Input service tax credit can be used later if utilisation stays within the 35% ceiling; penalty and interest fail.

Accumulated input service tax credit could be carried forward and utilised later, provided the total utilisation did not exceed 35% of the service tax payable on output services where separate accounts were not maintained. The restriction under Rule 3(5) operated only on the extent of utilisation, not on the timing of use, and the rule did not require earlier credit to lapse or be exhausted within the same month or quarter. On the stated facts, the credit utilisation remained within the permissible ceiling, so the basis for penalty and interest on alleged excess utilisation did not survive.

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Issues: Whether accumulated input service tax credit could be utilised at a later point of time so long as the total utilisation did not exceed 35% of the service tax payable on output services, and whether penalty and interest were leviable on the alleged excess utilisation.

Analysis: Rule 3(5) of the Service Tax Credit Rules, 2002 permits utilisation of credit only up to 35% of the service tax payable on the output service where separate accounts are not maintained. The restriction operates on the extent of utilisation, not on the timing of utilisation, and the rule does not provide that credit accumulated in earlier periods lapses or must be exhausted in the same month or quarter. On the facts, the total credit utilised remained within the permissible ceiling for the relevant period. Since the tax liability was correctly discharged through a permissible mix of cash payment and credit utilisation, the foundation for penalty and interest did not survive.

Conclusion: The utilisation of accumulated input service tax credit was held to be valid, and the demand of penalty and interest was set aside in favour of the assessee.

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