an important judgement of Hon’ble Kolkata CESTAT in the case of M/s Seven Star Steels Ltd. Versus Commissioner of Central Excise, Customs & Service Tax, BBSR-II [(2013] 32 taxmann.com 186 (Kolkata)] on following issue:
Whether Rule 3(5) of the Cenvat Credit Rules, 2004 (“the Credit Rules”) for reversal of Cenvat credit on inputs or capital goods also applicable to reversal of credit availed on input services?
In the instant case, M/s Seven Star Steels ltd. (“the Company” or “the Appellants”) was engaged in the manufacture of sponge iron (“the finished goods”) in their factory. For the manufacture of the finished goods, the Appellants procured iron ores (“the input”) during the period April, 2007 to March, 2009. In procuring the input, the Appellants had paid service tax of Rs 35,73,629/- on GTA service. The Department alleged that instead of utilizing the entire quantity of the input in the manufacture of the finished goods, the Company sold some quantity of the input as such and did not use the same in or in relation to the manufacture of the finished goods. Accordingly, the proportionate Cenvat credit of service tax paid on the GTA service in bringing the input was directed to be reversed being not used in the manufacture of the finished goods. The said demand was confirmed by the adjudicating authority and an penalty of Rs.2,000/- was imposed besides recovery of interest. The Appellants aggrieved by the order of the Adjudicating Authority filed the appeal before the ld. Commissioner (Appeals), who upheld the order of the adjudicating authority. Hence the Appellants have filed an appeal before the Hon’ble CESTAT.
The Hon’ble Kolkata CESTAT decided the issue in favour of the Appellant and held that Rule 3(5) of the Credit Rules is directed for reversal of Cenvat credit on inputs or capital goods and the same is not applicable to the credit availed on the “input services”.
The Hon’ble CESTAT rejected the allegation of the Department that the credit availed was to be reversed on two counts; firstly, the input after being brought to the factory, were subjected to the process of screening and process of screening was a part of the manufacturing process. After the input was subjected to the process of screening, the same could not be called as input as such. Secondly, Rule 3(5) of the Credit Rules is directed for reversal of Cenvat credit on inputs or capital goods and the same is not applicable to the credit availed on the “input services”.
It was concluded that inputs, input services and capital goods have been separately defined in the Credit Rules and therefore are independent of each other. Rule 3(5) of the Credit Rules only talks about the Cenvat credit taken on inputs or capital goods. It does not refer to the Cenvat on Input services. In other words, there is no provision in Rule 3(5) of the Credit Rules to reverse credit of service tax availed in relation to inputs or capital goods when removed from the factory.
Hence, the Hon’ble Kolkata CESTAT rejected the contention of the Department and decided the case in favour of the Appellant.