay Service Tax even if the main contractor has discharged Service Tax liability, has been settled by the Order of the Larger Bench of this Tribunal in MELANGE DEVELOPERS (supra). We do not hence examine the other judgments cited by revenue. It is also clear that prior to the issue of the Master Circular in 2007, Boards Circulars held that Service Tax was not required to be paid by certain categories of the sub-contractor, provided the principal had paid the Service Tax. Hence there was some ambiguity in the understanding of law prior to 23-8-2007. Further even in the case of Sunil Hi-Tech Engineers (supra), cited by revenue there was a difference of opinion among the Members of the Division Bench and the issue was finally decided by a majority opinion after the matter was referred to a third Member, highlighting that there were divergent views involving interpretation of law. Moreover, there is nothing in the SCN that shows that there was any intent on the part of the appellant to evade duty. Not indicating the income in the ST3 return as a result of the prevailing practice and the appellants understanding of law does not in itself show an intention to evade payment of duty. As stated by a three Judge Bench of the Hon’ble Supreme Court in Cosmic Dye Chemical Vs Collector of Central Excise [(1995) 6 SCC 117], in the context of Section 11A of the Central Excise Act, 1944, which is in identical to Section 73 of the Finance Act, 1994 that:

“Now so far as fraud and collusion are concerned, it is evident that the requisite intent, i.e., intent to evade duty is built into these very words. So far as misstatement or suppression of facts are concerned, they are clearly qualified by the word “wilful” preceding the words “misstatement or suppression of facts” which means with intent to evade duty. The next set of words “contravention of any of the provisions of this Act or rules” are again qualified by the immediately following words “with intent to evade payment of duty”. It is, therefore, not correct to say that there  can be a suppression or misstatement of fact, which  is not wilful and yet constitute a permissible ground  for the purpose of the proviso to Section 11-A.  Misstatement or suppression of fact must be wilful.”

(emphasis added)

7. Having found that the demand in this case is time barred, we find that the Hon’ble Allahabad High Court in Commissioner Customs, Central Excise & Service Tax Vs M/S Monsanto Manufacturer Pvt. Ltd. [2014 (35) STR 177 (ALL)], was of the view that once it is held that the demand is time barred, there would be no occasion for the Tribunal to enquire into the merits of the issues raised by the Revenue. In State Bank of India Vs. B.S. Agricultural Industries (I) [AIR 2009 SUPREME COURT 2210], the Supreme Court held that, if the complaint is barred by time and yet, the consumer forum decides the complaint on merits, the forum would be committing an illegality and, therefore, the aggrieved party would be entitled to have such order set aside. Further the Hon’ble Supreme Court in Commissioner Of Customs, Mumbai Vs M/S B.V. Jewels And Ors [AIR 2005 SUPREME COURT 1231 / (2004) 172 ELT 3], held that “If, in reality, the CEGAT found that the action taken by the departmental authorities was beyond the period of limitation, it could have disposed of the appeals before it only on that ground without examining the merits”. Hence the impugned order merits to be set aside along with interest and penalty imposed.

8. For the reasons stated we do not propose to examine the dispute regarding the exigibility of the service rendered by the appellant to tax prior to 16.05.2008, when the expression “to a customer” in Section 65(105)(zzg) of the Finance Act, 1994, was replaced by “to any person”. As regards the proof sought from the appellant by revenue to show that the principal contractor had also provided the same service, we find that the letter of the Principal dated 25.09.2009, cited above, has not been disproved by revenue. In any case the point gets subsumed in the larger issue of time bar, resulting from the prevailing practice due to the divergent interpretation of law and lack of evidence in the SCN to demonstrate any intent on the part of the appellant to evade duty.

9. In the circumstances we set aside the impugned order and allow the appeal. The appellant is eligible for consequential relief as per law. The appeal is disposed of accordingly.

(Order pronounced in open court on 02.12.2025)