2013 (12) TMI 853 - AT - Service Tax

Availment of CENVAT Credit - Penalty imposed u/s 11AC - Held that - appellant is a manufacturer of P or P medicaments and discharging appropriate duty on the final products so manufactured. It is also undisputed that in order to diversify, they had proposed to enter into manufacturing of herbal products, for which they had engaged services of consultant for ascertaining the market requirement, research requirement, standardization of materials and preclinical studies; on receipt of such report from the consultant, they were deliberating on the question of expansion/diversification. During the interregnum, period till the decision was taken, appellant availed Cenvat credit of the service tax paid by such consultant as service provider. Having abandoned the plan of diversification in the manufacturing herbal products, the services rendered by the consultant on this specific products, credit of said service tax, would not be available to the appellant - appellant has no case of availing Cenvat credit of the service tax paid by the service provider. Penalty seems to be unwarranted as the appellant had an idea of diversification into manufacturing activity of herbal products. When they availed cenvat credit of the service tax paid on the services of the consultant, who was engaged for considering such an activity, they had an intention to start the activity of herbal products. They could have had a bona fide belief in availing the Cenvat credit on such a service tax. In view of this, I hold that the penalty imposed by the adjudicating authority under Rule 15 of the Cenvat Credit Rules, 2004 seems to be inconsistent as the said rules envisages imposition of penalty on the intention to avail wrong cenvat credit - Decided partly in favour of assessee.

Summary

Issues:
- Availment of Cenvat credit on services for herbal products
- Eligibility of Cenvat credit under Cenvat Credit Rules, 2004
- Liability for interest on Cenvat credit
- Imposition of penalty under Rule 15 of Cenvat Credit Rules, 2004

Analysis:

Issue 1: Availment of Cenvat credit on services for herbal products
The appellant availed Cenvat Credit for services received regarding research, standardization, and preclinical studies for herbal products not manufactured by them. The department contended that these services did not qualify as input services. The appellant argued that the services were used for business diversification into herbal products, citing the definition of input services under Rule 2(l) of the Cenvat Credit Rules, 2004. However, the tribunal found that since the plan to manufacture herbal products was abandoned, the credit for service tax paid on these services was not available to the appellant.

Issue 2: Eligibility of Cenvat credit under Cenvat Credit Rules, 2004
The tribunal analyzed the definitions of input service and final products under the Cenvat Credit Rules, 2004. It concluded that the appellant, having abandoned the plan to manufacture herbal products, was not entitled to avail Cenvat credit for the services received. The tribunal emphasized the requirement for a nexus between the services utilized and the manufacturing of final products, which was lacking in this case due to the change in business plans.

Issue 3: Liability for interest on Cenvat credit
Considering the appellant's ineligibility for Cenvat credit, the tribunal held that interest liability arose, citing the decision in a previous case by the Hon'ble Supreme Court. The tribunal reasoned that once credit was wrongly availed, interest liability would apply, which was applicable in this scenario due to the appellant's incorrect availment of Cenvat credit.

Issue 4: Imposition of penalty under Rule 15 of Cenvat Credit Rules, 2004
The tribunal addressed the penalty imposed by the lower authorities under Rule 15 of the Cenvat Credit Rules, 2004. It found the penalty unwarranted as the appellant had a genuine intention to diversify into manufacturing herbal products when availing the Cenvat credit. The tribunal concluded that the penalty was inconsistent with the rules as it was based on the intention to avail wrong credit, which was not the case here. Therefore, the penalty was set aside based on the appellant's genuine belief in availing the credit for the intended business activity.

In conclusion, the tribunal disposed of the appeal, ruling against the appellant's availment of Cenvat credit for services related to herbal products due to the abandonment of the manufacturing plan, leading to interest liability but overturning the penalty imposed based on the appellant's genuine intentions.