Facts of the Case

  • The appellant, MGCANNERICKSON (India) Ltd., was engaged in advertising services and received services from foreign entities.
  • Service tax liability arose under Section 66A (reverse charge mechanism) for services received from outside India.
  • A show cause notice demanded service tax of ₹1.93 crore, alleging improper payment through CENVAT credit instead of cash.
  • The Commissioner and CESTAT held that such liability must be discharged in cash, though allowing re-credit later.

Issues Involved

  1. Whether service tax payable under reverse charge (Section 66A) could be discharged through CENVAT credit prior to 01.07.2012.
  2. Whether the Explanation added to Rule 3(4) in 2012 has retrospective applicability.
  3. Whether the demand and penalty imposed were legally sustainable.

Petitioner’s Arguments

  • Prior to 01 July 2012, there was no prohibition on using CENVAT credit for payment of service tax under reverse charge.
  • The Explanation inserted in Rule 3(4) in 2012 is prospective, not retrospective.
  • As per legal definitions, the recipient becomes a “provider of taxable service”, thus making the service an “output service” eligible for CENVAT utilization.

Respondent’s Arguments

  • Service tax under reverse charge must be paid in cash only, not through CENVAT credit.
  • The Explanation added in 2012 is clarificatory and therefore applicable retrospectively.
  • Services received from outside India are not “output services” for credit utilization.

Court’s Findings / Order

  • The Delhi High Court held that:
    • The Explanation inserted in Rule 3(4) in 2012 creates a substantive restriction and cannot be applied retrospectively.
    • Prior to 01 July 2012, there was no legal bar on utilization of CENVAT credit for reverse charge service tax.
    • Under legal fiction, the recipient is treated as a service provider, making it an “output service”.
  • The impugned CESTAT order was set aside, and the appeal was allowed in favour of the assessee.

Important Clarification by Court

  • Legal provisions imposing new liabilities or restrictions cannot be retrospective unless expressly stated.
  • Reverse charge services (imported services) were deemed output services prior to 2012, enabling CENVAT credit utilization.
  • The 2012 amendment was a substantive change, not a clarification.

Link to download the order -  https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:7955-DB/DNP19092019SERTA12019_155327.pdf

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