Whether the assessee is eligible to pay service tax from cenvat credit account against the services received from abroad?

PJ/Case Study/2013-14/51

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. 20, 45, 002/- as they paid service tax by utilizing cenvat balance while the same was required to be paid in cash and also did not obtain Service Tax Registration under the category of “Supply of Tangible Goods Services” under Section 69 of Chapter V of the Finance Act, 1994 read with Rule 4 of the Service tax Rules, 1994. 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 of the Finance Act, 1994. But on considering the submissions made by the assessee regarding deeming fiction of law which allows payment of service tax by utilizing cenvat balance, it was held that the assessee had correctly paid the applicable service tax for the period covered in the show cause notice and hence, the show cause notice issued is not sustainable and the same deserves to be dropped.

M/s. Kansara Modler Ltd. [Order-In-Original No. 27/ST/JPR-II/2013 dated: 19.02.2013]

Relevant Legal Provisions:-

Section 69 of the Finance Act, 1994:-

(1) Every person liable to pay the service tax under this chapter or the rules made there under shall, within such time and in such manner and in such form as may be prescribed, make an application for registration to the Superintendent of Central Excise.

(2) The Central Government may, by notification in the Official Gazette, specify such other person or class of persons, who shall make an application for registration within such time and in such manner and in such form as may be prescribed. Hence it is their legal obligation to discharge service tax liability in view of the above facts.

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

'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."

Rule 2(r) of the Cenvat Credit Rules:-"Provider of taxable service includes a person liable for paying service tax."

Rule 2(q) of Cenvat Credit Rules:-"Person liable for paying service tax has the meaning as assigned to it in the 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) in relation to a telephone connection or pager [or a communication through telegraph or telex or a facsimile communication or a leased circuit],-

a)    the Director General of Posts and Telegraphs, referred to in clause (6) of section 3 of tbe Indian Telegraph Act,1885 (13 of 1885); or
b)    the chairman-cum-Managing Director, MahanagarTelephone NigamLimited, Delhi, a company registeredunder the Companies Act. 1956 (1 of 1956);Or
c)    any other person who has been granted a license by the Central Government under the first proviso to sub-section (1) of section 4 of the Indian Telegraph Act, 1885 (13 of 1885);

(ii) in relation to general insurance business, the insurer or re-insurer, as thecase may be, providing such service;

(iii) in relation to insurance auxiliary service by an insurance agent. any person carrying on general insurance business or the life insurance business, as the case may be, in India:

(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;

(v) in relation to taxable service provided by a goods transportagency. where theconsignor or consignee of goods is,-

(a) any factory registered under or governed by the Factories Act, 1948 (63 of 1948);
(b) any company [formed or registered under] the Companies Act, 1956 (1 of 1956);
(c)

any corporation established by or under any law:
(d) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any pad of India:
(e) any co-operative society established by or under any law:
(f) any dealer of excisable goods, who is registered under the Central Excise Act. 1944 (1 of 1944) or.^tne rules made thereunder: or
(g) any body corporate established, or a partnership firm registered, by or under any law any person who pays or is liable to pay freight either himself or through his agent for the transportation of such goods by road in a goods carriage:

(vi)in relation to business auxiliary service of distribution of mutual fund by amutual fund distributor o^r an agent, as the case may be, the mutual fund or asset management company, as the case may be, receiving such service:

(vii) in relation to sponsorship service provided to anybody corporate or firm located in India. the body corporate or, as the case may be the firm who receives such sponsorship service.'

“RULE 3. CENVAT credit.— (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 –

(i) the duty of excise specified in the First Schedule to the Excise Tariff Act, leviable under the Excise Act;

(ii) the duty of excise specified in the Second Schedule to the Excise Tariff Act, leviable under the Excise Act;

(iii) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978 (40 of 1978);

(iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957);

(v) the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001);

(vi) the Education Cess on excisable goods leviable under section 91 read with section 93 of the Finance (No. 2) Act, 2004 (23 of 2004);

(via) the Secondary and Higher Education Cess on excisable goods leviable under section 136 read with section 138 of the Finance Act, 2007 (22 of 2007);]

(vii) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv), (v) [, (vi) and (via)];

(viia) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act :

Providedthat a provider of taxable service shall not be eligible to take credit of such additional duty;

(viii) the additional duty of excise, leviable under section 157 of the Finance Act, 2003 (32 of 2003);

(ix) the service tax leviable under section 66 of the Finance Act;

(x) the Education Cess on taxable services leviable under section 91 read with section 95 of the Finance (No. 2) Act, 2004 (23 of 2004); and

(xa) the Secondary and Higher Education Cess on taxable services leviable under section 136 read with section 140 of the Finance Act, 2007 (22 of 2007); and]

(xi) the additional duty of excise leviable under [section 85 of Finance Act, 2005 (18 of 2005)].

paid on –

(i) any input or capital goods received in the factory of manufacture of final product or premises of the provider of output service on or after the 10th day of September, 2004; and

(ii) any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, 2004,

including the said duties, or tax, or cess paid on any input or input service, as the case may be, used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 214/86-Central Excise, dated the 25th March, 1986, published in the Gazette of India vide number G.S.R. 547(E), dated the 25th March, 1986, and received by the manufacturer for use in, or in relation to, the manufacture of final product, on or after the 10th day of September, 2004.

Explanation.- For the removal of doubts it is clarified that the manufacturer of the final products and the provider of output service shall be allowed CENVAT credit of additional duty leviable under section 3 of the Customs Tariff Act on goods falling under heading 9801 of the First Schedule to the Customs Tariff Act.

Rule 3(4) of Cenvat Credit Rules, 2004:-

"(4) The CENVAT credit may be utilized for payment of –
(a) any duty of excise on any final product; or
(b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or
(c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or
(d) an amount under sub-rule (2) of rule 16 of Central Excise Rules, 2002; or
(e) service tax on any output service.

Provided that while paying duty of excise or service tax, as the case may be, the CENVAT credit shall be utilized only to the extent such credit is available on the last day of the month or quarter, as the case may be, for payment of duty or tax relating to that month or the quarter, as the case maybe:

Provided further that the CENVAT credit of the duty, or service tax, paid on the inputs, or input services, used in the manufacture of final products cleared after availing of the exemption under the following notifications of Government of India in the Ministry of Finance (Department of Revenue), -

(i)             No. 32/99-Central Excise, dated the 8th July, 1999 [G.S.R. 508(E), dated 8th July. 1999];
(ii)            No. 33/99-Central Excise, dated the 8th July. 1999 [G.S.R. 509(E), dated 8th July, 1999];
(iii)           No. 39/2001-Central Excise, dated the 31st July, 2001 [G.S.R. 565 (E), dated the 31st July, 2001];
(iv)           No. 56/2002-Central Excise, dated the 14th November. 2002 [G.S.R. 764(E), dated the 14th November, 2002];
(v)            No. 57/2002-Central Excise, dated 14th November, 2002[G.S.R. 765(E), dated the 14th November, 2002];
(vi)           No. 56/2003-Central Excise, dated the 25th June, 2003 [G.S.R. 513 (E), dated the 25th June, 2003]; and
(vii)          No. 71/2003-Central Excise, dated the 9th September, 2003 [G.S.R. 717 (E), dated the 9th September, 2003],

shall, respectively, be utilized only for payment of duty on final products, in respect of which exemption under the said respective notifications is availed of:

Provided also that no credit of the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, shall be utilised for payment of service tax on any output service:

Provided also that the CENVAT credit of any duty specified in sub-rule (1), except the National Calamity Contingent duty in item (v) thereof, shall not be utilized for payment of the said National Calamity Contingent duty on goods falling under tariff items 8517 12 10 and 8517 12 90 respectively of the First Schedule of the Central Excise Tariff:

Provided also that the CENVAT credit of any duty mentioned in sub-rule (1), other than credit of additional duty of excise leviable under [section 85 of Finance Act, 2005 (18 of 2005)], shall not be utilised for payment of said additional duty of excise on final products.

Section 75 of the Finance Act, 1994:-

“Every person, liable to pay the tax in accordance with the provisions of section 68 or rules made thereunder, who fails to credit the tax or any part thereof to the account of the Central Government within the period prescribed, shall pay simple interest at such rate not below ten per cent and not exceeding thirty-six per cent per annum as is for the time being fixed by the Central Government, by Notification in the Official Gazette for the period by which such crediting of the tax or any part thereof is delayed.”

Issue: - Following issue was made before the Adjudicating Authority:-

Whether the assessee is eligible to pay service tax from cenvat credit account against the services received from abroad?

Brief Facts:-

The assessee, M/s Kansara Modler Ltd. are engaged in the manufacture of Ultra Precision Steel Rollers/Steel Rollers falling under Chapter Sub Heading No. 84829130 of the first Schedule to the Central Excise Tariff Act, 1985 and also having service tax registration under section 69 of the Finance Act, 1994 read with Rule 4 of the Service Tax Rules, 1994 for payment of service tax on taxable service provided by them under the category of ‘Goods Transport Agency Services’, ‘Business Auxiliary Services’ and ‘Scientific or Technical Consultancy Services’ in terms of Notification No. 36/2004-ST dated 31.12.2004 read with Section 68(2) of the Finance Act, 1994. The assessee appears to have not paid/ irregularly paid the Service Tax amounting to Rs. 2045002/- (ST- Rs.1985440/- + Ed. Cess- Rs.39709/- + SHE Cess- Rs.19853/-) and did not obtain service tax registration under the category of Supply of tangible goods service under Section 69 of Chapter V of the Finance Act, 1994 read with Rule 4 of the Service Tax Rules, 1994. On scrutiny of the half yearly ST-3 return filed by the assessee for the half year from Oct, 2010 to March, 2011 & April, 2011 to Sept., 2011 with the Superintendent (ST), Central Excise Range-I, Jodhpur on 15.04.2011 & 18.10.2011, it has been observed that the assessee has filed ST-3 return in respect of the taxable services namely Goods Transport Agency falling under sub-clause (zzp) of clause (105) of Section 65 of Chapter V of the Finance Act, 1994, Business Auxiliary Service falling under sub-clause (zzb) of clause (105) of Section 65 of Chapter V of the Finance Act, 1994 and Supply of Tangible Goods Service falling under sub- clause (zzzzj) of clause (105) of Section 65 of Chapter V of the Finance Act, 1994 and under part A2 of Sr. No. ii of the said return, the assessee have ticked the box prescribed against category of 'service receiver liable to make payment of service tax' in respect of the above said services for which the return of service tax has been filed by them. Further it was observed that the assessee was liable to pay service tax amounting to Rs. 2045002/- (ST- Rs.1985440/- + Ed. Cess- Rs.39709/- + SHE Cess- Rs.19853/-) leviable on 'Supply of tangible goods service' received by them from a person who has a fixed establishment in a country other than India.

Further they observed that the assessee has furnished the details of input stage CENVAT credit in the table under the Serial No. 5 of their said return of service tax filed in Form ST-3 as in force by virtue of the Service Tax (Second Amendment) Rules, 2007 and has shown amounts relating to CENVAT credit. In addition to other details, the assessee has also shown utilization of such unavailable CENVAT credit purportedly for discharging part of the Service Tax liable to be paid by them. As per the clause iii of Rule 3 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, Provides that where the taxable service referred to in sub-clause (zzzzj) of clause (105) of section 65 of the Act is received by a recipient located in India, then such service shall be -mated as taxable service provided from outside India and received in India subject to the condition that the tangible goods supplied for use are located in India during the period of use of such tangible goods by such recipient.

It appears that the noticee has not got themselves registered under the category of Supply of Tangible Goods Service under Section 69 of Chapter V of the Finance Act, 1994 read with Rule 4 of the Service Tax Rules, 1994. As per Rule 5 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, 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 of excise paid on any input or service tax paid on any input services under CENVAT Credit Rules, 2004. In terms of Rule 2(p) of the CENVAT Credit Rules, 2004, '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, and the expressions 'provider' and 'provided' shall be construed accordingly. The taxable services provided from outside India and received by the assessee in India appear to be neither output service provided by the assessee nor the assessee is a provider thereof. Further, as per Rule 3(4)(e) of the CENVAT Credit Rules, 2004, the CENVAT credit can be utilized for payment of service tax on any output service, therefore, payment of Service Tax levied in terms of Section 66A of Chapter V of the Finance Act, 1994 on the taxable services covered by Rule 3 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 and liable to be paid by the assessee in terms of the provisions of Section 68(2) ibid read with Notification No. 36/2004- ST dated 31.12.2004 does not appear to be admissible to be made through CENVAT credit account. Consequently, the service tax liability was required to be paid in cash through Challan or electronically through internet banking only. As such, the assessee appears to have contravened the provisions of Rule 6 of the Service Tax Rules, 1994 read with Section 68(2) of Chapter V of the Finance Act, 1994 and Notification No. 36/2004-ST dated 31.12.2004 and Rule 5 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 and Rule 3(4)(e) of the CENVAT Credit Rules, 2004 and Rule 2(p) ibid.

As per the instructions given against SI. No. 5 of the Format of ST-3 return prescribed vide Service Tax (Second Amendment) Rules, 2007, Details of input stage CENVAT credit were to be filled by a taxable service provider only and not to be filled by service receiver liable to pay service tax or input service distributor. The assessee have filled the details of CENVAT credit of inputs taken by them as in the Half Yearly ST-3 return submitted for the period Oct, 2010 to March, 2011 & April, 2011 to Sept., 2011 (as also the amount wrongly utilized by them purportedly for payment of their service tax liability in respect of taxable services provided to them from outside India and received by them in India). As such, it appears that the assessee have contravened the provisions of Rule 7(1) of the Service Tax Rules, 1994 read with Section 70(1) of the Finance Act, 1994 and the Service Tax (Second Amendment) Rules, 2007. The details filled in by the assessee under the Serials No. 5 and 5B of their ST-3 return appear liable to be struck off from the above said return of Service Tax filed by the assessee.

From the above, it appears that the assessee were liable to pay Service Tax amounting to Rs. 20,45,002/- on Supply of Tangible Goods service in cash during the period from Oct, 2010 to March, 2011 & April, 2011 to Sept., 2011, but they have paid the same through Cenvat account. The assessee is a company registered under the Companies Act, 1956 and governed by professional management with various advisors and consultants at their disposal for day to day work. Contravention of the above said provisions of Chapter V of the Finance Act, 1994 and the rules made thereunder appear to have been allowed to take place with intent to evade payment of Service Tax as mentioned in para 2 above. As such, the said amount of Service Tax appears recoverable under Section 73(1) of the Finance Act, 1994 along with interest thereon under the provisions of Section 75 of the Finance act, 1994. The assessee also appears liable for penal action under Section 76 of the Finance Act, 1994 for failure to pay Service Tax in contravention of provisions of Section 68(2) of the Finance Act 1994 read with Rule 6 of the Service Tax Rules, 1994. The assessee also appears to have rendered themselves liable to penal action in terms of the provisions of Section 77 of the Finance Act, 1994 for contravening the provisions of Rule 4 & 7(1) of the Service Tax Rules, 1994 read with Section 69 & 70(1) of the Finance Act, 1994 and the Service Tax (Second Amendment) Rules, 2007. In view of the facts narrated above, the assessee issued with a Show cause notice.

Assessee’s Contentions:-

The appellant submit that the impugned show cause notice is alleging that the taxable services received from abroad shall not to be treated as output services. In support of this contention, Rule 5 of the TAXATION OF SERVICES (PROVIDED FROM OUTSIDE INDIA AND RECEIVED IN INDIA) RULES, 2006 is produced. The analysis of this rule makes it clear that the services received from abroad will not be treated as output service only for the purpose of availment of Cenvat Credit. As such, restriction contained in the above rule 5 is limited to the availment of credit, i.e. service recipient cannot take Cenvat Credit just like a normal service provider. But this rule nowhere states that the manufacturer of dutiable goods or provider of taxable services is not allowed to avail the Cenvat Credit. Thus, where a manufacturer or service provider (who is otherwise allowed to avail the credit) is also receiving the taxable services from abroad can avail the credit in their due capacity and the above rule is not applicable on them. As such, the stand taken by the department while issuing the show cause notice is not tenable and is liable to be quashed.

Further they submit that in the impugned show cause notice it is alleged that the in terms of definition of output service given in Rule 2(p) of the Cenvat Credit Rules, 2004, the taxable services provided from outside India and received by them in India appear to be neither output service provided by them nor they are a provider thereof. In this regard, they submit that according to Rule 3(4) of the Cenvat Credit Rules, 2004 they can utilize the Cenvat Credit in payment of Service Tax on any Output Service. The term ‘Output Service’ is defined in Rule 2(p) of the Cenvat Credit Rules. Therefore, it is clear that is they are considered as the provider of output service for the said services; therefore such service is deemed as an output service for them and so, they can pay it by utilizing the Input Credit.

They submit that recently the Hon’ble High Court of Karnataka in the case of Commissioner of Service Tax v/s M/s Aravind Fashions Ltd [2011-TIOL-748-HC-KAR-ST] has held that the service tax can be paid on services received from abroad from Cenvat Credit. This is exactly in this case. They have also received the taxable services from abroad and have paid the service tax thereon from the Cenvat Credit balance. Thus, extending the ratio of above decision, the impugned show cause notice should be set aside. Similar decision has been given in the following cases:-

·         Commissioner of Central Excise, Chandigarh v/s Nahar Industrial Enterprises [2010-TIOL-868-HC-P&H-ST]
·         Commissioner of Central Excise v/s M/s Nahar Spinning Mills Ltd [2011-TIOL-413-HC-P&H-ST]
·         CCE, Jaipur-II v/s M/s Rajasthan Spinning & Weaving Mills Ltd [2011-TIOL-1748-CESTAT-DEL]

On the basis of the afore-said judgments of the High Court, it is clear that the issue is no longer res-integra and has been settled in their favour. Though these decisions have been rendered in context of GTA services, its ratio is equally applicable in their case as in case of GTA services also, the service recipient has been made person liable to pay the service tax. Thus, the above decisions are also applicable on them and extended the benefit of these decisions, the impugned show cause notice is liable to be quashed.

It was submitted that GTA has been specifically removed from the definition of “Output Services” as given under Rule 2(p) of the Cenvat Credit Rules, 2004 by virtue of Budget announced for the year 2008-09. The effect of this will be that the GTA cannot be treated as “output service” for the purpose of paying the Service Tax from the Cenvat Credit as per analogy discussed here above. But, no such amendment has been done in case of services received from abroad. As such, these services will continue to be deemed as output service for the purpose paying the Service Tax from Cenvat Credit balance as discussed here above. This analogy has been favoured by hon’ble Tribunal in the following cases:-

· M/s Anurag Ferro Products Pvt Ltd v/s CCE & CR, BBSR [2009-TIOL-1345-CESTAT-KOL]
· Toyota Kirloskar Motors Pvt Ltd, Bangalore v/s Commissioner of Central Excise (LTU), Bangalore [2009- TIOL-1437-CESTAT-BANG]

An analysis of these decisions makes it clear that GTA has been excluded from the definition of output services w.e.f. 1.3.2008. As such, it was very well covered in the definition of output services upto this date. Since the period covered in the given show cause notice is prior to this period. As such, they have rightfully paid the service tax from Cenvat Credit and the same should be upheld. Since these decisions are squarely applicable in their case, the benefit of these decisions should be extended to them and the impugned show cause notice should be quashed.

They further submit that the allegation of show cause notice that they cannot pay service tax from Cenvat Credit as they have not availed the same in the capacity of Service Provider is not sustainable. They have taken credit as a manufacturer and it is duly available to them without any suspicion. Further they are also providing the taxable services of Technical testing and analysis services. As such, they have also availed the Cenvat Credit in capacity of service provider also.

Further, the provisions regarding utilization of Cenvat Credit are contained in Rule 3(4) of the Cenvat Credit Rules, 2004. The analysis of said rule makes it clear that the credit rightfully availed can be utilized for the payment of either excise duty or service tax. There is no one to one correlation for utilization of Cenvat Credit. As such, they have rightfully utilized the Cenvat Credit for the payment of Service Tax as service recipient. Therefore, show cause notice should be quashed and no demand, interest or penalty should be imposed.

It is further submitted that the credit rightfully availed as a manufacturer can be utilized for payment of service tax on taxable services. In a letter issued by Director General, this issue of cross utilization of Cenvat Credit availed as manufacturer and utilized for payment of service tax; has been clarified. This has been done in 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. In their case, they have also availed the credit in the capacity of provider of taxable service as well as manufacturer of dutiable goods. As such, the impugned show cause notice is not tenable and is liable to be set aside.

They submit that in the impugned show cause notice it is alleged that they have not got their selves registered under the category of Supply of Tangible Goods Service under Section 69 of Chapter V of the Finance Act, 1994. For this it is proposed to impose penalty u/s 77 of the Finance Act, 1994. In this regard, it is submitted that the service tax was paid in due time. However, there was an error that the registration could not be got amended. But since the service was paid on time, there is no loss of revenue; as such the penalty is not imposable as getting the registration amended is merely procedural lapse. Thus, the impugned show cause notice is not sustainable and is liable to be quashed.

They submit that the impugned show cause notice is alleging that interest is payable by them under the provisions of section 75 of the Finance Act, 1994. As such, interest is imposable for the delay/failure to pay the service tax. In this regard, it is submitted that they have duly paid the service tax from Cenvat Credit. It has also been held in the case of STERLITE INDUSTRIES (INDIA) LTD. Versus COMMISSIONER OF C. EX., VAPI [2008 (225) E.L.T. 397 (Tri. - Ahmd.)] that payment from Cenvat is also a type of payment. Since the interest is imposed for delay in payment of service tax and they have paid the service tax on time; no interest is imposable on them under section 75 ibid. Therefore the impugned show cause notice is not tenable and is liable to be quashed.

They further submit that the show cause notice is contending that as per instructions given against Sl. No, 5 of the Format of ST-3 return prescribed vide Service Tax (Second Amendment) Rules, 2007, Details of input stage CENVAT credit were to be filled by a taxable service provider only and not to be filled by service receiver liable to pay service tax or input service distributor. It was alleged that they have filled the details of CENVAT credit of inputs taken by them as in Half Yearly ST-3 return submitted for the period Oct, 2010 to march, 2011 & April, 2011 to Sept., 2011 (as also the amount wrongly utilized by them purportedly for payment of their service tax liability in respect of taxable services provided to them from outside India and received by them in India). As such, it appears that they have contravened the provisions of Rule 7(1) of the Service Tax Rules, 1994 read with Section 70(1) of the Finance Act, 1994 and the Service tax (Second Amendment) Rules, 2007. Therefore, the details filled in by them under Serial No. 5 and 5B of ST-3 return appear to be liable to be struck off from said return. In this regard, they submit that besides filing the service tax return as a recipient of service, they are also filing the return as provider of taxable service of Technical testing and analysis services. A provider of taxable service namely Technical Testing and analysis service can duly avail the Cenvat Credit and fill in the same as the above said instructions clarifying serial no. 5 of ST 3 restricts only the recipient of taxable service and input service distributor to fill in the details of credit availed. This instruction specifically provides that the said column is to be filled by the provider of taxable service. Since they are duly providing the Technical Testing and analysis service, they have rightly filled the serial no. 5 of the ST 3 return. Further, the restriction to fill this column applies only to those persons who are filing the service tax return as a person liable to pay the service tax or as an input service distributor. This does not apply on the persons who are also providing some other taxable services. As such, the contention of the impugned show cause notice is not justified and is liable to be quashed.

They submit that on the basis of above discussion and the cases cited here above, they have rightfully made payment of service tax from Cenvat Credit. Even if the contention of the show cause notice is accepted for the argument sake, then also penalty is not warranted as they have acted under the bonafide belief and no penalty can be imposed on them for the acts done under bonafide belief. It has been held in various cases that no penalty is warranted when the assessee has acted on the basis of bonafide belief. 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 analysis of said 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 show cause notice should be set aside and the whole proceedings should be dropped.

Reasoning of the Commissioner (Adjudicating Authority):-

The Hon’ble Assistant Commissioner held that it is apparent from the perusal of the facts that the assessee is engaged in providing services under the category of 'Goods Transport Agency Services', 'Business Auxiliary Services' and 'Scientific or Technical Consultancy Services' and for that purpose they were receiving services under the category of 'Supply of tangible goods service' from a person who has a fixed establishment in a country other than India and paid the service tax from the cenvat credit account during the period covered under the impugned show cause notice and paid the service . It is very essential to refer the provisions of Rule 3 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 wherein it has been provided that where the taxable service referred to in sub-clause (zzzzj) of clause (105) of section 65 of the Act is received by a recipient located in India, then such taxable service shall be treated as taxable service provided from outside India and received in India subject to the condition that the tangible goods supplied for use is located in India during the period of use of such tangible goods by such recipient.

From the provisions of the Rule 3(4) of the Cenvat Credit Rules, 2004, and the activity undertaken by the assessee, they observe that the cenvat credit can be utilized for payment of service tax by any person who is the provider of the output services who, in turn, be the person liable to pay service tax inclusive of the person who is the recipient of 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, as provided in the Rule 2(1)(d)(iv) of the Service Tax Rules, 1994. Further, they also observe that in the instant case the assessee is the recipient of taxable service under the category of 'Supply of tangible goods service', from a person who has a fixed establishment in a country other than India, is the person liable to pay service tax and, thus, in turn, is the provider of the output services who can utilized the cenvat credit as per the provisions of the service tax Rule 3(4) of the Cenvat Credit Rules, 2004. They also find force in the averments of the assessee that, prior to amendment made in the Cenvat Credit Rules, 2004 vide notification no. 28/2012-ST dated 20.6.2012 having effect from 01- 07-2012, the Cenvat Credit cannot be used to pay the service tax where the person liable to pay is the service recipient. Thus, they are of the confirmed view that the assessee had correctly paid service tax from cenvat credit account on the services received under the category of 'Supply of tangible goods service' from a person who has a fixed establishment in a country other than India.

Further they observed that the show cause notice has also proposed penal action under Section 76 and 77 of the Finance Act, 1994 for contravention of various provisions of the Finance Act, 1994 read with Rule 4 and 7 of the Service Tax Rules, 1994. Since the assessee had correctly paid the applicable service tax for the period covered in the show cause notice as the discussion made in foregoing paras hence, the show cause notice issued in the instant case is not sustainable and the same deserves to be dropped. Since the show Cause Notice is not found sustainable, therefore, the interest and the penalty provisions in the instant Show Cause Notice are not attracted.

Decision:- Demand dropped.

Conclusion:- The issue under consideration that whether cenvat credit can be utilised for payment of service tax as service recipient has been a matter of constant litigation. There have been many judicial pronouncements but recently two high courts have held that such utilization is legal and proper and have validated payment of service tax under reverse charge by utilizing cenvat credit balance. However, w.e.f., 01.07.2012, specific explanation has been added which restricts cenvat utilization for discharging service tax liability as service recipient.

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PJ/CASE STUDY/2012-13/51
20 April 2013

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PJ/CASE STUDY/2012-13/51 20 April 2013

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PJ/CASE STUDY/2012-13/51
20 April 2013