Pre-deposit relief in service tax dispute: reimbursement valuation demand waived, while head office CENVAT credit required partial deposit.

A partial pre-deposit dispute arose over service tax demands relating to CENVAT credit taken on invoices issued in the name of the head office and valuation of reimbursement expenditure. The head office invoices did not support a strong prima facie case because the head office was not registered as an Input Service Distributor under the CENVAT Credit Rules, 2004, so deposit was required on that component. By contrast, the reimbursement-expenditure demand was based on Rule 5(1) of the Service Tax Valuation Rules, 2006, which had been struck down as ultra vires Sections 66 and 67 of the Finance Act, 1994; that component justified full waiver of pre-deposit.

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Issues: Whether waiver of pre-deposit should be granted in respect of the service tax demand arising from CENVAT credit availed on invoices in the name of the head office and the demand based on inclusion of reimbursement expenditure in the taxable value.

Analysis: The Applicant had availed CENVAT credit on invoices issued in the name of its head office even though the head office was not registered as an Input Service Distributor under the CENVAT Credit Rules, 2004, and no strong prima facie case was made out on that component. In respect of the demand relating to reimbursement expenditure, the demand was raised by applying Rule 5(1) of the Service Tax Valuation Rules, 2006, but that rule had been struck down by the Delhi High Court as ultra vires Sections 66 and 67 of the Finance Act, 1994. On that basis, the demand on reimbursement expenditure warranted full waiver of pre-deposit.

Conclusion: Full waiver of pre-deposit was granted for the reimbursement-expenditure demand, while the Applicant was directed to deposit 10% of the disputed CENVAT credit amount, with the balance stayed during pendency of the appeal.

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