Whether credit deniable to recipient on ground that service provider has not paid service tax?

PJ/CASE LAW/2015-16/2614

Case:-KIRAN MOTORS LTD. VERSUS COMMR. OF C. EX. & SERVICE TAX, SURAT-I

Citation:- 2014 (36) S.T.R. 172 (Tri. - Ahmd.)

Brief facts:- These appeals have been filed by the appellant against two Orders-in-Appeal both dated 20-3-2013 under which the Order-in-Originals No. V/ST/AC/107Dem/10-11, dated 24-1-2011 and V/ST/AC/Dem/499/08-09, dated 20-12-2010 passed by Assistant Commissioner, Central Excise and Customs, Surat-I were upheld. The issue involved in both the stay applications/appeals is the same and are being taken up for disposal under this common order. The issue involved in both these cases is that appellant has taken Cenvat credit on the basis of proper cenvatable documents but during the course of Audit it was observed that the service providers did not pay the required service tax with respect to the documents on the basis of which Cenvat credit was taken by the appellant. On merits of the case the issue was decided against the appellant by the Adjudicating Authority and the first Appellate Authority.

Appellant’s contention:- None appeared on behalf of the appellant who vide letter dated 3-9-2013 submitted that the stay applications/appeals may be decided on the basis of submissions made by them in their appeal memoranda. In the appeal memoranda, inter alia, appellant has argued that as per the provisions of Rule 4(7) of the Cenvat Credit Rules, 2004 credit can be taken on the basis of the document received by them on which service tax paid or payable is indicated. Appellant also submitted that as per C.B.E. & C. Circular No. 766/82/2003-CX., dated 15-12-2003 it has been clarified that reversal proceedings cannot be resorted to against the recipient of the input services. It is accordingly, prayed by the appellant to grant them stay and also decide their appeals.

Respondent’s contention:-Sh. K.J. Kinariwalla (A.R.) appearing on behalf of the Revenue reiterated the stand taken by the Adjudicating Authority and the first Appellate Authority.

Reasoning of judgement:- The issue involved in these appeals is whether Cenvat credit taken by the recipient can be varied at a later stage when it is known that the provider of the services have not paid proper duty. In this regard, it is relevant to go through the provisions contained in Rule 4(7) of the Cenvat Credit Rules which read as follows :-
“Rule 4 (7) - The Cenvat credit in respect of input service shall be allowed, on or after the day which payment is made of the value of input service and the service tax paid or payable as is indicated in invoice, bill or, as the case may be, challan referred to in rule 9.”
It is evident from the provisions contained in Rule 4(7) of the Cenvat Credit Rules that Cenvat credit in respect of input services has to be allowed for the service tax paid or payable as indicated in the invoice, bill or, challan referred to in Rule 9 of the Cenvat Credit Rules. There is no provision in the Cenvat Credit Rules that if any amount of service tax shown to have been paid or payable in the duty paying document is not paid by the original manufacturer or the service provider, then Cenvat credit taken is required to be varied at credit taking end. To clarify this matter further it is observed that C.B.E. & C. under Circular No. 766/82/2003-CX., dated 15-12-2003, issued vide No. 201/45/43-CX, has given following clarification in para-5 :-
“5. On the issue of availment of credit by the user-manufacturer, it is clarified that action against the consignee to reverse/recover the Cenvat credit availed of in such cases need not be resorted to as long as the bona fide nature of the consignee’s transaction is not in dispute.”
From the above clarification also it is made amply clear that the recipient of the inputs/input services should not be asked to reverse the Cenvat credit availed in such cases so long as the bona fide nature of the consignee’s transaction is not in dispute. In the case of the appellant there is no evidence that the transaction between the service provider and the service recipient was not bona fide. At the time of receiving of duty paying document appellant cannot be expected to verify whether proper service tax has been paid by the appellant or not. In view of the above after allowing the stay applications/appeals themselves are taken up for final disposal.
For the reasons recorded above when service tax credit has been taken on the basis of valid documents by the appellant the credit is required to be allowed in view of Rule 4(7) of the Cenvat Credit Rules which has also been clarified under C.B.E. & C. Circular dated 15-12-2003 by the Revenue. Accordingly, appeals filed by the appellant are allowed.

Decision:- Appeals allowed.

Comment:- The crux of the case is that credit cannot be denied to the recipient on the grounds that the provider of service failed to pay service tax as far as recipient has taken credit on the basis of the valid document received by them on which service tax has been paid by them to the service provider. As per Rule 4(7) of the Cenvat Credit Rules, Cenvat credit in respect of input services has to be allowed if the value of service and service tax indicated in the invoice has been paid by the recipient. It is not possible for the service receiver to verify whether proper service tax has been paid by the service provider or not. Hence, credit cannot be denied on the basis that provider of the services has not paid service tax.

Prepared by:- Monika Tak

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PJ/CASE LAW/2015-16/2614

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