2018 (10) TMI 1557 - AT - Service Tax

Court allows Cenvat Credit for residential unit sale after completion certificate

M/s Alembic Ltd. and Shreno Ltd. Versus C.C.E. & S.T. Vadodara-I

The court held that Rule 6 of the Cenvat Credit Rules did not apply to the Appellants as the sale of residential units after obtaining the completion ... CENVAT Credit - Construction of real estate projects - Rule 3 of the Cenvat Credit Rules, 2004 - whether the Appellants are required to reverse any portion of the Cenvat Credit availed by them, after receipt of Completion Certificate for the projects, since thereafter, they will not be discharging Service Tax liability on properties sold thereafter, where no advance was received prior to receipt of Completion Certificate at all? Held that:- The output service must first be exempt service. That upon receipt of Completion Certificate for the projects, the output activity of sale of residential units becomes “non-service” as per provisions of Section 65B of the Finance Act, 1994 read with definition of the term “exempt service” under Rule 2(e) of the CCR, 04. This is further supported by specific amendment carried out in Rule 6(1) of the CCR, 04 whereby w.e.f. 1.4.16, Explanation 3 was inserted specifically dealing with a situation as in the present case, where a deeming fiction was created that for the purposes of Rule 6 of CCR, 04, exempted services as defined in clause (e) of rule 2 shall include an activity, which is not a ‘service’ as defined in section 65B(44) of the Finance Act, 1994 provided that such activity has used inputs or input services. That there was no such stipulation prior to 1.4.16 in law and prima facie such situation was not to be treated as exempt service and did not attract the mischief created under Rule 6 of the CCR, 04 - However, for the period prior to 1.4.16, does this mean that a service provider can take and retain full credit on input services received even after receipt of Completion Certificate? In our considered view, the situation will be governed by Rule 3 of the CCR, 04 till such time, i.e. till the time Rule 6 was specifically made applicable by virtue of the deeming fiction created. It is trite law and in terms of Rule 3 of the CCR, 04, Cenvat Credit of Service Tax paid on input services used to provide output service, is eligible. In light of the provisions of Rule 3 of the CCR, 04, the Appellant cannot avail full Cenvat Credit on input services received after obtaining completion certificate, however, the Appellants cannot be expected to pay an amount equal to 8%/10% of sale price of immovable property after obtaining such Completion Certificate where no Service Tax is paid as if it is sale of immovable property since Rule 6 of the CCR, 04 per se does not apply to the present case until 1.4.16 at all. Even after 1.4.16, since the Appellants had availed only proportionate credit, we are of the view that they are not legally required to pay 8%/10% amount under Rule 6(3) of the CCR, 04 since they can be said to have maintained separate accounts as required under Rule 6(2) of the CCR, 04. Whether the Appellants were also required to reverse proportionate credit, out of the valid input service credits availed by them during the period 2010 till obtaining Completion Certificate, i.e. availing during the time when whole of output service of construction of residential complex was taxable? - Held that:- While the law does not intend to allow any undue benefit to a service provider in terms of Cenvat Credit of Service Tax paid on input services used in providing non-taxable output activity, however, Modvat / Cenvat Credit is a vested right. Once it is legally and validly availed, the same cannot be denied and/or recovered unless specific provisions exist for the same. It has been a consistent judicial view that credit entitlement is on the date of receipt of inputs when the output activity was wholly dutiable. Merely because the finished goods eventually became exempt later on, the credit availed on inputs which were contained in semi-finished / finished goods state was held as not deniable. The assesse is not required to wait till output service is sold to the service recipient. The assesse can take the credit immediately after the day on bill/ challan of input service is received. In the present case, there is no dispute that the appellant have availed the credit after receipt of bill, challan in respect of input service, therefore, the appellant was legally entitled to take the credit on the date after the receipt of service Bills/ Challans. Therefore, the availment of cenvat credit by the appellant is absolutely legal and correct in accordance with Rule 4(7) of Cenvat Credit Rules, 2004 - Since we hold that the Appellants are not required to reverse any credit availed by them on valid input services availed during the period 2010 till obtaining of Completion certificate, the said amounts reversed by them under protest cannot be retained by the revenue authorities and have to be returned to the Appellants. Appeal allowed - decided in favor of appellant. Issues Involved:1. Applicability of Rule 6 of the Cenvat Credit Rules (CCR), 2004.2. Eligibility to avail Cenvat Credit under Rule 3 of the CCR, 2004.3. Maintenance of separate accounts as required under Rule 6 of the CCR, 2004.4. Reversal of Cenvat Credit availed during the period when output service was taxable before receipt of Completion Certificate.5. Eligibility for refund of the amount paid under protest towards Credit availed from 2010 till receipt of Completion Certificate.Detailed Analysis:1. Applicability of Rule 6 of the Cenvat Credit Rules, 2004:The primary issue is whether the receipt of consideration for residential units sold as immovable property after obtaining the completion certificate amounts to providing exempted service, thereby invoking Rule 6 of the CCR, 2004. The court found that after the completion certificate, the sale of residential units becomes a 'non-service' as per Section 65B of the Finance Act, 1994, and Rule 2(e) of the CCR, 2004. This was supported by the amendment in Rule 6(1) of the CCR, 2004, effective from 1.4.16, which included an activity not defined as a service under Section 65B(44) of the Finance Act, 1994, within the scope of exempted services. Therefore, prior to 1.4.16, such activities were not considered exempt services, and Rule 6 did not apply.2. Eligibility to Avail Cenvat Credit under Rule 3 of the CCR, 2004:The court held that under Rule 3 of the CCR, 2004, Cenvat Credit of Service Tax paid on input services used to provide output service is eligible. The Appellants were taking proportionate credit after receiving the completion certificate, supported by CA certificates and due intimation to the revenue department. The court found that the Appellants could not avail full Cenvat Credit on input services received after obtaining the completion certificate, but they were not required to pay 8%/10% of the sale price of immovable property as Rule 6 did not apply until 1.4.16.3. Maintenance of Separate Accounts as Required under Rule 6 of the CCR, 2004:The court found that the Appellants maintained proper separate accounts by availing proportionate credit based on the square foot area where Service Tax was paid. This was supported by CA certificates and certified work sheets, fulfilling the obligation under Rule 3 of the CCR, 2004, read with Rule 6. The court referred to the decision in Foods, Fats and Fertilizers Ltd., which held that maintaining separate accounts for receipt and consumption of inputs used in dutiable and exempted products, even on a pro-rata basis, is sufficient compliance.4. Reversal of Cenvat Credit Availed During the Period When Output Service was Taxable Before Receipt of Completion Certificate:The court agreed with the Appellants that credit eligibility is to be examined at the time of receipt of input service and not governed by later developments, such as the conversion of property into immovable property after receiving the completion certificate. The court referred to Rule 11 of the CCR, 2004, which deals with credits availed in the past when the output activity was wholly taxable. The court held that the Appellants were not required to reverse any credit availed during the period when the output service was taxable.5. Eligibility for Refund of the Amount Paid Under Protest:The court found that since the Appellants were not required to reverse the credit availed during the period 2010 till obtaining the completion certificate, the amounts reversed under protest could not be retained by the revenue authorities and must be refunded. The court noted that the amounts were appropriated against the demand of 8%/10% of the sale of immovable property, which was not sustainable as the Appellants maintained separate accounts.Conclusion:The court concluded that the Appellants were not liable to pay 8%/10% of the value of service that became exempt after receipt of the completion certificate under Rule 6 of the CCR, 2004. The Cenvat Credit on input services received after obtaining the completion certificate could not be wholly allowed, but the proportionate credit availed was sufficient compliance. The Appellants maintained proper separate accounts as required under Rule 6 of the CCR, 2004. The Appellants were not required to reverse Cenvat Credit availed during the period when the output service was taxable before receiving the completion certificate. The Appellants were eligible for a refund of the amount paid under protest. The appeals were allowed with consequential relief.