Service Tax - CENVAT Credit through wrong Classification - DGST
COMMISSIONER, Service Tax in the CBECwrote a letter to the DGST in 2009 about irregular availment of Cenvat Credit by leading hotel chains, as reported to him by the Chief Commissioner, Chandigarh. The DGST promptly circulated this letter to all Chief Commissioners and called for Action Taken Reports.
The Issue: TajGVK were taking credit of the entire amount of Service Tax paid in respect of the services provided by the service provider viz. M/s Indian Hotel Corporation Ltd.(IHCL) even though services of M/s IHCL were being used by M/s GVK for providing both taxable and exempted services. M/s GVK were availing the aforesaid full credit on the ground that the services provided by M/s IHCL was "Management or Business Consultant's Services' while, in fact, such services would more appropriately fall under 'Business Auxiliary Services'. This practice of wrong classification of the service provided by M/s IHCL was apparently resorted to meet the requirement of Sub Rule 5 of Rule 6 of Cenvat Credit Rules, 2004.
[just as a recap – As per Rule 6 of the CENVAT Credit Rules, credit is not allowed on input services used in exempted goods or services and you know the options of maintaining separate accounts or paying 5% on the exempted goods or services. Certain services like Security Agency, Management or Business Consultant, etc,. were exempted from this requirement. And that should be the reason for misclassification according to the Chief Commissioner]
Many formations were kind to the DGST and sent in their reports and after nearly two years, the DGST admits that it is still waiting for reports from a few formations. [What do you do when field formations do not send their reports? Apparently NOTHING!]
Anyway, based on reports from the field, DGST observes that “the service provider, in most of the cases, is M/s Indian Hotel Corporation Ltd. (M/s IHCL), an assessee registered with Service Tax-I Commissionerate, Mumbai. However, there are others as well viz. M/s Apeejay Sunder Corp. Services, Kolkata, M/s Sarovar Hotels Pvt. Ltd., Mumbai, M/s Nirulas Comer House P. Ltd. etc. who also provide similar services to hotel chains and enable the service recipient to take full Cenvat credit by treating the services as 'Business Consultancy Services'. The field formations are of a uniform view that the services provided by M/s IHCL and other such service providers to the owners of hotels cannot be considered to be 'Management Consultant Services' but such services are actually in the nature of Business Support Service or Business Auxiliary Service or Franchise Service, as the case may be, depending on the exact nature of services provided in a particular case. In this context, Chandigarh and Jaipur-I Commissionerates had requested Mumbai-I Service Tax Commissioner to change the classification of the services provided by M/s. IHCL from 'Management Consultant's Services' to 'Business Support Service' or 'Business Auxiliary Service'.
In so far as services provided by M/s Indian Hotel Company Ltd. is concerned, Service Tax-I Commissionerate, Mumbai has also opined that the services rendered by M/s IHCL, Mumbai were not in the nature of 'Management Consultancy Service', as claimed by them, and that the same would appropriately be classified under 'Business Auxiliary Service. He has further informed that they have already taken up the issue and are in the process of verifying the records of M/s IHCL so as to classify the services rendered by them correctly. The moment they change classification of their services, the issue would cease to exist. Even other similar service providers would follow suit. Till then, action is required to be taken by the field formations to prevent / recover the inadmissible excess Cenvat Credit availed by the recipient of such services.”
Now an interesting Twist in the Tale:
In the meantime, the Commissioner, Chandigarh-I, who had originally taken up the issue, had, dropped the demand notice issued in this respect to M/s TajGVK Hotels and Resorts (service recipient) by passing an Order-in-Original dt.20.09.2010 by holding, inter-alia, that 'the cause which has initiated the present proceedings was beyond the control of the noticee; the noticee cannot be held responsible for the misclassification of taxable service at the hands of provider of such service; so the demand is not sustainable and it is even hit by time bar also apart from being not sustainable on merits' etc.
Do you think they will keep quiet if a Commissioner has the audacity to pass such reasonable, just, fair and legal order? Such high handed behaviour is not tolerated in the field.
A Committee consisting of two erudite Chief Commissioners has reviewed the Order-In-Original passed by the Commissioner, on the grounds of both facts and law, with directions to the Commissioner, Central Excise, Chandigarh I to file appeal before CESTAT.
Do you wonder what legal grounds the learned Committee could have found to challenge the Commissioner's order? Revenue officers are ingenious!
In the review order, the committee observed that:-
++ 'M/s IHCL, the service provider was not mentioning the classification of the service provided on the invoices issued by them to the noticee; that non indication of classification in the invoices tantamount to suppression of material fact with intent to wrongly avail (to read 'wrongly pass on') the benefit of Rule 6 (5) of Cenvat Credit Rules, 2004;
++ The adjudicating authority erred in deciding the case which should have kept the case pending till the decision of Commissioner, Service Tax, Mumbai ( to whom a reference was made earlier) is communicated to him.
++ The burden of proof regarding the admissibility of the Cenvat Credit shall lie upon the manufacturer or provider of output service taking such credit; thus it was the noticee who was required to ensure the description of service and as to what is the classification of input service to discharge this burden even if there was some misclassification at the service provider's end;
++ The entire onus of correct availment was on the noticee'.
Considering the issue in this backdrop, the DGST wants
++ All the field formations to take appropriate action in the matter to protect the revenue.
++ Commissioner, Service Tax-I, Mumbai to complete the ongoing investigation/ verification immediately and communicate the result thereof at the earliest.
++ Reports about the final outcome of the action taken to be forwarded by all concerned.
Tailspark: The whole issue has now lost relevance as the all important Rule 6(5) of the CENVAT Credit Rules has now been deleted from the Rules with effect from 1 st April 2011 by Notification No. 3/2011-CENT dated 01.03.2011. All the exercises would be for digging the past.
F.No.V/DGST/30-MISC-45/2009/756 , Dated: February 08, 2011