Service tax on composite services: excess tax from debit notes was adjustable, and Cenvat credit remained admissible on the third-party component.

Service tax paid on the full value of a composite output service became excess tax when debit notes later reduced the value for deficiency, so the amount corresponding to the debit notes was not payable again and could be adjusted against future liability under Rule 6(3) of the Service Tax Rules, 1994, with interest only for the intervening period. On the third-party service component included in the appellant's billed composite service, Cenvat credit was admissible because that component formed part of the taxable output service and tax had already been discharged on the full invoice value. The demand and connected penalties were therefore unsustainable and were deleted.

---

---

Issues: (i) Whether the demand raised on debit notes issued for deficiency in service was sustainable where service tax had already been paid on the full bill value and the excess tax was claimed to be adjustable against future liability. (ii) Whether Cenvat credit was admissible on the service tax component attributable to services provided by a third party to the recipient, where the appellant's invoice included such value and debit notes were raised accordingly.

Issue (i): Whether the demand raised on debit notes issued for deficiency in service was sustainable where service tax had already been paid on the full bill value and the excess tax was claimed to be adjustable against future liability.

Analysis: The debit notes represented reduction in the value of the output service on account of deficiency. Since tax had already been paid on the entire invoice value, the amount corresponding to the debit notes did not remain payable as service tax. The excess tax paid was held to be adjustable against future liability under Rule 6(3) of the Service Tax Rules, 1994, with interest payable only for the intervening period until such adjustment became available.

Conclusion: The demand of Rs. 1,97,700/- was unsustainable and was set aside in favour of the assessee.

Issue (ii): Whether Cenvat credit was admissible on the service tax component attributable to services provided by a third party to the recipient, where the appellant's invoice included such value and debit notes were raised accordingly.

Analysis: The service attributable to the third party formed part of the composite service billed by the appellant and was treated as a deemed input service for the appellant. As service tax had been paid on the entire bill value, including the third-party component, credit was held admissible on the tax reflected in the debit note.

Conclusion: Cenvat credit of Rs. 1,03,952/- was admissible and the penalty connected with the disallowed demand was not sustainable.

Final Conclusion: The impugned order was set aside in entirety and the appeal succeeded with consequential relief, including deletion of the penalties.

Ratio Decidendi: Where service tax has been paid on the full value of a composite service and a debit note subsequently reduces that value for deficiency, the excess tax is adjustable against future liability and Cenvat credit remains admissible for the tax component attributable to the service forming part of the appellant's taxable output service.

---