2018 (5) TMI 1421 - AT - Service Tax

Tribunal allows cenvat credit of Rs. 4.42 crores, rejects Revenue's formula-based restriction

The Tribunal set aside the order disallowing cenvat credit amounting to Rs. 4.42 crores for irregular availing of credit under the Cenvat Credit Rules, ... Validity of formulaic restriction on Cenvat credit - Definition of Input Service under Cenvat Credit Rules, 2004 - Burden on Revenue to establish ineligibility of input services - Service to self not leviable to Service Tax - Prospective application of amendments to Cenvat Credit RulesValidity of formulaic restriction on Cenvat credit - Definition of Input Service under Cenvat Credit Rules, 2004 - Whether the Department can restrict or disallow Cenvat credit by applying a ratio/formula of output taxable value to total expenditure. - HELD THAT: - The Tribunal held that Cenvat Credit Rules, 2004 define an input service as any service used by a provider of taxable service for providing an output service. The Revenue adopted a thumb rule - computing the ratio of value of output taxable services to total expenditure and restricting credit pro rata - but produced no statutory basis for such a method. The Rules themselves prescribe the circumstances in which credit may be restricted or reversed; absent any specific statutory provision permitting a formulaic apportionment, the Department cannot disallow credit merely by applying a thumb rule. Consequently, once credit is availed in respect of services falling within the definition of input service, it cannot be denied by resort to an unsupported formula.The formulaic restriction adopted by the Revenue is without legal basis and cannot be sustained; impugned disallowance on that ground is set aside.Burden on Revenue to establish ineligibility of input services - Whether the Department established that the Cenvat credit availed pertained to ineligible input services. - HELD THAT: - On examination of the show cause notice and the adjudicating order, the Tribunal found that the Revenue did not bring forward any specific grounds demonstrating that the credits availed related to ineligible services. Apart from identifying a small amount conceded in audit (aquarium, gymnasium, etc.), no material was produced to show that the claimed input services fell outside the scope of the Rules. In the absence of such positive material, denial of credit is not justified.The Revenue failed to discharge the burden of proving ineligibility; disallowance of credit for lack of such proof is set aside (except amounts admitted).Service to self not leviable to Service Tax - Whether services rendered by KDMIPE to other ONGC divisions (internal units) attract Service Tax and justify reversal of Cenvat credit. - HELD THAT: - The adjudicating authority treated services rendered to other ONGC divisions as exempt and used that to restrict credit. The Tribunal observed that services rendered internally to other divisions of the same enterprise constitute service to self and are not exigible to Service Tax; therefore such internal services do not warrant reversal of credit on the ground that Service Tax was not paid by the recipient division.There is no basis to disallow credit on the ground that services to other ONGC divisions were not taxed; internal services are not leviable and do not justify reversal.Prospective application of amendments to Cenvat Credit Rules - Whether the amendment to Rule 6(1) of the Cenvat Credit Rules effective 01.04.2016 could be applied to the disputed earlier period. - HELD THAT: - The Tribunal noted that Rule 6(1) was amended with effect from 01.04.2016 to include an Explanation; however, such amendment is prospective in operation. The dispute relates to October 2007 to December 2012, and the Tribunal held that the post 2016 amendment cannot be applied retrospectively to permit disallowance for the earlier period.The 01.04.2016 amendment to Rule 6(1) is not applicable to the disputed period and cannot be invoked to deny credit for that period.Admitted concessions upheld - Whether amounts admitted by the appellant during proceedings should be sustained. - HELD THAT: - Counsel for the appellant conceded specified small amounts identified in audit. The Tribunal recorded those concessions and did not disturb them.The admitted amounts are upheld and excluded from the setting aside of the impugned order.Final Conclusion: The appeal is allowed in part: the adjudicating order disallowing Cenvat credit by applying a thumb rule, and reversing credit on the basis that services to other ONGC divisions were not taxed, is set aside for the period October, 2007 to December, 2012; the 01.04.2016 amendment is inapplicable to the disputed period; amounts expressly admitted by the appellant are sustained. Issues:Dispute over irregular availing of cenvat credit under Cenvat Credit Rules, 2004 by the appellant leading to disallowance of credit amounting to Rs. 4.42 crores, alleged suppression of facts, and imposition of penalties.Analysis:1. The dispute in this case revolves around the appellant's availing of cenvat credit under Cenvat Credit Rules, 2004 during the period October 2007 to December 2012. The Department alleged irregular availing of Service Tax by the appellant, primarily focusing on the disproportionate cenvat credit accumulation in relation to the total service tax liability. The Revenue adopted a formula to restrict the cenvat credit based on the ratio of total output service value to total expenditure, which was challenged by the appellant as lacking statutory backing.2. The appellant argued that the cenvat credit availed pertained to various input services, including those under reverse charge mechanism, and were in compliance with Section 2(l) of the Cenvat Credit Rules, 2004. They contended that services provided to other units of ONGC were not subject to service tax as they were considered exempt services until April 2016. The appellant also emphasized that the Revenue's formula for restricting cenvat credit lacked legal basis and that the Department failed to prove any ineligible input services availed by the appellant.3. The Tribunal examined the relevant legal provisions, including Rule 2(l) of the Cenvat Credit Rules, 2004, which defines input services allowable for cenvat credit. It was noted that the Revenue did not establish any grounds to disallow the cenvat credit availed by the appellant. The Tribunal emphasized that once cenvat credit is availed for eligible input services, it cannot be denied based on a formula or thumb rule, as specified under the Cenvat Credit Rules, 2004.4. The adjudicating authority had justified the restriction of cenvat credit based on the appellant's services to other ONGC Divisions, which were considered as services to self and not subject to service tax. However, the Tribunal disagreed with this reasoning, stating that the levy of Service Tax on such internal services was not justified. The Tribunal also clarified that the amendment in Rule 6(l) of the Cenvat Credit Rules, effective from April 2016, could not be applied retrospectively to the prior period under dispute.5. Ultimately, the Tribunal set aside the impugned order except for the demand admitted by the appellant during the proceedings. The appeal was disposed of in favor of the appellant, emphasizing the legal entitlement to cenvat credit for eligible input services and rejecting the Revenue's formula-based restriction on cenvat credit.This detailed analysis of the judgment highlights the key legal arguments, interpretations of relevant provisions, and the Tribunal's decision on the issues raised in the case.