Input Service Distributor liability cannot be sustained where exempted service is not identified and recovery is otherwise misapplied.

An Input Service Distributor cannot be fastened with Cenvat credit recovery on the footing that trading of securities was an exempted service where the record also showed that the assessee was not actually engaged in such trading. The demand notices failed to identify any other specific exempted service forming the basis of the recovery, and the Tribunal noted that an Input Service Distributor is only a distributing office, not the manufacturer or output service provider against whom recovery of inadmissible credit can be imposed in the manner attempted. On that basis, the demand, interest and penalties were held unsustainable and set aside.

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Issues: Whether Cenvat credit demand and penalty could be sustained against an Input Service Distributor on the premise that services relating to trading of securities constituted exempted service and, consequently, whether the impugned demands under the recovery provisions were legally maintainable.

Analysis: The demand notices and the consequential orders proceeded on the footing that trading of securities was an exempted activity, but the record also showed that the authorities themselves had found that the assessee was not in fact involved in trading of securities. The notices did not clearly identify any other specific exempted service on which the demand was based. The Tribunal reiterated that an Input Service Distributor is only a distributing office and is not the manufacturer or provider of output service against whom recovery of inadmissible credit can be fastened in the manner attempted. In these circumstances, the invocation of the recovery mechanism for the distributed credit could not be sustained.

Conclusion: The demand, interest and penalties were unsustainable and were set aside in favour of the assessee.

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