CESTAT Allows Adjustment of Partner’s Service Tax Payment Against Firm’s Liability, Upholds Sub-Contractor Tax Demand

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 service tax liability of the partnership firm, provided the payment relates to services rendered by the firm and not to the partner’s independent proprietary activities.

The decision was delivered by a Bench comprising Judicial Member Binu Tamta and Technical Member Hemambika R. Priya while partly allowing an appeal filed by M/s Deepa Construction, a partnership firm engaged in construction and works contract services in Chhattisgarh. The appeal arose from an Order-in-Original passed by the Commissioner of CGST and Central Excise, Raipur, confirming a service tax demand of ₹2.83 crore along with interest and penalties under Sections 77 and 78 of the Finance Act, 1994.

The demand followed scrutiny of income tax returns and TDS data for the financial years 2013–14 to 2017–18, which showed substantial receipts from taxable services. The Department alleged non-payment of service tax and invoked the extended period of limitation on the ground of suppression of facts.

A key issue before the Tribunal was whether service tax paid using the PAN-based service tax registration of one of the partners, Shri K. Surendran Nair, could be treated as valid discharge of the partnership firm’s tax liability. The Department argued that the firm and its partner were distinct 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) as well as decisions of the Gujarat High Court. It noted that a partnership firm and its partners are not separate legal entities in the rigid manner suggested by the Department for service tax purposes. Since it was undisputed that the taxable services were rendered by the partnership firm and that service tax had actually been paid, the Tribunal held that such payment could not be ignored merely due to a mismatch in registration, especially when the Department had accepted the same arrangement for several years.

Accordingly, the Bench ruled that service tax paid by the partner must be adjusted against the firm’s liability, subject to verification that the payments did not pertain to services independently provided by the partner in his proprietary capacity.

On the issue of services rendered by the appellant 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 the services rendered by him, even if the main contractor has already discharged tax on the overall contract. The plea of revenue neutrality was expressly rejected.

The Tribunal also examined 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. Observing that the adjudicating authority had not verified the relevant documents, the Bench remanded this issue for fresh consideration.

Similarly, the issue of abatement under Rule 2A of the Service Tax (Determination of Value) Rules, 2006 was remanded. The Tribunal held that invoices, work orders, payment records, and other documents produced by the appellant required detailed scrutiny to correctly compute the taxable value and service tax liability.

In conclusion, the Tribunal allowed adjustment of service tax paid by the partner against the firm’s liability, upheld the firm’s liability as a sub-contractor, and remanded issues relating to computation of demand on works contract and transportation services for fresh adjudication after granting due opportunity to the appellant. The appeal was thus partly allowed, and the impugned order was sustained only to a limited extent.