CESTAT Allows Adjustment of Service Tax Paid by Partner Against Firm’s Liability in Deepa Construction Case

February 03, 2026 : The Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has ruled that service tax paid by a partner under his individual service tax registration can be adjusted against the tax liability of the partnership firm, provided the payment relates to services rendered by the firm itself.

The ruling came in an appeal filed by M/s Deepa Construction, a partnership firm engaged in construction and works contract services, against an order passed by the Commissioner, CGST and Central Excise, Raipur. The Commissioner had confirmed a service tax demand of ₹2.83 crore along with interest and penalties under Sections 77 and 78 of the Finance Act, 1994, for the period from 2013–14 to 2017–18.

The Bench comprising Binu Tamta (Judicial Member) and Hemambika R. Priya (Technical Member) noted that the demand was raised after scrutiny of income tax returns and TDS data, which showed substantial receipts from taxable services. The Department alleged suppression of facts and invoked the extended period of limitation to confirm the demand.

A key issue before the Tribunal was whether service tax paid under the PAN-based registration of one of the partners, Shri K. Surendran Nair, could be treated as valid payment towards the firm’s service tax liability. The Department argued that the partner and the partnership firm were distinct legal entities and that tax paid under the partner’s registration could not be adjusted against the firm’s dues.

Rejecting this contention, the Tribunal examined the nature of a partnership under Section 4 of the Partnership Act, 1932, and relied on Board Circular No. 58/07/2003-CX (ST) and judicial precedents of the Gujarat High Court. It held that, for service tax purposes, a partnership firm and its partners cannot be treated as entirely separate in the rigid manner suggested by the Department.

The Tribunal observed that it was undisputed that the taxable services were rendered by the partnership firm and that service tax had in fact been paid, though under the partner’s registration. It held that such payments could not be ignored merely due to a registration mismatch, especially when the Department had accepted the same registration and payments for several years. Accordingly, the Bench directed that the service tax paid by the partner be adjusted against the firm’s liability, subject to verification that the payments did not relate to services independently rendered by the partner in his proprietary capacity.

On the issue of services rendered by Deepa Construction as a sub-contractor to Tecpro Systems Ltd., the Tribunal upheld the service tax demand. Relying on the Larger Bench decision in Melange Developers Pvt. Ltd., it reiterated that a sub-contractor is independently liable to pay service tax on services rendered by him, even if the main contractor has discharged service tax on the overall contract. The plea of revenue neutrality was expressly rejected.

With respect to receipts shown under the head “Transportation and Hiring,” the appellant claimed exemption for transportation of goods by road under Section 66D of the Finance Act, 1994. The Tribunal noted that the adjudicating authority had not examined the supporting documents to verify the nature of these receipts and remanded the issue for fresh consideration.

The Tribunal also remanded the issue relating to abatement under Rule 2A of the Service Tax (Determination of Value) Rules, 2006, observing that invoices, work orders, and payment records produced by the appellant required detailed scrutiny for correct computation of taxable value and service tax liability.

In conclusion, the Tribunal partly allowed the appeal, permitting adjustment of service tax paid by the partner against the firm’s liability, upholding the firm’s liability as a sub-contractor, and remanding the issues relating to works contract and transportation services for fresh adjudication after granting due opportunity to the appellant.

Cause Title: M/s Deepa Construction v. Commissioner of Central Goods and Service Tax & Central Excise, Raipur
Case No.: Service Tax Appeal No. 50608 of 2021
Coram: Binu Tamta (Judicial Member) and Hemambika R. Priya (Technical Member)