2025 (7) TMI 1458 - AT - Service Tax

Deprival of credit brought forward - failure to carry forward service tax credit in statutory returns for over four years - extinguishment of the credit or not - HELD THAT - On perusal of the impugned order it is seen that many of the objections raised by the appellant to the demand have been accepted and that the order itself created the dispute which now continues for the sole reason that reliance has been placed upon the decision of a Larger Bench of the Tribunal in re BDH Industries Ltd as well as re-formulation of rule 4(7) of CENVAT Credit Rules 2004 to the extent that any restoration should have been within a reasonable period. There are no provision in law nor in any decision of the Tribunal or of the constitutional courts which has set out reasonable period as the criteria in identical or similar circumstances. On perusal of the decision of the Larger Bench of the Tribunal as it is found that the sole issue was limited to the precedent offered by decisions in Commissioner of Central Excise Belgaum v. Comfit Sanitary Napkins (I) Pvt Ltd 2004 (9) TMI 160 - CESTAT BANGALORE and in Motorola India Pvt Ltd v. Commissioner of Central Excise Bangalore-III 2005 (9) TMI 152 - CESTAT BANGALORE for adjudging dispute on duty liability discharged both at the time of clearance and cumulatively at the end of the month an entirely different issue. M/s BDH Industries Ltd the appellant therein took credit of the excess amount so paid and in that context reference was made to the Larger Bench of the Tribunal on the common understanding that the Central Government was not entitled to retain the said credit but restitution was nevertheless constrained within the scheme of law. In the peculiar facts of that case in which the amount debited once was re-credited without express sanction of the competent authority even though the credit had been erased out of existence. In the present case there is no assertion that the disputed credit was ever utilized wrongly or rightly and hence that credit never did merge into the corresponding duties/taxes paid to Central Government at one time. It was merely a non-reporting of the credit accumulated and in the absence of any specific provision or any dispute on the eligibility which could not have a bar on the retention of the credit there is no reason for us to suppose or presume a reasonable period. There is no prescribed internal record into which the impugned credit must go for validity. Thus on application of the facts of the present case denomination as anything other than procedural lapse in not reporting the existence of such credit the impugned order cannot survive and is accordingly set aside. Appeal allowed.

Summary

ISSUES:

Whether failure to carry forward service tax credit in statutory returns for over four years results in extinguishment of such credit under section 73(2) of Finance Act, 1994 and rule 14 of CENVAT Credit Rules, 2004.Whether suo motu restoration of previously unreported but validly taken and retained CENVAT credit is permissible without prior sanction of tax authorities.Whether demand of tax, interest under section 75 of Finance Act, 1994, and penalty under rule 15 of CENVAT Credit Rules, 2004 can be sustained for non-reporting of eligible credit in returns.Whether the non-reporting of credit in statutory returns amounts to ineligibility under rule 3(1) or breach of retention provisions under rule 6 of CENVAT Credit Rules, 2004.The legal significance of 'reasonable period' for restoration of credit as interpreted by Tribunal and High Courts in related precedents.

RULINGS / HOLDINGS:

The failure to carry forward the credit in returns does not extinguish the credit where there is no allegation of ineligibility under rule 3(1) or breach under rule 6 of CENVAT Credit Rules, 2004; "there is no reason for us to suppose or presume a reasonable period" for restoration in such circumstances.Suo motu restoration of credit that was validly taken and properly retained is permissible and does not require prior sanction of tax authorities, as the credit was never utilized or merged into duty paid; the impugned demand based on non-reporting alone cannot be sustained.Demand of tax, interest under section 75, and penalty under rule 15 for non-reporting of eligible credit in returns is not tenable in absence of any statutory bar or allegation of wrongful availment or utilization of credit.Non-reporting of credit in returns is a procedural lapse and does not affect the substantive right to credit where eligibility is undisputed; "credit cannot be denied only on the ground that the credit was not taken in the particular Cenvat account, which is not the prescribed record."Precedents imposing a "reasonable period" limitation for restoration of credit relate to different factual matrices involving higher or notional credit or credit once extinguished; such limitation is inapplicable to the present facts.

RATIONALE:

The Court applied the framework of the Finance Act, 1994, and CENVAT Credit Rules, 2004, emphasizing that the essential conditions for estopping credit utilization or recovery under rule 14 are ineligibility under rule 3(1) or breach of retention under rule 6.The Court relied on authoritative circulars clarifying entitlement to carry forward credit, and on Tribunal precedents which held that procedural errors in reporting do not extinguish substantive credit rights.The Court distinguished the present case from precedents involving restoration of credit after utilization or extinguishment, noting that here the credit was never utilized or merged into duty payments, and therefore restoration is not constrained by "reasonable period" limitations.The Court recognized the evolving nature of the tax credit scheme from set off, MODVAT to CENVAT, underscoring the purpose to avoid cascading tax effect and preserve the integrity of the tax credit scheme.The Court noted that returns serve primarily as procedural tools and archival records, and non-reporting in returns does not ipso facto extinguish credit when eligibility and retention are not disputed.The Court rejected reliance on decisions of Larger Benches and High Courts that do not directly apply to the facts here, particularly where those decisions involved credit once utilized or extinguished, or higher/notional credit claims.