Practice being adopted by leading Hotel Chains to utilize Cenvat Credit beyond permissible limits – reg. - Service Tax - F.No.V/DGST/30-MISC-45/2009/756

F.No.V/DGST/30-MISC-45/2009/756 DIRECTORATE GENERAL OF SERVICE TAX 9 th Floor, Piramal Chambers, Jijibhoy Lane, Parel, Lalbaug, Mumbai 400 012 Ph. No.24178515, 24102587 Dated: February 8, 2011 Sub: Practice being adopted by leading Hotel Chains to utilize Cenvat Credit beyond permissible limits reg. Please refer to this office letter of even number dated 27.04.09 whereunder copy of letter Dy. No.62/Comm. (ST)/2009 dated 27.03.2009 from the Commissioner (Service Tax), CBEC, New Delhi along with its enclosures, was forwarded to you for taking appropriate action and calling for the action taken report. In the said letter dated 27.03.2009, the Commissioner Service Tax, had informed this office about irregular availment of Cenvat Credit by leading hotel chains, as reported to him by the Chief Commissioner, Customs Central Excise, Chandigarh vide letter C.No. 06-Zone 14-S.Tax-2009 dated 5th March, 2009. The issue in this case was that M/s Taj GVK were taking credit of the entire amount of Service Tax paid in respect of the services provided by the service provider viz. M/s Indian Hotel Corporation Ltd.(IHCL) even though services of M/s IHCL were being used by M/s GVK for providing both taxable and exempted services. M/s GVK were availing the aforesaid full credit on the ground that the services provided by M/s IHCL was "Management or Business Consultant's Services' while, in fact, such services would more appropriately fall under 'Business Auxiliary Services'. This practice of wrong classification of the service provided by M/s IHCL was apparently resorted to meet the requirement of Sub Rule 5 of Rule 6 of Cenvat Credit Rules, 2004 . In this connection, this office received the action taken reports from many field formations while the report is still awaited from a few. Most of the formations which have sent the reports have conveyed that they have found similar issue prevailing in their jurisdiction and that they are taking the necessary action to protect the revenue. On perusal of these reports, it has been observed that the service provider, in most of the cases, is M/s Indian Hotel Corporation Ltd. (M/s IHCL), an assessee registered with Service Tax-I Commissionerate, Mumbai. However, there are others as well viz. M/s Apeejay Sunder Corp. Services, Kolkata, M/s Sarovar Hotels Pvt. Ltd., Mumbai, M/s Nirulas Comer House P. Ltd. etc. who also provide similar services to hotel chains and enable the service recipient to take full Cenvat credit by treating the services as 'Business Consultancy Services'. The field formations are of a uniform view that the services provided by M/s IHCL and other such service providers to the owners of hotels can not be considered to be 'Management Consultant Services' but such services are actually in the nature of Business Support Service or Business Auxiliary Service or Franchise Service, as the case may be, depending on the exact nature of services provided in a particular case. In this context, Chandigarh and Jaipur-I Commissionerates had requested Mumbai-I Service Tax Commissioner to change the classification of the services provided by M/s. IHCL from 'Management Consultant's Services' to 'Business Support Service' or 'Business Auxiliary Service'. In so far as services provided by M/s Indian Hotel Company Ltd. is concerned, Service Tax-I Commissionerate, Mumbai has also opined that the services rendered by M/s IHCL, Mumbai were not in the nature of 'Management Consultancy Service', as claimed by them, and that the same would appropriately be classified under 'Business Auxiliary Service. He has further informed that they have already taken up the issue and are in the process of verifying the records of M/s IHCL so as to classify the services rendered by them correctly. The moment they change classification of their services, the issue would cease to exist. Even other similar service providers would follow suit. Till then, action is required to be taken by the field formations to prevent / recover the inadmissible excess Cenvat Credit availed by the recipient of such services. It may not be out of place to mention here that the Commissioner, Chandigarh-I, who had originally taken up the issue, had, in the meantime, dropped the demand notice issued in this respect to M/s Taj GVK Hotels and Resorts (service recipient) by passing an Order-in-Original dt.20.09.2010 by holding, inter-alia, that 'the cause which has initiated the present proceedings was beyond the control of the noticee; the noticee can not be held responsible for the misclassification of taxable service at the bands of provider of such service; so the demand is not sustainable and it is even hit by time bar also apart from being not sustainable on merits' etc. However, it has now been reported by the Chief Commissioner's office, Chandigarh, vide their letter dated 16.12.2010 that the subject Order-in-Original has been reviewed by the committee of Chief Commissioners on 10.12.2010 on the grounds of both facts and law, with directions to the Commissioner, Central Excise, Chandigarh I to file appeal before CESTAT. In the review order, the committee observed that 'M/s IHCL, the service provider was not mentioning the classification of the service provided on the invoices issued by them to the noticee; that non indication of classification in the invoices tantamount to suppression of material fact with intent to wrongly avail (to read 'wrongly pass on') the benefit of Rule 6 (5) of Cenvat Credit Rules, 2004 ; that the adjudicating authority erred in deciding the case which should have kept the case pending till the decision of Commissioner, Service Tax, Mumbai ( to whom a reference was made earlier) is communicated to him'. The committee further observed that 'the burden of proof regarding the admissibility of the Cenvat Credit shall lie upon the manufacturer or provider of output service taking such credit; thus it was the noticee who was required to ensure the description of service and as to what is the classification of input service to discharge this burden even if there was some misclassification at the service provider's end; the entire onus of correct availment was on the noticee'. Considering the issue in the backdrop of what is stated herein above, all the field formations are hereby requested to take appropriate action in the matter to protect the revenue. Commissioner, Service Tax-I, Mumbai would be expected to complete the ongoing investigation/ verification immediately and communicate the result thereof to this office at the earliest. Reports about the final outcome of the action taken may please be forwarded to this, office by all concerned. Yours faithfully, (Additional Director General)