AVAILING SERVICE TAX CREDIT PRIOR TO MAKING PAYMENT OF SERVICE TAX IS PERMISSIBLE BUT THE ASSESSEE IS LIABLE TO PAY INTEREST AND PENALTY

[Mr. M. GOVINDARAJAN]

                        CENVAT Credit Rules, 2004 allows the service provider or manufacturer of final products to take and utilize excise duty paid on capital goods or inputs and service tax paid for input services subject to the conditions mentioned in Rule 4.   In respect of taking credit of service tax paid on the input services the condition is prescribed in Rule 4(7).   The sub-clause (7) of Rule 4 provides that the CENVAT credit in respect of input service shall be allowed, on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case ma be, challan referred to in Rule 9.

                        In the course of service tax audit if such violations are found the Department would not allow even to take credit.  In one case, (discussed below) the Tribunal held that it is permissible to take service tax credit prior to making payment of service tax but the assessee is liable to pay interest and penalty.

                        In ‘Praveen Jain &Co., Private Limited V. Commissioner of Service Tax,Delhi’ – 2011 (265) ELT 239 (Tri.Del) the appellant received input service during the period of October 2004 to November 2004.   The appellant has taken credit of service tax indicated in the invoices during the said period and utilized the same.   The appellant paid the said bills including service tax during the period from February 2005 to May 2005.   The Department issued a show cause notice alleging that the recipient of service could not take credit unless they made payment of service charges and service tax to the service provider and therefore the Department concluded that the credit taken by the appellant was irregular.   The Original Authority confirmed the demand and imposed penalty.  The appellant filed appeal against the order of the Original Authority before the Commissioner of Central Excise (Appeals) who upheld the findings of the Original Authority. 

                        Therefore the present appeal has been filed by the appellant before the tribunal.   The appellant contended that the credit facilities for input service was introduced on 10.9.2004 and the assessee was not familiar with the law and as in the case of receipt of inputs they have taken the credit of service tax based on the invoices for input services.  It was mistake as they are eligible to take credit only after the payment was made by them.   They have received the services from the registered service provider.   They have also made the payments and therefore the denial of credit and demand of duty is not justified.   The appellant relied on the decision of the Tribunal in ‘Raj Khosla & Co. Private Limited V. Commissioner of Service Tax, New Delhi’ – 2008 (07) LCX0297 in which it was held that on subsequent regularization of the deficiency of the documents, the mistake has been condoned and the credit has been made available.

                        The Department contended that Rule 9(3) of CENVAT Credit Rules, 2004 is violated by the appellants.  The appellant was required to take precautions as envisaged in the said rule before taking credit.  It is clear violation of legal provision of Rule 9 as they have taken credit without paying service charge and service tax to the service provider.   As initially taking of credit itself is not legal, the payment of service charges and service tax subsequently cannot rectify the mistake and the credit taken has been rightly denied and duty demanded and penalty has imposed.

                        The Tribunal considered the submissions put forth by the appellants and the Department and also perused the records submitted before it.   The Tribunal indicated that there are some basic differences in conditions relating to taking credit in respect to inputs and taking credit in respect of output service.  The payment of price and excise duty to the supplier of inputs is not pre conditions for taking credit.   The requirement is that supplier has genuinely issued invoices with relevant particulars and in such cases the recipient were entitled to take credit immediately on receipt of inputs.   The payment of duty on the inputs will be monitored by the officers in charge of the factory of supplier of inputs.  In the case of services, the situation is slightly different.   The payment of service tax by the service provider is linked to his receiving the service charges from the recipient of services.  The Tribunal held that as a corollary, the condition that the recipients are not entitled to take credit till they make payment of service charges and service tax as has been prescribed. 

                        The Tribunal held that the appellants undisputedly have taken the credit based on invoices from the service provider without making payment of service charges and service tax.   The Original Authority clearly held that the appellants have paid the service charges and service tax to the service provider after some delay.  There is no allegation or finding that the provider of service from whom the appellants have received the services are not genuine or that they are not registered with the excise Department.   Therefore the Tribunal held that on subsequent payment of service charges and service tax to the provider of service, the appellants are eligible to take the credit.   The Tribunal further held that during the interim period i.e., between the date of taking credit and the date of payment to the service provider, the appellants have enjoyed the monetary benefit and therefore the demand of interest for this period as held by the Original Authority deserves to be upheld.   The Tribunal also upheld the penalty of Rs. 10,000/- imposed on the appellants.