CENVAT credit on due diligence legal and accounting services allowed where a proposed acquisition was not pursued.

CENVAT credit on legal and chartered accountant services used for due diligence in connection with a proposed acquisition was held admissible, even though the proposal was later abandoned. The amended definition of input service from 01.04.2011 expressly included accounting, financial and legal services, and credit could not be denied merely because the due diligence report was not ultimately acted upon. The non-crystallisation of the acquisition was treated as an internal business decision, not a ground to disallow credit. As the services were received, tax was paid, and they had a business nexus with the appellant's stock broking activity, the disallowance was unsustainable.

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Issues: Whether CENVAT credit of service tax paid on legal services and chartered accountant services used for due diligence in connection with a proposed acquisition, which was later not pursued, was admissible as input service credit.

Analysis: The definition of input services, as amended with effect from 01.04.2011, included accounting, financial and legal services. Credit cannot be denied merely because the due diligence report was not ultimately acted upon. The acceptance or rejection of such a report is an internal business decision, and the Department cannot treat the non-crystallisation of the proposal as a ground to disallow credit. The relevant considerations were whether the service was received, whether service tax was paid, and whether it was used in relation to the provision of output services. As the appellant was engaged in stock broking, the due diligence services obtained before deciding on acquisition of share warrants had the necessary nexus with its business activity.

Conclusion: The appellant was eligible for CENVAT credit, and the disallowance was unsustainable.

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