2025 (4) TMI 1396 - AT - Service Tax

Availment of CENVAT credit on input services under the Reverse Charge Mechanism (RCM) on the basis of invoices/bills rather than the prescribed GAR-7 challans evidencing payment of service tax - Rule 9 of the CENVAT Credit Rules 2004 - HELD THAT - The CENVAT Credit of the service tax on the input services is available to appellant on the receipt of invoice by the service recipient. The scheme of taxation of services provide for payment of the tax either by the service provider or the service recipient after the closure of the month in which the invoice is issued. In case of the reverse charge mechanism the scheme of taxation follows the same pattern. It is true in terms of Rule 9 the document prescribed for availing the CENVAT Credit is challan evidencing the payment of Service Tax by the service recipient. However Rule 9 will have to be read along with the Rule 4 (7) and the CENVAT Credit will be allowed only after the tax has been paid in terms of first proviso. The appellant has taken CENVAT Credit and declared in their return filed for the Month of June 2017 only after the receipt of the challan evidencing the payment of Service Tax paid by them on the reverse charge basis. They have taken the credit and utilized the same for payment of the tax due for the month of June 2017. It is not the case of the revenue that the said amount would not be admissible as CENVAT Credit but the what is under dispute is that the said credit could not have been utilized for payment of Service Tax for the month of June 2017. When the admissibility of the CENVAT credit is not in dispute then the credit taken by the appellant in the month of June 2017 for the payment made by them during the Month of July 2017 cannot be anything but an procedural lapse as has been held by the Ahmedabad Bench in case of Gujarat Pipavav Port Ltd. 2008 (2) TMI 376 - CESTAT AHMEDABAD . Bench observed that The entire credit cannot be denied to them. Admittedly the same stands availed premature and in any case was available during the subsequent period. Inasmuch as the same is utilized by the appellant interest in accordance with law is required to be paid. Taking a lenient view I do not find it a fit case for imposition of penalty. Conclusion - The credit of service tax on input services under RCM is admissible on receipt of invoice and payment of service tax by the recipient as per Rule 4(7) read with Rule 9 of the CENVAT Credit Rules 2004. There are no merits in the appeal filed by the revenue - Appeal filed by the revenue is dismissed.

Summary

Issues Presented and Considered

1. Whether the respondent was entitled to avail CENVAT credit of Rs. 68,42,830/- on input services under the Reverse Charge Mechanism (RCM) on the basis of invoices/bills rather than the prescribed GAR-7 challans evidencing payment of service tax.

2. Whether the utilization of CENVAT credit towards the payment of service tax liability for June 2017, when the credit was only admissible after payment of service tax in July and August 2017, was lawful.

3. Whether the denial of CENVAT credit and imposition of penalty under Rule 15 of the CENVAT Credit Rules, 2004 read with Section 78 of the Finance Act, 1994 was justified given the facts and circumstances.

4. The scope and interplay of Rule 9 and Rule 4(7) of the CENVAT Credit Rules, 2004 regarding the admissibility and timing of CENVAT credit under RCM.

5. Whether the respondent had any intent to evade payment of service tax, which would justify imposition or reduction of penalty.

Issue-wise Detailed Analysis

Issue 1: Entitlement to CENVAT Credit on the Basis of Invoices/Bills Instead of GAR-7 Challans

The legal framework centers on Rule 9(1)(e) of the CENVAT Credit Rules, 2004, which prescribes that CENVAT credit for input services where service tax is payable under RCM shall be availed only on the strength of challans evidencing payment of service tax by the recipient. The revenue contended that invoices/bills alone are not valid documents for credit under RCM, and hence the credit availed by the respondent was irregular.

However, Rule 4(7) of the CENVAT Credit Rules clarifies that CENVAT credit shall be allowed on or after the day on which the invoice, bill, or challan referred to in Rule 9 is received, provided the service tax payable by the service recipient under RCM is paid. The first proviso to Rule 4(7) specifically conditions credit allowance upon payment of service tax by the recipient.

The Tribunal noted that while Rule 9 prescribes the documents for availing credit, Rule 4(7) governs the timing and conditions of credit allowance. The respondent had received the invoices and subsequently paid the service tax under RCM via challans dated 06.07.2017 and 14.08.2017, before the audit or issuance of the show cause notice. This sequence satisfied the condition that credit is allowed only after payment, even if the invoice was earlier.

Precedents cited include the Education Guide clarifying that credit of tax paid by the service recipient under partial reverse charge is available on the basis of the payment challan, and credit of tax paid by the service provider is available on the basis of invoice, subject to conditions. The Tribunal emphasized the integrated reading of Rule 9 with Rule 4(7), concluding that credit was admissible once payment was made, regardless of the initial document being an invoice or challan.

Thus, the Tribunal rejected the revenue's argument that credit could not be availed on invoices/bills, holding that the respondent was entitled to credit once the tax was paid and the invoice received.

Issue 2: Utilization of CENVAT Credit for Payment of Service Tax for June 2017 Liability

The revenue challenged the utilization of credit towards payment of service tax liability for June 2017, contending that since the payment of service tax (and thus admissibility of credit) was only made in July and August 2017, such credit was not available for discharge of June 2017 liability.

The Tribunal acknowledged that the credit became admissible only after payment of service tax in July and August 2017, hence could not be used to discharge the June 2017 liability. This was a procedural lapse or premature utilization of credit.

Precedents from the Ahmedabad Bench in Gujarat Pipavav Port Ltd. and Mumbai Bench in Emerson Innovation Center and India Cement Ltd. were relied upon. These decisions held that such premature availing of credit is a procedural lapse, not an outright denial of credit, provided the credit is ultimately available and interest is paid for the intervening period.

Accordingly, the Tribunal held that the credit was wrongly utilized for June 2017 liability but this did not justify denial of credit or heavy penalty. Interest may be payable for the premature use, but the credit itself was not to be denied.

Issue 3: Denial of CENVAT Credit and Imposition of Penalty

The adjudicating authority had denied the entire credit and imposed penalty equal to the credit amount, alleging suppression of facts and intent to evade tax. The Commissioner (Appeals) reduced the penalty to Rs. 50,000/- recognizing absence of intent to evade.

The Tribunal examined the facts and found that the respondent had paid the service tax under RCM before the audit or show cause notice, filed returns timely, and maintained proper records. There was no evidence of suppression or deliberate evasion.

The Tribunal referred to the Apex Court's ruling that evasion requires deliberate avoidance of duty payment, not mere failure or procedural lapse. Since the respondent had paid the tax and availed credit lawfully, the penalty was excessive.

Hence, the Tribunal upheld the reduction of penalty and set aside the denial of credit and the larger penalty imposed.

Issue 4: Interpretation and Interplay of Rule 9 and Rule 4(7) of the CENVAT Credit Rules, 2004

The Tribunal undertook a detailed interpretation of Rule 9 and Rule 4(7). Rule 9 prescribes the documents for availing credit, while Rule 4(7) sets conditions for allowing credit, including receipt of invoice/bill/challan and payment of service tax under RCM.

The Tribunal held that Rule 9 cannot be read in isolation but must be harmonized with Rule 4(7), which governs timing and conditions. Receipt of invoice initiates the credit process, but credit is allowed only after payment of service tax by the recipient, evidenced by challan.

This interpretation ensures that credit is not denied where tax is paid subsequently, and documents are in order. The Tribunal's approach aligns with the statutory scheme and avoids penalizing procedural delays or mismatches in timing.

Issue 5: Intent to Evade Payment of Service Tax

The revenue alleged that the respondent had intent to evade tax by wrongly availing and utilizing credit. The Tribunal analyzed the conduct and found no such intent. The respondent had paid the tax, filed returns timely, and maintained records.

The Tribunal cited the Apex Court's principle that evasion requires deliberate avoidance of payment, not mere error or timing mismatch. The absence of suppression or concealment negated any intent to evade.

Therefore, the Tribunal concluded that penalty should be reduced to a nominal amount, reflecting the procedural lapse rather than willful evasion.

Significant Holdings

"Once the service tax payable by the party on RCM basis, stood paid by him, he became entitled to CENVAT credit and the same was not deniable."

"The allegation of suppression of facts or intent to evade was totally misconstrued."

"The CENVAT credit cannot be denied when the duty paid nature of the goods/services, its receipt and utilization was not in dispute."

"When the law requires an intention to evade payment of duty then it is not mere failure to pay duty. It must be something more. That is, the assessee must be aware that the duty was leviable and it must deliberately avoid paying it."

"The credit of service tax on input services under RCM is admissible on receipt of invoice and payment of service tax by the recipient, as per Rule 4(7) read with Rule 9 of the CENVAT Credit Rules, 2004."

"Premature utilization of credit before the tax is paid is a procedural lapse and does not justify denial of credit or imposition of heavy penalty, provided the credit is ultimately available and interest is paid."

"Penalty imposed under Rule 15 of the CENVAT Credit Rules, 2004 read with Section 78 of the Finance Act, 1994 should be reduced where there is no intent to evade but only procedural irregularity."

Final determinations:

• The respondent was entitled to avail CENVAT credit on input services under RCM after payment of service tax evidenced by challans, even if credit was initially taken on invoices.
• Utilization of credit for June 2017 liability before payment of tax in July/August 2017 was irregular but not sufficient to deny credit or impose full penalty.
• Denial of credit and imposition of penalty equal to credit amount was unsustainable and set aside.
• Penalty was rightly reduced to Rs. 50,000/- reflecting procedural lapse without intent to evade.
• Credit admissibility and timing governed by combined reading of Rule 9 and Rule 4(7) of the CENVAT Credit Rules, 2004.