Input service credit allowed for erection under specified services; service tax on lease rental income set aside per Rule 6(3) CCR

CESTAT Bangalore allowed the appeal, setting aside the impugned order. The tribunal held that input service credit for laying foundations supporting capital goods is disallowed unless linked to specified services like works contracts; since erection and commissioning fall under specified services, credit was justified. Service tax demand on lease rental income was set aside, following precedent that such rent-sharing among associated enterprises is not a taxable service. The demand for reversal of CENVAT credit under Rule 6(3) CCR was also rejected based on CBIC Circular No.213/3/2019-ST, which restricts reversal only when both inputs and input services are restricted. Regarding abatement on repair and maintenance under works contract, the appellant correctly discharged duty on 60% of the value per Valuation Rules, so the demand was unsustainable.

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ISSUES:

Whether cenvat credit on the service portion in execution of works contract and construction services used for laying foundation or making structures for support of capital goods is irregularly availed.Whether service tax is payable on lease rental income arising from internal sharing of premises among divisions of the same legal entity.Whether non-reversal of cenvat credit as per Rule 6(3) of the Cenvat Credit Rules, 2004, in respect of specified exempted services, is justified.Whether irregular availment of abatement with respect to repair and maintenance service under works contract is sustainable.Whether extended period of limitation can be invoked in absence of suppression of facts with intent to evade service tax.Whether penalty can be imposed despite absence of reasonable cause for failure to pay service tax.

RULINGS / HOLDINGS:

On cenvat credit irregularity: The input service credit relating to laying of foundation or making of structures for support of capital goods is excluded from credit except when the output service is one or more of the specified services; since erection and commissioning services are specified services, the cenvat credit claim is justified.On lease rental income: The demand for service tax is unsustainable as the sharing of rent among divisions of the same legal entity constitutes an internal arrangement and does not amount to rendering of service.On non-reversal of cenvat credit under Rule 6(3): Following CBIC Circular No.213/3/2019-ST dated 05.07.2019, reversal under Rule 6(3) is not required for services covered by notification 26/2012-Service Tax unless both inputs and input services are restricted; thus, the demand for reversal is set aside.On abatement for repair and maintenance services: Rule 2A(ii)(C) applies to maintenance and repair of immovable property, requiring service tax on 60% of total contract value; since the appellant discharged duty accordingly, demand for irregular abatement is unsustainable.On invocation of extended limitation period: In absence of suppression of facts with intent to evade tax, invocation of extended period is not justified.On penalty imposition: Penalty cannot be imposed where no reasonable cause for failure to pay service tax is shown, and provisions of Section 80 should apply.

RATIONALE:

The Court applied the definition of "input service" under Rule 2(1)(A) of the Cenvat Credit Rules, 2004, including amendments effective from 01.07.2012, which exclude service portions used for laying foundation or structures supporting capital goods except when the output service is specified under clause (b) of Section 66E of the Finance Act.The Tribunal relied on precedents holding that internal sharing of rent between divisions of the same legal entity does not constitute a taxable service, referencing authoritative decisions including a Supreme Court ruling affirming such principle.The Court followed CBIC Circular No.213/3/2019-ST clarifying that services specified in notification 26/2012-Service Tax do not automatically become exempted services necessitating reversal under Rule 6(3) unless both inputs and input services face restrictions, thereby overruling the demand for reversal.Valuation under Rule 2A of the Service Tax (Determination of Value) Rules, 2006, was interpreted strictly according to the nature of works contract; maintenance and repair services attract service tax on 60% of contract value, which was complied with by the appellant.The extended limitation period under Section 73(1) of the Finance Act, 1994, requires proof of suppression of facts with intent to evade tax; absence of such evidence negates its applicability.Penalty provisions require demonstration of willful default or suppression; absence of reasonable cause and failure to consider Section 80 provisions renders penalty imposition unsustainable.

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