2007 (5) TMI 84 - AT - Service Tax

Cenvat credit - Department contended that appellant used credit of duty paid on inputs and capital goods as also credit of service tax paid on input service for payment of output service and accordingly demand were made - Held that department contention was not correct and set aside demand

Summary

Issues:
- Disallowance of CENVAT credit for Service Tax paid on "Goods Transport Agency's Service" received for inward and outward movement of goods.

Analysis:
The appellants, as manufacturers of cotton yarn, were paying Service Tax on services received for inward and outward movement of goods. The dispute arose when the department objected to the appellants utilizing credit of duty paid on inputs and capital goods, as well as credit of Service Tax paid on input services, for the payment of this tax. The lower authorities sustained the objection and demanded the amount 'wrongly' utilized as credit. However, the penalty imposed on the appellants was vacated by the appellate authority. The appeal in question was against the denial of the CENVAT credit.

The crucial question in this case revolved around the interpretation of the Explanation to the definition of "Output service" under Rule 2 (p) of the CENVAT Credit Rules, 2004. The Explanation clarified that if a person liable for paying Service Tax does not provide any taxable service, the service for which they are liable to pay Service Tax shall be deemed to be the output service. During the period of dispute, the appellants were only receiving taxable services and not providing any. Therefore, the "Goods Transport Agency's Service" on which they paid Service Tax was deemed to be their "output service," allowing them to avail credit of Service Tax paid on any input service and/or credit of duty paid on any input or capital goods. The decision of the lower authorities to deny the credit was deemed unsustainable based on this interpretation.

A precedent cited in a similar case further supported the appellants' position. The precedent highlighted that paying Service Tax on services availed in connection with the removal of the final product constituted an "output service," entitling the appellants to utilize credit for payment of Service Tax. Additionally, a circular from the Board was referenced, which clarified the applicability of Section 68(2) of the Finance Act, 1994. However, this clarification did not consider the Explanation to the definition of "Output service" and was deemed invalid during the period when the Explanation was in force.

Ultimately, the appellate tribunal set aside the impugned order disallowing the credit, thereby allowing the appeal in favor of the appellants.