CESTAT allows appeal against recovery of service tax credit on inputs cleared to another factory

CESTAT Allahabad allowed the appeal against recovery of CENVAT credit with interest and penalty. The case involved reversal of service tax credit availed on services related to inputs, where part quantity was cleared to another factory. The Tribunal held no specific provision in CENVAT Credit Rules requires reversal of proportionate input service tax credit when inputs are cleared as such. Only central excise duty credit needs reversal under Rule 3(5), not service tax credit. The demand lacked legal backing as tax cannot be levied by inference or presumption beyond statutory provisions.

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Issues Involved:
1. Whether the appellant is required to reverse the Cenvat credit of service tax availed on input services when the inputs are removed as such from the factory.
2. Whether the demand for reversal of Cenvat credit of service tax has any legal backing under the Cenvat Credit Rules, 2004.

Issue-wise Detailed Analysis:

1. Requirement to Reverse Cenvat Credit of Service Tax on Input Services:

The appellant, engaged in manufacturing various assemblies and parts, availed Cenvat credit on capital goods, inputs, and input services. Upon auditing, it was found that the appellant had cleared certain inputs to another factory after reversing the excise duty credit but not the service tax credit on input services. The department issued show cause notices demanding the reversal of service tax credit, alleging that the appellant had willfully not reversed the credit of service tax on inputs removed as such.

The appellant contended that there is no provision in the Cenvat Credit Rules, 2004, or any other statute, which mandates the reversal of Cenvat credit of service tax on input services when inputs are removed as such. This argument was supported by the Tribunal's decision in the appellant's own case for a subsequent period, where it was held that no specific provision requires the reversal of proportionate input service tax credit involved in the inputs cleared as such. The Tribunal noted that the Cenvat Credit Rules only require the reversal of the central excise duty credit availed on such inputs.

2. Legal Backing for Demand of Reversal of Cenvat Credit of Service Tax:

The Tribunal referenced a Tariff Conference of Central Excise, which concluded that Rule 3(5) of the Cenvat Credit Rules, 2004, does not necessitate the reversal of credit on input services. The rule only mandates the reversal of credit availed on inputs or capital goods when they are removed as such. The conference emphasized that input services are consumed once the inputs and capital goods are received in the factory, and thus, there is no requirement for reversing the credit of input services when the associated inputs are removed.

The Tribunal further supported its decision by citing the Hon'ble Punjab & Haryana High Court's ruling in Commissioner of Central Excise, Chandigarh-I v. Punjab Steels, which held that the credit of input service availed at the time of receipt of inputs does not need to be reversed when the inputs are cleared as such. The High Court observed that the Cenvat Credit Rules explicitly define 'input' and 'input service' separately and require the reversal of credit only for inputs or capital goods, not for input services.

The Tribunal also referred to the Constitution Bench of the Hon'ble Supreme Court in Mathuram Agrwal v. State of Madhya Pradesh, which emphasized that the intention of the legislature in a taxation statute must be gathered from the plain language of the provisions. It is impermissible to add or substitute words to infer a tax liability not explicitly stated in the statute.

Conclusion:

The Tribunal concluded that the appellant is not required to reverse the Cenvat credit of service tax on input services when the inputs are removed as such. The demand for reversal of such credit has no legal backing under the Cenvat Credit Rules, 2004. The impugned order was set aside, and the appeal filed by the appellant was allowed with consequential relief as per law.

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