Cenvat credit reversal with interest defeats service tax demand and penalty where tax was otherwise paid under the valuation rules.

Reversal of inadmissible Cenvat credit with interest, together with intimation to the Department, was treated as equivalent to non-availment for the purpose of Notification No. 01/2006-ST, so the pre-July 2012 abatement could not be denied merely because credit had earlier been taken. For the post-June 2012 period, tax paid under Rule 2A(ii) read with Notification No. 24/2012-ST, including the differential amount and interest, defeated the construction service demand. The separate demand for alleged excess Cenvat credit also failed after reversal with interest. Once the substantive tax and credit liabilities were neutralised, no penalty survived.

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Issues: (i) Whether reversal of Cenvat credit with interest disentitled the assessee from the benefit of Notification No. 01/2006-ST for the pre-July 2012 period. (ii) Whether the post-July 2012 demand under construction service was sustainable when tax was paid on the basis of Rule 2A(ii) of the Service Tax (Determination of Value) Rules, 2006 read with Notification No. 24/2012-ST. (iii) Whether the demand of Rs. 27,429/- towards alleged excess Cenvat credit was sustainable. (iv) Whether penalty was imposable once the tax and credit disputes stood resolved by payment and reversal.

Issue (i): Whether reversal of Cenvat credit with interest disentitled the assessee from the benefit of Notification No. 01/2006-ST for the pre-July 2012 period.

Analysis: The assessee had availed input service credit during the relevant period but reversed the credit along with interest before adjudication and informed the Department. Such reversal was treated as equivalent to non-availment of Cenvat credit for the purpose of the abatement notification. The denial of the notification on the sole ground of prior availment of credit was therefore not justified.

Conclusion: The assessee remained entitled to the benefit of Notification No. 01/2006-ST for the period upto June 2012, and the demand on that basis was unsustainable.

Issue (ii): Whether the post-July 2012 demand under construction service was sustainable when tax was paid on the basis of Rule 2A(ii) of the Service Tax (Determination of Value) Rules, 2006 read with Notification No. 24/2012-ST.

Analysis: For the post-June 2012 period, the assessee paid tax by applying the valuation mechanism under Rule 2A(ii) and claimed the abatement available under Notification No. 24/2012-ST. The differential tax, as computed by the assessee, had already been paid with interest and intimated to the Department. In these circumstances, the demand under construction service could not survive.

Conclusion: The post-July 2012 demand under construction service was not sustainable.

Issue (iii): Whether the demand of Rs. 27,429/- towards alleged excess Cenvat credit was sustainable.

Analysis: The disputed credit of Rs. 27,429/- was reversed by the assessee along with interest and the reversal was communicated to the Department. Once the excess credit stood neutralised, recovery of the same amount could not be sustained.

Conclusion: The demand on account of excess Cenvat credit was unsustainable and was set aside.

Issue (iv): Whether penalty was imposable once the tax and credit disputes stood resolved by payment and reversal.

Analysis: Since the substantive tax demands and the credit dispute were found to be unsustainable after reversal, payment, and intimation, no separate penal consequence could survive on the facts of the case.

Conclusion: No penalty was imposable on the assessee.

Final Conclusion: The confirmed demands and penalties were wholly set aside, and the assessee succeeded in the appeal.

Ratio Decidendi: Reversal of inadmissible Cenvat credit with interest and payment of the differential service tax in accordance with the applicable valuation mechanism defeats a demand founded solely on prior credit availment or alleged underpayment, and the penal consequences cannot survive when the substantive liability itself is not sustained.

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