whether provider of output service “ Market research agency” can be allowed to pay service tax by debiting cenvat credit taken on input and capital goods.

CASE STUDY

Prepared By: CA Akanksha Anchaliya and Arundhati bajpai

Introduction: :- M/s Umax Packaging (hereinafter referred to as the appellant) is engaged in manufacture of flexible rolls and plastic pouches falling under sub-heading no. 39219096 and 39239090 of the Schedule to the Central Excise Tariff Act, 1985.
A show cause notice no. V (39) 30/80/2015/485 dated 18.01.2016 was issued to the appellant alleging that they have wrongly utilised the cenvat credit amounting to Rs. 84,720/- for payment of service tax under Market Research Agency Service on the ground that the input services were not used in or on relation to provision of Market Research Agency Service. It was alleged that the wrongly availed cenvat credit is recoverable under the provisions of Rule 14 of the Cenvat Credit Rules, 2004 along with interest and penalty. The appellant filed reply to the show cause notice vide letter having reference as PJ/SCN-485/U-34/2015-16/4517 dated 08.02.2016. However, the submissions made by the appellant in their reply to the show cause notice and during the course of personal hearing were not adhered to by the learned adjudicating authority and impugned order in original no. 83/2016-ST dated 23.02.2017 was passed thereby confirming denial of cenvat credit amounting to Rs. 84,720/- along with interest and penalty under section 11AC (1)(c) of the Central Excise Act, 1944.
Aggrieved by the impugned order in original (hereinafter referred as order) confirming recovery of cenvat credit along with interest and penalty, the appellant filed the appeal before COMMISSIONER(Appeals).Thus vide order in appeal it was held that if the assessee is registered under Central Excise and paying Central Excise duty for goods manufactured also paying Service Tax for services rendered, assessee to be entitled to have common Cenvat account in which credit of taxes paid on inputs as well as on input services may be taken. Consequently amount of credit is admissible to assessee and assessee is free to utilize same either for the payment of duty of central excise and service tax. Thus demand along with interest and corresponding equivalent penalty imposed was set aside.

Relevant Legal Provisions:

As per the provision of Rule 3(4) of the Cenvat Credit Rules, 2004, -

“The Cenvat Credit may be utilised for payment of-

Any duty of excise on any final product; or
An amount equal to cenvat credit taken on inputs if such inputs are removed as such or after being partially processed; or
An amount equal to the cenvat credit taken on capital goods if such capital goods are removed as such; or
An amount under sub-rule (2) of rule 16 of the Central Excise Rules, 2002; or
Service tax on any output service.”

Issue Involved: The issue involved in this case is that whether or not provider of output service “ Market research agency” can be allowed to pay service tax by debiting cenvat credit taken on input and capital goods.

Brief Facts:M/s Umax Packaging (hereinafter referred to as the appellant) is engaged in manufacture of flexible rolls and plastic pouches falling under sub-heading no. 39219096 and 39239090 of the Schedule to the Central Excise Tariff Act, 1985. A show cause notice no. V (39) 30/80/2015/485 dated 18.01.2016 was issued to the appellant alleging that they have wrongly utilised the cenvat credit amounting to Rs. 84,720/- for payment of service tax under Market Research Agency Service on the ground that the input services were not used in or on relation to provision of Market Research Agency Service. It was alleged that the wrongly availed cenvat credit is recoverable under the provisions of Rule 14 of the Cenvat Credit Rules, 2004 along with interest and penalty. The appellant filed reply to the show cause notice vide letter having reference as PJ/SCN-485/U-34/2015-16/4517 dated 08.02.2016 .Personal hearing for the case was convened on 17.11.2016 which was attended by their authorised representative, Pradeep Jain wherein the submissions made in their reply were reiterated.However, the submissions made by the appellant in their reply to the show cause notice and during the course of personal hearing were not adhered to by the learned adjudicating authority and impugned order in original no. 83/2016-ST dated 23.02.2017 was passed thereby confirming denial of cenvat credit amounting to Rs. 84,720/- along with interest and penalty under section 11AC (1)(c) of the Central Excise Act, 1944.

Aggrieved by the impugned order in original (hereinafter referred as order) confirming recovery of cenvat credit along with interest and penalty, the appellant prefer to file the appeal.

Assessee’s Contention:

The appellant submit that the Order-In-Original passed by the learned Assistant Commissioner is wholly and totally erroneous and is liable to be set aside.

The impugned orderhas alleged that they have wrongly utilised the cenvat credit of service tax to the extent of Rs. 84,720/- for payment of service tax under Market Research Agency Service for the reason that the input service credit utilised was not availed in or in relation to provision of market research agency service. In this regard, they submit that as the “Market Research Agency Services” are not covered under the Reverse Charge Mechanism, there is no legal obligation to pay service tax for such services in cash only. The service tax on said services may be paid by utilizing the cenvat credit balance available with M/s Umax Packaging in the capacity of manufacturer registered under the Central Excise Laws.

Furthermore, as per the provision of Rule 3(4) of the Cenvat Credit Rules, 2004, -
“The Cenvat Credit may be utilised for payment of-

Any duty of excise on any final product; or
An amount equal to cenvat credit taken on inputs if such inputs are removed as such or after being partially processed; or
An amount equal to the cenvat credit taken on capital goods if such capital goods are removed as such; or
An amount under sub-rule (2) of rule 16 of the Central Excise Rules, 2002; or
Service tax on any output service.”

Accordingly, the credit may be utilised by the appellant for paying service tax on any output service provided by them, including the “Market Research Agency Services”. It is also worth mentioning that no one to one correlation is required for availment and utilisation of cenvat credit earned in the capacity of manufacturer and that in the capacity of a service provider. As such, there is no restriction in utilizing credit balance available with the appellant in the capacity of manufacturer, for payment of service tax for the services provided under the category of “Market Research Agency Services”. Therefore, the impugned order in original issued for recovery of cenvat credit utilised for payment of service tax under ‘Market Research Agency Services’ is not at all sustainable and is liable to be dropped.

The impugned order has placed reliance on the decision given by Hon’ble Bombay High Court in the case of COMMISSIONER OF C.EX., NAGPUR VERSUS ULTRATECH CEMENT LTD. [2010 (260) E.L.T. 369 (BOM.)]. In this regard, the appellant submits that erroneous reliance has been placed on the above cited decision as it pertains to credit admissibility of advertisement, sales promotion, market research etc by a manufacturer of non alcoholic beverage bases on the ground that such services are not relatable to the concentrate manufactured by the appellant. It is pertinent to mention that erroneous reliance has been placed on the above cited decision as it was ruled in favour of assessee wherein it was concluded that the cenvat credit of services will be admissible as far as the services are used in relation to the business of manufacturing of the final product. As such, the reliance placed on the above decision is misplaced. Moreover, it is contended in the impugned order in original that the service should be used in or in relation to provision of output service and not in or in relation to manufacture of final products. In this respect, the appellant submit that no one to one correlation is required for utilisation of cenvat credit and they have already placed reliance on number of judicial pronouncements on the same. However, the reliance placed on the said decisions has been simply rejected without any justifiable reasons which leads to passing of a non-speaking and non-reasoned order which has no relevance in the eyes of law in light of the decision given in the case of COMMISSIONER OF CENTRAL EXCISE, BANGALORE VERSUS SRIKUMAR AGENCIES [2008 (232) E.L.T. 577 (S.C.)] wherein it was held that:-

“Appellate Tribunal’s order - Non-speaking order - Facts not analysed in detail in impugned order by Tribunal - Disposal of appeals by mere reference to decisions not proper way to deal with appeals - Applicability of decision cited by Revenue not considered - Appeals involving different goods - CESTAT ought to have examined cases individually and articles involved - Manner of disposal not proper - Impugned order set aside - Question referred to Larger Bench of Supreme Court not answered as matter remitted to CESTAT for fresh decision by appropriate Bench - Section 35C of Central Excise Act, 1944. - By clubbing all the cases together and without analyzing the special features of each case disposing of the appeals in the manner done was not proper. [para 6]”
In view of above decision, an order passed without discussing and distinguishing the case laws cited by the appellant is void ab initio. Therefore, extending the benefit of this decision, the impugned order, being a non speaking and non reasoned order, deserves to be quashed and the appeal should be allowed.

Aligning with the above, the appellant submit that in order to substantiate their contention that the cenvat credit earned by a manufacturer and service provider is available as common pool for utilisation against excise duty/service tax liability, the appellant wish to place reliance on the following judicial pronouncements:-
COMMISSIONER OF C. EX., SALEM VERSUS V. THANGAVEL & SONS (P) LTD. [2015 (37) S.T.R. 144 (TRI. – CHENNAI)] :-

Cenvat credit - Utilization of - Availment of credit on inputs received for manufacture of excisable goods towards payment of Service Tax on Business Auxiliary Service (BAS) rendered -Assessee, manufacturer of excisable goods and provider of BAS - HELD : Prima facie, no dispute regarding admissibility of Cenvat credit availed on inputs -Once assessee held eligible for availment of credit, credit can be utilized either for payment of Excise duty or for payment of Service Tax as stipulated in Rule 3(4) of Cenvat Credit Rules, 2004 - No restriction for utilization of common input credit on inputs and input services for payment of Excise duty or Service Tax - In view of Tribunal’s decision in Lakshmi Technology and Engineering Industries Ltd. [2011 (23) S.T.R. 265 (Tribunal)] and S.S. Engineers, no infirmity in Commissioner (Appeals) order - Impugned order upheld - Rules 3(1) and (4) of Cenvat Credit Rules, 2004. [paras 6, 7, 8, 9]

C.C.E., COIMBATORE VERSUS LAKSHMI TECHNOLOGY & ENGINEERING INDUS. LTD. [2011 (23) S.T.R. 265 (TRI. – CHENNAI)]:-

Cenvat credit - Utilisation of credit - Common pool - Renting of immovable property services provided by manufacturer of excisable goods -Manufacturer entitled to use the credit from a common pool to which different categories of specified excise duties, Customs duty and Service tax are allowed to be taken as credit - Similarly, a provider of taxable service is also entitled to take credit of specified excise duty, additional duty of Customs and Service tax in respect of input services and utilise the credit from all these sources for the purpose of paying Service tax - Rule permit taking of credit under a common pool and permit use of the credit from the common pool for different purposes and there is no restriction placed to the effect that credit accounts should be maintained for use for manufacture of excisable goods and for use for providing services - Assessee registered themselves as service provider of service of renting of immovable property and paying Service tax as provider of output service and therefore utilisation of credit taken by them is valid - Rule 3(4) of Cenvat Credit Rules, 2004. [paras 6, 7]

S.S. ENGINEERS VERSUS COMMISSIONER OF CENTRAL EXCISE, PUNE-I [2015 (38) S.T.R. 614 (TRI. – MUMBAI)] :-

Cenvat credit of input services - It can be utilized for payment of Excise duty on goods manufactured by assessee - Rule 3 of Cenvat Credit Rules, 2004 does not stipulate maintenance of separate account as a manufacturer and as a service provider- Restriction imposed in third proviso to Rules 3(4) and Rule 7(b) ibid do not cover cross utilization of credit of Excise and Service Tax, as a general proposition -Also, format of ER-1 return and ST-3 return indicates intention to permit cross utilization of credit of Excise duty and Service Tax. [paras 5, 7]

FORBES MARSHALL PVT. LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, PUNE [2010 (258) E.L.T. 571 (TRI. – MUMBAI)]:-

Cenvat credit of Service tax - Input service - Credit denied in respect of taxable services on ground that services, not input services - Demand confirmed on the ground that appellants not submitted conclusive supporting documentary evidences to justify claim -HELD : As per Rule 3 of Cenvat Credit Rules, 2004, appellants shall be allowed to take credit of the Service tax paid by them on input services, which may be utilised by them for payment of any duty of excise on any final product or any Service tax on any output services - Proper records for receipt and consumption of input services to be maintained - No explanation with regard to purpose for which these input services, availed - Matter needs verification of invoices showing purpose of use of input service - No need for segregation of credit amount used in manufacturing and output services - Matter remanded to adjudicating authority for said verification - Rules 2(l) and 3 ibid. [paras 6, 8]
Cenvat/Modvat - Burden of proof - Manufacturer, to maintain proper records for receipt and consumption of input services recording relevant information regarding value, tax paid, Cenvat credit taken and utilized - Burden of proof lies on appellants - Rule 9 of Cenvat Credit Rules, 2004. [para 6]
Cenvat credit of Service tax - Segregation of, not warranted as no provision in Cenvat Credit Rules, 2004 for segregation of input services used in manufacture or to provide output service.[para 7]

JYOTI STRUCTURES LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, NASIK [2012 (285) E.L.T. 356 (TRI. – MUMBAI)]:-

Cenvat credit - Denial of - Failure to maintain separate accounts for input/input service availed for providing output service - HELD : No provision for segregation on input/Cenvat credit for payment of excisable goods and for payment of Service Tax - No requirement for one to one correlation - Impugned order set aside - Appeal allowed - Rule 3 of Cenvat Credit Rules, 2004. [2010 (258) E.L.T. 571 (Tribunal) followed]. [paras 4, 6]

EIMCO ELECON INDIA LTD. VERSUS COMMR. OF C. EX., AHMEDABAD [2006 (206) E.L.T. 379 (TRI. – MUMBAI)]:-

Demand - Cenvat/Modvat - Inputs - Credit availed in respect of inputs were allegedly used for discharging duty on final goods in which such inputs were actually not used - Appellants maintaining a consolidated entry of credit in respect of all the inputs, therefore, credit earned on which inputs has been utilised for discharge of duty for which final product cannot be segregated - There is no one-to-one correlation between the Modvat credit availed in respect of a particular inputs and duty payment on a particular final product - Impugned order not justified - Rules 57A and 57-I of erstwhile Central Excise Rules, 1944 - Rule 3 of Cenvat Credit Rules, 2001 - Section 11A of Central Excise Act, 1944. [para 3]

SUMITA TEX SPIN PVT. LTD. VERSUS COMMISSIONER OF C. EX. & S.T., RAJKOT [2015 (39) S.T.R. 502 (TRI. - AHMD.)]:-

Cenvat credit - Utilization of - Accumulated credit used for payment of Service Tax liability under BAS - Clearance of manufactured goods on payment of duty and payment of Service Tax on BAS undertaken simultaneously - Assessee switching over from dutiable scheme of Notification No. 29/2004-C.E. to full exemption scheme of Notification No. 30/2004-C.E. - Accumulation of credit in Cenvat credit account on reversal of credit of inputs in assessee’s factory - HELD : Cenvat credit in Cenvat credit account can be utilized for payment of both Central Excise duty and Service Tax liability - Rules 3(1) and 3(4) of Cenvat Credit Rules, 2004 clearly prescribes credit taken can be used for payment of tax on any service - Rules 3(1) and 3(4) of Cenvat Credit Rules, 2004. [paras 5, 5.1, 6, 7]

SHRI DNYANESHWAR SSK LTD. VERSUS COMMISSIONER OF C. EX., AURANGABAD [2014 (310) E.L.T. 770 (TRI. – MUMBAI)] :-

Stay/Dispensation of pre-deposit - Cenvat - Utilization of credit - Molasses manufactured in sugar division cleared to distillery division on payment of duty and further used in manufacture of ethyl alcohol in distillery division - Ethyl alcohol is a non-excisable item and from ethyl alcohol, rectified spirit is manufactured which is again an excisable and dutiable item - Duty paid on molasses is taken as credit for payment of duty on rectified spirit - No one-to-one correlation required between input and output and the duty paid on any input can be utilized for payment of any duty of Excise on any final product - Plea that utilization of credit on molasses is not permissible under Cenvat Credit Rules as they stood at relevant time not acceptable - Prima facie case made out for grant of stay - Section 35F of Central Excise Act, 1944 - Rule 3 of Cenvat Credit Rules, 2004. [paras 7.1, 7.2, 8]

RANBAXY LABORATORIES LIMITED VERSUSCOMMISSIONER OF C. E., CHANDIGARH [2010 (253) E.L.T. 578 (TRI. - DEL.)]:-

Cenvat/Modvat - Inputs - No one to one relationship between credit earned input and final product for which credit utilized - Utilization of credit and utilization of input may not be in relation to one and the same final product and can be in relation to two different dutiable final products - Credit can be lawfully earned only on inputs to be used in dutiable and non-exempted final product - Utilization not complete till input used in or in relation to manufacture of dutiable final product - Rules 3 and 6 of Cenvat Credit Rules, 2004. [para 35]

SBI CARD & PAYMENTS SERVICES P. LTD. VERSUS COMMR. OF SERVICE TAX, DELHI [2014 (34) S.T.R. 858 (TRI. – DEL.)]:-

Stay/Dispensation of pre-deposit - Cenvat credit of Service Tax - Input credit availed on advertisement, event management and catering service for taxable output service as credit card agency service - HELD : Settled law that one to one correlation not required in availing Cenvat credit of input service to provision of output service - Agreement with Indian Railway Catering and Tourism Corporation (IRCTC) revealing co-branding agreement in respect of credit card agency service for use in catering service and other operations of IRCTC - Association prima facie not transforming services received from IRCTC into catering service - Arguable case in assessee’s favour - Requirement to pre-deposit waived of - Proceedings stayed - Rule 2(l) and 14 of Cenvat Credit Rules, 2004 - Section 35F of Central Excise Act, 1944 as applicable to Service Tax vide Section 83 of Finance Act, 1994. [paras 3, 4, 5, 6]

COMMR. OF SERVICE TAX, AHMEDABAD VERSUS KRISHNA COMMUNICATION [2013 (31) S.T.R. 285 (TRI. – AHMD.)]:-

Cenvat credit - Proportional credit on amounts written off as bad debts - Allegation of wrongful availment and proposal for reversal of credit availed - Service Tax not received on impugned amount - Eligibility of availment of credit by service provider and discharge of Service Tax liability by service provider, undisputed - Also services utilized for providing output services - First Appellate Authority setting aside Order-in-Original observed availment not wrongful and Rule 14 of Cenvat Credit Rules, 2004 does not envisage recovery of credit where Service Tax recovery pending or written off as bad debts later - HELD : Department trying to co-relate input service to output service - Settled law that one-to-one correlation in availment of credit of input service to output service not possible - Reasoning recorded by First Appellate Authority correct and in accordance with law held by Higher Judicial Forum - Impugned order correct, legal and not suffering from infirmity - Therefore, no interference called for in well reasoned order - Rule 14 ibid. [paras 10, 11, 12, 13]

PYROTECH WORKSPACE SOLUTIONS PVT. LTD. VERSUS COMMR. OF C. EX., JAIPUR-II [2016 (43) S.T.R. 299 (TRI. - DEL.)]:-

Cenvat credit of Service Tax - Denial of - Utilization of credit of input services for payment of excise duty on goods manufactured - HELD : Assessee both manufacturer of excisable industrial furniture and service provider - Nexus of input service of ‘commercial construction services’, involving installation of furniture including false ceiling, flooring, tiles etc., repair and maintenance service, GTA, etc., with taxable output services not disputable and wrongly held as deniable by Commissioner (Appeals) - Once credit legally availed, Rule 3(4) of Cenvat Credit Rules, 2004 allows its utilization for payment of either Service Tax or excise duty - Said Rule does not provide for one to one co-relation or condition between credit availed on input services and its utilization only for discharging Service Tax and not for paying excise duty - Impugned order not sustainable - Rules 2(l) and 3(4) of Cenvat Credit Rules, 2004. [para 4]
In light of the above cited decisions, it is crystal clear that no one to one correlation is required for utilisation of cenvat credit. The rightly admissible cenvat credit and accounted for in the records can be legitimately utilised for payment of either excise duty or for payment of service tax. Therefore, the allegation of the impugned order in original that they have wrongly utilised the cenvat credit of service tax on input services for payment of service tax under the category of ‘Market Research Agency Services’ is not at all sustainable and the impugned order in original is liable to be quashed.

The appellant further submit that the extended period of limitation is not invocable in the present case as the credit availment and utilisation was reflected in the returns filed by them and the same was based on a number of decisions that were rendered by various Tribunals wherein it was concluded that no one to one correlation is required for utilisation of cenvat credit. As such, there was bonafide belief regarding utilisation of cenvat credit.

The appellant submit that for invoking the extended period, the fraud, collusion or wilful misstatement should be there. It was held in the case of RAINBOW INDUSTRIES V/S. CCE [1994 (74) ELT 3 (SC)] that for invoking the extended period, two ingredients are essential – (i) Wilful suppression, mis-declaration, etc. and (ii) Intention to evade payment of duty. In absence of both of these extended period cannot be invoked. This has also been held in the case of CHEMPHAR DRUG & LIMITS reported in (2002-TIOL-266-SC-CX) wherein hon’ble Supreme Court held as under:-

“Demand – Central Excise – Limitation –Invoking extended period of five years – something positive other than mere inaction or failure on part of the manufacturer or producer or conscious or deliberate withholding of information when the manufacturer knew otherwise, is required before it is saddled with any liability, before the period of six months.”

Thus, in the light of above decision, extended period cannot be invoked blindly in every case. Where the assessees have been acting in the boundaries of law, the extended period cannot be invoked. Similar decision is given in the following cases:-

NESTLE INDIA LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, CHANDIGARH [2009 (235) E.L.T. 577 (S.C.)]

Demand - Limitation - Intermixture of vitamins cleared by assessee for more than 20 years prior to issue of show cause notice - Assessee offered to demonstrate but Department not availed opportunity to find out whether manufacture was involved - Extended period invocable only when there is positive act other than mere inaction or failure on the part of manufacturer and there must be conscious or deliberate witholding of information by manufactureras held in 1989 (43) E.L.T. 195 (S.C.) and 1989 (40) E.L.T. 276 (S.C.) - Tribunal order on non-sustainability of invocation of extended period,upheld - Proviso to Section 11A of Central Excise Act, 1944. [para 17]

COLLECTOR OF CENTRAL EXCISE VERSUS H.M.M. LIMITED [1995 (76) E.L.T. 497 (S.C.)];-

Demand - Limitation forextended period not invokable unless show cause notice puts assessee to notice specifically as to which of the various commissions or omissions stated in the proviso to Section 11A(1) of Central Excises & Salt Act, 1944 had been committed.[para 2]

COSMIC DYE CHEMICAL VERSUS COLLECTOR OF CENTRAL EXCISE, BOMBAY [1995 (75) E.L.T. 721 (S.C.)]:-

Demand - Limitation - Intent to evade duty must be proved for invoking proviso to Section 11A(1) of Central Excises & Salt Act, 1944 forextended periodof limitation - Intent to evade duty built into the expressions “fraud” and “collusion” but “mis-statement” and “suppression” being qualified by immediately preceding words “wilful” and “contravention of any of the provisions of this Act or rules” being qualified by the immediately following words “with intent to evade payment of duty”,.
- It is, therefore, not correct to say that there can be a suppression or mis-statement of fact, which is not wilful and yet constitutes a permissible ground for the purpose of the proviso to Section 11A. Mis-statement or suppression of fact must be wilful. [para 6]
Demand - Limitation - SSI manufacturer not including value of clearances of fully exempted goods in his declaration for previous financial year due to bona fide impression gained from two High Court judgments which held that fully exempted goods were not includible in the definition of “excisable goods” as defined in clause (d) of Section 2 of Central Excises & Salt Act, 1944 - Mis-statement or suppression of fact in the SSI declaration cannot be called wilful - Extended period of limitation not invokable- Proviso to Section 11A(1) ibid. [para 8]
Words and phrases - “Wilful” means intent to evade duty - Proviso to Section 11A(1) of Central Excises & Salt Act, 1944. [para 6]
Words and phrases - “Fraud” and “collusion” - Intent to evade duty is built into these very words - Proviso to Section 11A(1) of Central Excises & Salt Act, 1944. [para 6]

PADMINI PRODUCTS V/S COLLECTOR OF CENTRAL EXCISE– reported in 1989 (43) ELT 195 (SC)

“Demand- Limitation- Extended period of 5 years inapplicable for mare failure or negligence of the manufacturer to take out license pr pa duty when there was scope for doubt that goods were not dutiable – Dutiability of goods in doubt because to Trade notice Scope of fraud, collusion, willful mis-statement or suppression of facts or contravention of rule with intent evade duty- Rule 9(2) of the Central Excise Rules, 1994 and Section 11 S of Central Excise and Salt Act, 1994.when in view of the trade notice there is scope for believing that the goods were entitled to exemption and consequently no licence is required to be taken out, then the extended period of limitation for demand under Section 11 A is inapplicable. Mere failure or negligence on the part of the manufacturer either not to take out a licence or not pay duty in case where there was scope for doubt, does not attract the extended limitation. Unless there is evidence that the manufacturer knew that goods were liable to duty or he was required to take out of licence. For invoking extended period of five limitation duty should not had been said, short levied or short paid erroneously refunded because of either any fraud, collusion or willful mis-statement or suppression of facts of facts or contravention of any provision of the Act or Rules made there under. These ingredients postulate a positive act, therefore, failure to pay duty or take out a licence is not necessary due to fraud or collusion or willful mis-statement or suppression of facts contravention of any provisions of the Act. Likewise suppression of facts is not failure to disclose to the legal consequences of a certain provision.”

TAMIL NADU HOUSING BOARD V/S COLLECTOR OF CENTRAL EXCISE, MADRAS[1994 (74) ELT 9 (SC)]:-

Demand – Limitation for extended period invokable only if existence of both situations (1) suppression, fraud, collusion etc. and (2) intent to evade payment of duty proved- initial burden on Department- once department discharges such burden, it shifts and then applicability of provision to Section 11A(1) of Central Excise and Salt Act, 1944 is to be construed liberally.
In the above cases, it was held that mere inaction would not be a valid ground for invoking the extended period of limitation. There should be deliberate withholding of information with an intent to evade payment of duty without which extended period is not invokable. In the present case also, the credit availment and utilisation was reflected in the returns filed by them and there was no suppression of facts. As such, extended period cannot be invoked in the present case and the impugned order in original should be quashed. It is worth mentioning that the above decisions were relied upon in the reply to the show cause notice but these decisions have not been considered while passing the impugned order in original. As such, the order is non-speaking order which is not tenable in view of the decision given in the case of CC VS ESSAR OIL LIMITED [2010-TIOL-560-HC-AHM-CUS].

Even otherwise, the extended period of limitation cannot be invoked as the present show cause notice is being issued pursuant to audit objection raised vide letter dated GL-3/IAR-291/ST-II/JDR/38/2004 dated 23.05.2014 whereas the reply for the same was filed by us vide our letter having reference as PJ/CX./U-09/14-15/1275. However, the present show cause notice has been issued after considerable lapse of time. In this regard, reliance is placed on the decision given in the case of AGRO PACK VERSUS COMMISSIONER OF CENTRAL EXCISE, SURAT [2009 (240) E.L.T. 135 (Tri. - Ahmd.)] wherein it was held that:-

Demand - Limitation - Cenvat/Modvat - Credit note issued to consignee by appellant for rate difference in respect of finished goods and Cenvat credit taken on basis of photocopy of their own invoice - Excess payment and non-recovery of the same from buyer not disputed - Audit objection made in February, 2004 and reply thereto duly made by appellant in September, 2004 while show cause notice issued in March, 2006 - Extended period of limitation not invocable, no mala fide being attributed to appellants - Demand barred by limitation - Section 11A of Central Excise Act, 1944 read with Rule 57-I of erstwhile Central Excise Rules, 1944. [2006 (206)E.L.T.476 (Tribunal) relied on]. [para 3]
Therefore, the impugned order in original is not tenable on the grounds of limitation itself and deserves to be set aside.

The appellant submit that when the cenvat credit demand is not sustainable in view of the above cited submissions, the question of paying interest at the rates applicable under section 11AA does not arise. Hence, the impugned order confirming interest is not tenable and deserves to be dropped.

The appellant reiterates that the impugned order has wrongly imposed penalty under section 11AC as analysis of section 11AC makes it clear that no penalty can be imposed under the said section if there was no willful suppression or intention to evade payment of service tax on the part of the assessee. The impugned order has not been able to clearly establish that any of these elements were in existence in the present case. On the other hand, they have proved their bonafides as categorically discussed hereabove. It is submitted that when no such element was there, the penalty under Section 11AC of the Act is not required to be imposed on them. It has been held in the case of HINDUSTAN STEEL V. STATE OF ORISSA [1978 2 ELT J 159 (SUPREME COURT)] that an order imposing penalty for failure to meet statutory obligation is a result of proceedings which are quasi judicial in nature and penalty should not ordinarily be imposed unless the person acted deliberately in defiance of law or was guilty of misconduct or dishonest or acted in conscious disregard of his obligation. It is further held in the case of ORIENT CERAMICS AND INDUSTRIES [1987 (32) ELT 218 (I)] that words ‘with intent to evade payment of duty’ are very significant and unless and until the intention to evade payment of tax is proved on part of assessee, no penalty can be imposed. Similar view has been taken by hon’ble High Court in the case of COMMISSIONER OF CENTRAL EXCISE V/S ESS ESS ENGINEERS [2011 (23) S.T.R. 3 (P & H)]

Thus, mens rea is essential for invoking the penal provisions. Reliance is also placed on the following judgments:-

2010 (258) ELT 465 (SC) – Sanjiv Fabrics
2007 (207) ELT 27 (P &H) – UT Ltd
2007 (5) STR 251 (P & H) – Kamal Kapoor
2009 (238) ELT 3 (SC) – Rajasthan Spinning & Weaving Mills
2009 (238) ELT 209 (P&H) – J. R. Fabrics
2009 (238) ELT 226 (Mad) – Thirumala Alloys Castings
2008 (228) ELT 31 (Del) – K. P. Pouches

In view of these judgments, no penalty can be imposed unless mens rea or intention to evade payment of duty/service tax is proved. The appellant have categorically submitted that they have correctly discharged their service tax liability by utilizing cenvat credit and their act is backed by number of decisions as stated in preceding paragraphs. Thus, there was no suppression of facts and no penalty is imposable on them. Also, the impugned order has not otherwise proved the malafide intention; therefore, in view of these judgments the impugned order is liable to be quashed.

In continuation to the above, the appellant further submit that even the highest court of India – Hon’ble Supreme Court has held in the case of COMMISSIONER OF CENTRAL EXCISE, TRICHY VERSUS GRASIM INDUSTRIES LTD. [2005 (183) E.L.T. 123 (S.C.)] that where the act of assessee is based on the interpretation taken by the Tribunal, penalty cannot be imposed as the act is based on bonafide belief. The verdicts of Apex Court are produced as follows:-

“Penalty - Bona fide belief caused by Tribunal’s decision - Tribunal in a number of cases giving an interpretation as understood by assessee - Penalty not imposable - Rule 173Q of erstwhile Central Excise Rules, 1944 - Rule 25 of Central Excise Rules, 2002. [para 20]”
In the present case, the present act of availment and utilisation of credit of service tax is backed by decisions given by various Tribunals. The analysis of above decision makes it clear that since they have acted under bonafide, no penalty can be imposed on them. Therefore, the benefit of above decision of Hon’ble Supreme Court should be extended to them and the whole proceedings should be dropped.

Aligning with the above, it is submitted that the issue involved herein is that of interpretation of legal provisions and where interpretation of legal provisions is involved penalty cannot be imposed on the assessee. This contention has been upheld in the case of UNIFLEX CABLES LTD V/S COMMISSIONER OF CENTRAL EXCISE, SURAT-II [2011-TIOL-85-SC-CX] wherein it was held as under:

Central Excise – No penalty in a case of interpretational nature: The Commissioner, himself in his order-in-original has stated that the issue involved in the case is of interpretational nature, Keeping in mind the said factor, the Commissioner thought it fit not to impose harsh penalty and a penalty of an amount of Rs. 5 lakhs was imposed on the appellant while confirming the demand of the duty. Therefore, in the facts and circumstances of the present case, penalty should not have been imposed upon the appellant.
Thus, hon’ble Supreme Court has held that penalty is not imposable for issues involving the interpretation of legal provisions. In the instant case also, the credit availment pertains to interpretation of the provisions of Rule 3 of the Cenvat Credit Rules, 2004. As such, the impugned order imposing harsh penalty under section 11AC is not at all sustainable and should be set aside.
The appellant submits that the above cited decisions were relied upon in the reply to the show cause notice and the benefit of above cited decisions should have been extended to them but the impugned order has not even considered the ratio of the said decisions. As such, the order is non-speaking order which is not tenable in view of the decision given in the case of CC VS ESSAR OIL LIMITED [2010-TIOL-560-HC-AHM-CUS].

It is also submitted that the impugned order has also placed reliance on the decision given by the Hon’ble Supreme Court in the case of Union of India v/s Dharmendra Textile Processors [2008 (231) E.L.T. 3 (S.C.)] wherein it has been held that equal penalty is imposable and language employed in statue is determinative factor of the legislative intent. In this regard, the appellant submit that as per language of the section, penalty can be imposed only if the short-payment is due to any of the ingredients referred in the section like fraud, collusion, willful misstatement or suppression of facts. However, in the instant case, none of these ingredients are present. As such, the judgment of the hon’ble Supreme Court has been delivered by ignoring the provisions of the section mentioned in the law. It has been held in the case of A-One Granites v State of U.P. (2001)3SCC537; AIR2001 SC 1203; Salmond on Jurisprudence, 12th Edn. Pg 167 that the decision given by the hon’ble Apex Court which has been rendered per incuriam, i.e. by ignoring the provisions of the Act, is not binding under article 141 of the Constitution. The doctrine of per incuriam is an exception of the rule of precedents and it says that any expression resulting from ignorance is not a binding authority and it may be ignored. In the instant case, the mens rea/willful suppression has been mentioned as essential ingredients for the purpose of imposing the penalty as contemplated by the provisions of the Central Excise Act, 1944. But the hon’ble Supreme Court has rendered decision of Dharmendra Textiles by ignoring this vital fact. As such, it is not binding precedent as per doctrine of per incuriam. In the instant case, there was no willful suppression by the appellant and rather the appellant has bonafidely discharged its service tax liability by utilising cenvat credit earned in the capacity of manufacturer in light of various decisions rendered by the Tribunal. Further, returns have also been filed by the appellant. When everything was known to department, there cannot be any suppression of facts. Thus, allegation of suppression is not levelled. As such, the penalty under section 11AC of the Central Excise Act, 1944 that is leviable for the charge of suppression cannot be imposed upon them by relying on the case of Dharmendra Textiles. As such, the impugned order is not tenable and it should be set aside.
In continuation to above, it is submitted that the decision of hon’ble Supreme Court in the case of M/s Dharmendra Textiles has been referred by hon’ble Punjab and Haryana High Court in the following case:-

CCE, CHANDIGARH-II VS M/S SARVPRIYA INDUSTRIES LTD [2010-TIOL-523-HC-P&H-CX.]-

Central Excise - Supreme Court decisions in Dharmendra Textile as well as in RajasthanSpinning& Weaving Mills do not lay down that for every short payment of duty, penalty is automatic: Dharmendra Textile as well as in RajasthanSpinning& Weaving Mills is that mandatory penalty under Section 11AC of the Act was not applicable to every case of non-payment or short-payment of duty. Thus, even though the authorities may have no discretion once conditions stipulated under Section 11AC of the Act exist, in absence of fulfilment of such conditions, penalty could not be levied. In this view of the matter and the finding of the Tribunal that there was no allegation of suppression of facts with intent to evade the payment of duty, the penalty under Section 11AC of the Act was not warranted. No substantial question of law arises: PUNJAB AND HARYANA HIGH COURT
Thus, hon’ble High Court has ruled that penalty is not warranted in each and every case of non-payment of duty or short payment of duty. This should happen only due to suppression of facts with an intent to evade the payment of duty. In the light of this decision, since the impugned order has not been able to prove the ulterior motive, the penalty is not sustainable. Hence, the impugned order should be set aside and the appeal should be allowed
Reasoning adopted by the adjudicating authority: -It was held that once the credit is availed, the use of such credit is governed by Rule 3 of the Cenvat credit rule 2004. Sub rule (4) of the said rule speculate that cenvat credit may be utilized for the payment of any duty of excise on any final product as well as service tax on any output service. Accordingly the credit may be utilized by the appellant for paying service tax on any output service provided by them, including the market research agency services.Thus no one to one correlation is required for availment and utilization olf cenvat credit earned in the capacity of manufacturer and that in the capacity of the service provider. As such, there is no restriction in utilizing credit balance available in the capacity of the manufacturer, for payment of service tax for the services provided under the category of market research agency service.
Some of the series of judgements of the various tribunal on the issue are
COMMISSIONER OF C. EX., SALEM VERSUS V. THANGAVEL & SONS (P) LTD. [2015 (37) S.T.R. 144 (TRI. – CHENNAI)] :-
Cenvat credit - Utilization of - Availment of credit on inputs received for manufacture of excisable goods towards payment of Service Tax on Business Auxiliary Service (BAS) rendered -Assessee, manufacturer of excisable goods and provider of BAS - HELD : Prima facie, no dispute regarding admissibility of Cenvat credit availed on inputs -Once assessee held eligible for availment of credit, credit can be utilized either for payment of Excise duty or for payment of Service Tax as stipulated in Rule 3(4) of Cenvat Credit Rules, 2004 - No restriction for utilization of common input credit on inputs and input services for payment of Excise duty or Service Tax - In view of Tribunal’s decision in Lakshmi Technology and Engineering Industries Ltd. [2011 (23) S.T.R. 265 (Tribunal)] and S.S. Engineers, no infirmity in Commissioner (Appeals) order - Impugned order upheld - Rules 3(1) and (4) of Cenvat Credit Rules, 2004. [paras 6, 7, 8, 9]
The Hon’ble CESTAT in case of SECURE METERS LTD. Versus COMMISSIONER OF CENTRAL EXCISE, JAIPUR-II reported in 2017(3) G.S.T.L.485(Tri.-Del.) has held as under
Demand-Cenvat credit of service Tax-Input service credit-Manufacturer as well as provider of output service – confirmation of demand on ground that cenvat credit accrued by payment of service tax on commission given to commission agents for procurement of orders for commissioning and installation services.
Based upon these it was held that if the assessee is registered under Central Excise and paying Central Excise duty for goods manufactured also paying Service Tax for services rendered, assessee to be entitled to have common Cenvat account in which credit of taxes paid on inputs as well as on input services may be taken. Consequently amount of credit is admissible to assessee and assessee is free to utilize same either for the payment of duty of central excise and service tax. Thus demand along with interest and corresponding equivalent penalty imposed was set aside.

Conclusion:- On the basis of above it can be concluded that, there is no requirement of one to one correlation for utilization of cenvat credit. Thus the credit can be utilized for the payment of excise duty or service tax. The extended period of limitation was also not invocable as credit utilization was reflected in the return as there was a no deliberate withholding of information in order to evade tax. Thus credit was not wrongly utilized and no liability of interest is arising and also no penalty can be imposed.

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PJ/Case Study/2018-19/126
11 August 2018

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PJ/Case Study/2018-19/126
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