2010 (9) TMI 19 - HC - Service Tax

Cenvat Credit - Input Services - Service Tax paid on mobile phones - user of telephone services in business activities - Held that - The dispute in the present case relates to availing Service Tax Credit on mobile phones supplied to the employees during the period 2006-2007, that is, after 2004 Rules came into force. Under Rule 3(6) of the Service Tax Credit Rules, 2002, service tax credit was available in respect of such telephone connections which are installed in the premises from where output service is provided. There is no such provision contained in the 2004 Rules. Therefore, reliance placed on Rule 3(6) of the Service Tax Credit Rules, 2002 for the period in question is totally misplaced because, during the period in question the 2002 Rules were not in force and the said rules were replaced by 2004 Rules. Similarly the circular dated 20th June, 2003 which interprets 2002 Rules would also be not relevant for the period governed by 2004 Rules. - Credit allowed

Summary

Issues:
Whether the credit of Service Tax paid on Mobile Phone service is allowable under the CENVAT Credit Rules, 2004.
Whether the Respondents were entitled to avail Cenvat Credit on Service Tax paid on mobile phone services despite not establishing the relation to business activity under the CENVAT Credit Rules, 2004.

Analysis:
The case involved a dispute regarding the availing of CENVAT Credit of Service Tax paid on various input services, including Mobile Phone service, during 2006-2007. Show cause notices were issued to the assessee regarding the credit availed, which led to proceedings being initiated. However, the Assistant Commissioner later dropped the proceedings based on a Circular dated 23-8-2007 by the Central Board of Excise and Customs.

On appeal by the Revenue, the Commissioner (Appeals) dismissed the appeal, and further appeal to the Customs, Excise and Service Tax Appellate Tribunal was also dismissed. The Tribunal's decision was challenged in the High Court, arguing that the Service Tax Credit on mobile service should not be allowed based on certain rules and circulars.

The High Court analyzed the relevant rules and circulars, noting that the Service Tax Credit Rules, 2002, were replaced by the CENVAT Credit Rules, 2004. The Court emphasized that the provisions of the 2002 Rules and related circulars were not applicable during the period in question (2006-2007) governed by the 2004 Rules.

The Court highlighted Rule 16 of the 2004 Rules, which deems valid circulars issued under the corresponding provisions of the 2004 Rules. However, as there was no corresponding rule in the 2004 Rules to restrict service tax credit as in the 2002 Rules, the circular dated 20th June, 2003, was deemed irrelevant for the period in question.

Furthermore, the Court pointed out that under Rule 2(1) of the 2004 Rules, Cenvat Credit is available on any input service used in or in relation to the manufacture of final products or in activities relating to business, without restrictions. A later circular by the Central Board of Excise and Customs in 2007 confirmed the availability of credit on service tax paid on mobile phones under the 2004 Rules.

Ultimately, the High Court upheld the Tribunal's decision, finding no fault in granting the credit of service tax paid on mobile phones to the assessee. The appeal was dismissed in favor of the assessee, with no order as to costs.