2026 (2) TMI 1022 - AT - Service Tax

Input Service Distributor registration curable procedural defect; credit denial reversed where records prove entitlement and no apportionment required.

Denial of cenvat credit for non-registration of a zonal office as an input service distributor is treated as a curable procedural irregularity where ... Eligibility of Cenvat credit - Input Service Distributor registration - procedural irregularity and substantial benefit - Rule 6(3) of the Cenvat Credit Rules, 2004 - treatment of exempted services and reversal of credit - extended period of limitation - penalty u/s 77 and 78 of the Act - Eligibility of Cenvat credit - Input Service Distributor registration - HELD THAT:- Admittedly the zonal office was not registered as an input service distributor. However, while the cenvat credit availed on the input services are sought to be denied on this ground, equally it is pertinent to note that there is no dispute regarding the payment of the service tax in respect of which the credit has been availed nor is the eligibility of such services as input services being disputed. In such circumstances, when it also remains an uncontroverted fact that both the zonal office and the appellant main branch are located in the same building, and administratively when the entire financial requirements of the said zonal office, was being borne by the appellant main branch with the zonal office stated to be having no separate financial transactions or books of accounts, in accordance with the well settled position in law that substantial benefit cannot be denied for technical or venial breaches, this Tribunal is of the firm opinion that the substantial benefit of cenvat credit cannot be denied for the procedural infraction of non-registration of the zonal office as ISD, all the more when the appellant was not taken up on its claim in its reply that they were in possession of the invoices raised by the respective service providers duly indicating their branch address and which had all the requisite details for availing cenvat credit in conformity with the provisions of the Cenvat Credit Rules, and the said claim remained uncontroverted. Thus, the impugned order upholding the denial of cenvat credit on the ground of non-registration of the zonal office as ISD and for having passed on the credit, is wholly unsustainable. Treatment of exempted services and reversal of credit - HELD THAT:- The exemption of a service from the charge of service tax under Section 66 of the Finance Act 1994, even though the rate of tax levied is specified as the stipulated percentage of the value of such taxable service, is inherently and materially distinct from the exclusion of an element from the gross amount charged by the service provider for such service under Section 67 that provides for valuation of taxable services; an aspect which clearly has escaped the notice of the Ld. Appellate Authority. In any event, as observed supra, the SCN apart from the allegation of availment of the notification 13/2004-ST ibid does not specify any other exempted services that the appellant is alleged to have provided. Given the above, as well as the fact that the allegation in the SCN regarding availment of the exemption itself has remained unsubstantiated, the question of invoking provisions of Rule 6 of the Cenvat Credit Rules, 2004 to demand the alleged wrongly availed credit amount is wholly unsustainable and the findings in the impugned order on this aspect also is untenable. No evidence of any deliberate or positive act with an intent to evade payment of duty on the part of the Appellant, a public sector bank, no malafide is attributable to the Appellant and hence, the invoking of extended period is also unsustainable. Detailing such distinctions would needlessly make this order voluminous but it is to be stated that these decisions would not in any manner persuade this Tribunal to conclude contrary to the findings stated above. Thus, this Tribunal is of the considered view that the demands are unsustainable. Resultantly there does not arise any question of payment of interest or imposition of penalties. It is therefore held that the impugned order is liable to be set aside. Ordered accordingly. Issues: Whether denial and recovery of cenvat credit on the grounds that (i) the zonal office was not registered as an input service distributor and (ii) the appellant rendered both exempted and taxable services without applying Rule 6 apportionment, and consequential demand of interest and penalties, are sustainable.Analysis: The appeal record shows undisputed payment of service tax on the input services and that invoices with requisite details were available; the zonal office and the appellant main branch shared premises and financial responsibility and the zonal office had no separate financial transactions. Precedent of the jurisdictional High Court and other courts treats non-registration of an input service distributor as a curable procedural irregularity where complete records exist and the substantive entitlement to credit is otherwise established. The show cause notice did not identify or substantiate specific exempted services; the departmental orders proceeded on findings beyond the scope of the notice and conflated exclusion from taxable value with exemption from levy. There is no evidence of deliberate evasion or malafide conduct warranting invocation of extended limitation or imposition of penalties under the statute.Conclusion: Denial and recovery of the cenvat credit on account of non-registration of the zonal office as an input service distributor is unsustainable; calls for apportionment or reversal under Rule 6 are unsustainable in the absence of any substantiated claim of exempted services; consequential demands of interest and penalties and invocation of extended period are unsustainable. The impugned order is set aside and the appeal is allowed.