2011 (8) TMI 1008 - HC - Service Tax

Whether under the facts and circumstances of the case the Tribunal is correct in holing that the assessee is provider of output services for the purpose of utilizing Cenvat credit in spite of the fact that the assessee is only a receiver of services? Whether under the facts and circumstances of the case the Tribunal is right in holding that transportation of goods up to place of removal as output services though it has been held in no. of cases that it is an input service? Whether under the facts and circumstances of the case the Tribunal is right in holding that the citations relied upon by the respondents are applicable to the facts of the case though it is not the fact? Held that - We answer the substantial questions of law against the revenue and in favour of the assessee and hold that the appeal is devoid of merit and pass the following order.

Summary

Issues:
- Disallowance of Cenvat credit for input services
- Interpretation of Circular dated 3-10-2005
- Applicability of Cenvat credit rules to manufacturing activities

Issue 1: Disallowance of Cenvat credit for input services:
The appeal was filed by the revenue against an order disallowing Cenvat credit availed by the respondents for input services, specifically telephone services, utilized towards payment of services tax on goods transport agency. The original authority issued a show cause notice for disallowing the credit, which was confirmed after rejecting the respondent's reply. The appellate authority, however, allowed the appeal, stating that the assessee, involved in manufacturing activity, was not bound by the Circular dated October 3, 2005, and hence, had not committed any irregularity in discharging service tax liability using the credit. The High Court upheld the appellate authority's decision, emphasizing that the Circular applied only to manufacturers of final products, and since the respondent was engaged in manufacturing mosaic tiles, the credit availed was justified. The Court referred to previous decisions supporting this interpretation, concluding that the disallowance of Cenvat credit was unjustified.

Issue 2: Interpretation of Circular dated 3-10-2005:
The Circular dated October 3, 2005, was a pivotal point in the case, as it governed the eligibility of the assessee to avail Cenvat credit for input services. The revenue contended that the Circular restricted the credit to output services only, while the respondent argued that their manufacturing activity exempted them from this restriction. The High Court agreed with the respondent, highlighting that the Circular applied solely to manufacturers of final products, and since the respondent was also engaged in manufacturing mosaic tiles, they were not bound by the Circular's limitations. This interpretation was supported by previous decisions and led to the Court dismissing the revenue's appeal.

Issue 3: Applicability of Cenvat credit rules to manufacturing activities:
The case raised the question of whether the Cenvat credit rules applied differently to entities engaged in manufacturing activities. The revenue argued that the assessee, being a holder of service tax registration certificate for road transport services, was ineligible to avail Cenvat credit for input services. Conversely, the respondent contended that their involvement in manufacturing activities exempted them from the Circular's restrictions on credit utilization. The High Court examined the facts, noting that the respondent was registered under both service tax and excise acts due to their manufacturing of mosaic tiles. This dual registration and engagement in manufacturing activities led the Court to conclude that the Circular's limitations did not apply to the respondent, ultimately supporting the allowance of Cenvat credit in this context.

In conclusion, the High Court dismissed the revenue's appeal, upholding the decision that the respondent's availing of Cenvat credit for input services towards service tax payment on goods transport agency was justified, given their involvement in manufacturing activities and the inapplicability of the Circular dated October 3, 2005, to their circumstances.