It is generally understood that a sub contractor providing services to the main contractor is exempted from service tax in view of clarifications issued by the Central Board of Excise and Customs. But, is it really so? The relevant aspects have been discussed in the following paragraphs:
1. In para no. 3.4 of its circular no. No. B 43/5/97-TRU dated 2-7-97 (corresponding to Para 4.4 of the TRADE NOTICE NO. 53 CE (SERVICE TAX)/97 dated 4.7.97) for an the issue of service tax on "Consulting Engineer" the board has clarified that: -
4.4 The services should be rendered to a client directly, and not in the capacity of a sub-consultant associate consultant to another consulting engineer, who is the prime consultant. In case services are rendered to the prime consultant, the levy service tax does not fall on the sub-consultant, the levy service tax does not fall on the sub-consultant but is on the prime of main consulting engineer who raises a bill on his client (which include the charge for services rendered by the sub-consultant).
2. In Question no. 2.3 of Frequently Asked Questions answered by the CBEC in the month of October 2003 in the Second Part under the heading "service specific issues with reference to services introduced in the tax net in year 2003-04", in respect of "maintenance and repair service" it has been clarified that: -
Q.2.3) If there is a total sub-contract of the service, whether sub-contractor is supposed to take out a registration and discharge the tax liability?
Ans: The sub-contractor need not take a registration under service tax. In all such cases, service tax is to be paid by main service provider.
3. In Air Conditioner Company of India Versus CCE, Noida reported in [2006 (2) STR 123 (Tri. - Del) = 2006 -TMI - 308 - CESTAT - New Delhi] on the issue of Service Tax on Sub Contractor being consulting engineer, it has been held by the Honorable Tribunal that, "…. The said para 3.4 would have come to the rescue of the appellant, only if the two main contractors would have been "Consulting Engineers" themselves. The appellant has not produced any evidence that the two main contractors were "consulting engineers", and in the absence of any such evidence it cannot be held that the appellants services to two main contractors would fall under the purview of "a Sub - Consultant, associate Consultnat to another Consulting Engineer, who is the Prime Consultant.
In the light of above circumstances it has to be held that the services provided by the Appellant would get covered under the category of "Consulting Engineer" and appellant is liable to pay service tax."
4. Section 37B of the Central Excise Act, 1944 as applicable to service tax states that: -
37B. Instructions to Central Excise Officers. — The Central Board of Excise and Customs constituted under the Central Boards of Revenue Act, 1963 (54 of 1963), may, if it considers it necessary or expedient so to do for the purpose of uniformity in the classification of taxable services1 or with respect to levy of service tax2on such services3, issue such orders, instructions and directions to the Central Excise Officers as it may deem fit, and such officers and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the said Board :
Provided that no such orders, instructions or directions shall be issued—
(a) so as to require any Central Excise Officer to make a particular assessment or to dispose of a particular case in a particular manner; or
(b) so as to interfere with the discretion of the Commissioner of Central Excise (Appeals)] in the exercise of his appellate functions.
1 taxable services has been replaced in place of excisable goods,
2 service tax has been replaced in place of Duties of Excise, and
3 services has been replaced in place of goods)
5. Any clarification issued by the board is application for the purpose for which it has been issued. In T.P.I. INDIA LTD. Versus CCE reported in 2005 -TMI - 54188 - (CESTAT, WEST ZONAL BENCH, MUMBAI) it has been held by the honorable tribunal that, "An order under Section 37B is passed for uniformity of classification. Therefore, an order passed by the Board for classification of an item cannot be relied upon to classify totally a different item on the ground that the ratio or principle of the said order is applicable in case of another commodity. Classification of an entity is to arrived at by applying the statutory rules for Interpretation & notes as incorporated in the CETA 1985 itself, & decisions of High Court & Supreme Court. No such decision is to shown us on 'Ratio' aspect of 37B order as applied by Revenue. The order dated 24-9-1992 of the Board dealt with classification of HDPE fabrics and sacks made out of the same. The Board by a separate Section 37B order dated 20-10-1993 ordered classification of Polypropylene tapes/strips etc. under Chapter 39. This itself shows that the analogy or principle of classification adopted in an order passed under Section 37B by Board would not be automatically applied for deciding the classification of other commodity. In any case, the said order dated 24-9-1992 of the Board does not deal with the classification of HDPE fabrics laminated with plastics or paper. Hence, the reliance on the order dated 24-9-1992 in the present case is not sustainable."
6. By issues a circular and answers to the FAQ, the board has directly or indirectly granted exemption to services provided by the "Sub Contractors in case of Consulting Engineer Services and Repair & Maintenance Services". Though the power to grant exemption lies with the Central Government under section 93 of the Chapter V of the Finance Act, 1994 (service tax).
7. However, the question of validity of the above clarifications has not been raised in the above Decision of the Honorable Tribunal, we may assume that the clarifications are valid.
8.On careful consideration of the Decisions of the Honorable Tribunal, in the case of "Air Conditioner Company of India" and "T.P.I. INDIA LTD" supra, read with the provisions of Rule, 37B it can be envisaged that:-
8.1 To avail the benefit of clarification, the Main Contractor and Sub Contraction must fall under the same category (classification) i.e. Consulting Engineers Services or Repair & Maintenance Services. Where the classification of the main contractor and sub contractor are different, the above clarification can not came into rescue (see the decision in the matter of Air Conditioner Company of India Versus CCE, Noida reported in [2006 (2) STR 123 (Tri. - Del) = 2006 -TMI - 308 - CESTAT - New Delhi]) .
8.2 Since the clarifications as above have been issued only in respect of "Consulting Engineering Services" and "Repair & Maintenance Services", these clarifications can not be extended to other category of services automatically (see the decision in the matter of T.P.I. INDIA LTD supra).
8.3 To get the benefit of above clarifications, the sub contractor must have a proof that the main contractor has paid the service tax on the value of services including the amount paid to the sub contractor.
Please Note: -
Similar Clarifications have been issued for:
Circular No. B11/3/98 dated 7-10-1998
1 Architect Services
2 Interior Decorator Services
3 Market Research Agency