2006 (2) TMI 44 - AT - Service Tax

Service Tax - Input service tax credit - Credit is admissible with respect to taxable service received and consumed in relation to rendering of output service

Summary

Issues:
- Eligibility of Modvat credit for service tax paid by the respondent on input services.
- Interpretation of Service Tax Credit Rules regarding the availability of credit for input services falling under the same category as output services.

Analysis:
The case involves an appeal by the Department against an order setting aside the denial of Modvat credit for service tax paid by the respondent on input services. The respondent, engaged in online information and database services, availed credit for service tax paid to BSNL. The Department argued that input and output services did not fall under the same category, making the Modvat credit ineligible. The key contention was whether the respondent was entitled to avail input stage credit as per Rule 3 of the Service Tax Credit Rules.

The Department contended that the taxable services provided by the respondent differed from the service tax paid to BSNL, emphasizing strict interpretation of the Rules. Conversely, the respondent argued that without the input service, they could not provide the output service, citing the definition in the Service Tax Credit Rules and a clarification issued by the Department. The core issue was whether the input service fell under the same category as the output service, as required by the Rules for availing credit.

The Tribunal analyzed the relevant Rule 3 of the Service Tax Credit Rules, emphasizing that the intention was to grant credit for input services related to the rendering of output services falling under the same clause. The definition of input service as taxable service received and consumed in relation to output service supported the respondent's position. The Tribunal noted that the respondent's reliance on the leased line from BSNL was crucial for providing internet services, highlighting the necessity of the input service for the output service. The Tribunal concluded that denying the Modvat credit would defeat the government's intention to provide input stage credit to service providers, affirming the order allowing the credit to the respondent.

In conclusion, the Tribunal dismissed the Department's appeal, upholding the decision to grant Modvat credit to the respondent for service tax paid on input services. The judgment highlighted the importance of interpreting the Service Tax Credit Rules in a manner that aligns with the government's intention to facilitate credit for input services essential for providing output services.