2025 (1) TMI 476 - AT - Central Excise

Service tax credit demand of Rs. 1.35 crore set aside after timely payment under reverse charge mechanism

CESTAT Kolkata allowed the appeal, setting aside the demand for recovery of CENVAT credit of Rs. 1,35,91,278 along with interest and penalty. The ... Disallowance/recovery of CENVAT Credit along with interest and imposed equal amount of tax as penalty - service tax paid under the reverse charge mechanism (RCM) for Goods Transportation Agency (GTA) services - Interest and penalty - HELD THAT:- The appellant has paid service tax on GTA service under RCM basis. Under RCM basis, the service tax liability is paid within 5th of the next month and the CENVAT Credit of the same is availed by the Appellant while filing the ST 3 return of the half year wherein the said amount paid by the Appellant is also shown as CENVAT Credit in the Cenvat table of the return. The same is also disclosed in ER 1 return by the Appellant. Thus, it is observed that the allegation of availment of CENVAT Credit without payment cannot arise as the payment is done within the due date of payment of service tax which is also visible from the table set out in the demand order. There is no dispute with respect to the genuineness of input services availed by them. Thus, the appellant is eligible to avail the credit and the allegation in this regard in the impugned order is not sustainable. Utilization of credit before making payment of the service tax - HELD THAT:- It is observed that if the appellant has utilized the credit before making the payment of service tax on GTA service, at the maximum the department could have demanded interest for the few days before which the credit was utilised, before payment. However, it is observed from the submission of the appellant that although they have availed the CENVAT Credit during the relevant period, they have not utilised the credit for the payment of any other liabilities for the said month. Thus, there is no obligation on them to pay any interest. Hon’ble Supreme Court in UOI AND ORS. VERSUS IND-SWIFT LABORATORIES LTD. [2011 (2) TMI 6 - SUPREME COURT] held that no interest is payable when there is no utilisation of CENVAT Credit. By following the ratio of the decisions, it is held that the appellant is not liable to pay interest as the credit taken by the appellant was not utilized before making the payment of service tax. Levy of penalty - HELD THAT:- Since there is no irregularity in availment of the credit, no penalty imposable on the appellant and hence the penalty imposed in the impugned order is set aside. Conclusion - i) The appellant is eligible to avail the CENVAT Credit of service tax of Rs. 1,35,91,278 - paid by them on RCM basis for Goods Transportation Agency Services and hence the demand confirmed in the impugned order along with interest, is set aside. ii) The penalty imposed on the appellant in the impugned order is set aside. Appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether CENVAT credit of service tax paid under reverse charge mechanism (RCM) for Goods Transportation Agency services can be validly availed in the month in which the relevant invoice/challan is received, notwithstanding payment of service tax being due by 5th of the next month (Rule 3(4), Rule 4(7) and Rule 9(1), CENVAT Credit Rules, 2004). 2. Whether availment of CENVAT credit prior to actual payment of service tax under RCM attracts disallowance and recovery, and whether interest under Sections 11AA/11AB of the Central Excise Act and Rule 14 of the CENVAT Credit Rules is payable where credit is availed but not utilized before making the RCM payment. 3. Whether imposition of penalty equal to the amount of disallowed credit under Section 11AC read with Rule 15 of the CENVAT Credit Rules is sustainable where availment of credit is found to be proper and there is no utilization prior to payment. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal framework for availing CENVAT credit on input services under RCM Legal framework: Rules 4(7) and 9(1) of the CENVAT Credit Rules, 2004 prescribe that CENVAT credit in respect of input services shall be allowed on or after the day on which the invoice or challan referred to in Rule 9 is raised; Rule 9(1)(a) allows a manufacturer to claim credit based on specified documents (including invoices/challans) issued by service providers. Rule 3(4) concerns timing of payment under RCM. Precedent treatment: The Tribunal has previously followed the proposition that credit can be availed on the basis of prescribed documents (invoices/TR-6 challans) and that receipt of such documents is material for entitlement. Decisions cited by the appellant (including a recent Tribunal decision considering Ind-Swift Laboratories Ltd.) support that document-based entitlement and subsequent compliance with payment provisions are determinative. Interpretation and reasoning: The Tribunal construed Rules 4(7) and 9(1) to mean that entitlement to CENVAT credit arises when the document specified in Rule 9(1) is received. Where RCM payment is required by the 5th of the next month, receipt of invoice/TR-6 challan in the relevant month suffices for availing credit for that month, subject to compliance with payment due dates. The Tribunal found the assessee possessed the requisite invoices/challans for the disputed period. Ratio vs. Obiter: Ratio - entitlement to CENVAT credit on input services for a month is established by receipt of documents specified in Rule 9(1), even where payment under RCM falls due thereafter, provided other statutory requisites are met. This forms a binding part of the decision. Any ancillary remarks on administrative practice are obiter. Conclusion: The Tribunal held that CENVAT credit availed on the basis of invoices/TR-6 challans for GTA services during the period in dispute was legally permissible; the allegation of wrongful availment contrary to Rule 3(4) was not sustainable. Issue 2 - Liability for interest where credit is availed before payment under RCM but not utilized before payment Legal framework: Interest provisions under Sections 11AA/11AB of the Central Excise Act and Rule 14 of the CENVAT Credit Rules apply where tax/credit irregularity causes delayed remittance; assessment of interest depends on whether credit was utilized and whether payment was delayed vis-à-vis utilization. Precedent treatment: The Tribunal relied on its recent decision that after considering the Supreme Court decision in Union of India v. Ind-Swift Laboratories Ltd., interest is not payable where CENVAT credit, though availed, has not been utilized prior to the payment of the underlying service tax. Several decisions cited by the appellant support the proposition that interest is linked to utilization causing short remittance rather than mere availment. Interpretation and reasoning: The Tribunal reasoned that if credit is availed but remains unutilized before the payment of service tax under RCM, no actual deprivation of revenue arises that would attract interest. The maximum equitable remedy, if utilization preceded payment, would be demand for interest for the short period of such utilization; but where no utilization occurred, interest liability does not arise. The factual finding was that the credit taken was not utilized for other liabilities in the relevant months. Ratio vs. Obiter: Ratio - no interest is payable where CENVAT credit availed prior to payment under RCM is not utilized before the RCM payment, aligning with prior Tribunal precedent and Supreme Court reasoning as interpreted. Observations about hypothetical short-period utilization and corresponding limited interest are obiter to the extent they address scenarios not present on facts. Conclusion: The Tribunal held that no interest was payable as the appellant had not utilized the credit before making payment of service tax under RCM; accordingly interest charged in the impugned order was set aside. Issue 3 - Penalty assessment where availment found proper and no utilization before payment Legal framework: Section 11AC of the Central Excise Act read with Rule 15 of the CENVAT Credit Rules prescribes penalty for wrongful availment or misuse of CENVAT credit; imposition requires demonstration of irregularity or wrongful availment. Precedent treatment: Penalty jurisprudence requires a finding of culpability or irregular availment; where availment is consistent with statutory provisions and documents, penalty is normally not sustainable. Interpretation and reasoning: Given the Tribunal's findings that (a) the appellant had requisite invoices/challans and thus entitlement to credit, and (b) the credit was not utilized prior to payment of the RCM liability, there was no irregularity or wrongful availment attracting penalty. The Tribunal reasoned that absence of misuse or deprivation of revenue negated the basis for imposing penalty equal to the credit amount. Ratio vs. Obiter: Ratio - penalty under Section 11AC cannot be sustained where the availment of credit is lawful and there is no utilization constituting misuse; such penalty is therefore inappropriate. Ancillary comments on proportionality are obiter. Conclusion: The Tribunal set aside the penalty imposed under Section 11AC/Rule 15, holding it unsustainable in light of lawful availment and absence of utilization before payment. Cross-references and overall disposition All three issues are interlinked: entitlement under Rules 4(7)/9(1) establishes lawful availment (Issue 1), which determines interest exposure under Sections 11AA/11AB (Issue 2) and penalty exposure under Section 11AC/Rule 15 (Issue 3). Applying these principles to the facts, the Tribunal allowed the appeal, set aside demand and interest, and quashed the penalty.