2024 (10) TMI 1129 - AT - Service Tax

Service tax waived on water supply from government, Cenvat Credit re-availment allowed under Rule 6(3)

M/s. Indian Oil Corporation Limited Versus Commissioner of GST & Central Excise, Bhubaneswar

CESTAT Kolkata ruled in favor of appellant on multiple service tax and Cenvat Credit issues. The tribunal held appellant not liable for service tax on ... Liability to pay service tax on supply of water to Government of Odisha - re-availment of Cenvat Credit subsequent to change of option under Rule 6(3) of Cenvat Credit Rules, 2004 - Cenvat Credit availed on invoices after one year of issuance in the year of return. Whether the appellant is liable to pay Service Tax on supply of water by Government of Odisha in terms of Section 66(B)A of the Finance Act, 1994? - HELD THAT:- The said issue has been settled by this Tribunal in the case of M/S. PARADEEP PHOSPHATES LIMITED VERSUS COMMISSIONER OF CGST & EXCISE, BHUBANESWAR-I, BHUBANESWAR [2024 (6) TMI 1410 - CESTAT KOLKATA] wherein this Tribunal observed 'The appellant is, therefore, justified in asserting that the Agreement executed between the appellant and the government is for supply of water for which charges are paid by the appellant on the basis of volume of water drawn and it is not a case of assignment of right to use natural resources of the government.' - As issue has already been settled by the decision of this Trbunal for water supply by Government of Odisha, the appellant is not liable to Service Tax. Therefore, issue is no more res-integra and appellant is not liable to pay Service Tax. Re-availment of Cenvat Credit subsequent to change of option under Rule 6(3) of the Cenvat Credit Rules, 2004 - HELD THAT:- The appellant has intimated to the Department vide letters dated 01.12.2016 and 12.01.2017 and which were in well knowledge of the Department. Therefore, no suppression can be alleged against the appellant. Therefore, no demand can be raised against the appellant for re-availment of credit subsequent to change of option under Rule 6(3) of the Cenvat Credit Rules, 2004. Therefore, the demand of Rs. 183,09,57,095/- is set aside. Cenvat Credit availed on invoice after one year of the issuance - HELD THAT:- The same has been shown by the appellant in the ER-1 return which was filed on 12.01.2017 and which has well within the knowledge of the Department in 2017 itself, therefore, no suppression of facts can be alleged against the appellant. Therefore, Cenvat credit cannot be denied to the appellant only on the reason that they have shown in the ER-1 return beyond one year period. Interest and penalty - HELD THAT:- As no demand is sustainable against the appellant, consequently no interest is payable by the appellant and no penalty is imposable. The impugned order is set aside - appeal allowed. The core legal questions considered in this appeal are threefold: (1) Whether the appellant is liable to pay Service Tax on the supply of water by the Government of Odisha under the reverse charge mechanism as an assignment of natural resources; (2) Whether the appellant's re-availment of Cenvat Credit subsequent to a change of option under Rule 6(3) of the Cenvat Credit Rules, 2004 (CCR) is permissible and compliant with law; and (3) Whether Cenvat Credit can be denied solely on the ground that it was reflected in ER-1 returns after one year of invoice issuance, in light of the provisions of Rule 4(7) of the CCR.Issue 1: Liability to Service Tax on Supply of Water by Government of OdishaThe legal framework revolves around Section 66D(a)(iv) of the Finance Act, 1994, which taxes services provided by the Government to business entities, and the Mega Exemption Notification No. 25/2012-ST dated 20.06.2012, which exempts certain assignments of natural resources, specifically to individual farmers for farming purposes. The Revenue's contention was that the supply of water by the Government of Odisha to the appellant constituted an assignment of the right to use natural resources, thereby attracting Service Tax under the reverse charge mechanism.The Tribunal's reasoning relied heavily on precedent, notably the decisions in Sasan Power Ltd. and Paradeep Phosphates Ltd., where it was held that agreements for supply of water by government entities to industrial users do not amount to assignment of rights to use natural resources but are contracts for supply of water as a service. The Tribunal emphasized that the agreement stipulated payment based on the volume of water drawn, with no guarantee of uninterrupted supply, and the appellant bore the cost of drawing water, indicating a supply contract rather than a grant of rights.Applying this legal interpretation to the facts, the Tribunal concluded that the appellant's payments to the Government of Odisha were for supply of water and not for assignment of natural resource rights. Therefore, the supply did not attract Service Tax under Section 66D(a)(iv). The Tribunal further noted that the issue was settled by binding precedent, rendering the demand for Service Tax unsustainable.The Revenue's competing argument that the supply fell under taxable 'assignment of natural resources' was rejected as contrary to established judicial interpretation. The Tribunal thus set aside the demand of Rs. 2,21,57,352/- on this ground.Issue 2: Re-availment of Cenvat Credit Subsequent to Change of Option under Rule 6(3) of CCRThe appellant had initially reversed Cenvat Credit on LPG and SKO supplied for exempted purposes under Rule 6(3A) of CCR for the financial year 2015-16. Subsequently, the appellant changed the option to apply Rule 6(3)(i), which prescribes a fixed percentage (6%) reversal of credit on exempted goods, intimated the Department accordingly, and re-availed the previously reversed credit. The Department, after a delay of nearly four years, issued a Show Cause Notice alleging that the option once chosen could not be revised and that the re-availment was irregular, further suggesting that the appellant should have claimed a refund instead.The Tribunal examined the relevant provisions of Rule 6(3) and its Explanation 1, which require the option to be chosen for the entire financial year but do not expressly prohibit revision of the option. The appellant's conduct of timely intimation to the Department and payment of the revised reversal amount, with no objections raised at the time, was a critical fact. The Tribunal relied on the principle from Rajendra Prasad Gupta v. Prakash Chandra Mishra that procedural steps are permissible unless expressly prohibited by law.Moreover, the appellant's contention that LPG and SKO, being by-products cleared under end-use exemptions, were not subject to reversal provisions was supported by judicial precedents including the Madras High Court and Supreme Court decisions, and a recent CESTAT ruling. The Tribunal found that the Department's interpretation was erroneous and that no suppression or concealment of facts occurred to justify invoking the extended period of limitation.Consequently, the Tribunal held that the re-availment of Cenvat Credit was lawful and set aside the demand of Rs. 183,09,57,095/-. The Tribunal also rejected the Department's argument that the appellant should have sought refund instead, noting that this was beyond the allegations in the Show Cause Notice and not supported by law.Issue 3: Cenvat Credit Availed on Invoices After One Year of IssuanceThe Department sought to deny Cenvat Credit availed on invoices after one year of their issuance, relying on Rule 4(7) of the CCR, which requires credit to be availed within one year from the date of invoice. The appellant contended that although the credit was reflected in ER-1 returns after one year, the credit was availed in their books and Cenvat registers within the stipulated one-year period, and that Rule 4(7) does not prescribe statutory records for credit availment.The Tribunal observed that the delay in showing credit in ER-1 returns did not amount to suppression or violation since the credit was recorded timely in books of accounts and registers, which were accessible to the Department. The Tribunal noted that the Department had knowledge of these credits as early as January 2017, negating any claim of concealment or fraud to invoke extended limitation.Accordingly, the Tribunal held that denial of credit solely on the basis of delayed reporting in ER-1 returns was unsustainable.Limitation and Extended Period of LimitationAcross all issues, the Tribunal scrutinized the invocation of the extended period of limitation. It was held that the Department failed to demonstrate any suppression of facts or fraudulent conduct by the appellant to justify extending limitation beyond the normal period. The appellant, being a Public Sector Undertaking under the Ministry of Petroleum and Natural Gas, was unlikely to conceal facts from the Department. The timely intimation of changes in credit reversal options and the transparent accounting of credits further negated any claim of suppression.Therefore, the Tribunal concluded that the entire demand was barred by limitation, and the extended period of limitation was wrongly invoked.Significant HoldingsOn the issue of Service Tax on water supply, the Tribunal held:'The Agreement is for supply of water by the government to the appellant and is not for assignment of any right to the appellant to use the natural resources of the government... The appellant is, therefore, justified in asserting that the Agreement executed between the appellant and the government is for supply of water for which charges are paid by the appellant on the basis of volume of water drawn and it is not a case of assignment of right to use natural resources of the government... In this view of the matter no service was provided by the government to the appellant.'On the re-availment of credit under Rule 6(3), the Tribunal emphasized:'Every procedure is to be understood as permissible till it is shown to be prohibited by the law... The appellant has complied with Rule 6(3) of CCR by choosing revised option for the entire Financial Year... No suppression can be alleged against the appellant.'On denial of credit for delayed ER-1 reporting, the Tribunal observed:'Cenvat Credit cannot be denied to the appellant only on the reason that they have shown in the ER-1 return beyond one year period... No suppression of facts can be alleged against the appellant.'Finally, the Tribunal concluded that no interest or penalty was payable as no demand was sustainable.