2020 (2) TMI 1254 - AT - Service Tax

Broadcaster not required to keep equipment in constant use for tax credit eligibility

Videocon D2H Ltd Versus Commissioner of Central Excise, Customs & Service Tax

The Tribunal held that the appellant, a provider of broadcasting services, was not required to keep capital goods in constant use to avoid consequences ... Reversal of CENVAT Credit - capital goods - removal of equipment from the premises of the provider - treatment of waste and scrap on reversal - place of removal - rule 3(5) of CENVAT Credit Rules, 2004 - HELD THAT:- The appellant is a provider of taxable services and the expression ‘removal’, as utilized in Central Excise Act, 1944, is germane only for determination of valuation with intent to subject manufactured goods to assessment which does not logically lend itself for applicability to a provider of output service. Moreover, the said expressions are neither qualified with ‘grammatical variations and cognate expressions’ nor amenable for adoption within CENVAT Credit Rules, 2004. Instead, it would be appropriate for us to lay emphasis on the scheme of CENVAT Credit Rules, 2004 which was reframed to cover input services procured by manufacturers and providers of output services as well as inputs procured by manufacturers and providers of output services. In the present dispute, we are concerned with ‘capital goods’ alone. ‘Capital goods’, by their very nature, are not absorbed into the final product let alone finding inclusion in intangible ‘output service’. It is not contemplated, either in Finance Act, 1994 or in general commercial usage, that capital goods should be in perpetual operation. The absence of such condition in CENVAT Credit Rules, 2004 reflects this common understanding that capital goods are dutiable on procurement and that, unlike the availment of credit of duties suffered on inputs, credit thereof is permitted at certain specified stages and, that too, only twice. Dis-connection of service is preceded by usage, even for a time, of the capital goods which suffice to continue the eligibility owing to existence as such even after service has been rendered. This is clear from the provisions of rule 3(5) of CENVAT Credit Rules, 2004 in accordance with which the manufacturer is required to reverse the credit in full when cleared as such and, under rule 3(5)(a), to reverse in proportion to remenant value after being put to use and at the appropriate rate of duty in the event of transformation as ‘waste and scrap’ - it is only upon the transfer of possession to another manufacturer/provider of output service that credit originally availed can be curtailed and for the facilitation of availment by the successor manufacturer/provider of output services. In the absence of any specific statutory provision requiring such reversal along with absence of further availment of credit by any other assessee, it is held that the impugned order is erroneous in its presumption and in application of law - Appeal allowed - decided in favor of appellant. Issues Involved:1. Obligation to keep capital goods in constant use for avoiding consequences under rule 14 of CENVAT Credit Rules, 2004.2. Ineligibility of CENVAT credit due to removal of 'consumer premises equipment' without reversal of credit.3. Interpretation of 'place of removal' and 'use' in the context of CENVAT Credit Rules.4. Applicability of rule 3(5) of CENVAT Credit Rules, 2004 to 'post-usage' removal.5. Limitation period for issuance of show cause notice under Section 11A of the Central Excise Act, 1944.Detailed Analysis:1. Obligation to Keep Capital Goods in Constant Use:The primary issue in this appeal was whether the provider of 'output service' must keep capital goods in constant use to avoid the consequences under rule 14 of CENVAT Credit Rules, 2004. The appellant, a provider of broadcasting services, had supplied 'set-top boxes' and 'control instruments' to customers. These remained at customer premises even after the service was deactivated, leading to the availment of ineligible CENVAT credit amounting to Rs. 39,17,72,895/-. The adjudicating authority confirmed a total demand of Rs. 40,63,50,355/- along with interest and penalties.2. Ineligibility of CENVAT Credit Due to Removal of Equipment:The appellant contended that the demand related to written-off equipment was superfluous as they had already reversed the CENVAT credit. They argued that the eligibility for CENVAT credit is based on procurement for 'pass through' to the customer's premises, and there is no provision for usage as a continuing condition for eligibility. They also highlighted that rule 3(5) of the CENVAT Credit Rules, 2004 applies only when goods are removed 'as such' and not after usage. The adjudicating authority, however, maintained that the capital goods were taken to customer premises and never returned, thus not entitling the appellant to CENVAT credit.3. Interpretation of 'Place of Removal' and 'Use':The appellant relied on various judicial precedents to argue that 'place of removal' has a specific connotation and that 'used' should be interpreted as 'intended for use'. They cited the Hon'ble Supreme Court's decision in State of Haryana v. Dalmia Dadri Cement Ltd, which clarified that 'use' means 'intended for use'. They further argued that discontinuation of service does not disqualify them from availing CENVAT credit, as the equipment was initially used for providing output services.4. Applicability of Rule 3(5) of CENVAT Credit Rules, 2004:The appellant contended that rule 3(5) of the CENVAT Credit Rules, 2004, which requires reversal of credit when goods are removed 'as such', does not apply to 'post-usage' removal. They argued that capital goods, by their nature, are not absorbed into the final product or service and are not required to be in perpetual operation. The adjudicating authority's reliance on rule 3(5) was thus misplaced.5. Limitation Period for Issuance of Show Cause Notice:The respondent argued that the plea of limitation was not applicable, citing the Hon'ble High Court of Gujarat's decision in Commissioner of Central Excise, Surat – I v. Neminath Fabrics Pvt Ltd, which held that the period of limitation for issuing a show cause notice under Section 11A of the Central Excise Act, 1944, is extended to five years in cases of suppression, and the concept of 'date of knowledge' does not curtail this period.Conclusion:The Tribunal found that the CENVAT Credit Rules, 2004, do not stipulate a condition of deployment in operations for eligibility to CENVAT credit. The appellant was a provider of output services at the time of procurement, and the removal of capital goods to customer premises did not disqualify them from availing credit. The Tribunal held that the adjudicating authority's order was erroneous in its presumption and application of law. Consequently, the demand for tax and other penalties was set aside, and the appeal was allowed.