By TIOL News Service

CHENNAI, SEPT 04, 2013: THE assessee is engaged in manufacture of yarn of different kinds. The assessee holds Service Tax Registration for the Service Goods Transport Agency ("GTA"). During the period between 1.1.2005 and 30.9.2005, the assessee had paid the service tax due on the GTA service by utilizing the CENVAT Credit availed on inputs and capital goods. The adjudicating authority viewed that such adjustment of the CENVAT Credit towards the liability on Service tax was contrary to the Rule. It was held that the CENVAT Credit could be utilised only in respect of "input service" as per definition of 2(l) of CENVAT Credit Rules, 2004. Thus, utilisation of CENVAT Credit for payment of service tax due was improper and consequently show cause notice was issued, proposing to demand service tax on GTA under Section 73 of Chapter V of Finance Act, 1994 along with interest under Section 75 of the Finance Act, apart from proposing levy of penalty under Section 76 of the Act.

Aggrieved by the order of the adjudicating authority, the assessee went on appeal before the Commissioner of Central Excise (Appeals), contending that the understanding of the Revenue that the service would fall within the definition of "output service" in view of explanation to Rule 2(p) of CENVAT Credit Rules, 2004 was contrary to law. The first Appellate Authority pointed out that going by Section 68(2) of Chapter V of Finance Act, 1994, the recipient of GTA services was also treated as deemed provider of services. Thus, there could no dispute that the assessee was liable to pay service tax from 1.1.2005 to 30.9.2005. The Commissioner pointed out that as far as the quantum of service tax liability was concerned, there was no dispute. The Adjudicating Authority denied the facility utlising CENVAT Credit on the simple ground that the activity of the assessee would fall under Rule 2(p) of CENVAT Credit Rules, 2004. Referring to CENVAT Credit Rules, particularly to Rule 3(4), the Commissioner held that the assessee was not entitled to the benefit of adjustment of the service tax liablility as against CENVAT credit available.

Aggrieved by the same, the assessee went on further appeal before the Customs, Excise and Service Tax Appellate Tribunal. It pointed out that the question raised by the assessee was directly covered in its favour by the decision in the case of R.R.D. TEX (P) LIMITED v. COMMISSIONER OF SERVICE TAX, SALEM- 2007-TIOL-891-CESTAT-MAD, wherein the Tribunal referred to the Explanation to Rule 2(p) of the CENVAT Credit Rules as to the definition of 'output service', whereunder , where a person liable for paying service tax did not provide any taxable service, the service for which he was liable to pay service tax shall be deemed to be 'output service'. The Tribunal also referred to the Tribunal's order in Final Order No. 262/2007 dated 20.3.2007, wherein the Tribunal considered the Explanation to Rule 2(p) of CENVAT Credit Rules, 2004 as well as the decision of the Delhi Tribunal reported in 2007-TIOL-555-CESTAT-DEL in the case of COMMISSIONER OF CENTRAL EXCISE, CHANDIGARH v. M/ S.NAHAR INDUSTRIAL ENTERPRISES LIMITED and thus allowed the appeal preferred by the assessee. In so holding, the Tribunal also rejected the reliance placed by the Revenue to the circular dated 3.10.2005 of the Central Board accepting the contention of the assessee , thereby, set aside the order of the Revenue rejecting the adjustment thereon.

Aggrieved by the same, the Revenue is on appeal before the High Court.

The standing counsel appearing for the Revenue submitted that the view of the Tribunal based on the Explanation to Rule 2(p) of the CENVAT Credit Rules, is totally unsustainable in the context of the circular issued by the Central Board explaining the provisions thereon on using CENVAT Credit towards service tax liability. He further pointed out that the case of NAHAR INDUSTRIAL ENTERPRISES LIMITED reported in 2007-TIOL-555-CESTAT-DEL, relied on by the Tribunal, was appealed by the Revenue before the Punjab and Haryana High Court in the decision reported in 2010-TIOL-547-HC-P&H-ST -COMMISSIONER v. NAHAR INDUSTRIAL ENTERPRISES LIMITED. In the said decision, the High Court upheld the order of the Tribunal. Pointing out to Rule 3(4)(e) of the Cenvat Credit Rules 2004, the High Court held that Cenvat Credit could be utilized for payment of service tax on any output service. The said decision was followed by the Delhi High Court in the decision - COMMISSIONER OF SERVICE TAX v. HERO HONDA MOTORS LIMITED and COMMISSIONER OF CENTRAL EXCISE v. AURO SPINNING MILLS. The Delhi High Court pointed out that in view of the fiction created under Section 68(2) of the Finance Act, 1994, that the recipient of the services who discharged the liability on behalf of the provider was also treated as a person liable to pay service tax in relation to such service. Thus, in view of the fiction under Section 68(2) of the Finance Act with the CENVAT Credit Rules, the High Court agreed with the decision reported in the case of NAHAR INDUSTRIAL ENTERPRISES LIMITED reported in 2007-TIOL-555-CESTAT-DEL.

The counsel for the Revenue however pointed out that NAHAR INDUSTRIAL ENTERPRISES LIMITED reported in 2007-TIOL-555-CESTAT-DEL is now pending in appeal before the Apex Court in Special Leave Petition (Civil) 19542 of 2010 as well as in the case of ALLENA AUTO INDUSTRIES P.LIMITED , Special Leave Petition (Civil) No. 5276 of 2011. In the background of the pendency of the appeals and in the context of the provisions of CENVAT Credit Rules, the question of the assessee adjusting the liability of service tax as against the CENVAT credit would not be a justifiable one.

The High Court disagreed with the line of reasoning put forth by the Revenue and observed,

"Going by the fiction under Section 68(2) of the Finance Act, 1994 and CENVAT Credit Rules, 2004, deeming the payer of service tax as the person liable for paying the service tax in relation to such service, it is clear that while in the case of "input service", any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal, is considered as "input service", in contrast to this, the explanation given under "output service" in Rule 2(l) of CENVAT Credit Rules, thus deems that in the case of a person not proving taxable service or manufacture final products but liable for paying service tax, the service for which he is liable to pay service tax by reason Section 62(2) of the Finance Act, 1994 shall be deemed as "output service". Thus, while Rule 2(l) and 2(p) cover two classes of persons, the recipient of GTA services, by virtue of the Explanation to Rule 2(p) of the CENVAT Credit Rules, as a provider of output service, is entitled to all benefits that a person providing input service would be entitled to in the matter of CENVAT credit adjustment. Thus, a reading of Rules 2(l) and 2(p) would show that they cover two different situations and though their operations are totally different, yet, for the purpose of giving credit to the service tax payable from the CENVAT Credit available, the recipient is also entitled to the same relief as a provider of the service. Thus, we do not find any error in the reasoning of the Tribunal that in the payment of service tax liability by the recipient of taxable service, such assessees are also entitled to make use of CENVAT Credit to discharge their liability under the Service Tax provisions. Consequently, we do not agree with the submission of the Revenue to set aside the order of the Tribunal.

Learned Standing Counsel appearing for the Revenue also placed reliance on the circular issued by the Board clarifying the provisions under Rules 2(l) and 2(p) of the Rules. Considering the fact that Rules 2(l) and 2(p) cover two different situations, in either event, the Rules contemplated adjustment of service tax liability as against the CENVAT Credit available to the assessee , the circular relied on would not be of any assistance to the Revenue.

We respectfully endorse the view of the Punjab and Haryana High Court, the Delhi High Court and the Himachal Pradesh High Court. In the light of the above discussion, we have no hesitation in affirming the view of the Tribunal, thereby, dismissing the above Civil Miscellaneous Appeal."

(See 2013-TIOL-665-HC-MAD-ST)