By TIOL News Service

MUMBAI, NOV 12, 2013: THE appellants are manufacturers of fragrances and aroma chemicals (Ch. 29 & 33). The appellant availed service tax credit on Intellectual Property Right (IPR) services provided to them by their Managing Director during September 2007 to July 2008.

In his statement, the Chief Financial Officer of the company stated that the Managing Director was an employee of the company and was using the laboratory facilities of the company and the raw materials provided by the company to create new products. Revenue was of the view that services rendered by the Managing Director who is an employee to the appellant firm, cannot be considered as a service rendered and, therefore, no credit can be taken of the service tax paid on such IPR services; that IPR, if any, belongs to the company and not to the individual and, therefore, no IPR services have been provided by the Managing Director to the appellant firm.

Suffice to say that the jurisdictional authorities issued a SCN dated 03/01/2011 proposing to deny the service tax so availed of Rs.1,23,90,991/- on the IPR services.

The notice was adjudicated by the CCE, Mumbai-III and the impugned order was passed wherein CENVAT Credit amounting to Rs.1,23,90,991/- was denied and was sought to be recovered along with interest thereon. A penalty of Rs.2,000/- was also imposed on the appellant. Goods which were cleared by utilizing wrongly availed CENVAT credit were ordered to be confiscated in terms of Rule 25 of the CER, 2002 but since the goods were not available for confiscation a redemption fine of Rs.20 lakhs was imposed.

Aggrieved of the same, the appellant is before the CESTAT.

The appellant made the following submissions.

+ In April 2007 the Central Excise authorities conducted audit of the appellant's records and enquired about the royalty payments made to Shri G.D. Kelkar, Managing Director. The appellant explained that the royalty was paid to Shri G. D. Kelkar as per the decision of the Board of Directors of the company inasmuch as Shri G.D. Kelkar had developed certain formulas and processes useful for the manufacture of the products by the appellant company. The department informed the appellant that the royalty payment attracted liability to service tax.

+ Vide letter dated 26/06/2007 the jurisdictional Superintendent (Audit) issued a letter to the appellant directing them to pay service tax amounting to Rs.59,57,159/- plus interest.

+ In pursuance to the said direction, Shri G.D.Kelkar got himself registered with the department under the category of IPR services. Thereafter, Shri G.D.Kelkar paid a sum of Rs.52,03,449/- towards service tax on a royalty amount of Rs.4,33,62,075/- along with education cess of Rs.1,04,069/- and interest and penalty amounting to Rs.12,46,592/- vide a challan dated 28/06/2007. Shri Kelkar also paid another sum of Rs.7,08,745/- towards the differential service tax payable as the royalty received by him Rs.4,86,69,596/- vide challan dated 20/07/2007. This was for the period 2005-2006. Subsequently Shri Kelkar paid a service tax amount of Rs.63,75,428/- for a royalty amount of Rs.5,15,81,137/- for the period 2006-07. Shri Kelkar also filed service tax returns reflecting the above payments vide returns dated 24/10/2007 for the period April 2006 to September 2006 and April 2007 to September 2007. He also raised invoices on the appellant vide invoices dated 05/07/2007 and 05/03/2008 for the royalty payments towards IPR services rendered by him.

+ It is on the strength of these invoices the appellant took credit of the service tax paid on the IPR services received by them from Shri Kelkar. Therefore, the entire transactions were undertaken in accordance with the law with the full knowledge of the department. The payment of service tax by Shri Kelkar has not been disputed by the department and has been accepted by the department. If that be so, the department cannot take the stand that the appellant did not receive any services and the credit taken by the services paid on IPR services is not an eligible credit.

+ It is further submitted that the taxability and the related issues of input service has to be decided by the departmental authorities having jurisdiction over the service provider and the authorities of the recipient factory cannot sit in judgement on these matters. Reliance is placed on the decision in Ultratech Cement 2011-TIOL-800-CESTAT-MUM.

+ It is also submitted that the department was aware of the whole transaction and, therefore, there is no suppression on the part of the appellant in taking the credit and availing the same and therefore, demands are barred by limitation as held in the following decisions:

a) Fedders Lloyd Corporation 2007-TIOL-217-SC-CX

b) Maruti Udyog Ltd., 2002-TIOL-78-CESTAT-DEL.

c) Gopal Zarda Udyog 2005-TIOL-123-SC-CX-LB

The Revenue representative had nothing to add except reiterate the findings of the adjudicating authority.

The Bench inter alia observed -

+ It is clear that it was at the behest of the department Shri Kelkar discharged the service tax liability on IPR services on the royalty received by him from the appellant company. Shri Kelkar also took registration and discharged the duty liability and also filed returns assessing the liability to service tax. The payments made by Shri Kelkar were accepted by the department and no dispute was raised on the assessment returns filed by ShriKelkar.

+ In other words, the discharge of service tax liability by the service provider was never disputed by the department at all. Shri Kelkar also raised invoices on the appellant, which shows the nature of the services rendered, the amount charged, the service tax liability discharged and all other relevant particulars. On the strength of these invoices, the appellant company has taken credit.

+ Once the appellant has received the services and has borne the incidence of service tax, the appellant is rightly entitled to the service tax credit. The authorities at the service recipient's end has no jurisdiction to question the classification of service and the liability to service tax so long as the authorities having jurisdiction over the service provider's end do not dispute the same.

+ Therefore, the impugned demand holding that the appellant has not received any input service and, therefore, not eligible for any service tax credit is unsustainable in law.

+ As early as in 2007, when the records of the appellant firm were audited by the department the payment of royalty to ShriKelkar and receipt of service by the appellant was known to the department, and thereafter, on the advice of the department ShriKelkar obtained service tax registration and discharged service tax liability. The receipt of service and availment to service tax credit was also reflected by the appellant in the monthly ER-1 returns. Therefore, the whole transaction, the payment of service tax and availment of credit thereon was in the full knowledge of the department. In spite of having the information, the show-cause notice has been issued in this case only in January 2011 after a lapse of more than 3 ½ years. Thus, the demand is clearly time barred.

Holding that the order is not sustainable in law, the same was set aside and the appeal was allowed.

In passing: Incidentally, the commendation certificates issued to the Audit team stay put - after all, they did their job!

(See 2013-TIOL-1684-CESTAT-MUM)