Incorrect utilisation of CENVAT credit for payment of service tax on input services.
Well, that brings us back to the CAG report.
Every year CAG compiles elaborate annual reports to the Parliament and this annual jamboree entails in compiling staid and lacklustre observations made by various CERA audit parties during the previous year. At TIOL , we take pains in going through this report and highlight some of the observations made therein. No wonder, one of my colleagues called this report ‘a perfect recipe for insanity' but nevertheless we have to deal with such occupational hazards once in a year and bring forth the controversial observations which have the potential to snowball into thousands of show cause notices in the field formations just because it forms a part of the CAG's annual report. Last week we have highlighted some of the observations which have the potential to wake up exorcised ghosts.
One more such observation is Para 11.3 of Chapter IX of the Report, title of which is “ Incorrect utilisation of CENVAT credit for payment of service tax on input services”.
It was observed that assessees are utilizing CENVAT credit balances for payment of service tax on input services for discharging their obligations as service recipients. The examples of such services are ‘Goods Transport services' and ‘Intellectual Property Right services'. So the CAG admits that GTA service is an ‘input service'.
We can come to this aspect a little later. The crux of the observation in this Para is that CENVAT credit balance cannot be utilized for payment of service tax by a service recipient who is mandated by law to pay service tax in terms of s. 68 (2) read with Rule 2 (1) (d) of Service tax Rules, 1994. Unfortunately, the observation does not actually make any references to these statutory provisions. We deciphered and inferred this from the observation. Further this was also admitted by the Ministry.
The moot point is whether a service recipient is eligible to utilize the balances available in CENVAT Credit account to discharge the service tax liability as recipients of taxable services (including ‘import of services'). Though this is the rigid view of the CAG and the Department, Tribunal Benches have thought otherwise. In AP Paper Mills Ltd Vs CCE Visakhapatnam [ ] and several other cases, the Tribunal held that when GTA service is a deemed ‘output service' in terms of Rule 2 (p) of CENVAT Credit Rules, 2004, service tax can be paid by utilizing the CENVAT Credit account. The following are some of the reported cases on this issue.
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Strangely, it is observed in different sections of the Annual Report that CERA parties takes shelter under Tribunal judgments and quote them only wherever it is in favour of the Revenue and conveniently ignore those judgments which are in favour of the assessee.