Case Law Details
Vodafone Mobile Services Limited Vs Commissioner of Service Tax (CESTAT Chennai)
Held that the ceiling of 20% under Rule 6(3)(c) is not applicable to capital goods and 17 input services specified under Rule 6(5) of the CENVAT Credit Rules, 2004.
Facts- The appellant is in the business of providing ‘telephone services’ (later known as ‘telecommunication services’) which were brought under the Service Tax net with effect from 01.07.1994 vide Notification No. 01/94 dated 28.06.1994.
It appears that the appellant has been paying Service Tax regularly, but it appeared to the Revenue that the appellant was not paying
Service Tax on the ‘interconnection service’ falling under the category of telecommunication service, which enables the telephone subscribers of various telegraph authorities to connect with each other.
The Revenue also appears to have noticed that the appellant, who was providing the interconnection service, was also collecting interconnect usage charges (IUC), the tax on which was being remitted by the appellant only from 01.06.2007. The reason for not paying the Service Tax on the said IUC charges prior to 01.06.2007, apparently, is due to the fact that Service Tax on IUC charges was exempted.
With this, the Revenue suspected that the appellant was providing both taxable and exempted services prior to 01.06.2007 and hence, by virtue of Rule 6(3)(c) of the CENVAT Credit Rules, 2004, the appellant could utilize credit only to the extent of an amount not exceeding 20% of the amount of Service Tax payable on taxable output service.
Conclusion- Held that the ceiling of 20% under Rule 6(3)(c) is not applicable to capital goods and 17 input services specified under Rule 6(5).
Further, the Bench has also considered the Board Circular No. 137/203/2007-CX-4 dated 01.10.2007 to hold that “… ceiling of ‘20% of the service tax payable’ on utilization of credit for payment of service tax, as prescribed in Rule 6(3)(c) has to be compared not with total credit utilization, but with the utilization of credit, other than capital goods credit and service tax credit in respect of the 17 input services mentioned in Rule 6(5)…”. That is to say, all the credit pertaining to input services under Rule 6(5) and capital goods credit, should be permitted to be utilized; the restriction is only in respect of the input services credit not falling under Rule 6(5) and inputs.
FULL TEXT OF THE CESTAT CHENNAI ORDER
M/s. Vodafone Mobile Services Ltd. (formerly ‘M/s. Vodafone Essar Cellular Ltd.), who is the appellant herein, has come up in appeal against the Order-in-Original No. CHN-SVTAX-03-COM-66 & 67-2016-17 dated 28.02.2017 passed by the Commissioner of Service Tax, Service Tax-III Commissionerate, Chennai.
2.1 Brief undisputed facts, as could be gathered from the Show Cause Notice as well as the impugned order, are that the appellant is in the business of providing ‘telephone services’ (later known as ‘telecommunication services’) which were brought under the Service Tax net with effect from 01.07.1994 vide Notification No. 01/94 dated 28.06.1994. It appears that the appellant has been paying Service Tax regularly, but it appeared to the Revenue that the appellant was not paying Service Tax on the ‘interconnection service’ falling under the category of telecommunication service, which enables the telephone subscribers of various telegraph authorities to connect with each other. The Revenue also appears to have noticed that the appellant, who was providing the interconnection service, was also collecting interconnect usage charges (IUC), the tax on which was being remitted by the appellant only from 01.06.2007. The reason for not paying the Service Tax on the said IUC charges prior to 01.06.2007, apparently, is due to the fact that Service Tax on IUC charges was exempted. With this, the Revenue suspected that the appellant was providing both taxable and exempted services prior to 01.06.2007 and hence, by virtue of Rule 6(3)(c) of the CENVAT Credit Rules, 2004, the appellant could utilize credit only to the extent of an amount not exceeding 20% of the amount of Service Tax payable on taxable output service.
2.2 A Show Cause Notice No. 14/2010 dated 29.04.2010 thus came to be issued alleging that since the appellant was rendering both taxable and exempted services and having not maintained separate accounts, they could utilize CENVAT Credit only to the extent of an amount not exceeding 20% of Service Tax payable on output services, as mandated under sub-clause (c) of sub-rule (3) to Rule 6 ibid. It was thus proposed that the appellant having utilized the credit exceeding 20%, as prescribed, such excess credit utilized by the appellant was liable to be recovered, along with appropriate interest and various penalties. The Show Cause Notice has been issued covering the period from April 2005 to May 2007 by alleging that the appellant had wilfully suppressed the fact that they had provided interconnection service and received charges for the same and that they had also suppressed the fact of not maintaining separate accounts, as required under the statute.
3.1.1 It appears that the appellant filed a very detailed reply rebutting the allegations in the Show Cause Notice and the appellant appears to have contended that up to 01.06.2007, when services provided in relation to telephone connection were taxed separately, no Service Tax was payable on the IUC charges collected by telecom companies. They have been using capital goods, inputs and were also availing various input services for providing output services and they appear to have pleaded that the quantification of demand was incorrect since the same was based on the assumption that the entire credit utilization reflected in their ST-3 return was relating to the credit availed on inputs and input services. Further, they have also taken a ground that the restriction stipulated in Rule 6(3)(c) ibid. would not apply to credit availed on capital goods since the appellant had sufficient credit and consequently, there was no excess utilization, as alleged in the Show Cause Notice.
3.1.2 They further appear to have pleaded that Rule 6(4) ought to have been invoked and not Rule 6(3)(c) since it mandates that no CENVAT Credit is eligible only if the capital goods are used exclusively in the manufacture of exempted goods or in providing exempted services.
3.1.3 They also appear to have contended that the demand was barred by limitation as the extended period of limitation could not have been invoked since the Revenue, other than alleging suppression, has not brought out any documentary evidence on record to justify the same and which is contrary to the documents borne on record.
3.1.4 The appellant claimed to have been filing, as admitted by the Revenue, its returns regularly under the erstwhile ‘telephone services’ and later, ‘telecommunication services’ and that their accounts were regularly audited by the Revenue; with the amendment effective 20.10.2005 which required an assessee to provide details of credit taken, separately, on inputs, input services and capital goods, was very much within the knowledge of the Department; and hence, the allegation of suppression could not sustain.
3.2 They had also relied on an order of the Principal Bench of the CESTAT in M/s. Idea Cellular Ltd. v. Commissioner of Central Excise, Rohtak [2009 (16) S.T.R. 712 (Tribunal – Delhi)] wherein the Learned Bench had allowed the utilization of CENVAT Credit availed in respect of 17 input services specified in Rule 6 (5) of the CENVAT Credit Rules, 2004 and had also permitted the utilization of CENVAT Credit on capital goods under Rule 6 (4) ibid. without imposing any restriction of 20% of Service Tax payable on output services in terms of Rule 6(3)(c) of the CENVAT Credit Rules, 2004.
4.1 During the course of adjudication, the Commissioner of Service Tax, Service Tax-III Commissionerate, Chennai appears to have taken cognizance of another Show Cause Notice No. 71/2008 dated 28.03.2008 issued to the appellant, chose to pass a common impugned Order-in-Original dated 28.02.2017. Paragraph 2.4 of impugned order contains same allegations; to quote: –
“2.4 It appears that once the service provider is not able to maintain a separate account for both taxable and exempted service and when the input services, inputs and capital goods are common for both the categories, the service provider is entitled to utilize the Cenvat credit to the extent of 20% of the service tax payable on the output taxable service as per Rule 6 (3) (c) of Cenvat Credit Rules, 2004.
It further appears that the restriction under Rule 6 (3) (c) of Cenvat Credit Rules will equally be applicable to capital goods credit as well as services notified in Rule 6 (5) of Cenvat Credit Rules, 2004.”
4.2 In the impugned order, the Adjudicating Authority drops the similar demand proposed in Show Cause Notice No. 71/2008 dated 28.03.2008, but however, confirms the demand carried in Show Cause Notice No. 14/2010 dated 29.04.2010 and it is against this demand which came to be confirmed that the present appeal has been filed before this forum.
5. Both the Representative for the Revenue as well as the Learned Advocate for the appellant submit that the Revenue has not filed any appeal against the order dropping the demand in Show Cause Notice No. 71/2008 dated 28.03.2008.
6. Heard Ms. Krithika Jaganathan, Learned Advocate for the appellant and Smt. K. Komathi, Learned Representative for the respondent.
7.1 The Learned Advocate for the appellant, while reiterating the grounds urged against the impugned order, would submit that the primary assumption of the Revenue is that the entire credit utilized pertained to the credit taken on inputs and input services and hence, restricting to 20% in terms of Rule 6(3)(c) ibid., was wrong and that the Revenue has failed to take note of the fact that the restriction in Rule 6(3)(c) would not apply to the credit availed on capital goods insofar as Show Cause Notice No. 14/2010 was concerned. In this regard, she submitted that Rule 6(4) would apply and not Rule 6(3)(c).
7.2 The Learned Advocate has also submitted that in respect of the earlier Show Cause Notice No. 71/2008 which was issued on similar allegations, proposing to demand similar CENVAT Credit, the lower authority had dropped the proceedings by observing that the utilization of credit in excess of 20% of the capital goods credit and on the services specified in Rule 6 (5) ibid. was in order; but however, the lower authority has deviated without any logic to confirm the demand proposed in Show Cause Notice No. 14/2010 after observing that the Show Cause Notice was issued for utilization of CENVAT Credit in excess of 20% on ‘inputs and input services’. That is to say, it is the case of the appellant that had the Commissioner considered the exclusion of utilization of credit relating to capital goods as well in this Show Cause Notice, then, there would have been no demand.
7.3 She further contended that as long as capital goods were not used exclusively for providing exempted services, there was no other restriction in availing and utilizing the credit thereon; that is to say, the eligible CENVAT Credit could be fully utilized for payment of Service Tax liability and therefore, the restriction could not apply to the capital goods credit.
7.4 Ms. Krithika Jaganathan, Learned Advocate, has further invited our attention to the chart placed on the record, which is part of the reply to the Show Cause Notice, to drive her point that the credit utilization on input services was, in any case, much below the 20% limit prescribed, excluding capital goods credit.
7.5 It is their further case that the Learned Principal Bench in the case of M/s. Idea Cellular Ltd. (supra) has decided a more or less similar issue and that even for the other reason of invoking the extended period of limitation, the demand confirmed in the impugned order cannot sustain.
8. Per contra, the Learned Additional Commissioner for the respondent relied upon the findings of the Commissioner.
9. We have heard the rival contentions and we have perused the documents placed on record. We have also gone through the orders of CESTAT Benches relied upon during the course of arguments.
10. After hearing both sides, we find that the only issue that is to be decided by us is: whether the Revenue is justified in holding that the appellant had utilized the CENVAT Credit in excess of the 20% limit prescribed under Rule 6(3)(c) of the CENVAT Credit Rules, 2004 and whether the consequential demand for recovery of the alleged credit used in excess of 20% is justified?
11.1.1 At paragraph 2.4 of the impugned order, which is extracted at paragraph 4.1 above, the Learned Commissioner has, while referring to the Show Cause Notice No. 71/2008, observed that the restriction under Rule 6(3)(c) ibid. would equally apply to capital goods credit as well as services notified under Rule 6(5) ibid. At paragraph 2.9, however, while dealing with Show Cause Notice No. 14/2010, the lower authority has only observed that the appellant did not maintain separate accounts though it was providing both taxable and exempted services prior to 01.06.2007 and hence, they should have utilized credit only to the extent of an amount not exceeding 20% of the amount of Service Tax payable on taxable output service.
11.1.2 At paragraph 5.9, the Learned Commissioner has referred to the earlier paragraphs 5.3 and 5.4, to hold that the ceiling of 20% of utilization of credit was not applicable to capital goods and to 17 input services specified under Rule 6(5) ibid.
11.1.3 In the impugned order, the Adjudicating Authority has clearly admitted that Show Cause Notice No. 71/2008 dated 28.03.2008 was issued to M/s. Vodafone Essar South Limited, Chennai and Show Cause Notice No. 14/2010 dated 29.04.2010 was issued to M/s. Vodafone Essar Cellular Limited, Coimbatore and it appears that the above Show Cause Notices were for the periods from September 2004 to March 2007 and April 2005 to May 2007 respectively. Further, he appears to have accepted the plea of the appellant in their reply to the Show Cause Notice No. 71/2008 that, in view of the clear provisions of Rule 6(5) ibid., they were entitled to avail and utilize the whole of the CENVAT Credit in respect of the specified services unless the same were used exclusively for providing exempted output service; that it is not the case of the Revenue that the appellant had used any of the specified services exclusively for providing exempted output service and that the restriction under Rule 6(3)(c) would not apply to services specified in Rule 6(5) ibid.
11.1.4 The Learned Commissioner also appears to have accepted the plea of the appellant in their reply to the above Show Cause Notice that even if the capital goods were partly used for providing exempted service, the credit of the whole of the excise duty paid on the capital goods was required to be allowed. From paragraph 2.8 of the impugned order, it is most relevant for us to observe the fact that the Department was aware of the activity of the appellant. For clarity, the relevant portion of the paragraph is reproduced below: –
“2.8 …
… The department was also aware of the fact that they were providing taxable as well as exempted service and were not maintaining separate accounts, the department should have known from the ST-3 returns that they have utilised cenvat credit to pay more than 20% of output service tax. Therefore, the allegation of suppression of facts by them with an intent to evade payment of service tax is factually incorrect.”
11.2.1 When the Learned Commissioner deals with the other Show Cause Notice i.e., Show Cause Notice No. 14/2010, he ignores the legal contentions of the appellant as well as the facts within the knowledge of the Revenue as to the provision of taxable as well as exempted services by the appellant, which is extracted by us in the above paragraph, and chooses to adjudicate in a different manner, thereby clearly adopting an inconsistent approach and it is not the case of the Learned Commissioner that there was any change in the stand of the appellant insofar as the provision of taxable as well as exempted services was concerned, nor was there any issue with regard to non-maintaining of separate accounts.
11.2.2 Going further, at paragraph 5.9, while dealing with one of the legal contentions of the appellant as to the applicability of the restriction provided under Rule 6(3)(c) to the credit availed on capital goods and the credit pertaining to 17 input services specified in Rule 6(5), he holds as under: –
“5.9 …
As already discussed in Para 5.3 & 5.4 I hold that the ceiling of 20% of utilization of credit is not applicable to capital goods and to 17 input services specified under Rule 6(5) of CCR. However unlike in the Show cause notice No. 71/2008 where the demand is made on the credit utilized in excess of 20% relating to capital goods and input services specified under Rule 6(5) of CCR, the demand in this notice is issued for utilization of Cenvat credit in excess of 20% of input and input services.”
11.2.3 It is clear from the findings of the Learned Commissioner in the paragraph extracted hereinabove that he has held that the ceiling of 20% under Rule 6(3)(c) is not applicable to capital goods and 17 input services specified under Rule 6(5).
12.1 We find that the above is precisely the ratio laid down by the Learned Principal Bench in the case of M/s. Idea Cellular Ltd. (supra) wherein the contentions of the appellant therein have been accepted by the Bench. The relevant observation of the Learned Principal Bench reads as under: –
“4. Second plea of the Appellants is that even if the provisions of Rule 6(3)(c) are attracted, the limit of ‘20% of the service tax payable’ on utilization of tax credit for payment of service tax on telephone service is not applicable in respect of capital goods Cenvat credit and service tax credit in respect of 17 input services specified in Rule 6(5). We agree with this plea of the appellant as –
(a) In terms of the provisions of sub-rule (4) of Rule 6 of the Cenvat Credit Rules, 2004, capital goods Cenvat credit is not permissible only when the capital goods are exclusively used for manufacture of ‘exempted goods’ or for providing ‘exempted service’, implying that in a situation where the capital goods are used for providing non exempt taxable service as well as “exempted service” or for manufacture of non exempt dutiable goods as well as ‘exempted goods’, the capital goods Cenvat credit shall be available ;
(b) In terms of the provisions of sub-rule (5) of Rule 6 of Cenvat Credit Rules 2004, service tax credit in respect of 17 input services specified in this sub-rule shall be available unless such services are used exclusively in or in relation to providing “exempted service” or manufacture of ‘exempted goods’, implying that in a situation when these services are used for providing non exempt taxable services as well as ‘exempted services’, or for manufacture of non-exempt dutiable goods as well as ‘exempted goods’ the credit will be available; and
(c) Tribunal in its judgment in case of CCE, Goa v. V.M. Salgaonkar & Bros. Pvt. Ltd. (supra) with regard to provisions of Rule 6(3)(c) has held that if an assessee being eligible for some Cenvat service credit takes the credit, he should be allowed to utilize the same, as there is no reason for allowing some credit and not permitting its utilization.”
12.2 Further, the Bench has also considered the Board Circular No. 137/203/2007-CX-4 dated 01.10.2007 to hold that “… ceiling of ‘20% of the service tax payable’ on utilization of credit for payment of service tax, as prescribed in Rule 6(3)(c) has to be compared not with total credit utilization, but with the utilization of credit, other than capital goods credit and service tax credit in respect of the 17 input services mentioned in Rule 6(5)…”. That is to say, all the credit pertaining to input services under Rule 6(5) and capital goods credit, should be permitted to be utilized; the restriction is only in respect of the input services credit not falling under Rule 6(5) and inputs.
13.1 In the impugned order, the Learned Commissioner having held as extracted in the above paragraph, however, denies the above benefit to the appellant by holding that the appellant did not provide any evidence or supporting documents to prove their claim.
13.2 We do not agree with the above conclusion for the reason that the same set of documents, apparently, were relied upon and the Learned Commissioner has also nowhere denied the fact that the eligibility to utilize the whole of CENVAT Credit could not be denied in respect of the specified services unless the same were exclusively used for providing exempted output service and nor is it the case of the Department that the restriction under Rule 6(3)(c) would not apply to the services specified in Rule 6(5).
14.1 Insofar as the arguments of the Learned Advocate with regard to invoking of the extended period of limitation, we find that the Learned Commissioner has confirmed the contention in the Show Cause Notice that the Department had no other way of knowing the facts until their records were audited which, according to us, runs contrary to his own observations at paragraph 2.8 of his own order, a part of which is extracted by us hereinabove at paragraph 11.1.4 of this order.
14.2 When he deals with the adjudication of both the Show Cause Notices, he accepts the fact that “the Department was aware” while dealing with one Show Cause Notice, the logic for which is not brought out on record, but while dealing with the other Show Cause Notice, he does not want to admit the awareness of the Department as to the provision of taxable and exempted services by the appellant. This again is not acceptable in the eye of law as the Learned Commissioner has entertained inconsistent stands and has not justified for each of his stands by relying on any documentary evidence.
14.3 Be that as it may, the fact remains that other than alleging wilful suppression of facts, the Revenue has not adduced any documentary evidence in support of its allegation to justify the same. We find that in the very same order in M/s. Idea Cellular Ltd. (supra), the Learned Principal Bench has, following the ratios of the Hon’ble Supreme Court, held that something positive rather than mere inaction or failure on the part of an assessee has to be proved before invoking the extended period of limitation, though the Learned Bench has sustained the demand therein for the normal period. We find that the same ratio applies to this case also.
15. In view of our above discussions, we are of the clear view that the demand as well as the impugned order, to the extent it is appealed before us, cannot sustain, either on merits or on limitation and hence, the same is set aside.
16. In the result, the appeal is allowed.
(Order pronounced in the open court on 26.05.2023)
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