CENVAT credit on VCES-paid reverse charge tax was denied, but penalty was deleted for bona fide disclosure.

CENVAT credit was held inadmissible on service tax paid under the VCES scheme on reverse charge basis, because the payment was not made against an ordinary eligible document and fell within the restriction reflected in Rule 9(1)(b); the demand and interest were therefore upheld. Penalty was set aside because the credit had been disclosed in the CENVAT account and to the Revenue, and the dispute turned on interpretation of the legal provisions rather than conduct warranting penal action. The assessee received only partial relief, with tax and interest sustained but penalty deleted.

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Issues: (i) Whether service tax paid under the VCES scheme on reverse charge basis was eligible for Cenvat credit. (ii) Whether penalty was sustainable in the facts of the case.

Issue (i): Whether service tax paid under the VCES scheme on reverse charge basis was eligible for Cenvat credit.

Analysis: The payment was not made in the ordinary course against a regular invoice, but under the VCES scheme in respect of tax that had remained unpaid at the relevant time. The circular relied upon clarified that, apart from the restriction on utilization of CENVAT credit for payment of tax dues under the scheme, admissibility of credit had to be tested under the Cenvat Credit Rules. On that footing, the credit was treated as falling within the mischief of Rule 9(1)(b), since the tax was paid after non-payment in circumstances amounting to suppression or non-levy, and not through an ordinary eligible document under Rule 9(1)(a).

Conclusion: The credit was held inadmissible and the demand with interest was upheld.

Issue (ii): Whether penalty was sustainable in the facts of the case.

Analysis: The entire credit had been reflected in the Cenvat credit account and informed to the Revenue. The matter was also treated as one involving interpretation of the legal provisions, without a sufficient basis to impose penal consequences.

Conclusion: The penalty was set aside.

Final Conclusion: The dispute was resolved by sustaining the credit demand and interest while deleting the penalty, resulting in only partial relief to the assessee.

Ratio Decidendi: Credit is not admissible where tax is paid belatedly under VCES in circumstances treated as non-levy or suppression and the payment does not qualify under the ordinary credit-document regime, but penalty may still be waived where the dispute is bona fide and fully disclosed in the credit records.

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