Service Tax - Works Contractors - A cue from Supreme Court’s verdict ?
It has been a grappling issue under Service Tax since the levy of service tax on works contractors. The concept of sub-contracting is not most uncommon and prevalent in the construction industry. The main contractor (who has been awarded a work by the Employer/Client) engaged in construction work, as a part of practice or in inevitable circumstances, he awards a portion or whole of his work to other person (commercially known as “sub-contractor”). Both are engaged in construction business/activity and are liable for service tax. To avoid cascading effect of tax, they are allowed to avail CENVAT credit benefit on input service and capital goods which are not transferred to the Client. But this will not resolve the issue at all because of its very nature of the industry, most of the petty contractors are the major players in the field and may not even aware of the law and move from one place to other frequently. However in practical scenario it is increasingly become difficult to bring the sub-contractors into the operation of service tax provisions, namely get him registered and obtaining service tax invoice from him etc.
But the Department without considering the practical difficulties exist in the construction industry, has come out with a Circular No.96/7/2007-ST dated 23rd August, 2007 (Reference Code no.999.03) wherein both main contractor and sub-contractor are made liable for service tax.
In this context, it is pertinent to eulogize and quote a recent verdict by Supreme court in the case of L&T Ltd., (Civil Appeal No: 5239 of 2008 arising out of SLP(C) No: 12482 of 2007) decided on 26/8/2008 under Andhra Pradesh VAT Act wherein it was held finally by drawing the curtains that when a sub-contractor incorporates the goods in a works contract, by theory of accretion, the transfer of property is deemed to have been completed and no further liability accrues in the hands of the main contractor since there is no transfer of property from him to the Client, of course, though the very original contract agreement is entered into by him..
Let us wait and observe what the industry, consisting galore of works contractors, would act upon it in the case of service tax. Before that in my opinion the works contractors may take a cue from the above decision and defend that same analogy, if applied in service tax also, the transfer of property is deemed to have been effected by the sub-contractor only and hence main contractor cannot be questioned for service tax and the sub-contractor he who incorporated the goods and involved in transfer of property in goods to the Client can only be questioned and made liable to service tax.
Vision left to the industry and the Department..
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