Whether reversal of whole credit is required when proportionate credit reversed? The imposition of penalty is not warranted when demand itself is not sustainable

PJ/CASE LAW/2015-16/2620

Case:-RATHI DAGA Versus COMMISSIONER OF CENTRAL EXCISE, NASHIK

Citation:- 2015 (38) S.T.R. 213 (Tri. - Mumbai)

Brief facts:- This appeal was directed against Order-in-Appeal No. AKP/187/ NSK/2011, dated 30-9-2011 in which Commissioner (Appeals) confirmed the demand of Rs. 26,487/- along with interest and penalty of Rs. 26,487/- under Rule 15(3) of the Cenvat Credit Rules. He reduced credit disallowed from Rs. 16,204/- to Rs. 13,187/-.

The appellant is a partnership firm of Chartered Accountant under the trade name of M/s. Rathi Daga. They provided services under the category of ‘Practicing Chartered Accountant’. They rendered taxable as well as exempted services and utilised Cenvat credit on input services such as telephone services, insurance, repairs & maintenance of motor car etc. It was detected by Audit that they did not maintain separate accounts for services used in providing taxable and exempted services as required under Rule 6(2) of the Cenvat Credit Rules. The appellant had two options under Rule 6(3) of the Cenvat Credit Rules either to pay an amount equal to 8% of the value of the exempted services or pay an amount equivalent to the Cenvat credit attributed to the input services used for providing the exempted services by following conditions and procedure of Rule 6(3A). As they did not follow the conditions of Rule 6(3A), a show cause notice was issued demanding Rs. 26,487/- being the amount equal to 8%/6% of the value of exempted services. Further, it was also noticed that they had availed and utilised Cenvat credit of Rs. 16,204/- on input services of insurance and maintenance of motor vehicles which were not in the name of the firm. The Commissioner (Appeals) upheld the demand order passed by the adjudicating authority to the extent mentioned above.

Appellant’s contention:- The learned C.A. stated that it was ignored by the adjudicating authority that they had paid proportionate of Cenvat credit of Rs. 927/- as required under Rule 6(3)(ii), on 6-5-2010, before the issue of show cause notice on 11-11-2010. Further, that the provisions of Rule 6(3A) were technical in nature and there was no time limit prescribed for giving option to avail Rule 6(3A). He also stated that Rule 6(3A) was amended from 1-4-2008 and they were ignorant about these provisions and continued to follow the old provision which restricted utilisation of Cenvat credit to the extent of 20%. Further, he contented that the input services of insurance and car were used for business and expenses were reflected in the Profit & Loss Account of the firm. Further that the Order-in-Original and Order-in-Appeal travelled beyond the show-cause notice to the extent that the show-cause notice only sought to deny credit on the bills which were not in the name of the firm. Lastly he stated that extended period of limitation cannot be invoked in the absence of mens rea and relied on Hon’ble High Court of Karnataka judgement in the case of Commissioner of Central Excise & Service Tax, Bangalore v. M/s Adecco Flexione Workforce Solutions Ltd. - 2011-TIOL-635-HC-KAR-ST. = 2012 (26)S.T.R.3 (Kar.).

Respondent’s contention:- The learned A.R. reiterated the findings of the Commissioner

Reasoning of judgement:- The first issue to be decided was whether the appellant were required to pay 6%/8% of the value of exempted services under Rule 6(3)(i) or they may be allowed to make the payment under Rule 6(3)(ii). Revenue’s contention was that payment under Rule 6(3)(ii) can be allowed only when the procedure under Rule 6(3A) was followed. This procedure required various conditions to be followed as mentioned below :-

(a) while exercising this option, the manufacturer of goods or the provider of output service shall intimate in writing to the Superintendent of Central Excise giving the following particulars, namely :-

(i) name, address and registration No. of the manufacturer of goods or the provider of output service;

(ii) date from which the option under this clause is exercised, or proposed to be exercised;

(iii) description of dutiable goods or (output) services;

(iv) description of exempted goods or exempted services;

(v) Cenvat credit of inputs and input services lying in balance as on the date of exercising the option under this condition;

(b) the manufacturer of goods or the provider of output service shall, determine and pay, provisionally, for every month.

These conditions were not fulfilled by the appellant. Ongoing through these conditions, they found that they prescribed submission of details such as: exercising option to avail the facility, name, address and registration No., etc. Mostly these were factual details which were available from the records. However the amount of Rs. 927/- attributable to the amount of Cenvat credit on inputs used towards exempted services was paid by the appellant before the issue of show-cause notice. That this would be the amount required to be paid, under Rule 6(3A) was not disputed by Revenue. It would be too harsh to enforce payment of Rs. 24,194/- only because of non-payment of the due amount of Rs. 927/- on time as per procedure prescribed in Rule 6(3A). But the conditions do required that option should be exercised in writing to avail the facility and amount of Cenvat credit attributable to exempted goods must be paid provisionally for every month. This was not done by the appellants. No assessee would intentionally evade payment of Rs. 927/-. The appellant have pleaded ignorance about the new provisions and continued to restrict utilisation of Cenvat credit to the tune of 20% as per previous provisions of law. In any case Rule 6(3) only restricted availment of credit upto 20%. If did not make the credit lapse. Further, the restriction of 20% was removed from 1-4-2008. Therefore, they set aside the demand of Rs. 26,487/-. In the facts and circumstances of the case, they find that the mens rea with definite intent to evade duty was not established. And once mens rea was not established, imposition of penalty under Rule 15(3) of the Cenvat Credit Rules does not sustain in the light of Hon’ble High Court of Karnataka judgment in the case of M/s Adecco Flexione Workforce Solutions Ltd. (supra).

The next issue in this case was the admissibility of Cenvat credit on insurance, repair and maintenance of motor vehicles. The Commissioner in the impugned order acknowledged that the motor car was considered as an Asset in the books of accounts for the years 2008-09 and 2009-10. The Commissioner also acknowledged that the ledger showing depreciation also corroborates the fact of asset which is used for business of partnership firm. Similarly, the insurance, repairs and maintenance bills in respect of the motor vehicles issued in the name of partner are also taken into books of accounts, treating it as expenditure to the firm. Commissioner stated in his Order that “unless the contrary intention appears, property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm, the mere fact that the motor vehicles were registered in the name of partner and not in the name of firm, the credit cannot be denied, as the expenditure therefore had been incurred from the firm’s budget.” However, after stating the above, the Commissioner in the Order comes to a finding that the appellant failed to produce documentary evidence that the said vehicles had been used for the purpose of output service only. The Commissioner appears to contradict his own statement. On the one hand he says the expenditure has been incurred from the firm’s budget whereas on the other hand he comes to a conclusion that no documentary evidence showing use of vehicles for output services, has been produced. Therefore, they do not agree with the Commissioner’s finding. In any case it was never the allegation in the show-cause notice that the vehicles were not used for providing output services. The allegation in the show cause notice was vague as is stated that the insurance & maintenance of motor vehicle on which the Service Tax credit was availed appeared to be not input services and therefore credit of the same was inadmissible as per provision of Cenvat Credit Rules, 2004. The allegation in the show-cause notice was neither definitive nor substantiated in any manner. For this reason also, finding of the Commissioner was rejected. They held that the Cenvat credit was admissible. Consequently the penalty of Rs. 5,000/- under Section 77 was also set aside.

Accordingly, the impugned order was set aside and appeal was allowed with consequential relief, if any.

Decision:- Appeal allowed.

Comment:-The analogy of the case is that reversal of whole cenvat credit is not warranted though there is procedural infraction on the behalf of assessee. When the proportionate reversal has been done then compliance of rule is done. Even nobody will evade the small amount of Cenvat credit intentionally..

Secondly, Cenvat credit cannot be denied when it is shown as expenditure in books of accounts. When there is no allegation in SCN that input services are not used for providing services then credit cannot be denied on lack of documentary evidence of its use.

Prepared by:- Monika Tak

Checked by Prayushi Jain

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PJ/CASE LAW/2015-16/2620

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