CESTAT Chennai Allows Royal Enfield's CENVAT Credit Appeals, Sets Aside ₹51.47 Lakh Penalty

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, on 15 October allowed appeals filed by Royal Enfield and set aside demands for reversal of CENVAT credit and penalties imposed on the company.

A Bench comprising Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao held that the absence of a separate Input Service Distributor (ISD) registration did not, by itself, disentitle the company from claiming credit on eligible input services. It observed:

“we find that the impugned orders proceed on a fundamental misdirection in law. They tested the credit of a provider of output service by the standard applicable to a manufacturer alone, and left unanswered the appellant's plea on the marketing and branch offices. OIO I & II confirmed a demand larger than the one proposed under a provision not invoked, and invoked the extended period on reasoning that the Supreme Court has repeatedly rejected. OIO III set aside a binding decision of this Bench by a distinction without substance and imposed a penalty beyond the statutory ceiling. The Appellate Authority affirmed all of this without independent scrutiny.”

The dispute arose from three show cause notices issued to Royal Enfield for different periods between November 2012 and June 2017. The Department alleged that the company had wrongly claimed CENVAT credit on services received at its service stations and offices, as well as on certain services relating to its other manufacturing units. The authorities confirmed the demands, interest and penalties, and the Commissioner (Appeals) upheld those orders.

Royal Enfield argued that the services were used to provide taxable output services and that the relevant invoices were accounted for at its Tiruvottiyur premises in Chennai.

The Tribunal held that eligible input services used at service stations covered by the company's centralised service tax registration qualified for CENVAT credit, even if the stations were located away from the manufacturing factory.

It also set aside demands relating to marketing and branch offices, noting that the authorities had not properly examined Royal Enfield's submissions concerning sales promotion and related activities.

On the ISD credit of Rs. 23.77 lakh, the Bench found that the Department had not established the facts necessary to allege incorrect distribution of credit. It further held that the extended period of limitation could not be invoked merely because an audit detected the issue, in the absence of evidence of deliberate suppression to evade duty.

It also set aside the Rs. 8.09 lakh demand relating to services used exclusively at the Manjambakkam and Oragadam units, holding it time-barred despite Royal Enfield having reversed the credit. It set aside the Rs. 51.47 lakh penalty and held that a separate penalty of Rs. 4.75 lakh exceeded the applicable statutory maximum.

However, the Tribunal clarified that Royal Enfield could not reclaim the reversed credit of Rs. 23.77 lakh and Rs. 8.09 lakh at Tiruvottiyur or seek a refund, as the corresponding credit had already been availed by its other units.

Accordingly, the CESTAT allowed the appeals and set aside the impugned orders, subject to the clarification on the reversed credit.

For Royal Enfield: Consultant Sivarajan, along with Consultants M. Krishnakumar and Usha Kumari

For Department: Authorised Representative G. Krupa