CESTAT Delhi Sets Aside Service Tax Demand, Allows CENVAT Credit For Reverse Charge Payments Before July 2012

The Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that service recipients could use CENVAT credit to discharge service tax under the reverse charge mechanism on imported services before 1 July 2012.

It ruled that the restriction barring use of CENVAT credit for payment of service tax where the recipient was liable to pay tax came into force only from 1 July 2012 and could not be applied retrospectively.

The tribunal also held that a show cause notice issued in 2017 for the period between October 2011 and March 2012 was barred by limitation because the Department could not justify invoking the extended period.

A coram of Judicial Member Dr. Rachna Gupta and Technical Member P.V. Subba Rao observed that the explanation inserted in Rule 3(4) of the CENVAT Credit Rules, which bars utilisation of CENVAT credit for payment of service tax where the recipient is liable to pay tax under the reverse charge mechanism, was "in nature of a prohibition" and "cannot be applied prior to 1st July 2012."

"The Adjudicating Authority has invoked the explanation introduced in Rule 3 (4) of Cenvat Credit Rules, however, the said explanation had to take effect from 1st July 2012. The said explanation says that Cenvat credit cannot be used for payment of service tax in respect of services where the person liable to pay tax is the service recipient. The said explanation from the bare perusal has created a substantive liability and the prohibition on the payment of service tax on reverse charge basis from the Cenvat credit account. It has been the settled position of law that the provisions creating substantive right or liabilities cannot have the retrospective application... In light of this discussion, we hold that explanation to Rule 3 (4) of Cenvat Credit Rules, 2004 since it is in nature of a prohibition cannot be applied prior to 1st July 2012 i.e. the explanation is inapplicable to the period in dispute (October 2011 to March 2012).", it ruled.

Tata Teleservices Limited challenged an order confirming service tax, interest and penalties after the Department alleged that the company had wrongly used CENVAT credit, instead of cash, to discharge service tax on services imported from outside India between October 2011 and March 2012.

According to the Department, payment through CENVAT credit amounted to non-payment of service tax. It therefore sought to recover the tax by invoking the extended period of limitation.

The tribunal examined the explanation inserted in Rule 3(4) of the CENVAT Credit Rules. It noted that the explanation took effect only from 1 July 2012 and introduced a substantive restriction on the use of CENVAT credit for payment of service tax under the reverse charge mechanism. Since the restriction created a substantive liability, the tribunal held that it could not operate retrospectively.

The tribunal also referred to decisions of the Delhi, Rajasthan, Karnataka, Punjab and Haryana, and Bombay High Courts. It noted that these courts had consistently held that, before 1 July 2012, a person liable to pay service tax under the reverse charge mechanism could utilise CENVAT credit to discharge that liability. In view of those decisions, the tribunal held that the earlier Tribunal decision relied upon by the adjudicating authority was no longer applicable.

The tribunal further observed that the adjudicating authority's reasoning was internally inconsistent. It noted that the adjudicating authority had itself recorded that the CENVAT Credit Rules, during the relevant period, did not prohibit utilisation of credit for payment of service tax under the reverse charge mechanism. It had also acknowledged that the bar on such utilisation was introduced only later through the explanation to Rule 3(4).

On limitation, the tribunal observed that Tata Teleservices had already discharged the entire service tax liability by utilising CENVAT credit.

It held that there was nothing on record to justify invocation of the extended period of limitation. Consequently, the show cause notice, issued in 2017 for the period from October 2011 to March 2012, was held to be time-barred.

For Appellant: Advocates Lalitendra Gulani, Mohit Pugalia and Tannu Kumar Takkar, 

For Revenue: Jaya Kumari, Authorized Representative.