CESTAT allows CENVAT credit appeal, rejects denial based on delayed SEBI alert and service provider's non-payment

CESTAT Kolkata allowed the appeal, setting aside the order denying CENVAT credit. The tribunal held that credit cannot be denied based on SEBI's alert letter issued 16 months after appellant obtained NOC, as the alert was issued much later than the transaction date. Non-payment of service tax by the service provider is insufficient grounds to deny credit without proving appellant's connivance. Statements recorded during investigation lack evidentiary value without Section 9D compliance. The show-cause notice was time-barred as credit was properly reflected in books and returns. Consequently, no penalty was imposable.

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The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the appellant is entitled to avail Cenvat credit of Service Tax paid on input services procured from a service provider alleged to be a shell company;

(b) Whether non-payment of Service Tax by the service provider to the government can be a ground to deny Cenvat credit to the appellant;

(c) Whether the statements recorded during investigation, relied upon by the Revenue, have evidentiary value to deny Cenvat credit without compliance with statutory safeguards;

(d) Whether the extended period of limitation can be invoked for issuance of the show-cause notice in the absence of evidence of connivance or fraud on the part of the appellant;

(e) Whether the appellant's transactions with the service provider and the ultimate recipient of services were bona fide and supported by valid agreements, invoices, and evidence of receipt of services.

Issue-wise Detailed Analysis

1. Entitlement to Cenvat Credit on Services Procured from Alleged Shell Company

The appellant, acting as a financial intermediary, outsourced certain taxable services to a service provider, PIL, which was alleged by the Revenue to be a shell company based on a SEBI alert issued after the transaction date. The appellant availed Cenvat credit on the service tax paid to PIL and reflected the same in statutory returns.

The Revenue denied credit on the ground that PIL was a shell company and had not discharged service tax liability.

The Tribunal examined the timeline and facts, noting that the SEBI alert listing PIL as a suspected shell company was issued on 07.08.2017, approximately 16 months after the appellant had obtained the No Due Certificate through PIL on 14.03.2016. The Tribunal held that credit denial cannot be premised on an alert issued after the transaction date, as the appellant could not have had knowledge of such adverse information at the time of availing credit.

The appellant produced valid agreements, invoices, and evidence from the recipient of the output services (KIL) confirming receipt of the No Due Certificates from financial institutions, substantiating the bona fide nature of the services rendered. The Revenue did not discredit these evidences nor investigate the appellant or KIL to contradict the appellant's claim.

The Tribunal emphasized that the appellant was a bona fide purchaser of input services, supported by valid service tax registration of PIL and proper payment through banking channels, fulfilling the conditions under the Cenvat Credit Rules, 2004 (CCR).

2. Effect of Non-Payment of Service Tax by the Service Provider on Credit Availment

The Revenue contended that since PIL did not deposit the service tax collected, the appellant's credit was inadmissible under Rule 3 of the CCR.

The Tribunal analyzed binding precedents including the Jharkhand High Court's decision in Tata Motors Ltd. and the Tribunal's own ruling in L.G. Electronics India Pvt. Ltd., which established that the recipient of input services cannot be denied credit on account of non-payment of service tax by the supplier, absent evidence of collusion or fraudulent intent on the part of the recipient.

It was held that the appellant had complied with all statutory requirements, including payment of service tax to the service provider and possession of valid invoices. The law does not impose a duty on the recipient to verify deposit of tax by the supplier. The Revenue's remedy lies against the defaulting supplier.

Further reliance was placed on the Tribunal's decision in Bayer Material Science Pvt. Ltd., which reinforced that the recipient's entitlement to credit is not contingent upon the supplier's compliance with tax payment, provided the recipient has fulfilled its obligations under the CCR.

3. Evidentiary Value of Statements Recorded During Investigation

The Revenue relied on incriminating statements recorded from various persons associated with PIL to support the allegation of fraudulent availment of credit.

The Tribunal referred to the Punjab & Haryana High Court ruling in Ambika International, which held that statements recorded during investigation have no evidentiary value unless recorded in compliance with Section 9D of the Central Excise Act, 1944, as applicable to the Finance Act.

Since the procedural safeguards under Section 9D were not followed, the statements could not be used as a basis to deny credit or establish fraud on the part of the appellant.

4. Invocation of Extended Period of Limitation

The show-cause notice was issued invoking extended limitation period under the Finance Act, 1994.

The Tribunal noted that the appellant had disclosed the credit availed in ST-3 returns filed in 2016, and the Revenue failed to produce any evidence of collusion or fraudulent conduct by the appellant with PIL.

In absence of such evidence, the extended limitation period could not be invoked. This was consistent with the Tribunal's earlier rulings where extended limitation was held applicable only when fraud or suppression was established.

5. Bona Fide Nature of Transactions and Compliance with Cenvat Credit Rules

The appellant demonstrated that the services outsourced to PIL were integral to the output services provided to KIL, supported by agreements and correspondence confirming receipt of services.

The appellant's payment of consideration through banking channels, possession of valid tax invoices, and registration of PIL with the Service Tax Department satisfied the requirements of Rule 9(1) of the CCR.

The Tribunal observed that the Revenue did not challenge the genuineness of the appellant's output services or the contractual arrangements, nor did it disprove the appellant's compliance with procedural requirements for credit availment.

Conclusions on Each Issue

(a) The appellant is entitled to avail Cenvat credit on service tax paid to PIL, notwithstanding the subsequent SEBI alert classifying PIL as a suspected shell company issued after the transaction date.

(b) Non-payment of service tax by the service provider PIL is not a valid ground to deny credit to the appellant, absent evidence of collusion or fraud.

(c) Statements recorded during investigation without compliance with Section 9D do not have evidentiary value to deny credit or establish wrongdoing.

(d) The extended period of limitation cannot be invoked without proof of fraudulent conduct or suppression by the appellant.

(e) The appellant's transactions were bona fide, supported by valid agreements, invoices, and evidence of receipt of services, fulfilling the conditions under the CCR.

Significant Holdings

The Tribunal held verbatim:

"The appellant was a bonafide purchaser of input services for value from PIL on the basis of a valid and effective service tax registration issued to PIL by the service tax department and the credit of service tax was availed by the appellant on the strength of an agreement, legitimate tax invoice including payment of consideration through proper banking channel to PIL not entailing any violation of Rule 3, Rule 4 or Rule 9(1) of the CCR as alleged or at all."

"Non-deposit of service tax by PIL in respect to the tax invoice raised upon the appellant can be no ground to deny service tax credit to the appellant alleging violation of Rule 3 of the Cenvat Credit Rules especially when there is no evidence of connivance of the appellant with PIL."

"The statements recorded during the course of investigation, have no evidentiary value unless and until tested in terms of Section 9D of the Central Excise Act, 1944."

"The show-cause notice issued to the appellant is highly barred by limitation."

"The appellant has paid the service tax, on which they have taken cenvat credit on all the requirements in terms of Rule 9 (1) of the Cenvat Credit Rules, 2004, which are reflected in the invoice. Therefore, the cenvat credit cannot be denied on the ground of non-payment of service tax by the service provider."

"The credit of the service tax paid by him to the service provider for further deposit in the exchequer kitty cannot be denied to him on account of the lapse of the service provider. The Revenue's remedy, in these types of cases lies at the end of service provider, for initiating proceedings against him, in respect of the short levy of service tax."

Accordingly, the impugned order denying Cenvat credit and imposing penalty was set aside and the appeal allowed with consequential relief.

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