In the case of M/s. Surya Pharmaceuticals Ltd. Vs. Commissioner of Central Excise, it was held that the assessee can utilize accumulated Cenvat Credit to discharge the service tax liability towards GTA services prior to 01.03.2008. It was further held that the CENVAT credit cannot be utilised for discharging Service Tax on taxable services provided from outside India and received in India.
Facts of the Case
The appellants are registered with Central Excise department for the manufacture of Bulk drugs and are also registered under the Service Tax Rules, 1994 for Goods Transport Agency (GTA) service and Business Auxiliary (BAS) service. The appellants are service recipient of GTA services and are liable to pay service tax under reverse charge mechanism as per sub-section (2) of Section 68 of the Finance Act, 1994. They are also service recipient of BAS from foreign based export agents to whom they pay commission and by reverse charge, again, they are liable to pay service tax under provisions of Section 66A of the Finance Act, 1994, read with Rule 2(i)(d)(iv) of Service Tax Rules, 1994.
During the scrutiny of ST-3 returns for the half year ending March, 2007 to September, 2007, it was found that appellants had made payment of service tax under GTA and BAS services by utilizing their credit in Cenvat Credit account instead of paying the same in cash. The department entertained the view that as per Rule 5 of Taxation of Services Rules, 2006, the appellants ought to have paid the service tax in cash and they are not entitled to utilize Cenvat Credit for payment of their service tax liability. A show cause notice was issued, and after adjudication, the original authority confirmed the demand of service tax of Rs.13, 18,181/- and Rs.5, 93,232/- along with interest and also imposed equal amount of penalty. The appellants filed appeal before the Commissioner (Appeals) who vide the order impugned herein upheld the same. Being aggrieved, the appellants are before the Tribunal.
Contentions of the Assessee
The appellant contended that by reading Rule 2(p) and Rule 2(r) of CENVAT credit rules,2004 prior to 01.03.2008 together, the appellant being a person liable for paying service tax shall also be treated as a provider of output service. In such scenario, the appellant is eligible to utilize the credit to pay the service tax under the Cenvat Credit Rules. That the Cenvat credit scheme has been framed for the purpose of availing and utilizing credit. In the said rules, the term “provider of taxable service” has been defined to include a person who ultimately pays service tax. The intention is to entitle the person liable to pay service tax to utilize the credit for paying such tax. If a person liable to pay service tax is not allowed to utilize the credit to pay service tax, then this definition would be nugatory.
Contentions of the Department
The department relied on Rule 5 of Taxation of Services Rules, 2006 and the CBEC, New Delhi Instruction F. No. B 1/14/4/2006 TRU dated 19.4.2006. It is argued that the appellants who are liable to pay service tax under the reverse charge mechanism on services provided from outside India have to pay the same in cash and cannot utilize the credit for discharging the liability.
Held by Hon’ble CESTAT
The Hon’ble CESTAT stated that the issue with regard to whether the service recipient who is liable to pay the service tax can use the accumulated Cenvat Credit to discharge service tax towards GTA services is settled by various judgments. Some of the decisions are as follows:-
In the above judgments, it has been categorically held that the assessee can utilize Cenvat Credit to discharge the service tax liability towards GTA services. Following the dictum laid in the above judgments, it was held that the appellant succeeds with regard to the issue of GTA services. So in the present case, the dispute narrows down to the question whether the appellants can utilize Cenvat Credit to pay the service tax towards BAS services i.e., the services received from foreign based export agents.
The Hon’ble CESTAT further stated that the Finance Act, 1994 is the law which deals with taxability of services. Taxation of Service Rules, 2006 enacted under the Finance Act, 1994 inter alia lays contains provisions governing the services which are provided from outside India and received in India. Rule 5 of the said Rules prevents the utilization of credit for discharging Service Tax on taxable services provided from outside India and received in India. In view thereof the demand of service tax as deemed provider of BAS services as per the impugned order does not warrant any interference. The same is upheld. The impugned order to the extent of demand of service tax on account of GTA services as discussed above is set aside.
The Commissioner (Appeals) has upheld the penalty imposed under Section 76 of Finance Act, observing that the appellant ought not to have paid the service tax from Cenvat credit, but should have paid in cash. The issue being interpretational and as the appellant has already discharged the service tax, the Hon’ble CESTAT considered that imposing penalty would not be appropriate and the same is set aside in terms of section 80 of the Finance Act, 1994.
In the result, the impugned order is modified to the extent of setting aside the demand in regard to service tax on GTA services and the penalties imposed. The demand of service tax on BAS is sustained. The appeal is partly allowed in above terms.