2011 (9) TMI 486 - AT - Central Excise

Appellant denied CENVAT credit on inspection charges; penalty reduced under Rule 15.

The appellant's claim for CENVAT credit on inspection charges was denied as the cost of the service was not included in the value of the final product. ... CENVAT credit on third party inspection services as an input service - Inclusion of cost of input/input service in the assessable value of final goods - Value added tax concept in excise valuation - Interest consequential on confirmed demand - Penalty under Rule 15 of the CENVAT Credit Rules, 2004: mandatory vs. discretionary reduction under Rule 15(1)CENVAT credit on third party inspection services as an input service - Inclusion of cost of input/input service in the assessable value of final goods - Value added tax concept in excise valuation - entitlement to CENVAT credit of service tax paid on third party inspection charges - HELD THAT: - The Tribunal found on the record that inspection charges were not included in the assessable value of the goods and excise duty was not discharged on a value inclusive of those charges; the appellant recovered inspection charges separately from buyers. The Court held that for a service to qualify as an input service eligible for CENVAT credit, the cost of that service must form part of the value of the final product so that the duty operates as a value added tax. Where the cost of the service is not included in the assessable value, the tax on that service cannot be treated as a tax on inputs forming part of the value of the final product and, consequently, CENVAT credit of the service tax paid on such inspection cannot be allowed. Applying this principle, the Tribunal upheld the demand for service tax and interest. [Paras 7]Demand for service tax and consequential interest confirmed; CENVAT credit on inspection charges disallowedPenalty under Rule 15 of the CENVAT Credit Rules, 2004: mandatory vs. discretionary reduction under Rule 15(1) - liability to equivalent penalty under Rule 15 of the CENVAT Credit Rules, 2004 for availing CENVAT credit on inspection charges - HELD THAT: - The show cause notice alleged deliberate availment and suppression. The Tribunal examined the records and found that the appellant had maintained accounts showing payment and separate recovery of inspection charges, produced inspection certificates and bills, and that the audit team discovered the transactions from those records. There was no evidence of suppression or deliberate evasion. In these circumstances the Tribunal concluded that imposition of mandatory penalty under Rule 15(2) was not warranted and invoked Rule 15(1) to reduce the penalty to a nominal amount. [Paras 8]Penalty reduced to a nominal amount under Rule 15(1); mandatory penalty under Rule 15(2) not sustainedFinal Conclusion: The demands for service tax (for 2005 06 to 2006 07 and 2007 08) and consequential interest were upheld because inspection charges were not part of assessable value and thus not eligible for CENVAT credit; however, penalties imposed under Rule 15 were not sustained as mandatory penalties, and each penalty was reduced to Rs.10,000 under Rule 15(1). Issues:- Claim of CENVAT credit on service tax paid for inspection charges- Denial of CENVAT credit by lower authorities- Imposition of penalty under Rule 15 of the CENVAT Credit Rules, 2004Analysis:1. Claim of CENVAT credit on service tax paid for inspection charges:The appellant, a manufacturer of cast iron pipes, undertook third-party inspection of goods before clearance, with inspection charges and service tax collected from buyers. The appellant claimed CENVAT credit on the service tax paid. The contention was that since inspection was part of the manufacturing process, it qualified as an input service. However, the Revenue argued that post-manufacturing inspection did not relate directly to production and clearance, thus disqualifying the credit claim.2. Denial of CENVAT credit by lower authorities:The Assistant Commissioner issued show cause notices for irregular service tax credit availed by the appellant. Orders-in-original confirmed demands and penalties under Rule 15 of the CENVAT Credit Rules, 2004. The Commissioner (Appeals) upheld these orders. The appellant appealed against these decisions, emphasizing that inspection charges were not included in the assessable value of goods.3. Imposition of penalty under Rule 15 of the CENVAT Credit Rules, 2004:The issue of penalty under Rule 15 was considered. The appellant argued against deliberate evasion, stating that all transactions were recorded in their accounts. The Tribunal found no suppression of facts by the appellant and reduced the penalty imposed by lower authorities to Rs. 10,000 each, citing proper maintenance of records and absence of tax evasion intent.In the final judgment, it was concluded that the appellant's claim for CENVAT credit on inspection charges was not valid as the cost of the service was not included in the value of the final product. Therefore, the denial of service tax credit by lower authorities was upheld. However, the penalty under Rule 15 was reduced due to the absence of deliberate suppression of facts by the appellant. The appeals were disposed of accordingly.