2015 (11) TMI 1182 - AT - Service Tax

Denial of CENVAT Credit - eligible input services - Nexus with output services - assessee are providing the facility of lease financing to their employees to purchase cars through lease finance company - Held that - cost of EMI payable towards leased vehicle is recovered from the employees would show that this is only a ploy adopted to ensure that the benefit of depreciation of the vehicle can be availed by the company and benefit of service tax also can be availed by the company. Both these benefits would have been lost if the individuals were to purchase a vehicle or lease a vehicle. When the cost is recovered from the employee, it cannot be said that it forms part of the final cost of output service. One of the principles followed for allowing the benefit of cenvat credit is that it should form the cost of manufacture of input, output and final product or it should form cost of output service. When the cost of leasing is not borne by the company, it cannot be said that it forms pat of the output service. In such a scenario it would not be appropriate to allow the assessee to avail the benefit of cenvat credit without incurring any cost and availing only the benefits which may offer to be passed on to the employee or may not be, with which I am not concerned. Therefore I do not find any reason to interfere with the decision of the lower authorities that assessee is not eligible for cenvat credit and the credit availed should be paid back with interest. - Penalty u/s 78 is waived - Decided partly in favour of assessee.

Issues:
1. Eligibility of cenvat credit for lease financing provided to employees for purchasing cars.
2. Denial of cenvat credit by lower authorities leading to show-cause notice for service tax, interest, and penalty.
3. Consideration of waiver of pre-deposit and stay against recovery.
4. Interpretation of whether recovered EMI from employees affects eligibility for cenvat credit.
5. Imposition of penalty under Section 78 of Finance Act 1994.

Analysis:

Issue 1:
The case involved the eligibility of cenvat credit for lease financing provided by the appellants to their employees for purchasing cars. The lease agreement was between the assessee and the leasing company, with the vehicle registered under the company's name. The appellants recovered EMI from employees and paid it to the leasing company. The contention was that since the service tax was paid by the appellants and not recovered from employees, they should be eligible for cenvat credit. The appellants argued that the vehicles were used for official purposes by employees, justifying the credit claim.

Issue 2:
After proceedings before the original authority and the Commissioner (Appeals), cenvat credit was denied, leading to a show-cause notice for service tax, interest, and penalty under Section 78 of the Finance Act 1994. The lower authorities held that the recovered EMI from employees did not make the appellants eligible for cenvat credit, as the cost was not borne by the company, impacting the output service cost.

Issue 3:
The matter was initially listed for considering waiver of pre-deposit and stay against recovery. However, after hearing both sides, it was concluded that the case could be finally disposed of without pre-deposit. Both parties agreed, and the appeal proceeded for a final decision.

Issue 4:
The Tribunal referred to precedents indicating that if an amount is recovered for any facility provided, cenvat credit must be disallowed to that extent. The recovery of EMI from employees was viewed as a strategy to ensure the company availed benefits like depreciation and service tax, which would have been lost if individuals purchased or leased vehicles directly. The recovery from employees was deemed not forming part of the output service cost, leading to the denial of cenvat credit.

Issue 5:
Regarding the penalty imposed under Section 78 of the Finance Act 1994, the appellant argued that the issue was debatable, and they believed their practice was correct when availing the credit. Considering the small amount involved and the appellant's belief, the penalty was waived under Section 80 of the Finance Act 1994.

This detailed analysis of the judgment addresses the various issues raised, including the eligibility of cenvat credit, denial by lower authorities, waiver considerations, interpretation of recovered EMI impact, and the imposition and subsequent waiver of penalties under the Finance Act 1994.

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