2022 (6) TMI 582 - AT - Service Tax

CENVAT Credit - input services - services used for activities related to its corporate social responsibility CSR - non compliance of section 135 read with section 134 of the Companies Act - extended period of limitation - penalty - HELD THAT - Undisputedly, the output services rendered by the appellant were banking and other financial services . These services can be rendered and were rendered using various input services. After rendering these services the appellant earns some profit or meets other criteria laid down under section 135 of the Companies Act 2013. This results in a legal obligation on the appellant to spend some amount on the activities of corporate social responsibility. Of course, not fulfilling this responsibility attracts penalties under the Companies Act. Similarly, the company will also have other responsibilities towards their stakeholders such as payment of bonus, productivity linked incentives, etc. A provider of output service may utilise several services in its business and may pay service tax on them. If the legislative intent was to allow a provider of output service to avail Cenvat Credit on all such services, the rule would have read as any service used by the provider of output services . However, it does not read so. It qualifies the definition by for providing output services . Therefore, there could be services which are used by the provider of output services who provide output services and there could be services used not for providing output service for some other business purpose. In our considered view the corporate social responsibility falls under the second category. It has no nexus to providing any input services. Several services which are not directly input services for providing of output services or which are not used for manufacturing final product have been included in the inclusion part of the definition under rule 2(l) - It is not open for this Tribunal to modify or enlarge the scope of this Rule which is a legislative or quasi-legislative function. Extended period of limitation - imposition of penalties - HELD THAT - There is no evidence of fraud or collusion or wilful statement or suppression of the facts in the matter. Accordingly the demand can only be raised within the normal period of limitation. The denial of Cenvat Credit on the expenses incurred on corporate social responsibility within the normal period of limitation is upheld. The demand for extended period on limitation and the penalties are set aside. The matter is remanded to the original authority for limited purpose of calculating the amount of Cenvat Credit to be denied - Appeal allowed by way of remand.

Summary

Issues Involved
1. Eligibility of Cenvat Credit on Corporate Social Responsibility (CSR) expenses.
2. Invocation of extended period of limitation.
3. Imposition of penalties under Section 76 of the Finance Act, 1994.

Detailed Analysis

1. Eligibility of Cenvat Credit on Corporate Social Responsibility (CSR) expenses:

The appellant, a non-banking finance corporation, challenged the denial of Cenvat Credit on service tax paid for CSR activities. The definition of "input services" under Rule 2(l) of the Cenvat Credit Rules, 2004, was central to this issue. The appellant argued that CSR expenses qualify as input services since they are a statutory obligation under Section 135 of the Companies Act, 2013. They cited several case laws, including *Essel Propack Ltd.* and *Millipore India Pvt. Ltd.*, to support their claim.

The Tribunal, however, concluded that CSR activities do not qualify as input services for providing output services. It emphasized that input services must be used for providing output services, not merely for business operations. The Tribunal noted that CSR obligations arise after the provision of output services and are not directly linked to the provision of these services. The Tribunal also pointed out that the legislative intent was not to include CSR in the definition of input services, as it was not explicitly mentioned in the inclusion part of Rule 2(l).

2. Invocation of extended period of limitation:

The appellant contended that the extended period of limitation should not be invoked as they had taken Cenvat Credit under a bona fide belief. The Tribunal agreed, finding no evidence of fraud, collusion, or willful misstatement by the appellant. Consequently, the demand could only be raised within the normal period of limitation.

3. Imposition of penalties under Section 76 of the Finance Act, 1994:

The appellant argued that penalties were not applicable since the dispute was about Cenvat Credit, not the non-payment or short payment of service tax. The Tribunal upheld this view, stating that penalties under Section 76 could not be imposed in this case.

Conclusion

The Tribunal partially allowed the appeal, modifying the impugned order as follows:
- The denial of Cenvat Credit on CSR expenses within the normal period of limitation was upheld.
- The demand for the extended period of limitation and the penalties were set aside.
- The matter was remanded to the original authority for the limited purpose of calculating the amount of Cenvat Credit to be denied.

(Order pronounced in the open court on 09.06.2022)