Service tax classification and subcontractor liability turn on contract terms, prospective circular effect, and factual verification of accounts.

Processing and operating plant and machinery under the assessee's supervision, with consideration fixed on a tonnage basis and labour engaged in production-related work, was treated as processing/manufacturing activity rather than manpower recruitment or supply agency service, taking it outside service tax. As the activity itself was held non-taxable, the gross receipt cum-tax adjustment also failed. A demand based on an accounting discrepancy required fresh factual verification and was remanded for reconsideration on documentary evidence. Liability on subcontractor services was confined prospectively from 23.08.2007, so the earlier period was not taxable. The related penalty was set aside, with no penalty surviving on the remanded or interpretational issues.

---

---

Issues: (i) whether the activity of processing and operating plant and machinery was classifiable as manpower recruitment or supply agency service; (ii) whether the gross receipt demand required extension of cum-tax benefit; (iii) whether the demand arising from an alleged accounting error could be sustained on the existing record; and (iv) whether the demand raised on subcontractor services and the related penalty could be sustained in full.

Issue (i): whether the activity of processing and operating plant and machinery was classifiable as manpower recruitment or supply agency service.

Analysis: The contract and scope of work showed that the assessee was responsible for operating the plant, feeding raw material, maintaining equipment, ensuring three-shift operation, and carrying out production-related tasks. The labour deployed worked under the assessee's supervision, and the consideration was fixed on a tonnage basis rather than on manpower supplied. On these terms, the activity was not a mere supply of manpower. The activity was treated as processing and manufacturing activity, which fell outside service tax under the cited notification.

Conclusion: The demand under manpower recruitment or supply agency service was not sustainable and was set aside in favour of the assessee.

Issue (ii): whether the gross receipt demand required extension of cum-tax benefit.

Analysis: Since the underlying activity itself was held not taxable, the demand raised by treating the receipt as inclusive of service tax had no independent basis. Once taxability failed, the question of recomputing the gross amount on a cum-tax basis did not survive.

Conclusion: The cum-tax demand was set aside in favour of the assessee.

Issue (iii): whether the demand arising from an alleged accounting error could be sustained on the existing record.

Analysis: The adjudicating authority had rejected the assessee's plea because the alternate chartered accountant's certificate did not explain with evidence how the differential amount arose. The appellate forum found that this aspect required further factual clarification, especially on the source of the discrepancy between the two sets of accounts and certificates. The issue therefore required fresh adjudication after production of documents.

Conclusion: The matter on this demand was remanded to the adjudicating authority.

Issue (iv): whether the demand raised on subcontractor services and the related penalty could be sustained in full.

Analysis: The circular treating subcontractor services as taxable was held to operate prospectively from 23.08.2007. Accordingly, liability could not be fastened for the earlier period. The assessee's claim for abatement under the erection, commissioning and installation notification was not fully supported by breakup figures or evidence of material supply, so quantification on that aspect also required reconsideration. Since the major demands were set aside and the remaining demand was either restricted or remanded, the penalty could not be sustained as imposed, and no penalty survived on the remanded or interpretational issues.

Conclusion: The subcontractor demand was restricted prospectively, the pre-23.08.2007 portion was set aside, the quantification issue was remanded, and the penalty was set aside.

Final Conclusion: The appeal succeeded substantially, with the principal classification demand and cum-tax demand deleted, one demand remanded for fresh quantification, the subcontractor demand confined prospectively, and the penalty deleted.

Ratio Decidendi: Where the contract shows performance of production-related work under the assessee's control on a work-based consideration, the activity is not manpower supply; a circular imposing liability on subcontractors applies prospectively; and penalty cannot stand absent established suppression or mens rea.

---