2018 (7) TMI 1008 - AT - Service Tax

Utilization of CENVAT Credit - reverse charge mechanism - output services - whether the CENVAT credit availed by the appellants can be utilized towards the payment of input service paid on the basis of reverse charge mechanism? - Held that - The jurisdictional High Court of Karnataka in the case of M/s. Aravind Fashions 2011 (9) TMI 852 - KARNATAKA HIGH COURT observed that Order of the Tribunal sustained in which it was held that prior to 19.4.2006 recipient of services who was liable to pay service tax was entitled to avail cenvat credit for the purpose of making payment of service tax on import of services. Utilization of credit allowed - appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Utilization of CENVAT credit for payment of service tax under reverse charge mechanism.

Analysis:

Issue 1: Utilization of CENVAT credit for payment of service tax under reverse charge mechanism

The appellants, engaged in manufacturing passenger cars and registered under Central Excise and Service Tax, received 'Intellectual Property Services' and GTA services. The Department contended that these services were not output services, and the appellants were merely paying service tax on behalf of the service providers under Rule 2(1)(d)(iv) and Rule 2(d)(v)(a) of Central Excise Rules, 1994. A show-cause notice was issued demanding service tax payment of Rs. 3,33,03,995, penalties under Section 76 and 77, and interest under Section 75 of the Finance Act, 1994. The Commissioner (LTU) upheld the demand, citing Rule 3(4) of CENVAT Credit Rules, 2004, and a CBEC Circular. The appellants appealed, arguing that they could use CENVAT credit to discharge service tax liability under reverse charge mechanism, citing various case laws.

The Tribunal analyzed whether the CENVAT credit availed by the appellants could be used for payment of input service tax under reverse charge mechanism. Different Tribunals had conflicting views on this issue. However, the High Court of Karnataka in the case of M/s. Aravind Fashions and Godavari Sugar Mills Ltd. held that the recipient of service tax under reverse charge mechanism is treated as a service provider and can utilize CENVAT credit to discharge the tax liability. The Tribunal, following the High Court's rulings and the Supreme Court's affirmation, allowed the appeal, providing consequential relief to the appellants. The judgment emphasized the legal obligation on the recipient to pay tax on services received and the entitlement to use available CENVAT credit for this purpose.

In conclusion, the Tribunal's decision clarified the applicability of CENVAT credit for payment of service tax under reverse charge mechanism, aligning with the High Court's interpretation and providing relief to the appellants based on established legal principles and precedents.