No Cenvat credit reversal required where service tax is not paid due to non-recovery of consideration in case assessee pays service tax on receipt/ collection basis
An important judgment of the Hon’ble Tribunal in the case of Commissioner of Service Tax vs. Krishna Communication [(2013) 34 taxmann.com 43] on the following issue:
Whether the Cenvat credit reversal is required, where no service tax is paid on output services owing to non-recovery of consideration in case the assessee pays service tax on receipt/ collection basis under Rule 6(1) of the Service Tax Rules, 1994 (“the STR”)?
Krishna Communication (“the Respondent” or “the Asseesee”) are engaged in providing taxable services in the category of Advertising Services. The Respondent had availed the CENVAT Credit of input services on which Service Tax liability was paid and it was not utilized for providing the output services.
Due to non-recovery of consideration from some of the service recipient to whom advertisement services were rendered by the Assessee, the Respondent has written off the same as bad debt in the books of accounts. In terms of Rule 6 (1) of the STR the Respondent was supposed to pay service tax on actual receipt/ collection of consideration for services rendered. Accordingly, the Assessee did not pay service tax due to non-recovery of such consideration.
The authorities alleged that the Assessee is required to reverse the CENVAT Credit of the input services which is proportionate to the consideration not received and thus written off by the Respondent.
The Hon’ble Tribunal has held that the Cenvat credit is not required to be reversed where the Assessee provided taxable service but did not discharge service tax due to non-recovery of consideration and observed as under:
- The input service has been taken correctly. The inputs/input services have been used in providing output services. The output services are liable for payment of Service Tax. Hence, the eligibility of availing and utilizing the credit was not in question. As per Rule 6 of the STR, Service Tax is payable when the payment towards taxable services are received. No Service Tax is payable on that part of the payment which is not received. There is no provision in the Cenvat Credit Rules, 2004 (“the Credit Rules”) to deny proportional credit on the inputs which were used in providing the output service on which recovery is pending.
- The adjudicating authority has cited Rule 14 of the Credit Rules and held that when Service Tax was not realized, the output service has not suffered any Service Tax. Hence, the credit availed would fall under the category of wrongly utilized credit and Rule 14 of CENVAT Credit Rules would be apply. In this regards, the Hon’ble Tribunal observed that Rule 14 of the Credit Rules envisages reversal of credit wrongly utilized or erroneously refunded.
In this case, the services rendered are taxable services. The credit of inputs/input services availed is utilized in providing taxable output services. Hence, there is nothing wrong in availing and utilization of the credit. Rule 14 does not envisage recovery of credit in situations where Service Tax recovery was pending and written off as bad debts later.
Further, the Hon’ble Tribunal observed that the bad debts have accumulated over a period of time. It is not possible to identify this bad debt with any particular invoice/invoices on which the recovery was pending. There is no one-to-one connection in availing and utilization of the credit in taxable output services. Hence, there is no merit in the allegation that the input credit has been wrongly utilized.
Thus, the Hon’ble Tribunal held that proportional credit on the amount of bad debts written off by the Assessee is not liable to be reversed. Since credit availment and utilization is not wrong, no penalty is imposable.