Reverse charge service tax through CENVAT credit permitted before 01.07.2012; later bar held prospective and demand time-barred.

For the period before 01.07.2012, service tax payable on imported services under reverse charge could be discharged through CENVAT credit because the recipient was treated as the person liable to pay tax and, by legal fiction, as the provider of taxable service. The later Explanation to Rule 3(4), which barred such utilisation, was held to be a substantive restriction operating prospectively from 01.07.2012 and not retrospectively. On limitation, the Tribunal found no basis for the extended period once credit utilisation was held permissible, and held the notice time-barred. The demand and penalties were therefore unsustainable.

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Issues: (i) Whether, for the period prior to 01.07.2012, an assessee receiving services from outside India could discharge service tax payable under reverse charge mechanism by utilising CENVAT credit; (ii) whether the demand was time-barred by limitation, including invocation of the extended period.

Issue (i): Whether, for the period prior to 01.07.2012, an assessee receiving services from outside India could discharge service tax payable under reverse charge mechanism by utilising CENVAT credit.

Analysis: The Tribunal read Rule 3(4) of the Cenvat Credit Rules, 2004 with the definitions of "output service", "provider of taxable service", and "person liable for paying service tax". It held that, in respect of imported services, the Indian recipient became the person liable to pay service tax and, by legal fiction, the provider of taxable service, so the tax could be paid through CENVAT credit. The Explanation inserted in Rule 3(4), barring such utilisation where the recipient was liable to pay tax, was treated as creating a substantive prohibition and was held to be prospective from 01.07.2012. The Tribunal relied on the prevailing High Court authorities taking the same view and declined to follow the contrary Tribunal view relied on by the Department.

Conclusion: The assessee was entitled to utilise CENVAT credit for discharge of reverse charge service tax for the period October 2011 to March 2012; the demand on that ground was unsustainable and in favour of the assessee.

Issue (ii): Whether the demand was time-barred by limitation, including invocation of the extended period.

Analysis: Once utilisation of credit was held permissible for the relevant period, the basis for alleging evasion or suppression was negated. On the facts, the Tribunal found no material justifying invocation of the extended period and held that the notice, issued after the relevant period, was beyond limitation.

Conclusion: The demand was barred by limitation and the extended period could not be invoked, in favour of the assessee.

Final Conclusion: The impugned demand and penalties could not be sustained, and the appeal succeeded with the order-in-original set aside.

Ratio Decidendi: For periods prior to 01.07.2012, service tax payable on imported services under reverse charge could be discharged through CENVAT credit, and a later inserted prohibition on such utilisation could not be applied retrospectively.

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