The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that eligibility to claim CENVAT credit of service tax payable under the reverse charge mechanism does not extinguish the underlying tax liability. However, where the recipient is simultaneously entitled to credit of the tax paid, the revenue-neutral situation prevents the department from invoking the extended period of limitation.
The bench of Ajay Sharma (Judicial Member) and Hemambika R. Priya (Technical Member) set aside the invocation of extended limitation and the penalty under Section 78 of the Finance Act, 1994. It upheld the service tax demand for the normal period, if any, along with the penalty under Section 77.
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The company manufactured excisable goods falling under Chapter 84 and availed CENVAT credit of duty and tax paid on inputs and input services. It was also registered for payment of service tax.
The company paid ₹50,60,273 to various service providers towards manpower recruitment or supply agency services.
According to the department, the company, being a body corporate receiving services from individual service providers, was liable to pay ₹4,69,087 in service tax under the reverse charge mechanism prescribed by Notification No. 30/2012-ST dated June 20, 2012.
A show cause notice issued on January 18, 2016, proposed recovery of the tax with interest and penalties under Sections 76, 77 and 78 of the Finance Act, 1994.
The adjudicating authority confirmed the demand of ₹4,69,087, including cesses, along with interest. It also imposed an equivalent penalty under Section 78 and a penalty of ₹20,000 under Section 77.
On appeal, the Commissioner (Appeals) restricted the tax demand to ₹2,12,386 with interest and reduced the Section 78 penalty to ₹1,06,193. The company challenged that order before the Tribunal.
The company contended that any service tax paid under reverse charge would have been available to it as CENVAT credit. That credit, it argued, could have been used to discharge excise duty on manufactured goods or service tax on output services, including commissioning and installation services in which the manpower was used.
It maintained that the entire exercise was revenue neutral because payment of the disputed tax would have generated a corresponding credit entitlement.
The company also challenged the demand on limitation. It submitted that the transactions were recorded in its books of account, payments were made through banking channels, and the alleged non-payment was identified during an audit of its records.
According to the company, these circumstances did not establish suppression of facts or an intention to evade tax. It attributed the non-payment to a bona fide belief and argued that its eligibility for credit further undermined any allegation of deliberate evasion.
The department opposed the revenue-neutrality argument, maintaining that a possible entitlement to credit could not justify failure to pay service tax.
It submitted that the company had not furnished documentary evidence to substantiate its claim that services relating to payments of ₹22,91,105 to M/s Aditya Construction and M/s Petrochem Solution fell outside manpower supply services.
The department further argued that the company had failed to assess its liability correctly and disclose the relevant information in its ST-3 returns. It alleged that the non-payment came to light only during audit and amounted to suppression with an intention to evade tax.
The Tribunal rejected the proposition that eligibility for CENVAT credit, by itself, eliminated the obligation to pay service tax under reverse charge.
It explained that taking credit was subject to the conditions prescribed in the CENVAT Credit Rules, 2004. In particular, payment of the tax was a prerequisite to claiming the corresponding credit.
Consequently, the possibility of taking credit after payment could not be treated as having already discharged the tax liability.
The Tribunal held that the company remained liable to pay service tax under reverse charge as the recipient of the services. Its eligibility to claim credit of that payment did not extinguish the liability.
The Tribunal reached a different conclusion on the department’s use of the extended limitation period.
It held that where a service recipient was liable to pay tax and simultaneously eligible to avail CENVAT credit of that payment, the extended period could not be invoked.
The Bench relied on its earlier decision in South Eastern Coalfields Ltd. v. Commissioner, CGST, Customs & Central Excise, decided on November 6, 2024. That decision applied the principle that a reverse charge demand resulting in an equivalent credit entitlement was revenue neutral and could not sustain recovery through extended limitation.
The Tribunal held that invocation of the extended period in the present case was incorrect.
The Tribunal set aside the penalty under Section 78, which had been reduced to ₹1,06,193 by the Commissioner (Appeals).
However, it expressly preserved the demand falling within the normal limitation period, if any, and upheld the Section 77 penalty. The original adjudication order had imposed ₹20,000 under that provision.
The final order does not quantify any demand surviving within the normal period. Accordingly, the ruling should not be read as either confirming the entire ₹2,12,386 demand or unconditionally cancelling every component of the proceedings.
The decision draws a distinction between the obligation to pay reverse charge service tax and the department’s ability to recover it through extended limitation: credit eligibility does not remove the payment obligation, but revenue neutrality can defeat the extended-period demand.
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