2014 (7) TMI 76 - AT - Service Tax

Tribunal decision on CENVAT credit & penalties for trading activities upheld, interest recalculated

M/s HCL Infosystem Limited Versus CC&CE, Noida

The Tribunal upheld the disallowance of CENVAT credit and penalties imposed on the assessee for wrongly availing credit on trading activities. The ... Disallowance of CENVAT Credit - Trading activity - Credit reversed before issuance of SCN - Thereafter assessee did not respond to SCN and not attended hearing - Ex parte order passed - Imposition of penalty and interest - Held that:- From the judgment in Bill Forge Pvt. Limited [2011 (4) TMI 969 - KARNATAKA HIGH COURT], it is clear that liability to interest under Rule 14 of the Cenvat Credit Rules, 2004 read with Section 75 of the Finance Act, 1994 would arise only on that amount of cenvat credit, both debited in assessee’s books of accounts and utilised (taken) for remittance of the assessee s tax liability. There is no discussion in the adjudication order on this aspect of the matter. We, therefore, remit the matter to the respondent -Adjudication Authority for computation of the amount of interest liability, on the basis of the actual amount of cenvat credit utilised for discharging its service tax liability on the taxable services provided, by the assessee. Adjudication orders are sustained to the extent of the asssessed demand of cenvat credit and appropriation of the irregularly availed credit reversed by the assessee. The amount of penalty is also confirmed subject to an option that shall be provided to the appellant, to remit 25% of the penalty together with the specified interest, within thirty days from the date an order is passed by the Respondent determining the interest liability afresh, under Rule 14 of the Cenvat credit Rules read with Section 75 of the Finance Act, 1994, and the order is communicated to the appellant. This option shall be provided by the adjudication Authority in the order to be passed, pursuant to this remand - Decided partly in favour of assessee. Issues Involved:1. Disallowance of CENVAT credit availed by the assessee.2. Recovery of interest on the disallowed CENVAT credit.3. Imposition of penalty for availing CENVAT credit on trading activities.4. Invocation of the extended period of limitation.5. Clarification on the treatment of trading as an exempted service.6. Option to remit a reduced penalty.7. Calculation of interest on the actual amount of CENVAT credit utilized.Detailed Analysis:1. Disallowance of CENVAT Credit:The adjudication orders dated 21.11.2007 and 15.11.2007 disallowed the CENVAT credit availed by the assessee amounting to Rs. 1,20,40,920/- and Rs. 86,17,994/- respectively. The orders were based on the premise that the assessee, engaged in trading and providing taxable services, wrongly availed CENVAT credit on input services used for trading activities. Trading was not considered a service or an exempted service under the Service Tax Credit Rules, 2002, and the Cenvat Credit Rules, 2004, until an explanation was added in 2011 clarifying that trading is an exempted service. Therefore, the credit availed on input services used for trading was not permissible.2. Recovery of Interest:The orders mandated the recovery of interest on the disallowed CENVAT credit. The assessee contended that interest should only be calculated on the amount of credit actually utilized, not on the gross credit availed. The Tribunal remanded the case to the adjudicating authority to compute interest based on the actual amount of CENVAT credit utilized for discharging service tax liability, in line with the Karnataka High Court's judgment in CCE & ST, LTU, Bangalore vs. Bill Forge Pvt. Ltd.3. Imposition of Penalty:Penalties of Rs. 1,25,00,000/- and Rs. 90,00,000/- were imposed under Rule 15 of the Cenvat Credit Rules, 2004 read with Section 78 of the Finance Act, 1994. The assessee argued that the penalty should not be imposed as the availment of credit was based on a mistaken but plausible interpretation of the relevant provisions. The Tribunal upheld the penalties but provided the assessee an option to remit 25% of the penalty within thirty days from the date of the adjudication order, following the precedents set by the Delhi and Gujarat High Courts.4. Invocation of Extended Period of Limitation:The show cause notices invoked the extended period of limitation, alleging that the assessee deliberately failed to disclose the availment of CENVAT credit on trading activities. The Tribunal found that there was no scope for interpretational misconception and upheld the invocation of the extended period, citing the Tribunal's decision in Orion Appliances Ltd. Vs. CST, Ahmedabad.5. Clarification on Trading as an Exempted Service:The 2011 amendment to the Cenvat Credit Rules, 2004, clarified that trading is an exempted service. However, this clarification was deemed to have prospective effect only from 01.04.2011. Prior to this amendment, trading could not be considered an exempted service, and thus, no credit of service tax paid on input services used for trading could be taken.6. Option to Remit Reduced Penalty:The Tribunal provided the assessee with the option to remit 25% of the penalties imposed, along with interest and the amount of disallowed CENVAT credit, within thirty days from the date of the adjudication order. This option was in line with the decisions of the Delhi and Gujarat High Courts, which mandated that such an option should be explicitly specified in the adjudication order.7. Calculation of Interest:The Tribunal remanded the matter to the adjudicating authority to compute the interest liability based on the actual amount of CENVAT credit utilized for discharging the service tax liability on taxable services provided by the assessee. This decision was influenced by the Karnataka High Court's judgment in Bill Forge Pvt. Ltd., which clarified that interest is payable only on the amount of credit utilized, not merely availed.Conclusion:The Tribunal upheld the disallowance of CENVAT credit and the imposition of penalties but provided the assessee an option to remit a reduced penalty. The case was remanded to the adjudicating authority for recalculating the interest liability based on the actual utilization of CENVAT credit. The appeals were partly allowed, with no costs awarded.