Whether credit can be utilised for payment of Service tax in respect of services imported from foreign country?

PJ/Case Study/2013-14/52

CASE STUDY

Prepared by:-CA Neetu Sukhwani &
Kavita Thanvi

Introduction:-

The assessee was issued with a Show cause notice alleging that they have not paid/irregularly paid the Service Tax amounting to Rs. 1,77,981/- as they paid service tax by utilizing cenvat balance while the same was required to be paid in cash as the same pertained to BAS received from abroad. Thus, they were asked to deposit service tax under section 73(1) of the Finance Act, 1994, interest under Section 75 of the Finance Act, 1994 and penalty under Section 76, 77 and 78 of the Finance Act, 1994. The adjudicating authority did not consider the submissions of the assessee and confirmed the demand along with interest with respect to GTA service that was not the matter of consideration but refrained from imposing penalty. The assessee thereafter filed appeal to the Commissioner Appeals who upheld the order passed by the adjudicating authority. The present appeal arises from the order of the Commissioner (A) which rejected the grounds of the appellant. The contention of the appellant is that the Commissioner (A) has rejected their appeal without considering their submissions and hence the order is not tenable. It was finally decided by the Tribunal that the authorities below have mixed up the issue and have not given the clear finding. Thus, the appeal was remanded to the original adjudicating authority for deciding afresh on merits and limitation both.

M/s. Kansara Modler Ltd. v/s Central Excise Commissionerate (JP-II), Jaipur
[Order-In-Appeal no. 280(CB) CE/JPR-II/2011 dated: 10.01.2011]

Relevant Legal Provisions:-

Rule 5 of Cenvat Credit Rules:-

The taxable services provided from outside India and received in India shall not be treated as output services for the purpose of availing credit of duty paid on any input or service tax paid on any input services under Cenvat Credit Rules, 2004.

Rule 2 (p) of the Cenvat Credit Rules, 2004:-

Explanation.—For the removal of doubts it is hereby clarified that if a person liable for paying service tax does not provide any taxable service or does not manufacture final products, the service for which he is liable to pay service tax shall be deemed to be the output service;

Rule 2. Definitions:–

(d) “output service” shall have the meaning assigned to it in clause (p) of rule 2 of the CENVAT Credit Rules, 2004
The term ‘Output Service’ is defined in Rule 2(p) of theCENVAT Credit Rules, 2004, which is produced as follows:-
“Output service means any taxable service provided by the provider of taxable service, to a customer, client, subscriber, policy holder or any other person, as the case may be, the expression ‘provider’ and ‘provided’ will be construed accordingly.”
The ‘Provider of taxable service’ is defined in Rule 2(r) of the Cenvat Credit Rules, 2004. The definition is produced as under:-
“Provider of taxable service includes a person liable for paying service tax.”
Person liable for paying service tax is defined in Rule 2(q) of aforesaid Rules, which is produced below:-
“Person liable for paying service tax has the meaning as assigned to it in clause (d) of sub-rule (1) of rule 2 of the Service Tax Rules, 1994.”

Rule 2(1)(d) of the Service Tax Rules, 1994:-

“Person liable for paying the service tax means,-
(i)- - - - ----
(ii)- - - -
(iv) in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under section 66A of the Act, the recipient of such service;
--- -----

Issue: - Following issue was made before the CESTAT:-

Whether credit can be utilised for payment of Service tax in respect of services imported from foreign country?

Brief Facts:-

The appellant, M/s Kansara Modler Ltd is registered with Central Excise Department. They received services from foreign nationals for which they were liable to pay service tax as per Section 66A of the Finance Act, 1994. Appellant paid the service tax from cenvat credit account by the due date. Anti evasion party has visited the factory of the appellant and studied the documents relating to import of machine. They said that since the installation and commissioning is done by foreign supplier then the service tax on installation and commissioning is to be paid by the appellant. The officers told that the agreement did not provide for separate amount for installation then the service tax will be paid on complete amount though the abatement @ 67% will be available to them. The appellant moved an application to division office that they understand that they have to pay the service tax on complete amount under “Right to use tangible asset” service. But the department is saying under “commissioning and installation service”. As such the correct classification should be told to them so that they can get registered under the correct category. But the department did not reply. Even they have reminded the matter to range office vide their letter dated 23.06.2009 but no answer was received. The Department issued show cause notice no. V(ST)/SCN/276/JDR/09/702 dated 26.3.2010 for the period 1.10.2008 to 30.9.2009 alleging that the appellant had made irregular payment of service tax on Business Auxiliary services received from abroad and Goods Transport by Road service. It was alleged that the appellant had wrongly paid Service Tax from Cenvat credit account as recipient of services. Referring to Rule 5 of Taxation of services (provided from outside India and received in India) Rules, 2006 it was alleged that that taxable services received by the appellant from abroad are not to be treated as output service. It was also alleged that since no Cenvat Credit accrued to them in the capacity of Service Tax payer, hence the appellant cannot use it for discharging service tax liability as recipient of taxable services from abroad. The appellant duly replied the above show cause notice.

But the submissions made by the assessee were not considered and the adjudicating authority confirmed the demand of service tax to be paid in cash along with interest but however waived the penalty. Thereafter, the assessee filed appeal to the Commissioner Appeals. The Commissioner (A) did not accept the contentions of the appellant and the order in appeal no. 280(CB) ST/JPR-II/2011 dated 28.06.2011 was passed rejecting the contentions of the appellant. However, the learned commissioner has passed the order on payment of service tax on import of services. But he has also referred that GTA services are excluded from 1.3.2008 from output service. It implies that the learned appellate authority was thinking that they have paid the service tax on import of service as well as on GTA from Cenvat credit. But there was no issue of GTA which was referred in this appeal. But the learned commissioner (Appeal) has failed to consider their submission. Aggrieved by the impugned order-in-appeal, the appellant prefers to file this appeal before CESTAT.

Appellant’s Contentions:- The appellant made following submissions before the CESTAT:-

The appellant submit that they have pleaded before the appellate authority that the adjudication officer has passed the common order for various assesses. If one studies that order than it implies that they have paid the service tax on GTA. But we have paid the service tax on import of service from cenvat credit. Hence, the learned Deputy Commissioner was totally confused about the issue in show cause notice. Such an order-in-original is totally erroneous. The learned Commissioner has also said that the GTA has been deleted from output service from 1.3.2008. But there was no issue of GTA. The main issue was payment of service tax on import of service from cenvat credit. But the learned commissioner was also not clear about the issue and just passed the impugned order-in-appeal. Such an order is liable to be set aside.
The Order in Appeal passed by the learned Commissioner (Appeals) is alleging that the Rule 5 of Taxation of Services (Provided From Outside India And Received In India) Rules, 2006 says that the taxable services imported will not be considered as output service for the purpose of availing the Cenvat Credit. It is interpreted by learned Commissioner (Appeals) that due to this the recipient of imported taxable services cannot be treated as output service provider for the purpose of availing the Cenvat Credit and hence the credit cannot be utilized for paying the service tax. In this regard, it is submitted that the learned Commissioner (Appeals) has misinterpreted the aforesaid Rule 5. The Rule 5 was discussed in depth in the appeal memorandum and in the written submissions. The analysis of the said rule makes it clear that:-
·         This rule is applicable in case of the import of taxable service;
·         The import of taxable service will not be treated as output service for the purpose prescribed in this rule;

·         The purpose prescribed is the availment of Cenvat Credit on inputs/input services.

Thus, the import of taxable services is not considered as output service for the purpose of availment of Cenvat Credit on inputs/input services. In other words, if the assessee is registered with service tax department only in respect of import of the taxable services; then he cannot take the Cenvat Credit. But they were manufacturer of excisable goods and have taken the credit on input, input services and capital goods used in manufacture of final product. They have not taken the credit because they have imported the taxable service and paid the service tax thereon. Hence they have not contravened this rule.
In continuation to above it is submitted that this rule does not speak anything about utilization of Cenvat Credit. Thus, if the assessee has availed the Cenvat Credit in some other capacity (i.e. as a provider of taxable services or as a manufacturer of dutiable goods); he can definitely utilize the same in accordance to the provisions of Cenvat Credit Rules, 2004. The Cenvat Credit Rules, 2004 states that the credit rightfully availed can be utilized for paying the excise duty as well as service tax. In the instant case, they have rightfully availed the Cenvat Credit as the manufacturer of dutiable goods; thus, they can utilize the same for paying the service tax. The Rule 5 has no role in restricting the same. The provisions related to availment and utilization of Cenvat Credit as given in Rule 3(1) and Rule 3(4) of the Cenvat Credit Rules, 2004 were discussed in depth in the appeal memorandum and written submissions. While analyzing these rules, it was clear that rule 3 says that “(1) A manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of -….” Thus, two persons can take the credit – one is manufacturer of dutiable goods and other is provider of taxable service. They have taken credit as a manufacturer, thus, it is well within the boundaries of Rule 3(1) of Cenvat Credit Rules, 2004. According to Rule 3(4)(e) of the Cenvat Credit Rules, 2004 the credit rightfully availed can be used for paying the service tax on output service. As such, they have rightfully utilized the Cenvat Credit for the payment of Service Tax as service recipient. This discussion was done in depth in the appeal filed before the Commissioner (Appeal) but the learned Commissioner (Appeal) has not even mentioned it in the impugned order which makes the order non speaking which is non-tenable in the eyes of law.
The appellant further submit that the impugned order in appeal is alleging that there is restriction on availment of Cenvat Credit, so the question of utilizing the same does not arise at all. In this regard, it is reiterated that there is no one-to-one correlation in the credit taken and credit utilized. In other words, credit rightfully availed (whether in the capacity of service provider or as a manufacturer) can be utilized for paying the excise duty or service tax. It is not the case that the credit availed as manufacturer can be utilized only for paying the excise duty. The credit availed as a manufacturer can also be used for paying the service tax. Similarly, credit availed as service provider can also be used for paying the service tax. There is no restriction of cross utilization in the Cenvat Credit Rules, 2004. In the instant case, they have rightfully availed the credit as manufacturer of dutiable goods, thus, they can utilize the same for payment of service tax and it is in accordance with provisions of Cenvat Credit Rules, 2004. Further, the Director General has clarified the issue of cross utilization of Cenvat Credit availed as manufacturer and utilized as service provider and vice versa. This has been clarified in letter F. no. 381/23/2010/862 dated March 30, 2010. In this letter, Director General has clarified that the credit of inputs/capital goods/input services used for manufacture of goods or provision of services is available as a common pool and it can be used both for payment of excise duty as well as service tax. This DG letter also squarely supports their contention that they have rightfully utilized the Cenvat Credit availed as manufacturer in payment of service tax. This submission was duly made in the appeal memorandum and written submissions and copy of DG letter was also enclosed. But this submission is not even spelled out while passing the impugned order in appeal. The order passed without discussing their submissions and without giving the reasons as to why their submissions are not accepted, is not justified as it is a non speaking/non-reasoned order. In this regard, reliance is placed on the judgment given by the hon’ble Gujarat High Court in the case of CC Vs Essar Oil Limited [2010-TIOL-560-HC-AHM-CUS]. It was also held in M/s Nisha Cements Vs. CCE, Calicut [2010-TIOL-1255-CESTAT- BANG] that the order passed by lower Appellate Authority confirming duty demand by neither addressing various grounds raised by them nor discussing case law cited and without giving proper findings thereon, not sustainable. So going through the analogy given in the above decisions the impugned order passed against the assessee is not tenable in law because the Learned Commissioner (A) has not discussed the submissions made by them.

The appellant further submit that even if the contention of the impugned order in appeal (that there is restriction on availment of Cenvat Credit, so the question of utilizing the same does not arise at all) is accepted for the sake of argument only, then too such an interpretation is not justified as the language contained in the rule 5 of the import of services rules is plain and unambiguous. The language of the rule 5 is also in harmony with the provisions of the Cenvat Credit Rules, 2004 as per discussion made hereabove. It is held by the highest court of India in the case of Truetuf Safety Glass Industries vs Commissioner of Sales Tax, UP [2007 (215) ELT 14 (SC)] that it is a settled principle of law that the Court cannot read anything into a statutory provision which is plain and unambiguous. Similar decision has been given in the case of TATA CONSULTANCY SERVICES VersusSTATE OF ANDHRA PRADESH [2004 (178) E.L.T. 22 (S.C.)] by holding the view that Courts should not be over zealous in searching ambiguities or obscurities in words which are plain. Thus, the learned Commissioner Appeals, by wrongly interpreting a clear and unambiguous provision, has violated the principle laid down by the Court of last resort. Such an interpretation contrary to the principle of literal construction is not justified. Thus the contention of the impugned order in appeal is not sustainable and is liable to be set aside.

Further the order in appeal passed by the Commissioner (A) has been passed by relying on the decision of Commissioner of Service Tax, Bangalore v/s Arvind Fashions Ltd [2009 (13) STR 544 (Tri-Bang)]. The analysis of this judgment makes it clear that prior to 19.4.2006, there was an explanation in the definition of 'output service' as given in Rule 2 (p) of the Cenvat Credit Rules, 2004. The analysis of this explanation makes it clear that the explanation was applicable only in the following two cases:-

·         The person liable for paying service tax does not provide any taxable service, or
·         The person liable for paying service tax does not manufacture any dutiable goods.

If any of these two conditions was satisfied, the service for which he was liable to pay the service tax (i.e. GTA or Import of Service, etc.).
In other words, the said service was specifically mentioned as output service for the recipient of service and he was entitled to act as a normal service provider. Thus, even the recipient of said services was entitled to take the Cenvat Credit and utilize the same even if he was not providing any other service or even if he was not manufacturing any dutiable goods. This explanation was added to the definition of output service in order to take care of the persons who are only liable to pay the service tax under rule 2(1)(d) of the Service Tax Rules, 1994. Thus, the persons receiving such services could take credit and utilize the same even if no taxable services were provided or even if no other dutiable goods were manufactured. However, this explanation was omitted vide Notification No. 8/2006-Central Excise (N.T.) dated 19.4.2006. The omission of this explanation would mean that the recipient of service who is liable to pay the service tax is not entitled to take the credit if he is not providing any other taxable service or if he is not manufacturing the dutiable goods. The present case does not fall in this category as they have not taken the credit as recipient of imported service. They have availed the credit in the capacity of manufacturer of dutiable goods and as per discussion made here above in respect of rule 3(1) and rule 3(4) of the Cenvat Credit Rules, 2004; there is no restriction in doing the same.   Thus, the reliance placed on the aforesaid decision is misconceived and is liable to be quashed. The appeal should therefore be allowed.
In continuation of the same, the appellant further submit that the definition of output service is given in the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. It is clear from above that the “output service” includes the person liable for payment of service tax as a import of service. But it has not accepted by learned Commissioner. If the contention of the appellant is not accepted then there is no meaning of defining the terms “provider of taxable service” includes “a person liable for payment of service tax” in Cenvat credit Rules. Also the “person liable for payment of service tax” covers person listed to Rule 2(1) (d) of service tax rules. The Cenvat credit rules are meant for taking the credit and payment from cenvat credit. It does not ask about payment from cash. When these terms are defined in Cenvat credit rules then it is clear that these rules are meant for paying the service tax from cenvat credit. If this interpretation is not accepted then there is no need of defining these terms in Cenvat credit. Thus, this leads to clear cut conclusion that the payment of output service can be done from cenvat credit. Hence, following this analogy they have rightly paid the duty from Cenvat credit.
The appellant further submit that the impugned order in appeal passed by the learned Commissioner (Appeal) is not tenable as the same is passed without discussing the submissions made by them and detailed reasons have not been given to reject the said submissions. Therefore, the impugned order is a non-speaking order which is not tenable. It was held by the hon’ble Supreme Court that an order passed without discussing their submissions is not justified. It has been held in the case of Commissioner of Central Excise, Bangalore versus Srikumar Agencies [2008 (232) E.L.T. 577 (S.C.)] that an order passed without considering the submissions of the appellant is a non speaking order and a non speaking order is not legally viable in the eyes of law.

The appellant further relies upon the judgment given in WIPRO COMPUTERS LTD. Versus COMMISSIONER OF CUSTOMS, CHENNAI [2001 (135) E.L.T. 450 (Tri. - Chennai)]wherein the Tribunal held “An order not discussing evidence submitted by assessee nor technical literature or trade opinion a non-speaking order and not a legal order - Section 35A of Central Excise Act, 1944”and therefore, the order passed by the Dy. Commissioner is in violation of principles of natural justice and is required to be set aside.
Further in the case of ARBINDO LIQUORS LIMITED Versus COMMISSIONER OF CENTRAL EXCISE, NAGPUR [2001 (133) E.L.T. 631 (Tri. - Mumbai)](Annexure-6) says that an order narrates only what the Assistant Commissioner said and not what the assessee said. Such an order does not give any insight to the further appellate authority as to the correctness of the findings. It is for this reason that the principles of natural justice require that any order made in adjudication or in appeal, should be a “speaking” order. Similar decision is recently given in the following case: -
M/s S Kushal chand & Co Vs CC, Mangalore (Dated : September 9, 2009) [2010-TIOL-138-CESTAT-BANG]
In the instant case also, the submissions of the appellant have not been discussed and therefore it is liable to be set aside.
On the basis of above submissions it is ample clear that the person liable to pay the service tax, who have availed the credit in the capacity of manufacturer, can definitely utilize the Cenvat Credit for paying the service tax on the import of services. A no. of judgments in favour of this contention were cited in the reply to show cause notice, in the appeal memorandum and in the written submissions. In addition to those cases, reliance is also placed on the following cases:-
·         COMMR. OF S.T., MUMBAI Versus PHILLS ENGINEERING CORPORATION [2010 (20) S.T.R. 692 (Tri. - Mumbai)]
·         MOHINI INDUSTRIES Versus COMMISSIONER OF C. EX., RAIPUR [2009 (247) E.L.T. 735 (Tri. - Del.)]
·         CCE, Ludhiana v/s Nahar Spg. Mills Ltd [2010 (99) RLTONLINE 157 (CESTAT-DEL)]
·         M/s Sangam Spinners v/s CCE, Jaipur [2011-TIOL-778-CESTAT-DEL]
Therefore in all the above cases it is held that the Cenvat credit can be utilised for the payment of service tax on the services as a recipient of service. Moreover, it is clear from decision of PHILLS ENGINEERING CORPORATIONthat the credit can be availed even after 18.4.2006. Thus, it is clear that the credit availed after this date is also allowed. The stand of Commissioner (Appeal) is not acceptable. Therefore the appeal should be allowed.
Further, it was alleged that they have not registered under particular category with the department. In this regard, they submitted that they have imported machine and department contended that the service tax is payable under “errection, commissioning and installation” service and they said that they are paying service tax on complete amount of import of machine under “Right to use tangible asset”. Thus, the category of service was not clear. Hence, they asked the department that to guide them under which category the service tax is payable. But the department did not replied at all. But it is alleged in show cause notice that they are not registered in particular category. When the department is not clear about the classification then the allegation in show cause notice is not tenable.

Reasoning of the CESTAT:-

The Hon’ble CESTAT held that GTA service was not the disputed service and the only service was the one received from foreign country. The Commissioner (Appeals) has also referred to the provisions of Rule 5 of Taxation Services (provided from outside India and received in India) Rules, 2006. The said rule debars taking of credit in respect of such services by treating the same as output services. The appellant’s contention is that said rule does not debar utilising Cenvat credit availed in respect of other inputs or input services for the payment of duty on the services received from the foreign supplier. The demand also stand assailed on the point of limitation. They held that on going through the impugned order, the grounds of appeal, they find that the authorities below have mixed up the issue and has not given the clear finding. Accordingly, they set aside the impugned order and remand the appeal to the original adjudicating authority for deciding the same afresh after taking into consideration the appellant’s contention on merits and also on limitation.

Decision:- Appeal allowed by way of remand

Conclusion:- The substance of this case is that it is commonly encountered that a common order is passed in respect of similar issue pertaining to many parties but often, the order is passed on different point than that pertaining to the relevant assessee which was also in the present case. The only issue to be decided was that of utilisation of credit for payment of service tax for services imported from abroad but the order was passed with respect to GTA service which was not the issue under consideration. All this only adds to the cost of litigation for assessees.

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PJ/CASE STUDY/2012-13/52
27 April 2013

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PJ/CASE STUDY/2012-13/52
27 April 2013