Restaurants Need Not Reverse CENVAT Credit For Food Supplied As Part Of Service: CESTAT Mumbai

The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 15 July held that restaurants providing taxable restaurant services are not required to reverse CENVAT credit under Rule 6(3) of the CENVAT Credit Rules, 2004 merely because food or beverages are supplied as part of the service.

A Bench comprising Judicial Member Justice (Dr.) S.K. Mohanty and Technical Member M.M. Parthiban allowed the appeal filed by Speciality Restaurants Ltd. and set aside the order confirming the demand for reversal of CENVAT credit. It observed:

“On reading of the said Circular, it would transpire that in case of provision of the “Restaurant Service”, where food or any other articles are supplied, then there is no need for reversal of CENVAT Credit under Rule 6(3) of the Rules of 2004.”

Speciality Restaurants Ltd. was engaged in providing restaurant and outdoor catering services. It discharged service tax after availing the abatement available under Rule 2C of the Service Tax (Determination of Value) Rules, 2006.

The Department alleged that cooked food supplied by the appellant was exempt from central excise duty and therefore qualified as an "exempted service" under the CENVAT Credit Rules, 2004. On this basis, it contended that the appellant was required to reverse CENVAT credit under Rule 6(3) of the Rules.

Rejecting the Department's contention, the Tribunal relied on CBIC Circular No. 213/3/2019-Service Tax dated 5 July 2019, which clarified that apart from the restriction contained in Rule 2C of the Service Tax (Determination of Value) Rules, 2006, no additional reversal of CENVAT credit under Rule 6(3) of the CENVAT Credit Rules, 2004 was required for restaurant services involving supply of food or beverages.

The Tribunal observed that the issue had already been clarified by the Central Board of Indirect Taxes and Customs (CBIC), which had expressly stated that providers of restaurant services were not required to reverse credit under Rule 6(3). It further noted that the Commissioner had dropped identical proceedings against the appellant for the subsequent period from April 2015 to June 2017 by relying on the same CBIC Circular.

The Bench held that the Department could not sustain the demand for the earlier period when the legal position had already been clarified. Finding no ambiguity regarding the applicability of the Circular, it concluded that the Department's insistence on reversal of CENVAT credit under Rule 6(3) was legally unsustainable.

Accordingly, the CESTAT set aside the impugned order and allowed the appeal filed by Speciality Restaurants Ltd.

For the Appellant: Shri Vinay S. Sejpal, Advocate

For the Respondent: Shri Jitesh Kumar Jain, Authorized Representative