CENVAT credit on pollution certification upheld where taxability objection was absent and the service had a direct manufacturing nexus.

CENVAT credit on service tax paid for pollution-level certification was held sustainable because the show-cause notices did not allege failure of the input service test under Rule 2(l) and instead proceeded only on the premise that the service was not taxable. Where service tax has been paid by the service provider and accepted by the jurisdictional authorities, the recipient cannot be denied credit by re-opening the taxability of the provider's service. The certification also had a direct nexus with manufacturing, as it was required for environmental compliance in cement production, so it qualified as an input service. The denial of credit was therefore unsustainable and the assessee succeeded.

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Issues: (i) Whether CENVAT credit on service tax paid for certification of pollution level could be denied on the ground that the service was not taxable when that objection was not raised in the show-cause notice. (ii) Whether certification of pollution level had the requisite connection with manufacture so as to qualify as an input service for CENVAT credit.

Issue (i): Whether CENVAT credit on service tax paid for certification of pollution level could be denied on the ground that the service was not taxable when that objection was not raised in the show-cause notice.

Analysis: The notices proceeded only on the footing that the certification service was not taxable and, for that reason, service tax paid by the service provider could not be availed as credit. They did not allege that the service failed the test of input service under Rule 2(l). The settled position applied was that, where service tax has been paid by the service provider and accepted by the jurisdictional service-tax authorities, the recipient cannot be denied credit by questioning the taxability of the service at the recipient's end. The authority dealing with the recipient cannot decide the taxability of the service-provider's activity.

Conclusion: The objection could not be sustained and credit could not be denied on that ground; the finding is in favour of the assessee.

Issue (ii): Whether certification of pollution level had the requisite connection with manufacture so as to qualify as an input service for CENVAT credit.

Analysis: The certification was undertaken because the appellant's cement manufacturing activity was subject to environmental control laws requiring periodic pollution-level certification and related compliance. There was, therefore, a direct nexus between the manufacturing activity and the certification requirement. The contrary contention that there was no connection with manufacture was also held to be unconvincing, apart from being outside the scope of the notices.

Conclusion: The certification service was treated as sufficiently connected with manufacture for credit purposes, and the objection was rejected in favour of the assessee.

Final Conclusion: The denial of CENVAT credit was unsustainable both on the pleaded ground in the notices and on merits, so the impugned orders were set aside and the assessee succeeded.

Ratio Decidendi: Credit cannot be denied on a ground not raised in the show-cause notice, and a service incurred for statutory environmental compliance with a direct nexus to manufacturing activity may support CENVAT credit when service tax has been paid and accepted at the provider's end.

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