By TIOL News Service

MUMBAI, MAY 15, 2014: A case was booked by the Raigad Commissionerate against the appellant that they had availed CENVAT Credit of Service Tax paid on services which were used for trading activity of imported goods and relating to their real estate business and the credit so taken was utilised towards discharge of excise duty on goods manufactured at their factory at Alibaug. The officers of the appellant firm admitted that they had taken CENVAT Credit Rs.2,42,02,704/- without proper supporting documents and on services which were exclusively for trading activity.

It was further observed that the Head Office of the appellant had distributed CENVAT Credit of service Tax paid on input services to the Alibaug factory without getting themselves registered as Input Service Distributor (ISD) and even though the services were availed by the factories at other places. This amount was Rs.2,92,78,755/-.

There is also another allegation that the appellant had availed CENVAT Credit Rs.2,88,89,730/- without being in possession of proper documents. Further, there is an instance when credit of Rs.8,19,902/- was taken twice and availment of excess credit of Rs.28,84,078/- than that shown in the invoice.

The above allegedly ineligible credit totaling Rs.8,80,80,062/- was for the period September, 2006 to September, 2010. Similarly, for the period October, 2010 to December, 2011 the CENVAT Credit so availed was Rs.96,63,002/-.

The demands were confirmed by the CCE, Raigad with imposition of penalties galore.

In appeal, the Bench after hearing the extensive arguments in the matter of stay observed -

CENVAT on Construction Services [Rs.2.42 Crores] - the said construction was mainly used for storage of imported goods and was in respect of the trading activity. Prior to 2011, trading was not considered as service at all and, therefore, the appellant could not have taken credit pertaining to the trading activities ab initio. Since Rule 6(3) talks of dutiable as well as exempted services, it cannot apply to a situation wherein credit taken pertains to a non-service activity. Similarly, in the case of Insurance services availed by the appellant, bulk of it pertains to traded goods and, therefore, the appellant could not have taken credit in respect of this service for the manufacturing activity undertaken at their Alibaug factory.

CENVAT distributed by HO [Rs.2.93 Crores] - the distribution of the credit by the Head Office without being registered as ISD is against the provisions of CCR. Tribunal has consistently taken a view that the Service Tax credit can be distributed only if the services were received at the manufacturing premises and if it is received elsewhere, it is not permissible to avail of the Service Tax credit. Input Service Distribution scheme is a special scheme and if anyone wants to avail the benefit thereof, the terms and condition should be complied with completely. From the statements of the officials of the appellant firm, it clearly emerges that the credit was distributed by the Head Office without any registration and without ascertaining the receipt of the services at the Alibaug factory. Services received at the depots were also distributed to the Alibaug factory and also services received at the other factories of the appellant. Thus, as regards the denial of CENVAT Credit of Rs.2.92 Crore, the appellant is not prima facie eligible for the benefit of the same.

CENVAT on allegedly improper documents [Rs.2.89 Crores]: The appellant's claim is that the department has not clearly shown how the documents on strength of which the credit was taken was improper and what particulars were missing in the documents, so as to deny benefit of the CENVAT Credit. There is some merit in this contention but these needs to be verified with the actual documents which can be done only at the stage of final hearing.

The Bench also observed that in respect of the credits taken twice & taken in excess, the appellant has not made out any case at all.

In short, barring the demand of service Tax raised of Rs.2,88,89,713/- out of total demand of Rs.9.7 crore, the appellant has not made out a prima facie case for grant of stay, the Bench observed.

The CESTAT also noted that the appellant had made a payment of Rs.3.23 crore and which is a clear pointer to the wrong availment of credit by the appellant and coupled with the confessional statements it was apparent that the availment of CENVAT Credit at least to the extent of about Rs.7 crore by the appellant prima facie appears to be not in accordance with the provisions of CCR, 2004.

Holding that it appeared to be a case of "fraudulent availment" of ineligible CENVAT credit by resorting to manipulation of records/documents, deliberate mis-declaration and blatant violation of statutory procedures and the fact that the appellant had not pleaded any financial hardship, the Bench directed the appellant to make a pre-deposit of another Rs.3 Crores within eight weeks and report compliance.

We reported this order as 2014-TIOL-173-CESTAT-MUM.

As expected, the appellant filed an appeal before the Bombay High Court against this order of pre-deposit.

In the matter of the CENVAT distributed by Head Office of Rs.2.93 Crores, it is submitted that the HO has been subsequently registered as an Input Service Distributor and the lapse should be considered as a procedural and remedial one in view of the decision in Doshion Ltd. 2013-TIOL-395-CESTAT-AHM.

It is further mentioned that the Bench had found a strong prima facie case in favour of the appellant to the extent of demand of Rs.2.88 crores in the matter of the allegation that CENVAT was availed on allegedly improper documents. Inasmuch as since the appellant had already reversed CENVAT credit taken of Rs.3.23 crores out of the total demand of Rs.6 ½ crores (since in the matter of Rs.2.88 crores the Tribunal held that the appellant had a prima facie case), the order of pre-deposit of Rs.3 crores by the Tribunal would mean a deposit of the entire amount involved and which is not proper in law.

The Revenue representative submitted that the discretion that is exercised by the tribunal is in the facts and circumstances of the present case is not arbitrary or capricious. Inasmuch as since the Tribunal had held that fraud had been perpetrated on the public exchequer, it was not a fit case for interference by the High Court in its appellate jurisdiction.
In the matter of the submission made by the appellant that non registration as a ISD should be held to be procedural lapse, the High Court noted that it was not impressed and further observed -

++ At this prima facie stage, it would not be proper to comment either way as that would prejudice the case of the parties before the tribunal. The tribunal has noted that the allegations are serious and pointing towards a prima facie fraud. Therefore, in order to protect the interest of both sides that the tribunal made the interim order.

++ We are of the opinion that one can't at this stage break up the demand and hold that insofar as the sum of Rs.3,23,00,000/- out of the sum of Rs.6½ crores there is a strong prima facie case.

++ The demand cannot be considered after broken up and in isolation. It may be that the appellant would ultimately succeed. However, what the tribunal has gone by is the principle that prima facie case is not a case which would ultimately succeed but which merits require serious consideration and deeper investigation. It is in doing that the tribunal has observed that the interest of both sides can be protected by its interim order.

Holding that it is not in agreement with the submission of the appellant that the matter needs to be remitted back to Tribunal for examination of the contentions once again, the High Court dismissed the appeal on the ground that it did not raise any substantial question of law.

Nonetheless, the High Court extended time for making the pre-deposit ordered by the Tribunal till 15th June, 2014.

(See 2014-TIOL-734-HC-MUM-ST)