Cenvat available on service tax paid under reverse charge on service received from foreign service provider

Ericsson India Pvt. Ltd. Vs Commissioner of Service Tax (CESTAT Chandigarh)

CESTAT Chandigarh held that the assessee is entitled to cenvat credit of service tax paid under reverse charge mechanism on the services received from Foreign Service provider prior to 18.04.2006.

Facts-

The appellant is engaged in providing the taxable services. During the relevant period, the Appellant being the service recipient paid Service tax as per Rule 2(1)(d)(iv) of Service Tax Rules, 1994. The Service tax so paid by the Appellant was availed as Cenvat credit and was utilised for discharging its output Service tax liability.

During the audit proceedings, it was observed that the noticee had paid service tax on import of services during the relevant period and had availed and utilized the cenvat credit of the same. Thereafter, the Show Cause Notice was issued to the Appellant proposing to recover CENVAT credit along with applicable interest and penalty on the ground that the Appellant paid service tax u/s. 66A of the Act on behalf of the foreign service provider as recipient of service and therefore, the Appellant cannot be considered as an output service provider and accordingly, not eligible to avail credit under Rule 3(1) and Rule 3(4) of the Cenvat Credit Rules.

Adjudicating Authority vide the impugned order, granted partial relief to the appellant. Being aggrieved, the present appeal is filed.

Conclusion-

Held that in the present case, the only issue to be decided by this Tribunal is whether the appellant is eligible for cenvat credit on service tax paid on import of services under reverse charge mechanism for the period prior to 18.04.2006. This issue is no more res-integra and has been considered by various benches of the Tribunal and it has been consistently held by the Tribunal that the assessee is entitled to cenvat credit of service tax paid under reverse charge mechanism on the services received from Foreign Service provider prior to 18.04.2006.

Invocation of extended period of limitation is not justified because the appellant has not suppressed any material fact from the department and was subject to regular audit and has been regularly filing monthly service tax returns with the department. Therefore, the invocation of extended period is not justified in the facts and circumstances of this case.

FULL TEXT OF THE CESTAT CHANDIGARH ORDER

The present appeal is directed against the impugned order dated 15.10.2012 passed by the Commissioner (Adjudication) Service Tax, New Delhi whereby the Ld. Commissioner has confirmed the demand of Rs. 6,73,96,506/- under proviso to Section 73(1) of the Finance Act, 1994 read with Rule 14 of the Cenvat Credit Rules, 2004 along with interest and also imposed penalty under Section 76, 77 and 78 of the Finance Act, 1994.

2. The brief facts of the case are that the appellant is engaged in providing the taxable services under the category of Consulting Engineers Service, Maintenance and Repair Services, Erection, Commissioning and Installation and Information Technology Services to its customers, they are availing cenvat credit of service tax paid on input services used for providing output services as per Cenvat Credit rules, 2004 and is registered with the department for the said services.

• During the relevant period, the Appellant being the service recipient paid Service tax as per Rule 2(1)(d)(iv) of Service Tax Rules, 1994. The Service tax so paid by the Appellant was availed as Cenvat credit and was utilised for discharging its output Service tax liability.
• During the audit proceedings, it was observed that the noticee had paid service tax on import of services during the relevant period and had availed and utilized the cenvat credit of the same. It was further observed that the Appellant had availed the CENVAT credit of the Service tax paid on import of services amounting to Rs.24,10,06,569/- during period 2005-2006 to 2007-2008 and availed and utilised the credit so availed. The Appellant was asked to furnish the details of the credit availed and utilised during 2004-2005 to 2008-2009 under Credit Rules.
• Thereafter, the Show Cause Notice dated 30.09.2009 was issued to the Appellant proposing to recover CENVAT credit amounting Rs. 173,78,43,643 for the period 2004-2005 to 2008-2009 along with applicable interest and penalty on the ground that the Appellant paid service tax under Section 66A of the Act on behalf of the foreign service provider as recipient of service and therefore, the Appellant cannot be considered as an output service provider and accordingly, not eligible to avail credit under Rule 3(1) and Rule 3(4) of the Cenvat Credit Rules.

• After following due process, the Ld. Adjudicating Authority vide the impugned order, granted partial relief to the appellant by allowing the CENVAT credit availed and utilized after 18.04.2006 amounting to Rs. 167,04,47,137/-. However, CENVAT credit availed and utilized prior to 18.04.2006 amounting to Rs. 6,73,96,506/- was disallowed and the demand was confirmed under Section 73(1) of the Act along with interest and penalty after invoking extended period of limitation.
• Aggrieved by the said order, the appellant filed the present appeal.

3. Heard both the parties and perused the material on record.

4. Counsel for the appellant submits that the impugned order is not sustainable in law as the same has been passed without appreciating the facts and the law and the binding judicial precedents. She further submitted that in the impugned order, the Adjudicating Authority has denied the CENVAT credit of Service tax paid under reverse charge mechanism under Rule 2(1)(d) on the ground that the Appellant was not liable to pay service tax on import of services prior to 18.04.2006 and thus not eligible to avail CENVAT credit of the tax paid voluntarily.

4.1 She further submitted that during the relevant time, there was lack of clarity on the issue of law related to the liability of the service recipient to pay Service tax under reverse charge mechanism from August 2002 to 17.04.2006 in case services are provided by non­resident service provider. Ld. Counsel thereafter referred to the series of developments which took place to clear the position of law.

4.2 She referred to Notification No. 12/2002-S.T. dated 01.08.2002 inserted Rule 2(1)(d)(iv) of the Rules which provided that in case services are provided by non-resident service provider, the service recipient will be the “person liable to pay Service tax”. However, the Act was silent in this respect until the incorporation of Section 66A with effect from 18.04.2006.

4.3 She also referred to Notification No. 36/2004-S.T. dated 31.12.2004 which was issued under Section 68(2) of the Act notifying that in case services are provided by non-resident service provider, the service recipient will be liable to pay Service tax with effect from 01.01.2005.

4.4 She further submitted that vide Finance Act, 2005 Explanation in Section 65(105) was inserted with effect from 16.06.2005 to provide that service provided by person from its office or place of business located outside India and is received by a person having its office or place of business in India shall be deemed to be the taxable service. 4.5 She made mention of Notification No. 24/2005-S.T. dated 07.06.2005 vide which Notification No. 36/2004- S.T. was amended to bring it in line with the Explanation in Section 65(105).

4.6 She further submits that Finance Act, 2006 inserted Section 66A of the Act with effect from 18.04.2006, to settle the law that the service recipient will be liable to pay Service tax under reverse charge if the service provider is a non-resident. She further submits that Section 66A of the Act is not the charging service and it only creates a legal fiction to deem import of service as provision of service within India so that the provisions of the Act can be applied and the charging section remains Section 66 since the introduction of the Act. She also submits that the confusion regarding the date of applicability of Service Tax under reverse charge on service received from Foreign Service provider persisted due to the contradicting decisions by benches of Tribunal and Hon’ble High Courts.

4.7 She further submits that finally the service tax department issued Instruction F. No. 275/7/2010-CX.8A dated 30.06.2010 to clarify the applicability of Service tax based on the place of receipt of services by relying upon the judgement in the case of Indian National Ship Owners Association vs. UOI [2009 (013) STR 0235 (Bom.)] which was subsequently affirmed by the Hon’ble Supreme Court reported in 2010 (17) S.T.R. J57 (S.C.)] wherein it was clarified that if services which have been provided by a non-resident are received outside India, the services would be taxable from 18.04.2006 which was finally declared by the Board Circular F. No. 276/8/2009-CX8A dated 26.09.2011 declaring that the liability of Service tax under reverse charge mechanism will arise only with effect from 18.04.2006 in case the services are provided by a person located outside India to a person in India, irrespective of whether the services received in India or outside India.

4.8 Ld. Counsel further submits that the Appellant being a prudent and an honest taxpayer paid the Service tax for the relevant Period under bona-fide belief that the services received are liable to Service tax under Section 66 of the Act read with Rule 2(1)(d)(iv).

4.9 She further submits that this issue is no more res-integra and has been settled by various decisions of the Tribunal consistently holding that the assessee is entitled to avail cenvat credit in respect of service tax paid even when the service tax is paid under the mistake of law. For this submission, she relied upon the following decisions:-

• CCE & ST LTU, Chennai v. Tamil Nadu Petro products Ltd. [2015 (40) S.T.R. 878 (Mad.)]
• Alcatel Lucent India Ltd. Versus Commissioner of Service Tax [ST 55441 of 2014 Final Order No. 51039/2021 dated 21.01.2021]
• Bajaj Allianz General Insurance Co Ltd Versus Commissioner of Central Excise 2015 (37) S.T.R. 316 (Tri. – Mumbai)
• M/s Bharat Aluminium Company Ltd. v. CCE, Bilaspur 2018-TIOL-644-CESTAT- DEL
• M/s South Eastern Coalfields Ltd. v. CCE & ST, Bilaspur [Excise Appeal No. 52535 of 2015 vide order dated 17.10.2017]

4.10 She further submits that in the present case, there is no dispute that the services received by the Appellant from Foreign Service providers qualify as input services under provisions of Cenvat Credit Rules, 2004. Further, Rule 3(1)(ix) of the Credit Rules allows the manufacturer or producer of final products or provider of taxable service to take the credit of the service tax paid under Section 66 of the Ac if the taxable service is used for manufacturing activities or provision of output service.

4.11 She also referred to F.No. 354/148/2009-TRU dated 16.07.2009 wherein clarification was provided with respect to the admissibility of credit of service tax paid as recipient under Section 66A of the Act.

She also relied upon the following decisions:-

• Cargil Global Trading India Pvt. Ltd. v. CST, Delhi [ST/52125/2014 order dated 04.08.2017]
• Commissioner of CGST, Mumbai East v. M/s Gillette India Ltd. [ST/ 88304/2018, Order dated 03.07.2023]

4.12 She further made an alternative argument that if the payment made by the appellant under reverse charge is not considered as payment of tax or duty then the same can be refunded to the appellant without considering the limitation period as held in the following cases:-

• M/s 3E Infotech v. CESTAT, Chennai & CCE (Appeals-I), Madhural [2018 (18) G.S.T.L. 410 (Mad.)]
• Parijat Construction v. Commissioner Excise, Nashik [2018 (359) ELT 113 (Bom.)]

4.13 She further submits that the demand of cenvat credit has been confirmed pertaining to the period 2004-05 to 2005-06. The demand has been raised after invoking the extended period of limitation vide SCN dated 30.09.2009. She further submits that the extended period of limitation cannot be invoked as there was no wilful suppression of any fact relating to the availment of CENVAT credit from the Department. Further, the appellant was made subject to regular audits and the department was very well-aware about the activities of the Appellant. Further, the monthly returns in Form ST-3 were regularly filed with the department by the Appellant. Further, the appellant was under bona fide belief that service tax is to be discharged under reverse charge mechanism as there was no clarity in this respect which is evident from various circulars and notifications issued by department from time to time. Further, the issue involves interpretation of the complex provisions and the entire exercise of availing Cenvat credit is revenue neutral. For this submission, she relied upon the following decisions:-

• The Commissioner, Central Excise and Customs and Another Versus M/S Reliance Industries Ltd. And Commissioner of Central Excise and Service Tax Versus M/S Reliance Industries Ltd. [2023-TIOL-94-SC-CX]

5. On the other hand, the Ld. Authorized Representative reiterated the findings in the impugned order and in support of his submission, he relied upon the decision of the Tribunal in the case of Swarnandhra IJMII Integrated Township Development Co. Pvt. Ltd. vs. Commissioner of Customs, Central Excise & Service Tax, Hyderabad-IV-2022 (64) GSTL 556 (Tri.-Hyd.).

6. After considering the submissions of both the parties and perusal of the material on record, we find that in the present case, the only issue to be decided by this Tribunal is whether the appellant is eligible for cenvat credit on service tax paid on import of services under reverse charge mechanism for the period prior to 18.04.2006. 6.2 This issue is no more res-integra and has been considered by various benches of the Tribunal and it has been consistently held by the Tribunal that the assessee is entitled to cenvat credit of service tax paid under reverse charge mechanism on the services received from Foreign Service provider prior to 18.04.2006.

6.3 In this regard, we may refer to the decision in the case of Alcatel Lucent India Ltd. cited (supra) decided by Principal bench of the Tribunal. It is pertinent to reproduce the findings of the Tribunal which are contained in Para 12 to Para 16 and are as follows:-

12. The second issue that arises for consideration is regarding denial of CENVAT credit on service tax paid by the appellant on import of service under a reverse charge mechanism for the period prior to April 18, 2006. The relevant part of the order passed by the Commissioner is reproduced below:

“The assessees in their defence reply dated 26.4.2011 submitted that CENVAT credit is available in respect of service tax paid as a recipient of service under section 66A of the Act.

Whereas as per Rule 3(1)(ixa) of Cenvat Credit Rules, 2004:

3.(1) A manufacturer or producer of final products or a provider of output service shall be allowed to take credit of –

(ixa) the service tax leviable under section 66A of the Finance Act.

The above said clause has been inserted in Cenvat Credit Rules, 2004 by Finance Act, 2011 w.e.f. 18.4.2006 vide Notfn No. 23/2004-CE (NT) dated 10.9.2004. Therefore the cenvat credit of service tax paid under section 66A taken w.e.f. 18.4.2006 by the assessee. However, I disallow the cenvat credit of service tax paid under section 66A prior to 18.4.2006 by the assessee amounting to Rs.8,34,170/- however the Service Tax paid under reverse charge after 18.4.2006 is eligible to be taken as CENVAT Credit thus I allow Cenvat Credit of Service Tax of Rs.4,73,12,612/- and Rs. 3,58,07,426/- in respect of Show Cause Notice dated 23.10.2009 and 21.10.2010. ”

13. Learned Counsel for the appellant has relied upon decisions of the Tribunal in Commissioner of Central Excise and Service Tax 3M India Ltd.³ as also Aditya Birla NOVO Ltd. Vs. Commissioner of Central Excise, LTU, Mumbai⁴ to contend that the observations made by the Commissioner are not correct and that the appellant is entitled to avail CENVAT credit.

14. In 3M India Ltd., it was observed by the Tribunal as under:

2. “…… The only question to be decided by me in this appeal is whether the assessee has availed CENVAT credit wrongly as alleged in the show cause notice and whether the impugned order passed by the Commissioner (Appeals) allowing appeal of the assessee on the ground that assessee was not liable to pay service tax under the reverse charge mechanism until the introduction of Section 66A of the Finance Act, 1994. It is undisputed that service tax was paid for input services on reverse charge method (import of service in March, April, November, 2005. It is also undisputed that service tax liability on this type of service came into effect only from 18.04.2006 with the introduction of Section 66A of the Finance Act, 1994

3. Therefore, keeping in view the above facts, I am of the considered opinion that in the first instance, respondent was not liable to pay service tax and secondly having paid it, the assessee is entitled to get CENVAT credit and the assessee has rightly availed the CENVAT credit. Further, I note that by subsequent order of this Tribunal dated 19.02.2014 in the appellant’s own case, assessee was held to be entitled to take CENVAT credit also. Therefore, I am of the considered opinion that the Commissioner (Appeals) has rightly held that in the facts and circumstances of this case, extended period cannot be invoked as there is no suppression with intent to evade payment of duty on the part of the assessee. Therefore, I do not find any merit in the appeal filed by the Revenue and the same is dismissed and the impugned order is upheld.”

15. In Aditya Birla NUVO Ltd., the Tribunal observed as follows:

7. I have heard the ld Counsel for the parties and carefully perused the material on record including the circulars issued from time to time by the CBEC and also the judgements cited at bar by both sides.

8. After going through the various circulars and the judgements I find that there is only one charging section in the service tax i.e. Section 66, Section 66A is merely a deeming provision which deems that the services provided by various service providers are provided by service recipients in India. Section 66A is not a charging section and the same has also been made clear by Circular 354/148/2009-TRU dated 16.07.2009 and in the said circular CBEC has made it clear that there is no mistake or omission in that relevant provision of CENVAT Credit Rules, 2004 and credit of tax paid on imported services should be allowed if they are in the nature of input services. Further, in this case the tax was paid under section 66 of the Finance Act, and hence the credit is admissible to the appellant. Further, as per the department impugned order though the tax itself was not required to be paid then in that case credit is nothing but a refund of the tax erroneously paid by the appellant in their CENVAT Credit account. Further, in the case of Bajaj Allianz General Insurance (supra) the bench of this Tribunal by relying upon the judgement of the Supreme Court in the case of CIT vs Mahalakshmi Textile Mills Ltd. [1967 (66) ITR 710 (SC) has held that the Cenvat Credit taken by the appellant is nothing but refund of the service tax paid by them on the services which were not required to pay service tax. The above said decision is squarely applicable in the facts and circumstances of the present case. Further, in the case extended period cannot be invoked as the appellant have been disclosing the credits in their ER-1 returns and they were under a bonafide belief that they are liable to pay tax in terms of Rule 2(1)(d)(iv) and also entitled to take credit and the issue involved in the present case was with regard to interpretation of statutory provision and moreover the ld. Commissioner has also not given any finding that the appellant have suppressed anything from the department. Further, I find that the judgement cited by the ld. AR are not applicable in the facts and circumstances of the present case and it is not necessary for me to deal with each and every judgement separately. ”

16. In view of the aforesaid decisions of the Tribunal, it has to be held that the Commissioner was not justified in denying CENVAT credit on the service tax paid by the appellant on import of services for the period prior to April 18, 2006.”

6.4 Further, we find that the appellant under a bona fide belief that he is liable to pay service tax on import of service paid the service tax under Rule 2(1)(d) of the Rules and availed the cenvat credit of the same and thereafter utilized the cenvat credit for payment of outward service tax liability.

6.5 We also find that this issue was finally settled by the Hon’ble Supreme Court wherein it has been held that if the services are provided by a non-resident and are received outside India, the service would be taxable from 18.04.2006.

6.6 We also find that the Board has clarified the issue vide its Circular dated 26.09.2011 declaring that the liability of the service tax under reverse charge mechanism will arise only w.e.f. 18.04.2006 in case the services are provided by a person located outside India to a person located in India.

6.7 Further, we find that the service received by the appellant from the Foreign Service Provider is clearly an Input Service under the provisions of the Service Tax Rules.

6.8 Similarly, in other decisions relied upon by the appellant cited (supra), this issue has been decided in favour of the assessee by holding that the assessee is entitled to avail cenvat credit in respect of service tax paid even when the service tax is paid under a mistake of law. Therefore, by following the ratio of the above said decisions, we hold that the appellant is entitled to cenvat credit.

6.9 As regards, the invocation of extended period, we are of the considered opinion that in this case, keeping in view the fact that the position of law was not clear during the relevant time, invocation of extended period of limitation is not justified because the appellant has not suppressed any material fact from the department and was subject to regular audit and has been regularly filing monthly service tax returns with the department. Therefore, the invocation of extended period is not justified in the facts and circumstances of this case.

6.10. In view of our discussion above, we hold that the impugned order is bad in law on merits as well as on limitation; therefore, we set-aside the same by allowing the appeal of the appellant with consequential relief, if any, as per law.

(Pronounced on 12.01.2024)