CENVAT credit on statutory canteen services is limited where employee recoveries shift the tax burden, while penalty needs mala fide intent.

CENVAT credit on outdoor catering service used for a statutory canteen was treated as an input service because the canteen was mandated under section 46 of the Factories Act, 1948. However, credit was not admissible to the extent the food cost and corresponding service tax burden were recovered from employees, since that portion was borne by the ultimate consumer rather than the manufacturer. Penalty was held unsustainable where the credit claim arose in a debatable area and the record did not establish mala fide intent or conduct justifying penal action. The result was partial relief, with the credit issue limited by employee recovery and the penalty deleted.

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Issues: (i) whether CENVAT credit on outdoor catering service used for a statutory canteen was admissible where a portion of the food cost was recovered from employees, and (ii) whether penalty was sustainable for availing such credit.

Issue (i): Whether CENVAT credit on outdoor catering service used for a statutory canteen was admissible where a portion of the food cost was recovered from employees.

Analysis: The canteen was a mandated requirement under section 46 of the Factories Act, 1948 and the service was therefore connected with manufacture as an input service. However, to the extent the cost of food was recovered from employees, that portion of the service tax was borne by the ultimate consumer and could not be taken as credit by the manufacturer.

Conclusion: Credit was admissible in principle, but the portion attributable to amounts recovered from employees was not allowable.

Issue (ii): Whether penalty was sustainable for availing such credit.

Analysis: The legal position on credit against employee-recovered canteen costs had been unsettled until clarified by later precedent, and the record did not establish mala fide intent or conduct warranting penal consequences under the extended penal provision.

Conclusion: Penalty was not sustainable and was set aside.

Final Conclusion: The credit dispute was not interfered with on merits, but the penal component was deleted, resulting in only partial relief to the assessee.

Ratio Decidendi: Where a statutory canteen service is an input service, CENVAT credit is unavailable to the extent the service tax burden is shifted to employees through recovery, and penalty cannot be imposed absent mala fide intent for a debatable credit claim.

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