The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Allahabad, has held that CENVAT credit cannot be denied merely because the taxable input services were received at premises that had not been included in the service provider’s centralised registration.
The bench P.A. Augustian (Judicial Member) and Sanjiv Srivastava (Technical Member) upheld the denial of credit on works contract services used for the construction or setting up of BPO branches, observing that the assessee failed to produce evidence establishing that the services were used only for the repair, renovation or modernisation of existing premises.
The adjudicating authority had disallowed CENVAT credit of ₹2.06 crore, ordered recovery of applicable interest and imposed an equivalent penalty under Rule 15(3) of the CENVAT Credit Rules, 2004, read with Section 78 of the Finance Act, 1994. A separate penalty of ₹10,000 had also been imposed under Section 77 of the Finance Act.
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The appellant/assessee was centrally registered for providing several taxable services, including information and data access or retrieval services, commercial training and coaching, maintenance or repair services, business support services and business auxiliary services.
During an audit covering the period from April 2011 to March 2015, the department alleged that the company had availed inadmissible CENVAT credit of ₹93.75 lakh on services received at its BPO branches in Chennai, Hyderabad and Gurgaon.
According to the department, these branches were included in the company’s centralised registration only with effect from August 20, 2014. Consequently, credit relating to services received at those premises before their inclusion in the registration was treated as inadmissible.
The audit also questioned credit of ₹1.12 crore relating to service tax paid on works contract services received for BPO offices in Gurgaon, Chennai, Hyderabad and Noida. The department maintained that works contract services used for civil construction or setting up office premises stood excluded from the definition of “input service” under Rule 2(l) of the CENVAT Credit Rules.
A show cause notice was subsequently issued proposing recovery of the total credit of ₹2.06 crore, along with interest and penalties, by invoking the extended limitation period.
On the first issue, the Tribunal rejected the department’s contention that credit could be denied because the services were received at premises not included in the centralised registration.
The Bench relied on the Allahabad High Court’s decision in the Samsung India Electronics matter, which had followed the ruling in Commissioner, Service Tax Commissionerate v. Atrenta India Pvt. Ltd.
The Tribunal noted that Rule 3 of the CENVAT Credit Rules did not prescribe registration of the premises receiving the input services as a condition precedent for claiming credit.
Accordingly, it held that the company’s entitlement to CENVAT credit could not be defeated merely because its Chennai, Hyderabad and Gurgaon branches had not been added to the centralised registration during the relevant period.
The demand relating to taxable services received at the unregistered premises was therefore set aside.
The Tribunal, however, reached a different conclusion regarding credit of ₹1.12 crore claimed on works contract services.
The company contended that the disputed services were used for maintaining, repairing, renovating and modernising its existing office premises and not for constructing new offices. It argued that services used for renovation and modernisation were expressly covered by the inclusive portion of the definition of “input service”.
The Tribunal observed that the adjudicating authority had examined the documents and recorded a factual finding that the works contract services were used for the construction or setting up of BPO branches in Gurgaon, Chennai, Hyderabad and Noida.
The company, the Bench found, had not produced sufficient evidence to demonstrate that this factual finding was incorrect or perverse. A general assertion that the services were used for repairing, renovating or modernising existing facilities was insufficient in the absence of supporting evidence.
The Tribunal also distinguished works contract services from ordinary repair and maintenance services. Referring to the Supreme Court’s ruling in Commissioner of Central Excise and Customs v. Larsen & Toubro Ltd., it observed that a works contract is a distinct species of contract involving both goods and services.
Since service tax on the disputed transactions had been paid under the category of works contract services, the company could not subsequently seek to treat the transactions merely as repair or maintenance services to claim credit.
The Bench further observed that the exclusion clause in Rule 2(l) expressly covered the service portion in works contracts used for the construction or execution of a works contract involving a building or civil structure.
It held that the inclusive portion covering renovation, modernisation and repair could not override the specific exclusion applicable to works contract services used for construction or setting up the BPO branches.
The Tribunal consequently upheld the denial of CENVAT credit on the disputed works contract services, subject to the normal limitation period.
Although the credit on works contract services was found inadmissible, the Tribunal rejected the department’s invocation of the extended limitation period.
The company had regularly filed its ST-3 returns and disclosed the CENVAT credit availed by it. It had also filed refund claims under Rule 5 of the CENVAT Credit Rules, which had been examined by the department. Earlier show cause notices had reportedly been issued in relation to similar credit disputes.
The adjudicating authority nevertheless held that the extended period was available because the irregular credit came to the department’s notice only during the audit.
Calling this reasoning “flawed”, the Tribunal held that the availability of the extended period depended on the assessee committing an act or omission satisfying the conditions prescribed in the proviso to Section 73(1) of the Finance Act.
The manner in which the department discovered the alleged irregularity could not, by itself, establish suppression of facts, fraud, wilful misstatement or an intention to evade tax.
The Bench noted that the adjudication order failed to identify any deliberate act by the company that could justify invoking the extended period, particularly when the disputed credit had been disclosed in the statutory returns.
The Tribunal therefore restricted the surviving demand to the normal limitation period covering the financial year 2014-15.
The Tribunal upheld the liability to pay interest under Section 75 of the Finance Act on the amount of credit ultimately found inadmissible for the normal limitation period.
It observed that interest is compensatory and follows the tax or credit liability that remains payable. Accordingly, once the works contract service credit was held inadmissible and recoverable for 2014-15, the corresponding interest demand could not be faulted.
The exact amount of credit falling within the normal limitation period was not available from the records before the Tribunal. The matter was therefore remanded to the adjudicating authority for re-quantification.
The Tribunal set aside the penalty imposed under Section 78 after holding that the extended limitation period could not be invoked.
Relying on the Supreme Court’s ruling in Union of India v. Rajasthan Spinning and Weaving Mills Ltd., the Bench observed that the conditions required for imposing a fraud- or suppression-based penalty are substantially similar to those required for invoking the extended limitation period.
Since no deliberate deception or suppression with intent to evade tax had been established, the equivalent penalty under Section 78 was unsustainable.
The Tribunal also quashed the ₹10,000 penalty imposed under Section 77 for the company’s failure to include certain branches in its centralised registration.
It noted that the company was already centrally registered with the service tax department and was regularly filing ST-3 returns. The department had not alleged that the turnover from the branches omitted from the registration certificate was excluded from those returns.
The mere failure to include individual premises in the centralised registration certificate, therefore, could not establish a contravention of Section 69 of the Finance Act warranting a penalty.
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