CHANGE OF CLASSIFICATION AT SERVICE RECEIVER’S END

[Dr. Sanjiv Agarwal]

The nature of taxable services at the service provider's end decides the classification of taxable services by the service provider as per the provisions of section 65 A of the Finance Act, 1994.

Based on such classification, service provider obtains the service tax registration, pays service tax and files service tax return. The same classification is used for cenvat credit purpose. The issue which is being discussed in this article is whether the classification of taxable services can be questioned and by the Department at the service receiver's end, when it comes to cenvat credit or otherwise?

For example, if a chartered accountant has rendered some service, for a chartered accountant service provider , it is chartered accountant's services but at the service receiver's end, can it be treated as management consultancy service or some other service ? The disputes arise or may arise at the receiver's end when it avails cenvat credit since  there are sixteen services on which 100 percent cenvat credit is allowed under Rule 6(5) of the  Cenvat Credit Rules, 2004.

Let's take a hypothetical case where service provider renders some service which is classified as management and business consultancy service  at the service provider's end but the revenue authorities treat such service as business auxiliary services or business support service at the end of service receiver and as a result, deny the available 100 percent credit to the service receiver.

Further, it is also true that  service tax has been paid by  service provider  under 'Management Consultant Service' and returns filed  in form ST-3 under the said classification by service provider  . Hence, once the classification of service provider  under the category of Management Consultant's services  has been accepted by the Department  and service tax paid thereon is also  accepted, it is not open to Department to deny the credit of the said service tax paid to the at the service receiver's end. Department can not dispute this, ie,  for changing the classification or for that matter denying the credit. This  also  gets substantiated from the ratio of following judgments/CBEC Instructions -

i)   Sarvesh Refractroies  Pvt Ltd v CCE & C 2007 - TMI - 2610 - (SUPREME COURT OF INDIA)

ii)   CCE & C v Purity Flexpack Ltd 2006 -TMI - 3728 - (HIGH COURT GUJARAT AT AHMEDABAD)

iii) CCE & C v. MDS Switchgear Ltd. 2008 -TMI -   30952 - (SUPREME COURT)

iv)   Hindustan Lever Ltd. -( 2000 -TMI - 49882 - CEGAT, MUMBAI)

v) Hindustan Coca Cola Beverages Pvt. Ltd.v. CCE, Meerut- II 2010 - TMI - 77705 - (CESTAT, NEW DELHI)

vi)  Manikgarh Cement v. CCE, Nagpur (2010 -TMI - 78998 - CESTAT, MUMBAI)

vii)  CBEC Circular No. 877/15/2008-CX dated 17.11.2008

             The classification of taxable service can not be altered at the recipient end. The  classification of service as provided by service provider to receiver may  never have been disputed and challenged at the end of service provider of such service, and in such cases it could not be challenged at the receiver end being out of jurisdiction .

            In the  case of Sarvesh Refractories Ltd. 2007 -TMI - 2610 - (SUPREME COURT OF INDIA), the issue was admissibility of Credit on capital goods namely "Loadall" being classified by the manufacture under Heading 84.29. The consumer assessee availed  Credit on the said "Loadall" on the basis of the plea that these are appropriately classifiable under Heading 8427. The revenue took the stand that classification at the receiver end could not be altered /changed and accordingly the adjudicating authority denied the Credit as Heading 84.29 ousted from the definition of capital goods. However, Commissioner (Appeals) allowed the appeal of the consumer assessee and accepted plea that "Loadall" falls properly under Heading 84.27.The revenue challenged the order of the Commissioner (Appeals) before CEGAT which restored the order of the original authority by holding that  "loadall having been classified by the Central Excise Officer having jurisdiction over the manufacturer's factory as falling under Heading 84.29, the consumer of these goods could not get the classification of the manufacturer changed from Heading 84.29 to 84.27. On appeal by Sarvesh Refractories, the Hon'ble Superme Court upheld the order of the Tribunal by holding held that assessee as consumer cannot get classification changed to Heading 84.27 from 84.29 as declared by manufacturer, once "loadall"  is classified by Central Excise Officer having jurisdiction over manufacturer factory.

                In the case of CCE, Rajkot v Hindustan Lever Ltd. (2000 -TMI - 49882 - CEGAT, MUMBAI) where a particular classification was adopted by the factory of origin which was approved by the Departmental officers, it was held that   officers at the recipient factory were not competent to make any alterations thereto to the detriment of the assessees. In this case, the Revenue had taken a plea that  Credit be restricted to Rs. 800/- PMT on 'printed wrappers' being classifiable under a particular  sub-heading and accordingly, disallowed excess credit at the consumer's end . But Commissioner (Appeals) allowed the credit by holding that "where the officers holding jurisdiction over the suppliers factory had classified such wrappers under sub-heading 4823.90,  such classification could not be agitated or altered by the officer having jurisdiction over the factory of recipient manufacturer."

          In other two cases of Purity Flexpack Ltd  2006 -TMI - 3728 - (HIGH COURT GUJARAT AT AHMEDABAD) and MDS Switchgear Ltd. 2008 -TMI - 30952 - (SUPREME COURT)  the issue was that higher credit was availed on account of payment of duty either at higher rate or at higher assessable value at manufacturer's  end.    Apex court decided that it is not open to revenue to question at the end of consumer regarding the quantum of duty paid by the manufacturer. It was held that Central Excise Authorities  having jurisdiction over the manufacturer can not dispute the duty liability of the input supplier and can not restrict the credit on the ground of wrong classification.

          In  MDS case, apex court confirmed the view taken by Tribunal that duty already determined by the jurisdiction officers of the supplier unit can not be contested or challenged by the officer in charge of recipient unit.

In Hindustan Coca Cola Beverages Pvt. Ltd. V CCE, Meerut -II 2010 -TMI - 77705 - (CESTAT, NEW DELHI) credit was denied on the presumption of absence of liability for service provider under a particular category of service and in such a case, correctness of tax  paid was to be raised by issuing show cause notice by jurisdictional authorities of service provider. It was held that jurisdictional officer of recipient can not decide classification, valuation and other matters of service provider. It was further held that questioning assessment of service provider was beyond the jurisdiction of assessee's authorities .

In Manikgarh Cement v CCE Nagpur (2010 -TMI - 78998 - CESTAT, MUMBAI), where credit on management consultancy services were not covered u/s 65(108), it was held that once the duty is actually paid by input supplier, recipient manufacturer was entitled to credit irrespective of duty liability of inputs. It was further held that the principle was applicable to service tax. In CCE v Carborandum Universal Ltd (2009 -TMI - 35107 - CESTAT, CHENNAI), Tribunal while considering a similar dispute held that 'as the assessee had paid service tax and taken credit on the basis of valid documents, its eligibility to such credit can not be questioned on the basis that the assessement of the service by the department at the end of the service provider was incorrect .

In the case of Koch-Glitsch India Ltd  (2008 -TMI - 32668 - CESTAT, AHMEDABAD), the Tribunal took a similar view relying on several earlier decisions of the Tribunal. The Tribunal accepted the argument of the appellants (herein that once duty was actually paid by the input supplier, recipient manufacture was entitled to credit of the same irrespective of the fact whether such inputs were liable to duty or not. It was also held that though the decision cited related to dispute in a Central Excise case, the principle applied also to service tax cases.

Thus, it is  the settled position even at he level of Supreme Court that neither classification could be questioned at the consumer's end nor quantum of duty by the manufacturer is questionable at the recipient end. So the jurisdiction to question classification of taxable input service also ceases at the end of provider of taxable service.

On the above ratio, the CBEC vide Circular No. 877/15/2008-CX dated 17.11.2008 has also given similar clarification that credit of the entire amount of duty paid to be allowed. CBEC Circular issued from File NO 137/72/2008-CX.4 dated 21.11.2008, has clarified that the accumulated unutilized credit to the extent of 80% as on 1.4.2008 cannot be denied as no lapsing provision was incorporated and that the existing Rule 6(3) of the Cenvat Credit Rules does not explicitly bar the utilization of the accumulated credit. On the basis of aforesaid clarification, service receiver   is entitled to the credit in excess of 20% credit of service tax paid by  service provider and hence can fully utilize  the same.  Under the said scenario, it is felt that service receiver  is  entitled to 100% credit of service tax paid by  service provider. 

In Albert David Ltd v CCE, Bhopal 2010 -TMI - 78572 -(CESTAT NEW DELHI) relying on Rasoi Ltd v Union of India (2005) 182 ELT A 91(SC), it was held that right of carry forward of unutilized credit for further utilization can not be forfeited on its own volition. The right accrued can not extinguish without mandate of law. It is deniable subsequently by specific statutory provisions and not merely by any other construction.