CENVAT Credit under reverse charge: premature utilisation treated as procedural lapse, with credit allowed and reduced penalty upheld.

CENVAT credit on input services paid under reverse charge could not be denied where entitlement to credit was otherwise established and the only defect was premature utilisation before discharge of the tax. Reading Rule 9 with Rule 4(7) of the CENVAT Credit Rules, 2004, the Tribunal treated the lapse as procedural because the service tax was subsequently paid and returns were filed before the show-cause notice. In the absence of suppression of facts or intent to evade duty, denial of credit and imposition of equal penalty were not warranted, and the appellate authority's reduction of penalty was upheld.

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Issues: Whether CENVAT credit taken and utilised in respect of service tax paid under reverse charge mechanism could be denied, and whether the penalty reduced by the appellate authority required interference.

Analysis: The admissibility of credit on the underlying input services was not in dispute. The only objection was that, in respect of reverse charge liability, the credit became available only after payment of service tax, and the credit used for the June 2017 liability was therefore utilised prematurely. The Tribunal held that Rule 9 of the CENVAT Credit Rules, 2004 has to be read with Rule 4(7) of those Rules, under which credit is allowed after payment of the tax by the recipient. Since the tax was in fact paid and the returns were filed before issuance of the show-cause notice, the mistake was treated as a procedural lapse. In the absence of suppression of facts or intent to evade duty, denial of credit and imposition of equal penalty were not justified, and the reduced penalty was found appropriate.

Conclusion: The credit could not be denied on merits, and the reduction of penalty was upheld; the revenue's challenge failed.

Ratio Decidendi: Where the entitlement to CENVAT credit is otherwise established and the only defect is premature utilisation after payment under reverse charge, the lapse is procedural if the tax is subsequently discharged and there is no suppression or intent to evade, so denial of credit or severe penalty is not warranted.

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