CESTAT Ahmedabad Allows Refund of Pre-GST Service Tax Paid Under Reverse Charge: A Schulman Plastic India Pvt. Ltd. vs Commissioner of C.E. & S.T.

Background and Context

The transition from the erstwhile indirect tax regime to the Goods and Services Tax framework created numerous transitional challenges for assessees, particularly concerning credits accumulated under the CENVAT Credit Rules, 2004 that could not be utilised after 1 July 2017. One such challenge arose when assessees discovered — typically through audit proceedings — that they had Service Tax obligations for the pre-GST period but could only discharge those obligations after the GST regime had already come into force.

The Customs, Excise & Service Tax Appellate Tribunal, Ahmedabad, addressed precisely this scenario in the matter of A Schulman Plastic India Pvt. Ltd. Vs Commissioner of C.E. & S.T. (CESTAT Ahmedabad), examining whether an assessee who paid Service Tax under the reverse charge mechanism after 1 July 2017 — but in respect of services received prior to that date — was entitled to a cash refund under Section 142(3) of the CGST Act, 2017.

Facts of the Case

During an audit conducted under Final Audit Report No. 25/2018-19, audit officers pointed out that M/s. A Schulman Plastic India Pvt. Ltd., GIDC Manjusar, Vadodara, had received various taxable services for the period prior to 01.07.2017 on which Service Tax under the reverse charge mechanism had not been discharged at the appropriate time.

Following this audit observation, the appellant paid Service Tax under the reverse charge mechanism in respect of the following categories of services received prior to 01.07.2017:

  • Management services
  • Technical Consultancy services
  • Maintenance & Repair services
  • Manpower Recruitment services
  • Commission services
  • Goods Transport Agency (GTA) services
  • Legal Consultancy services

The aggregate Service Tax paid on these services amounted to Rs. 45,32,123/- as reported in the proceedings.

Additionally, the appellant paid Service Tax on ocean freight services for the period April 2017 to June 2017, amounting to Rs. 13,97,310/– as reported.

Both payments were made suo motu by the appellant under Section 73(3) of the Finance Act, 1994, a provision that enables an assessee to voluntarily discharge tax liability and thereby obtain a waiver of the issuance of a show cause notice as well as a waiver of penalty.

The Transitional Dilemma

Since the Service Tax was paid after 01.07.2017 — even though it pertained to the pre-GST period — the amount was eligible as CENVAT credit under the CENVAT Credit Rules, 2004 applicable to the existing law. However, because the GST regime had already been introduced, the CENVAT credit so accumulated could not be utilised in the normal course under the new framework.

To address such transitional situations, Section 142(3) of the CGST Act, 2017 was enacted, which provides for a cash refund of eligible CENVAT credit pertaining to the period under the existing law where such credit cannot be carried forward into the GST regime.

The appellant accordingly filed refund claims under Section 142(3) of the CGST Act, 2017.

Departmental Action and Lower Authority Rulings

The department issued two show cause notices dated 06.09.2018, proposing rejection of the refund claims. The basis for rejection was Section 142(8)(a) of the CGST Act, 2017, under which any tax amounts arising from assessment or adjudication proceedings under the existing law would not be admissible as input tax credit under the CGST Act.

Orders-in-Original

Both refund claims were rejected by the adjudicating authority vide:

  • Orders-in-Original No. REF/46/A.Schulman/Dn.V/2018-19 dated 29.10.2018
  • Orders-in-Original No. REF/47/A.Schulman/Dn.V/2018-19 dated 29.10.2018

The adjudicating authority held that:

  1. The appellant was ineligible for refund by virtue of Section 142(8)(a) of the CGST Act, 2017; and
  2. Since the appellant had opted for the voluntary payment route under Section 73(3) of the Finance Act, 1994, the question of CENVAT credit eligibility did not arise.

Order-in-Appeal

The appellant challenged both orders before the Commissioner (Appeals), whose Order-in-Appeal No. VAD-EXCUS-002-APP-572-573-2018-19 dated 07.01.2019 dismissed the appeals and added a further ground of rejection, namely:

  1. Having paid Service Tax under Section 73(3) of the Finance Act, 1994, the appellant was precluded from claiming CENVAT credit, making the refund claim under Section 142(6)(a) untenable.
  2. The act of paying penalty by the appellant indicated that the conditions under Rule 9(1)(bb) of the CENVAT Credit Rules, 2004 — involving fraud, collusion, wilful misstatement, or suppression of facts — were attracted, thereby disqualifying the credit.
  3. Since the Service Tax was paid after 01.07.2017, credit under the CENVAT Credit Rules, 2004 was unavailable, as those rules could not extend to the post-GST period.

Submissions Before the Tribunal

Appellant's Arguments

The appellant, represented by Shri Dhruvank Parikh, Learned Chartered Accountant, advanced the following contentions:

**On Section 142(8) vs. Section 142(3)😗*