Penalty and interest - wrongly availed cenvat credit

[Asked by Guest]

We were taking CENVAT credit of Service Tax on the basis of billing of expenses against the legal provision of taking the credit on payment basis. This practice was being followed by us till September 2006 and from that period onwards we have started taking the credit on payment basis as is legally permitted. Now since we are aware of the anomaly we would like to rectify by depositing the wrongly taken credit along with interest and penalty (if any). So please advice the way we can do the same as per the provisions of the Service Tax rules in order to avoid any tax scrutiny by the department in the future. Please also advice us in the case of scrutiny by Service Tax dept whether this input (taken wrongly with payment to suppliers) can be disallowed fully by the dept and whether we can claim it (in case of disallowance for the particular period) in the future. If there is any case regarding this issue please also quote the case study.

AI Summary

Cenvat credit on payment basis: pay differential tax with interest and disclose to avoid penalty if done pre notice.
Where CENVAT credit of input services was availed on accrual instead of on payment, the department may require reversal for the months of accrual and re availment on actual payment; the taxpayer should compute and pay the differential service tax with interest, and if paid voluntarily before issue of a show cause notice penalty is generally not leviable. Maintain month wise workings, discharge liability via challan (GAR 7) and file a disclosure letter with computations and proof of payment to regularize the position.