Non-Payment Of Service Tax By Sub-Contractor Due To Uncertainity Not Wilful Misstatement Or Fraud: Delhi HC Upholds CESTAT Order

A division bench of Justices Prathiba M. Singh and Rajneesh Kumar Gupta upheld the CESTAT order which held that bonafide belief of the sub-contractor that he was not required to discharge service tax liability cannot be ruled out amid prevailing controversy. It observed,

“Since there was no wilful misstatement or fraud and the CESTAT holds the same to be a bona fide belief of the Respondent, interference with the impugned order is not warranted in the present appeal.”

The Department had sought to invoke Section 73(1) of the Finance Act, 1994 to overcome the limitation for recovering dues of Assessment Years 2004-07.

Section 73 enables recovery of service tax not levied or paid or short-levied or short-paid or erroneously refunded, within thirty months from the relevant date. A provisio to the provision further stipulates that the recovery notice may be issued within five years, in case of fraud, collusion, wilful mis-statement or suppression of facts by the assessee.

Counsel appearing on behalf of the Department submitted that non-payment by the Respondent-assessee constitutes suppression, wilful mis-statement and fraud and hence, extended period of limitation can be invoked.

The High Court however noted that during the entire period between 2004 to 2007, there was an uncertainty as to whether service tax would be liable to be paid by a sub-contractor or not.

In fact, the position was settled only after the Department of Revenue issued a Circular on 23rd August, 2007, stating that even subcontractors were required to pay service tax.

The Circular clarified that merely because the services provided by a sub-contractor are used by the main service provider for completion of his work, does not in any way alter the fact of provision of taxable service by the sub-contractor.

“Services provided by sub-contractors are in the nature of input services. Service tax is, therefore, leviable on any taxable services provided, whether or not the services are provided by a person in his capacity as a sub-contractor and whether or not such services are used as input services. The fact that a given taxable service is intended for use as an input service by another service provider does not alter the taxability of the service provided,” the Circular read.

As such, the High Court dismissed Revenue's appeal.

Appearance: Mr. Shubham Tyagi, Adv for Revenue; Mr. Rajeev Kumar, Adv for Respondent

Case title: The Commissioner Of Central Tax, CGST Delhi East v. M/S Simplex Infrastructure Limited

Citation: 2025 LiveLaw (Del) 391

Case no.: CEAC 3/2024

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