The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that recovery proceedings were not sustainable where the assessee had already reversed the disputed CENVAT credit and the credit had remained unutilised.

The bench of Dr. Suvendu Kumar Pati (Judicial Member) has referred to Section 73(3) of the Finance Act, 1994, which provides that where an assessee, either on being pointed out by the department or on its own ascertainment, pays the tax liability along with applicable interest, no show-cause notice is required to be issued for recovery of such amount.

The appellant/assessee was engaged in providing various taxable services including works contract services, renting of immovable property, supply of tangible goods, business support services, construction services and manpower supply services. During an EA-2000 audit covering the period from 2013-14 to June 2017, the department observed that the company had availed CENVAT credit on certain input services such as rent-a-cab services, car repair expenses, health insurance, outdoor catering and insurance services relating to Jammu-side high-risk area operations. These credits were considered inadmissible by the department.

According to the record, the assessee accepted the audit objection and voluntarily reversed the disputed credit amounting to ₹11,05,642 on August 21, 2019 through the GST portal. The company also maintained that it possessed a CENVAT credit balance exceeding ₹2 crore during the relevant period, indicating that the disputed credit had never been utilised. Despite the reversal, the department subsequently issued a show-cause-cum-demand notice dated October 28, 2019 seeking recovery of the same amount and proposing an equivalent penalty by invoking the extended limitation period.

The appellant contended that once the credit had been voluntarily reversed pursuant to the audit findings, issuance of a demand notice under Section 73 was legally impermissible. It was further argued that the disputed credit had remained unutilised throughout and, therefore, neither recovery nor penalty could survive.

Reliance was placed on the Tribunal’s decision in GF Toll Road Private Ltd. and Others v. Commissioner of Central Tax & GST, Thane, wherein it had been held that where credit was merely taken but not utilised, recovery with interest and penalty was not justified. The appellant also highlighted that the audit report as well as the show-cause notice itself acknowledged the existence of a substantial credit balance in its account, reinforcing the position that the disputed amount had never been used for payment of tax.

The department defended the orders of the lower authorities and argued that the impugned credits were clearly inadmissible under the CENVAT Credit Rules, 2004. It was submitted that the department was justified in invoking the extended period and initiating recovery proceedings because the inadmissible credit had been wrongly availed by the assessee.

The Tribunal observed that the provisions governing recovery of wrongly availed CENVAT credit under Rules 14 and 15(3) of the CENVAT Credit Rules, 2004 require application of Section 73 mutatis mutandis.

The Tribunal noted that the show-cause notice itself recorded that the appellant had already reversed the disputed credit during the audit process. It further observed that the assessee maintained sufficient credit balance in its account, demonstrating that the disputed credit had not been utilised. In such circumstances, initiation of recovery proceedings and imposition of penalty after voluntary reversal of the credit was held to be contrary to law.

Allowing the appeal, the CESTAT set aside the Order-in-Appeal dated July 5, 2021 and granted consequential relief to the assessee. The Tribunal concluded that the demand notice itself was unsustainable because the disputed credit had already been reversed and remained unutilised, thereby attracting the protection available under Section 73(3) of the Finance Act, 1994.

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