CESTAT holds that Revenue Authorities cannot challenge correctness and legality of tax paid by service providers to deny credit to a service receiver

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CESTAT holds that Revenue Authorities cannot challenge correctness and legality of tax paid by service providers to deny credit to a service receiver

Recently, the Chennai bench of the Customs Excise and Service Tax Appellate Tribunal (CESTAT)¹held that when in doubt about the actual nature of service providedvis-à-visthe particulars mentioned in an invoice to avail input credit, the service provider would be required to be reassessed and the service recipient cannot be denied credit basis the invoice raised by the service provider.

Facts

● The appellant is a General Insurance company, which entered into an agreement with car manufacturers to issue insurance policies through their dealer network.

● The car dealers collect premiums from customers and issue policies.

● For this activity, the dealers receive a payout, for which the dealers raise an invoice on the appellant with the description

‘Provision of space, Computer, Internet and administrative support’ (impugned services).

● A show cause notice was issued to the appellant, alleging that the credit claimed by the appellant was ineligible basis the following:

− Payouts made by the appellant to the dealers are commission paid to them for the premiums collected from customers.

− The impugned services have never been provided, and hence, the appellant is not eligible to avail credit on such services.

Appellant’s key contentions

● The facilities provided by dealers to the appellant would fall under the category of ‘Business Support Services’ and the dealers have discharged applicable service tax on it. When the Revenue Authorities have collected service tax from the appellant through the dealer, and the appellant has borne its incidence, credit cannot be denied subsequently.

● The Revenue Authorities have not challenged the description of impugned services, as disclosed by the dealer on its output invoices, for non-compliance with Rule 4A of the Service Tax Rules, 1994. Once the nature and description of services as mentioned in the invoice by the service provider is not disputed, it cannot be questioned.

CESTAT’s ruling

The CESTAT held that unless the assessment made in the case of the dealer is revised, credit cannot be denied to the recipient, basis the following observations:

● The Revenue Authorities have not disputed the service tax collected from the appellant by the dealer and remitted to the Government.

● The CESTAT referred to the judgement by the Madras High Court², wherein the following principles were laid down –

− The correct test for deciding credit eligibility is to determine the character of payment made by the taxpayers on which they have availed the CENVAT credit;

− Unless the assessment by the service provider is revised, the interpretations/ questions about the nature of invoices raised

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on the taxpayers is unsustainable; and

− The correctness, legality or otherwise of the tax paid by the service providers cannot be challenged by the Revenue Authorities having jurisdiction over the service receiver availing the credit.

PwC comments

In the present case, the CESTAT has upheld the principle that the onus of determining the correctness of the nature of service provided is on the service provider and it should not affect the credit entitlement of the service recipient. While this principle is upheld in the context of service tax law, it may be relevant in the goods and services tax (GST) context only to the extent of the determination/ correctness of the nature of supplies. Given that the GST law stipulates other conditions for the availment of input credit, such as the payment of tax by supplier, etc., which puts the onus on the recipients, the above principle may not be entirely relevant and requires evaluation by the courts.

12021 (3) TMI 24 (Chennai CESTAT)

2M/ s. Modular Auto Limitedv.Commissioner of Central Excise, Chennai [2018-VIL-541-MAD-ST]

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In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.