2021 (12) TMI 675 - AT - Service Tax

Refund of CENVAT Credit - refund claim was rejected by the adjudicating authority stating that the tax has been voluntarily paid and that no credit is eligible in the GST regime - reverse charge mechanism - HELD THAT - It is brought out that appellant has paid the service tax voluntarily under self-assessment. The tax is paid under reverse charge mechanism for the services received by them from foreign service provider. On perusal of para 6.4 of the OIO it is seen that the adjudicating authority has denied refund of credit holding that the service tax has been paid voluntarily and also that no credit is available in GST regime. Section 174 (2) of the GST Act - It is clear that the liability if any under the erstwhile law of Finance Act 1994 to pay service tax would continue even after the introduction of GST. Conversely the right accrued under the said Act in the nature of credit available under CCR 2004 also is protected. If the assessee has to pay service tax even after the introduction of GST their right to avail the credit on the same cannot be denied. The Hon ble jurisdictional High Court in the case of TARA EXPORTS VERSUS THE UNION OF INDIA GOODS AND SERVICE TAX COUNCIL THE PRINCIPAL COMMISSIONER OF CGST AND CENTRAL EXCISE THE PRINCIPAL SECRETARY/COMMISSIONER OF COMMERCIAL TAXES THE ASSISTANT COMMISSIONER (ST) THE CENTRAL GST OFFICER AND THE ASSISTANT COMMISSIONER CGST AND CENTRAL EXCISE 2018 (9) TMI 1474 - MADRAS HIGH COURT has held that GST laws contemplate seamless flow of tax credits on all eligible inputs. In various decisions it has been held that substantive right of credit cannot be denied on account of procedural grounds. Section 142 (3) of GST Act provides how to deal with claims of refund of service tax of tax and duty / credit under the erstwhile law. It is stated that therein that such claims have to be disposed in accordance with the provisions of existing law and any amount eventually accruing has to be paid in cash - In the present case there is no allegation that the credit is not eligible to the appellant. It is merely stated that tax has been paid voluntarily and therefore credit is not available under the GST regime. Though credit is not available as Input Tax Credit under GST law the credit under the erstwhile Cenvat Credit Rules is eligible to the appellant. Such credit has to be processed under Section 142 (3) of GST Act 2017 and refunded in cash to the assessee. The rejection of refund claim cannot be justified - appeal allowed - in favor of appellant.

Summary

The core legal questions considered by the Tribunal were:

1. Whether service tax paid by the appellant under reverse charge mechanism during the pre-GST regime (January 2017 to June 2017), albeit belatedly in March 2019, qualifies for Cenvat credit under the erstwhile Cenvat Credit Rules, 2004.

2. Whether the appellant is entitled to refund of the amount of service tax paid under the pre-GST regime, given that the Cenvat credit mechanism ceased to exist after the introduction of GST from 1.7.2017.

3. The applicability of the repeal and savings provisions under Section 174(2) of the GST Act, 2017, and the refund provisions under Section 142(3) of the GST Act, in protecting the appellant's right to claim refund or credit of the service tax paid under the previous law.

4. The legal effect of voluntary payment of service tax under self-assessment and whether such payment precludes the appellant from claiming refund or credit.

5. The treatment of the appellant's refund claim under the GST regime, especially in light of the department's contention that no credit is available under GST for service tax paid under the previous law.

Issue 1: Eligibility of Service Tax Paid Under Reverse Charge for Cenvat Credit

The relevant legal framework comprised the Cenvat Credit Rules, 2004, specifically Rule 9(1)(e), which prescribes the challan evidencing payment of service tax by the service recipient as the document required to claim credit for tax paid under reverse charge mechanism. The appellant had paid the service tax voluntarily by challan dated 16.03.2019 for services received during January to June 2017.

The Tribunal noted that the appellant was eligible to avail credit of service tax paid under reverse charge as per the Cenvat Credit Rules applicable during the relevant period. The department's rejection of refund on the ground that the tax was voluntarily paid was found to lack fairness, particularly since the department had accepted the delayed payment along with interest. The Tribunal emphasized that acceptance of tax liability by the department cannot be used to deny the corresponding credit or refund claim.

Precedents relied upon included decisions where delayed payment under reverse charge was held to be eligible for credit, reinforcing the principle that substantive rights to credit should not be defeated by procedural delays or voluntary payment labels.

Issue 2: Impact of GST Introduction and Cessation of Cenvat Credit Mechanism

With effect from 1.7.2017, GST replaced the earlier indirect tax regime, and the Cenvat Credit Rules ceased to operate. The appellants could not avail credit under GST for service tax paid pre-GST. The department denied refund on the basis that credit is not available under the GST regime.

The Tribunal analyzed Section 174(2) of the GST Act, which contains repeal and savings provisions. Clause (c) of this section protects "any right, privilege, obligation, or liability acquired, accrued or incurred under the amended Act or repealed Acts." This provision safeguards the appellant's accrued right to credit under the erstwhile law despite the repeal of the Finance Act, 1994, and related statutes.

Further, Section 142(3) of the GST Act was pivotal. It provides that refund claims for amounts of CENVAT credit, duty, tax, interest, or other amounts paid under the existing law before, on, or after the appointed day (GST commencement) shall be disposed of under the provisions of the existing law, and any amount accruing shall be paid in cash. This non-obstante clause mandates that transitional credits or refunds must be processed and paid notwithstanding the introduction of GST.

The Tribunal held that although the appellant cannot avail credit under GST, the right to refund of credit under the erstwhile law remains intact and must be honored in cash as per Section 142(3).

Issue 3: Effect of Voluntary Payment and Self-Assessment on Refund Eligibility

The department's contention that voluntary payment of service tax precludes refund was examined. The Tribunal observed that the appellant had paid tax under self-assessment, which is a recognized mode of discharge of tax liability. The payment was accepted by the department, including interest, confirming the liability.

The Tribunal reasoned that acceptance of tax liability cannot be a ground to deny refund of credit. The voluntary nature of payment does not extinguish the substantive right to credit or refund accrued under the erstwhile law. The principle that substantive rights cannot be defeated by procedural or technical grounds was emphasized, consistent with judicial precedents.

Issue 4: Treatment of Refund Claim Under GST Regime

The department denied refund on the ground that no credit is available under GST for service tax paid prior to GST. The Tribunal clarified that while credit is not available under GST, the refund claim relates to the erstwhile law and must be adjudicated accordingly.

The Tribunal relied on judicial decisions affirming that transitional credits are vested rights and cannot be denied on procedural grounds. The right to refund under the previous law survives the transition to GST and must be processed under Section 142(3) of the GST Act.

The Tribunal referred to authoritative rulings where courts held that accumulated credits under the old regime do not lapse and must be refunded or credited as per the law in force at the time of accrual.

Significant Holdings

The Tribunal held that:

"The amended Act shall not affect any right, privilege, obligation, or liability acquired, accrued or incurred under the amended Act or repealed Acts." (Section 174(2)(c) of GST Act)

"Every claim for refund filed ... for refund of any amount of CENVAT credit, duty, tax, interest or any other amount paid under the existing law, shall be disposed of in accordance with the provisions of existing law and any amount eventually accruing to him shall be paid in cash." (Section 142(3) of GST Act)

The Tribunal concluded that the appellant's right to refund of service tax paid under reverse charge during the pre-GST period is protected by the repeal and savings provisions and refund provisions of the GST Act. The rejection of the refund claim on the ground of voluntary payment and non-availability of credit under GST was unsustainable.

The Tribunal set aside the impugned order and allowed the appeal with consequential relief, directing that the refund claim be processed and paid in cash in accordance with the provisions of the erstwhile law and Section 142(3) of the GST Act.