PG James

Off late many assessees faced the wrath of the Department by way of Show Cause Notices, spot recoveries and personal penalties owing to the alleged failure to take reasonable care while taking Cenvat credit. If the default of duty or tax payment is necessitated either due to genuine reasons or conscious evasion, the assessees at the receiving end are subject to harassment and intimidation by imposing all penal provisions in the Act and Rules. Even now, undue hardship is caused to assessees during Audit and also while processing refund claims, especially of Service Tax, due to the insistence of the officials to produce proof of payment of tax by the manufacturer or service provider for allowing credit or for granting refund.

 The erstwhile provisions contained in Rule 9(3) of Cenvat Credit Rules which imposed stringent obligation on the person availing Cenvat Credit to take all reasonable steps to ensure that the credit taken are goods or services on which duty or tax has been paid. Due to wide spread exploitation and harassment of tax payers based on the strength of the above provisions, the said clause was withdrawn with effect from 1.03.2007.

 The relevant provisions which existed earlier are reproduced below:

Rule 9 (3):  The manufacturer or producer of excisable goods or provider of output service taking CENVAT credit on input or capital goods or input service, or the input service distributor distributing CENVAT credit on input service shall take all reasonable steps to ensure that the input or capital goods or input service in respect of which he has taken the CENVAT credit are goods or services on which the appropriate duty of excise or service tax as indicated in the documents accompanying the goods or relating to input service, has been paid.

Explanation.- The manufacturer or producer of excisable goods or provider of output service taking CENVAT credit on input or capital goods or input service or the input service distributor distributing CENVAT credit on input service on the basis of, invoice, bill or, as the case may be, challan received by him for distribution of input service credit shall be deemed to have taken reasonable steps if he satisfies himself about the identity and address of the manufacturer or supplier or provider of input service, as the case may be, issuing the documents specified in sub-rule (1), evidencing the payment of excise duty or the additional duty of customs or Service Tax, as the case may be, either-

(a) from his personal knowledge; or

(b) on the basis of a certificate given by a person with whose handwriting or signature he is familiar; or

(c) on the basis of a certificate issued to the manufacturer or the supplier or, as the case may be, the provider of input service by the Superintendent of Central Excise within whose jurisdiction such manufacturer has his factory or such supplier or provider of output service has his place of business or where the provider of input service has paid the Service Tax, and where the identity and address of the manufacturer or the supplier or the provider of input service is satisfied on the basis of a certificate, the manufacturer or producer or provider of output service taking the CENVAT credit or input service distributor distributing CENVAT credit shall retain such certificate for production before the Central Excise Officer on demand.

As of now, Rule 4(7) of the Cenvat Credit Rules allows Cenvat credit in respect of input service on or after the day on which the Invoice, bill or challan as the case may be referred to in Rule 9 is received.

 The second proviso the above Rule clarifies that in case the payment of the value of input service and service tax paid or payable as indicated in the Invoice is not made within three months from the date of invoice, the manufacturer or service provider who has taken credit shall pay an amount equal to Cenvat credit on such input service.

 Even though above sub rule to Rule 9 has been deleted from Cenvat Credit Rules, recently Chandigarh Commissionerate has issued Trade Notice No. 10/2012, dated 13-7-2012, which is reproduced below, advising Trade to take reasonable steps to ensure that Service Tax has been paid by the input service provider before final manufacturer/service provider utilizes the Cenvat Credit.

 “It is brought to the notice of all the members of Trade and Industry that large scale evasion of Service Tax by service providers providing Security Agency Service and Manpower Supply Agency Service have come to light in this Commissionerate where the Service Providers have collected Service Tax from the Service Recipients but they have not deposited the service tax into the account of the Central Government as required under sub-section (1) of section 73A of Chapter V of the Finance Act, 1994 read as :

 “73A. Service Tax collected from any person to be deposited with Central Government.—(1) Any person who is liable to pay service tax under the provisions of this Chapter or the rules made there under, and has collected any amount in excess of the Service Tax assessed or determined and paid on any taxable service under the provisions of this Chapter or the rules made there under from the recipient of taxable service in any manner as representing service Tax, shall forthwith pay the amount so collected to the credit of the Central Government.”

 As per proviso sub-rule (6) of Rule 9 of CENVAT Credit Rules, 2004, read as under:

 “(6) The manufacturer of final products or the provider of output service shall maintain proper records for the receipt and consumption of the input services in which the relevant information regarding the value, tax paid, CENVAT credit taken and utilized, the person from whom the input service has been procured is recorded and the burden of proof regarding the admissibility of the CENVAT credit shall lie upon the manufacturer or provider of output service taking such credit.”

 All the trade associations/chambers of commerce and the members of the RAC (Regional Advisory Committee)/PGRC (Public Grievance Redressal Committee) and field formations are advised to take reasonable steps to ensure that Service Tax has been paid by the input service provider before final manufacturer/service provider utilizes the Cenvat Credit.”

The subject Trade Notice is issued in total neglect of the clear cut provisions in Cenvat Credit Rules regarding credit availment. Enforcement of the provisions at the receiving end either by way of reverse charge mechanism, partial & joint liability and the so called “reasonable steps” will only tend to further aggravate the woes and worries of the assessees.

  It has been specifically clarified in CBEC Circular No. 766/82/2003-CX dated 15th December, 2003 that in the case of default of duty payment by the Consignor, no action should be taken against the consignee so long as the transaction is bonafide.

“On the issue of availment of credit by the user-manufacturer, it is clarified that action against the consignee to reverse/ recover the CENVAT Credit availed of in such cases need not be resorted to as long as the bonafide nature of the consignee’s transaction is not in dispute”

Hon High Court of Gujarat in the case of [Vimal Enterprise Vs UOI, (2006 (195) E.L.T. 267 (Guj)] upheld that Cenvat/Modvat credit cannot be denied on faults for which assessee is not responsible

“It would be travesty of justice if the assessee is denied benefit, to which it is otherwise entitled to, for no fault of the assessee.

Once the object for which a provision is enacted is satisfied merely venial or technical breach by itself should not permit the authorities to adopt a stand which frustrates the object for which the entire scheme of Modvat has been framed. The endeavour must be to ensure that the scheme is made effective and not frustrated. In other words, the goods, which have been subjected, to duty when used as inputs for manufacture of final product, should not be made to bear duty once again as that would have a cascading effect not intended by legislature in so far as the ultimate consumer is concerned.”

The above judgement was relied upon by CESTAT, Bangalore in the case of Bhuwalka Steel Industries Vs Commissioner of Central Excise, Bangalore-(2010 (261) ELT 564 (Tri. – Bang.)

 It is high time that Board should initiate steps so as to bring more clarity in Rules and to avoid confusion and chaos in the mind of assessees which would eliminate undue hardships and harassments. It is also imperative to ensure that other Commissionerates also do not follow the suit of Chandigarh by issuing such arbitrary Trade Notices and deprives the assessees of the benefit provided for in the Rules.

At this juncture, it is pertinent to note the recommendation of the Committee headed by Shri Vijay.L.Kelkar in their Report on “Roadmap for Fiscal Consolidation” submitted to Govt on 3rd Sept, 2012.

“CBEC should put in place a robust information system to increase the deterrence level and the cost of evasion. Since both Union Excise Duties and Service Tax are VAT-type, the information system should provide for a mechanism for cross verification of all claims for input-tax credit. At present, such a mechanism does not exist. As a result, the ability of the Excise Department to detect fraudulent claims is severely undermined. Under the Kerala VAT regime the dealer must electronically provide invoice-wise details of all sales to, and purchases from, registered dealers. This enables the Department to cross-verify every claim for input tax credit and identify mismatches for further investigation.

A similar model for verification of TDS already exists in the Income Tax Department

Therefore, CBEC should also develop a similar model for comprehensive cross verification of claims for input tax credit.

This will significantly improve the economics of non-compliance in favour of the tax administration Further, this should be implemented immediately and need to wait till the introduction of the GST”

It is the duty and responsibility of the Dept to ensure that the duties and taxes which are claimed as Cenvat credit are actually remitted to the exchequer by the manufacturer or service provider. It is beyond the scope and purview of the person who avails such credit to cross check this it is only a high handed attempt to delegate this task by way of issuance of Trade Notices and instructions to the field formations

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