CENVAT credit reversal on bad debts not warranted where input services were duly used for taxable output services.

Proportionate reversal of CENVAT credit was not required merely because certain service charges were written off as bad debts. The input service credit had been validly taken for taxable output services, and non-realisation of receipts did not by itself show wrongful availment or utilisation of credit. Rule 14 of the CENVAT Credit Rules, 2004 applies only where credit is taken or utilised wrongly, or is erroneously refunded, and it does not create a separate obligation to reverse credit on failure to recover consideration. The absence of any one-to-one correlation between input services and individual receipts was accepted, so the demand, interest and penalties were not sustainable.

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Issues: Whether proportionate CENVAT credit attributable to amounts written off as bad debts was liable to be reversed under the service tax law.

Analysis: The credit on input services was admitted, and the services were used for providing taxable output services. The mere fact that some service charges remained unrealized and were written off as bad debts did not establish that the credit was wrongly taken or wrongly utilized. Rule 14 of the CENVAT Credit Rules, 2004 applies only where credit has been taken or utilized wrongly, or has been erroneously refunded, and it does not create a separate liability to reverse credit merely because recovery of sale proceeds is pending or ultimately fails. The reasoning rejecting a one-to-one correlation between input services and individual output receipts was accepted, and no provision was found in the CENVAT framework to deny proportionate credit on that basis.

Conclusion: Proportionate reversal of CENVAT credit on the amount written off as bad debts was not warranted, and the demand, interest, and penalties were not sustainable.

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