2007 (6) TMI 515 - AT - Service Tax

Tribunal permits input tax credits for paying service tax on Goods Transport Agency's Service

Pandian Textiles Mills (P) Ltd., Cheran Spinners Ltd. (P) Ltd. & Others Versus Commissioner of Central Excise, Salem

The Tribunal allowed the appeals, permitting the appellants to use input-duty credit, capital goods credit, and input service tax credit for paying ... - ISSUES PRESENTED AND CONSIDERED 1. Whether assessees who are recipients of Goods Transport Agency's Service (GTA service) could validly utilize CENVAT credit - including input-duty credit, credit on capital goods and input service tax credit - for payment of service tax on GTA service for periods prior to 19.4.2006. 2. Whether the Explanation to the definition of 'output service' under Rule 2(p) of the CENVAT Credit Rules, 2004 (in force before 19.4.2006) treats a service for which a person liable to pay service tax does not provide any taxable service as a deemed 'output service', and the legal consequences of that deeming for credit utilization. 3. Whether a Board Circular (dated 3.10.2005) or arguments based on Section 68(2) of the Finance Act, 1994 could override or negate the operation of the Explanation in Rule 2(p) for the relevant period. 4. Ancillary: Whether the impugned demands and penalties premised on disallowance of such credit were sustainable once the Explanation is applied. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Availability of CENVAT credit for payment of service tax on GTA service (periods prior to 19.4.2006) Legal framework: CENVAT Credit Rules, 2004 permit utilization of accumulated credit (input duty, capital goods credit and input service tax credit) for payment of duty/ tax on output. Rule 2(p) defines 'output service'; the Explanation to that definition (operative before its omission on 19.4.2006) deems, 'if a person liable for paying service tax does not provide any taxable service or does not manufacture final products, the service for which he is liable to pay service tax shall be deemed to be the 'output service'.' Section 68(2) of the Finance Act, 1994 is referenced in the impugned reasoning (and the Board Circular) about who is the taxable person. Precedent treatment: Tribunal decisions considered and followed include prior final orders holding that where the Explanation applied the service on which the recipient paid service tax (GTA service) constituted an 'output service' and therefore credit could be utilized for payment of service tax (cited final orders: R.R.D. Tex (P) Ltd.; The India Cement Ltd.; and a Single Member decision in Nahar Industrial Enterprises Ltd.). The impugned lower authorities' decision denying credit was contrary to these decisions and to the Explanation. Interpretation and reasoning: The Court examined the Explanation to Rule 2(p) and held that, for the period when the Explanation was in force (i.e., prior to 19.4.2006), an assessee who was only receiving taxable services and not providing any taxable service would nonetheless have the service for which he discharged service tax deemed to be his 'output service'. Where the GTA service was thus a deemed output service, the CENVAT Credit Rules permitted utilization of input duty, capital goods credit and input service tax credit towards payment of service tax on that service. The Board Circular relied upon by the Revenue (which interprets Section 68(2)) did not take the Explanation into account and therefore could not prevail during the Explanation's currency. The Court treated the Explanation as determinative for the relevant period. Ratio vs. Obiter: Ratio - Where the Explanation to Rule 2(p) is operative, a service for which a person liable to pay service tax does not provide any taxable service is deemed an 'output service', thereby permitting utilization of CENVAT credits for payment of service tax on such service. Obiter - Observations distinguishing Section 68(2) or the scope of the Board Circular beyond the Explanation's operative period are incidental and contextual. Conclusions: The assessees were entitled to utilize input-duty credit, capital goods credit and input service tax credit for payment of service tax on GTA service for the periods when the Explanation to Rule 2(p) was in force. The impugned orders disallowing such credit were unsustainable and were set aside. Issue 2 - Effect of the Explanation to 'output service' under Rule 2(p) and its temporal operation Legal framework: Rule 2(p), CENVAT Credit Rules, 2004, together with the Explanation as originally included, governs the characterization of services as 'output service' for credit utilization. The Explanation was omitted with effect from 19.4.2006; hence its operation is temporal and must be applied only to periods prior to omission. Precedent treatment: The Tribunal's earlier decisions applied the Explanation to treat GTA service (paid by a recipient) as output service for periods before omission and allowed corresponding credit utilization. Those decisions were followed here. Interpretation and reasoning: The Court emphasized that the Explanation must be read as a proviso that deems certain service liabilities to be 'output service' for the purpose of CENVAT credit usage. For liabilities discharged in the period when the Explanation existed, the characterization is conclusive and enables the use of accumulated credits for payment of tax on such deemed 'output service'. The temporal element is critical - the Explanation governs only liabilities incurred while it was in effect. Ratio vs. Obiter: Ratio - The Explanation's deeming effect makes the service liable for tax, when the assessee does not provide taxable services, an 'output service' for the purpose of credit utilization during its operative period. Obiter - Any inference about post-19.4.2006 consequences is not decided and remains outside the ratio. Conclusions: The Explanation applied to the disputed periods; accordingly, GTA service was deemed an 'output service' and credit utilization was lawful for those periods. The Court limited its holding to the Explanation's operative span. Issue 3 - Relevance of Board Circular dated 3.10.2005 and Section 68(2) of the Finance Act, 1994 Legal framework: Board Circulars are administrative clarifications but cannot supersede a statutory or rule-based deeming provision; Section 68(2) addresses liability concepts under the Finance Act but must be read with the CENVAT Credit Rules and their Explanation where operative. Precedent treatment: The impugned orders relied on the Board Circular and an interpretation of Section 68(2) to deny credit; however, Tribunal precedents and the Court's analysis treated the Explanation as prevailing for the covered period. Interpretation and reasoning: The Court held that the Board Circular's clarification - that a person discharging service tax liability is neither the provider of output service nor the manufacturer of final products as required under the CENVAT Credit Rules - failed to account for the Explanation to Rule 2(p). Where the Explanation existed, that deeming provision controls; therefore the Circular cannot negate the Explanation's statutory effect for the period in question. Ratio vs. Obiter: Ratio - Administrative circulars cannot be read to override or nullify a statutory/regulatory deeming provision in the period the latter is in force. Obiter - Broader commentary on the interplay between Section 68(2) and the CENVAT Rules beyond the covered period is not decided. Conclusions: The Board Circular and the contention based on Section 68(2) were not applicable to negate the Explanation's effect during its operative period; they could not justify denial of credit for the periods under consideration. Ancillary issue - Sustainability of demands and penalties premised on denial of credit Legal framework: Demands for duty equivalent to wrongly utilized credit and penalties flow from a sustained finding that credit utilization was impermissible. Precedent treatment: First appellate authorities had vacated penalties though upheld denial of credit; the Court addressed only the correctness of the denial of credit (and thereby the consequential correctness of demands). Interpretation and reasoning: Because the Court held that credit utilization was permissible under the Explanation, the underpinning for demands (and any penalty premised solely on improper utilization) was removed. The Court expressly set aside impugned orders disallowing credit; earlier vacation of penalties by the appellate authority was noted. Ratio vs. Obiter: Ratio - If credit utilization is held lawful under the controlling rule/Explanation, consequent demands based on disallowance cannot stand. Obiter - The Court did not re-adjudicate nuanced penalty grounds beyond what earlier appellate authorities had done. Conclusions: The impugned orders disallowing credit were set aside; consequential demands based on such disallowance could not be sustained for the periods covered by the Explanation. (Penalties, already vacated by the first appellate authority, were not reinstated.)