Madras High Court Upholds CENVAT Credit Reversal and Penalty for Suppression of Facts

Background of the Dispute

M/s Areva T & D India Limited, a manufacturer of relays, control panels, switches and their components classified under Chapter 85 of the Central Excise Tariff Act, 1985, was availing CENVAT credit on imported inputs in terms of the CENVAT Credit Rules, 2004.

During scrutiny of its records, the Department noticed that for the financial years 2003-2004 and 2004-2005, the assessee had entered into an annual maintenance contract (AMC) with M/s SAP France SA for maintenance of specified software, including Solaris 2.6 and Oracle database software, under a purchase order dated 21/12/1998, based on a quotation dated 09/12/1998. The AMC charges were payable in Deutsch Mark.

For the services rendered by M/s SAP France SA during 2003-2005, service tax was not paid contemporaneously. Instead, the assessee discharged service tax liability along with interest belatedly on 23/01/2006. Subsequently, in February 2006, the assessee took CENVAT credit of:

  • Service tax: Rs.2,04,274/-
  • Education Cess: Rs.1,11,333/-

The credit was taken as input service credit on the footing that the services were input services used in the manufacture of dutiable final products.

Statutory Framework on CENVAT Credit and Imported Services

Inputs and Input Services – Relevant Rule

Under Rule 3(1) of the CENVAT Credit Rules, 2004, a manufacturer of final products or a provider of taxable output services is entitled to avail credit of:

  • Service tax leviable under Section 66A of the Finance Act, 1994,
  • Paid on any input service received by such manufacturer or service provider,
  • On or after 19/09/2004.

In this case, the Department found that the assessee had availed input service credit of service tax paid on AMC charges pertaining to a period prior to 10/09/2004, whereas Rule 3(1) permitted such credit only from 19/09/2004 onwards.

Show Cause Notice and Allegations

A show cause notice dated 05/02/2008 was issued invoking Rule 14 of the CENVAT Credit Rules, 2004 read with Section 11A of the Central Excise Act, 1944. The Department raised the following core allegations:

  • Wrongful availment and utilisation of CENVAT credit of Rs.2,05,407/- (as per annexure to the notice) during February 2006 on ineligible input services;
  • Proposal to impose penalty under Rule 15(2) of the CENVAT Credit Rules, 2004 read with Section 11AC of the Central Excise Act, 1944, on the ground that:
    • The contractual arrangements between M/s SAP France SA and M/s Alstom (the former name of the assessee M/s Areva T & D India Limited) had been suppressed;
    • Such suppression led to wrongful availment of CENVAT credit with an intention to evade payment of duty;
  • Demand of interest under Section 11AB of the Central Excise Act, 1944, on the wrongly availed and utilised credit.

Assessee’s Defence Before the Adjudicating Authority

In its reply dated 07/03/2008, the assessee advanced the following main contentions:

  1. Nature of service as “information technology services”

    • Maintenance of computer software falls within the ambit of “information technology services”.
    • The definition of “Business Auxiliary Services” earlier covered certain technology-related services, but “maintenance of computer software” became specifically taxable only with effect from 01/05/2006 after amendment in the service tax law.
    • Consequently, services rendered by M/s SAP France SA for software maintenance prior to 01/05/2006 were not exigible to service tax.

  2. Service tax paid under mistake of law

    • Since, according to the assessee, no service tax was actually payable for the relevant period, the tax paid on 23/01/2006 was paid under a mistaken understanding of law.
    • Instead of filing a refund claim, the assessee took CENVAT credit suo motu, treating the amount paid as if it were admissible input service tax.

  3. No suppression, no intention to evade

    • The assessee effectively contended that there was no wilful misstatement or suppression and, therefore, extended limitation and penalty were unwarranted.

Findings of the Assistant Commissioner

The adjudicating authority (Assistant Commissioner) examined the records and submissions and reached the following conclusions:

  • Belated payment and subsequent credit

    • Service tax and interest for AMC services for 2003-2005 were indeed paid belatedly on 23/01/2006.
    • That amount was then availed as input service credit in February 2006.

  • Suo motu availment of credit is not a valid substitute for refund

    • Where service tax is paid on a transaction which is not taxable, such payment cannot be converted into CENVAT credit by the assessee on its own.