Utilizing Cenvat credit for foreign services not allowed under Rule 3(4) - Compliance deadline set

The Tribunal held that utilizing Cenvat credit for payment of service tax on services received from abroad was not permissible under Rule 3(4) of the Cenvat Credit Rules, as amended from 01-07-2012. The appellant was directed to reverse the credit already utilized and comply within 4 weeks from the pronouncement date of 12-02-14. Compliance was scheduled for 18/03/2014.

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Issues Involved:
1. Liability of service tax on services received from persons located abroad under the provisions of section 66A of the Finance Act, 1994.
2. Utilization of Cenvat credit for payment of service tax by the recipient of service under the reverse charge mechanism.
3. Legal validity of pre-deposit compliance through Cenvat credit.

Detailed Analysis:

1. Liability of Service Tax on Services Received from Abroad:
The appellant, a manufacturer of Yarn made from Artificial and Synthetic Staple Fibre, engaged agents abroad for selling goods and paid sales commission. The Revenue contended that the appellant had to pay service tax on these services under section 66A of the Finance Act, 1994, categorizing them as "Business Auxiliary Service." The appellant did not pay this tax, leading to proceedings for recovery. The adjudication and first appeal resulted in a demand of Rs. 4,23,824/- along with interest and penalty. The appellant filed an appeal and a stay application for waiver of pre-deposit of dues.

2. Utilization of Cenvat Credit for Payment of Service Tax:
The core issue was whether the appellant could use Cenvat credit to make the pre-deposit of service tax under section 66A. The Tribunal noted that pre-deposit for the admission of appeal could typically be made by debiting the Cenvat Credit Account. However, the specific legality of using Cenvat credit for service tax under section 66A needed examination.

3. Legal Validity of Pre-Deposit Compliance through Cenvat Credit:
The Tribunal reviewed the legal provisions and changes over different periods:
- Period Prior to 19-04-06: The law allowed payment of service tax through Cenvat credit, supported by various court decisions.
- 19-04-2006 to 28-02-2008: The omission of the explanation under Rule 2(p) of the Cenvat Credit Rules, 2004, changed the legal landscape.
- 01-03-2008 to 30-06-2012: Further amendments excluded services rendered by Goods Transport Agency from the definition of "output service."
- 01-07-2012 onwards: An explanation was added to Rule 3(4) of the Cenvat Credit Rules, explicitly prohibiting the use of Cenvat credit for payment of service tax where the recipient is liable.

The appellant argued that Rule 3(4)(e) permitted the utilization of Cenvat credit for payment of service tax on any output service, and there was no exclusion for services received from abroad. However, the Revenue countered that the appellant, as a recipient of service, could not use Cenvat credit for discharging their service tax liability, which had to be paid in cash. The Revenue relied on the Tribunal's decision in Sangam (India) Ltd. Vs CCE Jaipur, which clarified that services received from abroad could not be treated as "output service" for the purpose of Cenvat credit utilization.

The Tribunal concluded that allowing the utilization of Cenvat credit for services received could lead to significant revenue losses, as illustrated by hypothetical scenarios where no actual tax collection would accrue to the government. The amendments to the Cenvat Credit Rules aimed to plug this loophole. Given the specific prohibition introduced in Rule 3(4) with effect from 01-07-2012, the Tribunal held that the pre-deposit made through Cenvat credit was not proper.

Conclusion:
The Tribunal extended the time limit for compliance by 4 weeks and allowed the appellant to reverse the credit already made in the Cenvat account for complying with the stay order. The matter was scheduled for compliance on 18/03/2014.

(Pronounced in open court on 12-02-14)

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