Tax Department Cannot Dictate CENVAT Credit Compliance Method: CESTAT Delhi

The Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that tax authorities cannot compel a taxpayer to adopt a particular method of complying with its obligations under the CENVAT Credit Rules.

Setting aside the CENVAT credit and service tax demands, along with the interest and penalties, the tribunal ruled that the choice of compliance rests with the taxpayer.

A bench of Officiating President Dr. Rachna Gupta and Technical Member Subba Rao allowed the appeal filed by Vertiv Energy Pvt. Ltd.

Observing that the department cannot force a taxpayer to comply in a manner of its choosing, the tribunal held:

“Nothing in the CCR permits officers to make a choice and require the assessee to fulfil obligation as per the officers choice. An amount under rule 6(3) of CCR cannot be demanded from the assessee under Rule 14 of CCR by making a choice for the assessee.”

The dispute arose after the tax department alleged that Vertiv had not maintained separate accounts for taxable and exempt services, had availed CENVAT credit on common input services and was therefore liable to pay more than ₹12 crore.

It also alleged short payment of service tax under "erection, commissioning, and installation service" and on account of the increase in the service tax rate from April 1, 2012.

Vertiv contended that it had availed only proportionate CENVAT credit attributable to taxable services and had not taken credit attributable to exempt services. It also argued that service tax had already been discharged under the appropriate taxable categories, including works contract service.

On the demand arising from the increase in the service tax rate, it maintained that it had correctly applied the Point of Taxation Rules and had paid the differential tax wherever it was payable.

Agreeing with the company, the tribunal held that the CENVAT Credit Rules provide multiple methods for meeting the prescribed obligations and leave that choice to the taxpayer. It ruled that the department could not insist on one particular method and raise a demand on that basis.

The tribunal also found that Vertiv had demonstrated that it had taken only proportionate CENVAT credit on common input services and had not availed credit attributable to exempt services.

The tribunal further observed,“If the appellant has not availed complete amount of CENVAT credit the question of reversing a portion of it under rule 6(3) of CCR does not arise. This part of the demand cannot be sustained even for this reason.”

On the allegation of short payment under "erection, commissioning and installation service", the tribunal held that Vertiv had also rendered works contract and annual maintenance contract services and had paid the appropriate service tax on those services, and therefore the demand could not be sustained.

The tribunal also held that, applying the Point of Taxation Rules to the facts of the case, the higher rate of service tax was payable only to the extent payments were received after April 1, 2012. Since Vertiv had already paid the differential tax during the audit wherever applicable, no further amount remained payable.

The tribunal consequently set aside the impugned order and allowed the appeal with consequential relief.

For Appellant: Advocates B.L. Narasimhan and Ms. Shreya,

For Revenue: Aejaz Ahmad, Authorised Representative