Liability of subcontractor for service tax and Cenvat credit denial affirmed as prospective change; pre amendment demands and credit refusal set aside

Benefit of administrative circulars applied: under the 1997 circular a subcontractor was not liable for service tax where the main consultant paid tax; the 23.08.2007 circular making subcontractors liable applies only prospectively, so demands before 23.08.2007 are unsustainable. Taxability follows the date of provision of service, not receipt of payment; services provided before 23.08.2007 remain outside liability even if paid later, subject to adjudication verification. Cenvat credit was wrongly denied: credit taken on service provider invoices is allowable and cannot be refused merely for omission of the provider's registration number when tax payment by the provider is not disputed.

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Issues: (i) Whether demand of service tax on consultancy services provided by the appellant (sub/associate consultant) prior to 23.08.2007 is sustainable; (ii) Whether denial of cenvat credit of Rs. 61,200/- by invoking Rule 9(1)(g) of the Cenvat Credit Rules, 2004 read with Rule 4A(ii) of the Service Tax Rules, 1994 was justified.

Issue (i): Whether demand of service tax on services provided prior to 23.08.2007 is sustainable when main/prime consultants discharged service tax under Trade Notice No. 53-CE (Service Tax)/97 dated 04.07.1997 and Circular No. 96/7/2007-ST dated 23.08.2007 later made subcontractors liable.

Analysis: The earlier Trade Notice/Circular of 04.07.1997 exempted subcontractors from liability where the main consultant discharged service tax on the total value including amounts paid to the subcontractor. Circular No. 96/7/2007-ST dated 23.08.2007 changed the position prospectively by making subcontractors liable. The governing test is the date of provision of service; benefit of an existing circular cannot be denied retrospectively. Evidence submitted included certificates from main consultants declaring payment of service tax on total value.

Conclusion: Demand of service tax for services provided prior to 23.08.2007 is not sustainable and is ruled in favour of the assessee. The question whether payment received after 23.08.2007 renders earlier services taxable must be verified by the Adjudicating Authority based on date of provision of service.

Issue (ii): Whether cenvat credit of Rs. 61,200/- was rightly denied by invoking Rule 9(1)(g) of the Cenvat Credit Rules, 2004 read with Rule 4A(ii) of the Service Tax Rules, 1994.

Analysis: Rule 9(1)(g) of the Cenvat Credit Rules, 2004 and Rule 4A(ii) of the Service Tax Rules, 1994 apply to credit in the context of input service distributors. In the present facts the appellant availed credit on invoices received directly from the service provider, not on distributor invoices. The only defect in the invoice was non-mention of the service provider's registration number; there was no finding that service tax was not paid by the provider. Denial of credit on the incorrect legal basis and for a mere procedural lapse was therefore not justified.

Conclusion: Denial of cenvat credit of Rs. 61,200/- is set aside and ruled in favour of the assessee.

Final Conclusion: The impugned order is modified to the extent that (i) service tax demands relating to services provided prior to 23.08.2007 are not sustainable and (ii) the denial of cenvat credit of Rs. 61,200/- is set aside; appeals are allowed in these terms.

Ratio Decidendi: Where an earlier administrative circular exempts subcontractors from liability and is in force at the time of provision of service, the benefit of that circular cannot be denied retrospectively; and cenvat credit cannot be denied by misapplying provisions applicable to input service distributors or for mere procedural invoice deficiencies when there is no finding that the service tax was unpaid by the provider.

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