Denial of Cenvat Credit of Service Tax: time-barred demand and credit upheld where tax paid and returned.

Denial of Cenvat credit of service tax was unsustainable since the taxpayer had paid the tax, reflected credit in Cenvat accounts and filed periodic returns; therefore extended limitation for concealment/fraud could not be invoked and the demand was time-barred. The reasoning held that credit once legitimately availed on tax paid and utilized in final product cannot be disallowed merely because activity may not amount to manufacture or tax liability was questionable; consequently recovery, interest and penalty were not leviable and refund exercise was not mandatory where credit had been taken.

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Issues: Whether the denial of Cenvat credit of Service Tax paid by the appellant and invocation of extended limitation under Section 11A(4) for recovery, together with levy of interest and penalty, was legally sustainable.

Analysis: The appellant had paid Service Tax charged by shipping lines and port authorities and thereafter availed Cenvat credit, while regularly filing ST-3/returns and reflecting the credit. The department invoked the proviso to Section 11A(4) alleging fraud or suppression to extend the limitation. The Tribunal examined whether concealment or suppression existed where the credit and payments were disclosed in periodic returns and detected during audit. Precedents were applied holding that detection during audit or after returns does not ipso facto indicate suppression and, absent fraud or concealment, only the normal limitation applies. The Tribunal also considered that where tax was charged and paid and subsequently credited, the credit could not be denied merely because the underlying activity was later found non-taxable; refund or other remedies would be revenue neutral and do not justify denial of credit or extended limitation.

Conclusion: The denial of Cenvat credit and invocation of extended limitation under Section 11A(4) is not sustainable; no penalty is leviable; the impugned order is set aside and the appeal is allowed in favour of the appellant.

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