CESTAT New Delhi Allows Pre-GST CENVAT Credit Refund Under Reverse Charge Mechanism To Yokohama India

On 7 April, the Principal Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi allowed Yokohama India Pvt. Ltd. to claim a cash refund of CENVAT credit paid under the Reverse Charge Mechanism (RCM) for the pre-GST period.

Judicial Member Dr. Rachna Gupta clarified that Section 142(3) of the CGST Act protects such vested rights and the refund cannot be denied simply because the tax was paid after GST or due to alleged suppression without evidence. She observed:

“It is not the requisite for invoking this provision that payment should be made prior coming into effect of the CGST Act… the fact that the tax… was paid much later… is not relevant to deny the benefit of Section 142(3) of CGST Act.”

In 2022, Yokohama India paid service tax along with interest and penalty following audit objections for 2016–17 and 2017–18 (pre-GST). It then filed a refund claim of Rs. 7.62 lakh under Section 142(3) of the CGST Act. The Department rejected the claim, contending that cash refund was not permissible and alleging suppression. On appeal, this decision was upheld by the authority.

The Tribunal framed the issue as whether a refund of CENVAT credit paid in 2022 for pre-GST periods under reverse charge mechanism is admissible under Section 142(3).

Allowing the appeal, the Tribunal held that Section 142(3) requires refund claims of CENVAT credit under the existing law to be processed and paid in cash. It also noted that once a taxpayer pays service tax under the erstwhile law, they acquire a right to CENVAT credit, which Section 142(3) protects.

The Bench rejected the Department's suppression argument, noting that mere payment along with penalty pursuant to an audit objection does not prove intent to evade tax. It observed:

“There is nothing on record to prove any positive act… which may amount to… suppression… Mere fact that the non-payment was objected at the time of audit is miserably insufficient…”

The Bench also clarified that the Department wrongly invoked Rule 9 of the CENVAT Credit Rules, as it applies to service providers and not to service recipients under RCM. Relying on precedents including Indo Tooling Pvt. Ltd., the Tribunal reaffirmed that cash refund is permissible when the transition of credit under GST is not possible.

Accordingly, the CESTAT set aside the impugned order and allowed Yokohama's appeal.

Appearance for the Appellant: Shri Manish Hirani, Advocate 

Appearance for the Respondent: Shri Ram Pravesh Prasad, Authorized Representative