The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that excess service tax paid by an assessee may be adjusted against tax liability arising in later months or quarters and that Rule 6(4A) of the Service Tax Rules, 1994 does not restrict such adjustment to the immediately succeeding month or quarter.
The Bench of P. Dinesha (Judicial Member) and M. Ajit Kumar (Technical Member) has observed that the word “immediate” was absent from the provision. On a plain and natural reading of the rule, an assessee was permitted to adjust the excess amount against service tax liability arising in a succeeding month or quarter. The language did not confine the benefit to the immediately following period.
The principal issue before the Tribunal was whether the appellant was entitled to utilise advance or excess service tax paid during earlier financial years for discharging its tax liabilities in subsequent periods.
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BASF Catalysts India Private Limited was engaged in manufacturing catalysts, catalyst converters, metal converters and ceramic catalysts. It was also registered as a service provider under categories including Business Support Service, Intellectual Property Service, Manpower Recruitment Agency Service and Transport of Goods by Road Service.
During an internal audit, the Central Excise Commissionerate’s Audit Wing observed that the company had availed CENVAT credit of ₹2,85,63,386 in respect of service tax paid under the reverse charge mechanism on Business Support Service and Intellectual Property Service received from foreign service providers.
The audit further observed that advance tax payments made during 2011-12 and 2012-13 had been utilised against liabilities arising during 2012-13 and 2013-14. Similar adjustments were also made during 2014-15 and 2015-16.
The Revenue objected to these adjustments. According to the Department, Rules 6(1A) and 6(4A) of the Service Tax Rules permitted adjustment of excess service tax only against the liability of the immediately succeeding month or quarter.
Based on this interpretation, a show cause notice dated February 29, 2016 was issued for the period from 2012-13 to 2014-15, up to September 2015. The notice proposed to disallow the adjustments made by the company, recover the disputed amount under the proviso to Section 73 of the Finance Act, 1994, and impose applicable interest and penalties.
The Commissioner of Central Excise, Chennai-III, rejected the company’s explanation and confirmed the proposals through an order dated February 9, 2017. The company challenged that decision before the CESTAT.
For the subsequent period from October 2015 to June 2017, the Department issued a statement of demand dated September 18, 2017. The adjudicating authority once again confirmed the demand, applicable interest and penalty through an order dated April 11, 2018.
The Commissioner (Appeals) upheld that order on October 25, 2018, following which the company filed its second appeal before the Tribunal.
Appearing for the appellant, advocate Raghav Rajeev submitted that the controversy had already been decided by the Chennai Bench in South India Aluminium Company v. CGST and Central Excise, Chennai.
The appellant explained that it had made provisions in its books for services received from associated enterprises located outside India. Service tax was paid under the reverse charge mechanism on the value of those provisions, and the payments were disclosed in the company’s ST-3 returns.
When the actual invoices were subsequently received, however, the complete invoice value was inadvertently reflected once again in the ST-3 returns and the corresponding service tax was added to the company’s output tax liability.
The company contended that the payment made at the time of creating the provision was consequently adjusted against the service tax liability reflected when the actual invoice was received. According to the appellant, there was no liability to pay service tax twice on the same transaction under Rule 7 of the Point of Taxation Rules, 2011.
It was argued that the dispute involved double accounting of the same transaction rather than a voluntary adjustment of excess service tax against an independent subsequent liability. Therefore, Rule 6(4A) of the Service Tax Rules did not strictly apply to the case.
The appellant further submitted that even if Rule 6(4A) were treated as applicable, the Tribunal’s ruling in South India Aluminium Company established that excess service tax could be adjusted not merely in the immediately succeeding month or quarter but also in later months or quarters.
The Department defended the orders passed by the lower authorities and argued that the appellant had adjusted advance tax payments against liabilities arising in later months and quarters in violation of Rule 6(4A).
The Department maintained that the expression “succeeding month or quarter” used in the provision referred only to the immediately succeeding tax period. It accordingly urged the Tribunal to uphold the demands.
Reliance was placed on the decisions in JCT Electronics Limited v. Commissioner of Central Excise and Service Tax, Vadodara and Principal Commissioner of GST and Central Excise, Raipur v. Spectrum Coal and Power Limited.
The Tribunal examined its earlier Division Bench decision in South India Aluminium Company. In that case, the Bench had relied upon the ruling in Arun Exello Foundation, which considered the proper interpretation of Rule 6(4A).
Rule 6(4A) provided that where an assessee paid an amount exceeding the service tax payable for a month or quarter, the assessee could adjust that excess amount against its service tax liability for the succeeding month or quarter.
The earlier ruling had also considered situations in which an assessee had no service tax liability during the immediately succeeding month or quarter. It observed that a restrictive interpretation would make it impossible for the assessee to utilise the adjustment mechanism in such circumstances.
A similar difficulty would arise where the excess tax paid was greater than the entire liability of the immediately succeeding period. Rule 6(4A) did not state that only a portion of the excess could be adjusted immediately and that the remaining amount had to be claimed as a refund.
The provision was intended to permit an assessee to adjust excess payments against liabilities accruing later and thereby avoid the procedural difficulties involved in filing refund claims, the Tribunal observed.
It was also noted that allowing such an adjustment caused no loss to the Revenue because the Government already held the excess amount. In fact, the Revenue retained the benefit of the funds until the adjustment was eventually made.
The Tribunal distinguished the authorities relied upon by the Department. It noted that the ruling in JCT Electronics Limited had been delivered by a Single Member, whereas the decision in South India Aluminium Company had been rendered by a Division Bench.
Regarding Spectrum Coal and Power Limited, the Tribunal observed that the Chhattisgarh High Court had merely remanded the matter to the Tribunal for fresh consideration after hearing both parties.
The Bench found that the Division Bench ruling in South India Aluminium Company had decided an identical issue. Expressing agreement with that decision, the Tribunal held that the legal question raised in BASF Catalysts India’s appeals was no longer unsettled.
Following the ratio laid down in the earlier ruling, the CESTAT set aside both impugned orders and allowed the appeals. The company was also granted consequential benefits, if any, in accordance with law.
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