2011 (2) TMI 400 - HC - Service Tax

CENVAT credit allowed for cement and TMT bars used in warehouse construction; penalty under Rule 15(2) quashed

COMMR. OF C. EX., VISAKHAPATNAM-II Versus SAI SAHMITA STORAGES (P) LTD.

HC upheld CESTAT's view that CENVAT credit for cement and TMT bars used in constructing warehouses for storage and warehousing services was valid, finding ... Demand of service tax - Claimed CENVAT credit irregularly with reference to cement and TMT bars used in the construction of warehouses through which the storage and warehousing services - imposition of penalty under Rule 15 - HELD THAT:- Section 65(102) of the Finance Act defines “storage and warehousing” as to include storage and warehousing services for goods including liquids and gases but does not include any service provided for storage of agricultural produce or in service provided by cold storage. As per Section 65(105)(zza), read with Section 66 of the Finance Act, there shall be levied tax on storage and warehousing services at 12% of the value of taxable service. The service tax payable is determined in accordance with Section 67(4) read with the Service Tax Rules, 1994 made in exercise of the powers under Section 94 of the Finance Act. There is no dispute that every provider of taxable service is entitled to claim CENVAT credit in relation to input service. There is no dispute, that the assessee used cement and TMT bar for providing storage facility without which storage and warehousing services could not have been provided. Therefore the finding of the original authority as well as the appellate authority are clearly erroneous, which was correctly rectified by the CESTAT. In so far as the levy of penalty under Rule 15(2) of the Rules is concerned, unless and until there is a finding that there was suppression of fact, and irregular claim of CENVAT credit, the question of levying penalty under Rule 15(2) of the Rules docs not arise. In that view of the matter, the order levying penalty was rightly set aside by the CESTAT. These two appeals, for the above reasons, are, accordingly, dismissed. Issues:1. Eligibility of claiming credit under CENVAT Credit Rules, 20042. Imposition of penalty under Rule 15(2) of the RulesIssue 1: Eligibility of claiming credit under CENVAT Credit Rules, 2004The judgment involved two appeals filed by the Revenue under Section 35G of the Central Excise Act, 1944. The first appeal was against the respondent being held eligible to claim credit under the CENVAT Credit Rules, 2004, by the Customs, Central Excise and Service Tax Appellate Tribunal (CESTAT). The second appeal was against the penalty imposed by the Commissioner of Central Excise and Customs (Appeals), Visakhapatnam, which was vacated by the CESTAT. The respondent, a service provider registered under the Finance Act, was accused of irregularly claiming CENVAT credit on items like cement and TMT bars used in construction. The assessing authority issued a show cause notice proposing to determine short paid service tax and penalty. The Order-in-Original confirmed the demand for service tax, interest, and imposed a penalty. The appellate authority dismissed the appeals, leading to the appeals before the CESTAT.Issue 2: Imposition of penalty under Rule 15(2) of the RulesThe Junior Standing Counsel argued that the items claimed as credit, like cement and TMT bars, did not qualify as 'capital goods' or 'input' under the CENVAT Credit Rules, 2004. It was contended that the assessee wrongly claimed credit and suppressed facts while filing returns. However, upon review, the Court found that the appeals were misconceived. The definitions of 'input' and 'input service' under the Rules were examined, emphasizing that goods used in relation to the manufacture of final products or for providing output services are eligible for CENVAT credit. The Court referred to a Supreme Court decision which highlighted the importance of the functional utility of inputs in the manufacturing process to qualify for credit. In this case, the assessee used cement and TMT bars for providing storage facilities essential for their services, making them eligible for credit. The CESTAT's decision to set aside the penalty under Rule 15(2) of the Rules was upheld, as there was no finding of suppression or irregular claim of credit.In conclusion, the Court dismissed both appeals, affirming the eligibility of the respondent to claim credit under the CENVAT Credit Rules, 2004, and rejecting the imposition of penalty under Rule 15(2) of the Rules. The judgment emphasized the importance of the functional utility of goods in the manufacturing process for determining eligibility for CENVAT credit and highlighted the necessity of finding suppression of facts for levying penalties under the Rules.