By TIOL News Service

BANGALORE, NOV 12, 2013: APPELLANTS are engaged in the manufacture of motor vehicles. A show-cause notice was issued on 01.5.2012 to the appellant proposing to demand service tax of Rs. 1,78,37,676/- on foreign expenditure incurred towards 'Intellectual Property Rights Service' during the period 2008-09. The appellant discharged the entire amount of Rs. 1,78,37,676/-. However, dispute arises because the appellant chose to pay major portion of service tax by utilizing CENVAT credit on capital goods available with them. Revenue has taken a view that CENVAT credit would not have been utilized for payment of service tax and they should have paid in cash.

The Commissioner in his order has relied upon the provisions of Rule 3(4) and Rule 2(p) of CENVAT Credit Rules, 2004 and Rule 5 of Taxation of Service (Provided from outside India and received in India) Rules, 2006 to hold that the appellant could not have utilized the CENVAT credit for payment of service tax.

The Tribunal noted:

According to Rule 3(4)(e) of CENVAT Credit Rules, 2004, CENVAT credit may be utilized for payment of service tax on any output service. According to provisions of Section 66A(1) of the Finance Act, 1994, for all purpose, when demand are made under Section 66A, the service received has to be treated as 'output service'. Further, on considering the points at paragraph 17 of the order, we find that the Commissioner seems to have considered the heading of Rule 5 which reads - "the taxable services shall not be treated as output service". However, Rule 5 of Taxation of Service (provided from outside India and received in India) Rules, 2006, reads as under:-

"the taxable service provided from outside India and received in India shall not be treated as output services for the purpose of availing credit of duty of excise paid on any input or service tax paid on any input services under CENVAT Credit Rules, 2004."

The Tribunal observed,

"From the above rule, it is quite clear that the restriction applies for availing credit of duty only in respect of excise duty paid on input or service tax paid on any input services and not capital goods. In such a situation, the appellant has made out prima facie case in their favour for correctness of payment made by them. However, it is seen that payment was made after two years from the receipt of services and therefore, the appellant is liable to pay interest. Learned advocate for appellant fairly agrees to do so. Accordingly, We direct the appellant to deposit a sum of Rs. 40,00,000/- (Rupees Forty lakhs only) within 10 weeks from today and report compliance on 17.2.2014."

(See 2013-TIOL-1688-CESTAT-BANG)