CESTAT Remands Construction Subcontractor’s Tax Case To Decide Whether On-Site Fabrication Was Manufacture; Any Demand Limited To Normal Period

The assessee company provided construction and works-contract activities as a subcontractor to SAIL and NTPC during 2010–11 to 2015–16. It did not register or pay service tax, contending that the main contractors had paid tax on the full value of the services, including its work.

The Commissioner confirmed the proposals in the show cause notice and subsequent Statement of Demand, and imposed penalties on the company and penalties under Section 78A of the Finance Act, 1994 on its two directors.

On appeal, the company additionally argued that its on-site fabrication amounted to manufacture, not a taxable service; it had not raised this ground before the Commissioner.

Section 73(1) of the Finance Act, 1994 provides for recovery of service tax, with its proviso permitting an extended period in specified circumstances; Section 75 provides for interest on unpaid tax, and Section 78A provides for penalties on persons responsible for specified contraventions by a company.

The Tribunal referred to Commissioner of Service Tax, New Delhi v. Melange Developers Pvt. Ltd., 2020 (33) G.S.T.L. 116 (Tri.-LB), in which the Larger Bench held that a subcontractor was also liable to pay service tax, while the main contractor could take CENVAT credit of the tax paid.

The Tribunal reasoned that, where the subcontractor’s activity was a service but the main contractor had paid tax on it, the conflicting views on subcontractor liability precluded invocation of the extended limitation period.

It also held that a serious legal ground going to the existence of a taxable event could be considered, while giving the Commissioner the opportunity to examine the factual nature of the activity.

The Tribunal permitted the manufacture argument because it went to the threshold question whether a taxable service had been provided at all.

Determining that question required examination of the fabrication performed and whether it resulted in a new marketable good—an inquiry the Commissioner had not undertaken because the argument was not previously raised.

The Tribunal therefore remanded that issue rather than deciding it.

Separately, it concluded that if the activities were taxable services rendered as a subcontractor, the conflicting views on subcontractor liability meant the extended period could not be invoked; it relied on the same uncertainty in setting aside the directors’ Section 78A penalties.

The Tribunal directed that any service-tax demand confirmed on remand be confined to the normal limitation period.

The directors’ appeals were allowed, and their Section 78A penalties were set aside.