SUBSTANTIVE BENEFIT CANNOT BE DENIED ON A PROCEDURAL OR TECHNICAL GROUND WHERE THE BENEFICIARY HAS SATISFIED THE SUBSTANTIVE CONDITIONS FOR THE BENEFIT

The provisions of service tax make the service providers who are coming under the service tax net work to levy and service tax and remit the same to the credit of the Central Government.   CENVAT Credit Rules, 2004 allows the service providers to avail CENVAT credit for the input services, capital goods against the payment of service tax.   The provisions of CENVAT credit further provide conditions for availing the CENVAT credit.   The provisions further require to  maintain documents as stipulated.  Complying with the conditions availing in the CENVAT Credit Rules, the service provider can avail CENVAT credit.  Many a dispute is arising between the service providers and the department on availing CENVAT credit by means of interpretation of service tax provisions etc.,  The Department as well as the service providers to defend their cases put forth before the Authorities the technical grounds that are not followed.  Even though the service providers complied with conditions the benefits are being denied because on the technical grounds.   One case has come before the CESTAT, Chennai in 'M/s Bharat Sanchar Nigam Limited V. Commissioner of Central Excise, Salem' Final Order No. 1221/08, dated 28.10.2008 in which the tribunal held that a substantive benefit cannot be denied on a procedural or technical ground where the beneficiary has satisfied the substantive conditions for the benefit.

The factual matrix of the said case runs as follows:

The appellants, M/s Bharat Sanchar Nigam Limited (BSNL for short) are rendering taxable services including telephone services to their subscribers all over India.  The company divided the country into what are called 'Secondary Switching Area' (SSA for short) for rendering the services effectively.  Tamil Nadu is also having some SSAs under this concept.   The company has a Central Stores Depot (CDS for short) at Madurai.   The CSD is catering to the needs of the SSAs in Tamil Nadu Circle by way of purchase and supply of capital goods required for the rendering of the services.  Salem SSA is also availing the services of CSD.  Salem SSA is taking the credit on capital goods supplied by CSD, Madurai on the copies of manufacturer's invoices.  The CSD, Madurai got separate registration as 'first stage dealer' only from September 2005 and there was no separate registration prior to September 2005.   The lower authorities denied the credit on the said capital goods to the appellants on the ground that the credit had been taken by SSA, Salem without there being invoice issued by registered first stage dealer.  The denial of CENVAT Credit on capital goods amount to over Rs.32 lakhs for the period 2004-05 and 2005 -06. 

The present appeal is against the above said order.   The appellants put for the following submission:

·        A dealer should be a person who purchases and sells goods and that CSD, Madurai is not a dealer in this sense;

·        The capital goods purchased by CSD, Madurai are transferred to SSAs maintained by the appellants for being used in rendering the taxable service;

·        It was open to M/s BSNL at Salem to take the CENVAT credit in question on the strength of the copies of the manufacturer's invoices wherein CSD, Madurai had purchased the goods for BSNL;

·        The transfer of capital goods from CSD, Madurai to Salem SSA was also covered under 'Stores Issue Note' wherein the quantity of goods so transferred was specified;

·        The benefit of CENVAT credit on capital goods ought not to have been denied to Salem SSA on the technical ground that the goods were not supplied to the Salem SSA by CSD, Madurai under registered first stage dealer's invoice;

·        A substantive benefit like CENVAT credit should not be denied on procedural grounds as pointed in TISCO Ltd., V. Commissioner - 2001 (133) ELT 761 (Tri. Ker)

The Department put forth the following submission:

·        The department refers to the definition of 'first stage dealer' given under Rule 2 of the CENVAT Credit Rules, 2004 as also to the various CENVATable documents specified under Rule 9 of the said rules;

·        During the period of dispute, the transfer of capital goods from CSD, Madurai to Salem SSA had not been taken place under any of the CENVATable documents specified under Rule 9;

·        When the relevant statutory rule prescribes a document for availment of CENVAT credit on capital goods, the benefit can be availed only on the strength of such document and not otherwise

The tribunal considered the submissions.  They noted that from the date on which CSD, Madurai was registered as a first stage dealer, CENVAT credit is being availed by Salem SSA in respect of capital goods received from CSD, Madurai.   The dispute is for the period prior to this.  The CENVAT credit is denied on a technical ground that the capital goods were not received by the Salem SSA under cover of 'first stage dealer' given under Rule 2.   There is no dispute that the capital goods were duly paid and that the credit of duty was taken by Salem SSA by complying with the further conditions that the capital goods was to be used in the rendering of output service.

The perusal of Rules the tribunal found that the benefit of CENVAT credit of the duty paid on capital goods is admissible to a provider of output service in respect of capital goods received from a first stage dealer under cover of an invoice issued by the latter.   Strictly speaking, a 'first stage dealer' is one who has purchased goods from its manufacturer and sells it for a consideration.   In this present case, undisputedly, CSD, Madurai did not sell capital goods to Salem SSA and hence did not fit in the definition of 'first stage dealer'.  Further the department has not insisted on M/s BSNL having to satisfy the definition of 'first stage dealer' given under Rule 2 of the CENVAT Credit Rules, 2004.   They have been insisting only on registration as 'first stage dealer'.   Registration is a mere procedural requirement.  The substantive benefit of CENVAT credit on capital goods has been denied to the appellants on a procedural ground. 

It is settled law that a substantive benefit cannot be denied on a procedural or technical ground where the beneficiary has satisfied the substantive conditions for the benefit.  The two substantive conditions relevant to the present case are:

·        That the capital goods must be duty paid; and

·        That they should be used in the rendering of output service.

Both these conditions were admittedly satisfied by M/s BSNL  The tribunal held that the appellants are eligible for substantive benefit of CNEVAT credit on capital goods received by Salem SSA from CSD, Madurai during the period of dispute and allowed the appeal.