2009 (7) TMI 487 - AT - Service Tax

Dispute over Input Service Credit Reversal

The case involved a dispute over the reversal of credit on input services under Rule 3(5) of the Cenvat Credit Rules, 2004. The Revenue demanded credit ... Cenvat credit of service tax – Reversal of credit –The appellants are engaged in the manufacture of iron and steel ingots. The appellant availed Cenvat credit on inputs, capital goods and input services. During the period they cleared the inputs as such and reversed the credit in terms of Rule 3(5) of Cenvat Credit Rules, 2004. In this case Tri.-(Del.) by considering the decision of Chitrakoot Steel & Power Pvt. Ltd held that impugned order is set aside. Appeal is allowed with consequential relief. Decision in favor of appellant – against the revenue Issues:1. Interpretation of Rule 3(5) of Cenvat Credit Rules, 2004 regarding reversal of credit on input service.2. Applicability of Rule 3(1) of the Rules in relation to reversal of credit on input service.3. Justification of demand for service tax credit and penalty imposition based on Rule 3(5) of the Rules.Analysis:1. The case involved a dispute regarding the reversal of credit on input service under Rule 3(5) of the Cenvat Credit Rules, 2004. The appellants, engaged in the manufacture of iron and steel ingots, availed Cenvat credit on inputs, capital goods, and input services. The issue arose when they cleared inputs as such and reversed the credit in accordance with Rule 3(5). The Revenue demanded reversal of credit on input service related to the transportation of goods by road, leading to a penalty imposition by the original authority, which was upheld by the Commissioner (Appeals).2. The Advocate for the appellants argued that Rule 3(5) pertains to the reversal of credit on input or capital goods, not input services. He contended that the Commissioner (Appeals) incorrectly applied Rule 3(1) in this context, emphasizing the distinction between capital goods, input, and input service as defined under Rule 2 of the Rules. Citing a Tribunal decision, the Advocate highlighted the separate treatment of components under the Rules.3. On the other hand, the Revenue representative supported the Commissioner (Appeals)'s findings, asserting that Rule 3(1) allows for the credit of service tax under Section 66 of the Finance Act. The Revenue argued that when inputs are removed as such, the entire credit under Rule 3(1) must be reversed, encompassing both input and input service credits. The Revenue's position was that the reversal of credit should include both components based on the interpretation of Rule 3(5) of the Rules.4. The Tribunal's analysis focused on the provisions of Rule 3(1) and Rule 3(5) of the Cenvat Credit Rules, 2004. It clarified that Rule 3(1) permits the taking of credit on various duties, including service tax on inputs, capital goods, and input services. The Tribunal emphasized the separate definitions of input, capital goods, and input services under the Rules, indicating that they are distinct components. Notably, Rule 3(5) specifically addresses the payment upon removal of inputs or capital goods, without any provision for payment concerning input service credit.5. Referring to a previous case, the Tribunal reiterated that there is no provision for the reversal of credit on service tax related to inputs or capital goods upon removal. It highlighted Rule 14 of the Cenvat Credit Rules, 2004, which deals with the recovery of wrongly availed credit. The Tribunal concluded that the demand for service tax credit and penalty imposition based on the reversal of input service credit was not justified, ultimately setting aside the impugned order and allowing the appeal with consequential relief.