By TIOL News Service

MUMBAI, JUNE 18, 2015: THE applicant availed CENVAT credit of various input services such as legal services, CHA service, repair and maintenance service, manpower recruitment service, account and audit service which were used in relation to manufacturing activity undertaken at the Pune factory.

They had constructed an immovable property at Mumbai & which they rented out. Service Tax was being paid under the category of 'Renting of Immovable Property Service' by utilizing the Input Service credit taken in respect of services received in the Pune factory.

The CCE, Pune-I was not at all amused with this concept of 'borrowing' CENVAT credit for discharge of ST liability and, therefore, issued a SCN proposing to deny the utilisation of CENVAT credit and for recovery of the same.

In adjudication, the demand of Rs.54,44,777/- was confirmed and against this order the applicant filed an appeal before CESTAT.

The Bench while ordering pre-deposit of the entire amount of credit involved observed -

++ It is a basic principle of CENVAT credit that there has to be a nexus between the input and input service and the output and output service. Only in respect of input and input service which goes into the manufacture of output or which are used in or in relation to rendering of output service, credit can be taken. This is what Rule 3 of the CENVAT Credit Rules, 2004 stipulates.

++ If there is no nexus between the input and input service and the output or output service, credit cannot be taken or utilised. In the present case, it is not in dispute that the credit was earned in respect of input/input service which were used in or in relation to the manufacturing activity of the appellant. The same has no nexus with the rendering of the output service of renting of immovable property in Mumbai.

We had while reporting this order 2014-TIOL-1799-CESTAT-MUM mentioned - By the way, hope the ST authorities at Mumbai aware of this!

The appeal was heard recently.

A Miscellaneous application was also filed by the appellant praying for permission to re-credit Cenvat of Rs. 54,44,777/- which was deposited by them in cash as ordered by the Tribunal in stay order.

The appellant submitted that Rule 3(4) under which credit is utilized does not require establishing nexus between the input service and output service. Reliance is placed on the decisions in Lakshmi Technology & Engineering Indus. Ltd. - 2011-TIOL-700-CESTAT-MAD & Jyoti Structures Ltd. - 2012-TIOL-1312-CESTAT-MUM. It is also submitted that the demand is barred by limitation as the fact of the transaction of renting of immovable property was disclosed in the financial statement as “other income” and hence there is no suppression of facts because their unit had been audited and records seen. The appellant also argued that the service of renting is provided outside the jurisdiction of the Pune Commissionerate and therefore, utilization of CENVAT Credit has no significance; that even if it was utilized wrongly, the maximum the department can ask is to restore the credit which was utilized wrongly.

The AR reiterated the findings of the adjudicating authority and also relied on the decision 2014-TIOL-1799-CESTAT-MUM and Telco Construction Equipment Co Ltd 2013-TIOL-1942-CESTAT-BANG.

The Bench observed -

On merits:

+ It appears that the property located in Mumbai was never registered under service tax. In Pune the appellant had their manufacturing unit where they were taking credit of input services used in their manufacturing activities as well for providing output services. The correct procedure was to take recourse to centralized registration which they failed to do so. This being an omission no doubt but the center of the dispute lies elsewhere.

+ The prime question to be addressed by us is whether CENVAT Credit on various input services which are used by the appellant in the course of their manufacturing activity and output services may be utilized for the payment of service tax liability on the service of renting of immovable property. The judgement relied upon by the learned Counsel holds that there is a common pool of CENVAT Credit for manufacturing and service activity and there is no requirement to maintain separate accounts for use of credit for manufacturing and for output services. The issue in hand is somewhat different both on a factual matrix as well as on appreciation of law.

+ While we do agree that there is no requirement of maintaining separate accounts for input services to be used for manufacturing and output services, our considered view is that the basic requirement of nexus between input and output services, as a condition flowing from the Cenvat Credit Rules, must be met.

+ On reading (rule 3(4) of CCR) it is seen that credit may be utilized for payment of service tax on any output service in terms of Clause (e) above. Therefore as far as output service is concerned, there has to be a nexus between the two. That is, a nexus between the input service and the output service. Appellant has cited various judgments such as the judgement of the Hon'ble High Court in the case of Coca Cola India Pvt. Ltd. - 2009-TIOL-449-HC-MUM-ST to say that input services were correctly used by them for providing the service of renting. We do not agree with this.

+ The interpretation of this judgement cannot be stretched to such an extent so as to conclude that even if there is no nexus the input credit can be utilized for paying tax on the renting of property service. It is clear that the input service on which the credit was taken were mostly directly related to the manufacturing activities at Pune. And had no connection with the service of renting of property.

+ Therefore, there is no logic in the argument that credit on such input services can be used for paying the service tax liability on the renting of property in Mumbai. …We can understand if the factory itself is located in a rented premises, then perhaps the nexus could be there but in the present case we are of the view that input credit cannot be utilized for paying service tax liability on the renting of immovable property service provided in Mumbai.

+ Therefore, when the service tax credit in balance cannot be utilized for paying the service tax liability on renting, the question of its utilization does not arise and the demand of Rs. 54,44,777/- has been rightly confirmed by the Commissioner (along with interest) though the appellant had not taken centralized registration.

Limitation:

+ If some information is available in various reports and returns which are to be formulated in compliance to other statutes it does not lead to a conclusion that the utilization of credit for the activity of renting is known to the department. The department is not supposed to know each and every declaration made outside the Central Excise and Service Tax law. Even if the financial report is available to the audit, the same is meaningless in the sense that it does not indicate that input service tax credit is utilized to pay the tax liability on such renting of property. Therefore, we reject the argument of the appellant.

Plea in Miscellaneous application:

+ we do agree with the prayer in the miscellaneous application that if the credit is not available for paying service tax liability on the renting of property service, there is no bar on utilizing the same credit for manufacturing/other output services at Pune. As the appellant have already paid the amount of Rs. 54,44,777/- which is due to the department, they are allowed to take re-credit of the same amount.

Penalty:

In the circumstances, there is reasonable cause to waive penalty under Section 80.

The appeal was disposed of.

In passing: So, who won?Over to ST Mumbai now…is anyone around?

(See 2015-TIOL-1174-CESTAT-MUM)