2021 (8) TMI 866 - AT - Service Tax

Tribunal allows service tax credit for appellants under reverse charge mechanism

The Tribunal ruled in favor of the appellants, holding that they were eligible to avail service tax credit under the reverse charge mechanism. The ... Reverse charge mechanism - wrongly availed credit and utilized the credit - contravention of Service Tax Credit Rules, 2002 r/w CENVAT Credit Rules, 2004 - revenue neutrality - HELD THAT:- The appellants availed the credit of service tax paid by them under reverse charge as an input service recipient and utilized the same for payment of service tax. During the relevant period, the credit availed on service tax was governed by the Service Tax Rules, 1994 and credit availed on inputs and capital goods was governed by CENVAT Credit Rules, 2002. CENVAT Credit Rules, 2004 came into force with effect from 10.9.2004 and then the appellants transferred the unutilized credit to CENVAT account and utilized it for payment of central excise duty also. The appellant not being a service provider is not eligible to take credit of the service tax under Service Tax Rules, 1994 and that such credit cannot be used to discharge their service tax liability. When the credit was not eligible, appellant’s ought not to have transferred the unutilized service tax credit to CENVAT account and utilized it to discharge their tax / duty liability. It also needs to be stated that appellants were not liable to pay service tax under reverse charge mechanism prior to introduction of Section 66A in the Finance Act, 1994. The Hon'ble High Court of Bombay held that tax cannot be levied or collected on the basis of Rules only. The decision in the case of UNION OF INDIA VERSUS INDIAN NATIONAL SHIPOWNERS ASSOCIATION [2009 (12) TMI 850 - SC ORDER] where it was held that the provisions of Rule 2(1)(d)(iv) are clearly invalid. Although, there was no liability to pay the tax as per law, the appellants have discharged the tax liability as a service recipient and availed credit. So the situation is revenue neutral also. Appeal allowed - decided in favor of appellant. Issues Involved:1. Eligibility of availing service tax credit under reverse charge mechanism.2. Utilization of service tax credit for payment of central excise duty.3. Applicability of Service Tax Credit Rules, 2002 and CENVAT Credit Rules, 2004.4. Interpretation of Section 68(2) of the Finance Act, 1994.5. Validity of tax liability under reverse charge mechanism before the introduction of Section 66A in the Finance Act, 1994.Issue-wise Detailed Analysis:1. Eligibility of availing service tax credit under reverse charge mechanism:The appellants, engaged in the manufacture of motor cars and registered with the Central Excise Department, were paying service tax on input services received from foreign service providers under the reverse charge mechanism. The department contended that the appellant was not eligible to avail credit of the service tax paid under reverse charge mechanism, arguing that the appellant does not provide any output service and hence, credit is not admissible on the input services. However, the Tribunal, referencing Section 68(2) of the Finance Act, 1994, clarified that when the appellant pays service tax on behalf of a non-resident service provider, they are deemed to be a service provider, making them eligible for credit as the service provider.2. Utilization of service tax credit for payment of central excise duty:The department argued that the credit availed by the appellants could not be utilized for payment of central excise duty. The Tribunal, however, noted that after the introduction of CENVAT Credit Rules, 2004, the appellants rightly transferred their eligible service tax credit to the CENVAT credit account. The CENVAT credit, being a common pool of credit for capital goods, inputs, and input services, could be utilized for discharging tax/duty liability as per Rule 3(4) of CENVAT Credit Rules, 2004.3. Applicability of Service Tax Credit Rules, 2002 and CENVAT Credit Rules, 2004:The department alleged that the appellants wrongly availed and utilized credit in contravention of Service Tax Credit Rules, 2002 read with CENVAT Credit Rules, 2004. The Tribunal, however, emphasized that the Service Tax Rules, 1994 must be read along with the Finance Act, 1994, and dismissed the department's contention that the provisions of Section 68(2) of the Finance Act, 1994 do not apply to Service Tax Credit Rules or CENVAT Credit Rules, 2004.4. Interpretation of Section 68(2) of the Finance Act, 1994:Section 68(2) of the Finance Act, 1994, states that if service tax is paid under the reverse charge mechanism, all provisions of the said Chapter will apply to such person as if they are the person liable for paying the service tax. The Tribunal held that this provision clearly indicates that the appellant, paying service tax under reverse charge mechanism, is deemed to be a service provider and thus eligible to avail and utilize the credit.5. Validity of tax liability under reverse charge mechanism before the introduction of Section 66A in the Finance Act, 1994:The Tribunal referenced the decision in the case of Indian National Ship Owners Association, where it was held that tax liability under reverse charge mechanism for services received from a foreign entity would be applicable only after the introduction of Section 66A with effect from 18.4.2006. The Tribunal noted that the appellants were not liable to pay service tax under reverse charge mechanism prior to this date, making the situation revenue neutral as the appellants had already discharged the tax liability.Conclusion:The Tribunal concluded that the demand by the department could not sustain. The impugned orders were set aside, and the appeals were allowed with consequential relief, if any. The Tribunal's decision was pronounced in open court.