S.T. Appeal No. 55655 of 2014, ST/Misc. No. 50297/2018 (Arising out of Order-in-Original No. 027-COMM-Meerut-1-2014 dated 19.08.2014 passed by the Commissioner, Service Tax, Meerut-1) and Final Order No. 51950/2018

Decided On: 22.05.2018

Appellants: Oil and Natural Gas Corporation Limited
Respondent: CCE & ST, Meerut-I

Hon'ble Judges/Coram:
V. Padmanabhan, Member (T) and Ajay Sharma


V. Padmanabhan, Member (T)

1. The present appeal is filed against the Order-in-Original No. 27/2014 dated 28.08.2014. The appellant also filed miscellaneous application seeking to introduce a few additional arguments to strengthen the ground already advanced in the appeal. Same is allowed and with the concurrence of both parties, the appeal itself is taken up for final disposal.

2. The dispute pertains to the period October, 2007 to December, 2012 and pertains to Keshav Dev Malviya Institute of Petroleum Exploration (KDMIPE), Dehradun which is a Division of Oil and Natural Gas Corporation Limited (ONGC). The appellant is registered with the Service Tax Department and the output services include:

(i) Maintenance and Repair Service;

(ii) On line Information

(iii) Commercial Training or Coaching Service

(iv) Scientific and Technical Consultancy Service

(v) Erection, Commissioning and Installation Service and

(vi) Consultancy Services.

The appellant was availing cenvat credit under Cenvat Credit Rules, 2004 and, during the period under dispute, availed a total credit of about Rs. 4.48 crores. The Department, during the course of audit of the appellant's accounts, observed that during the period under dispute the appellant had incurred a total expenditure on the Institute to the tune of Rs. 1671 crore. But the total taxable value provided was about Rs. 19.74 crore but paid Service tax of about Rs. 2.09 crore. The Audit team observed that the bulk of the Service tax paid is out of cenvat credit. Show cause notice dated 09.04.2013 was issued to the appellant alleging that Service Tax was irregularly availed by the appellant. The Department was of the view that major portion of the input service was being used for there own organisation and only a very small portion in providing of output taxable service to other service recipients. In the show cause notice, the Revenue adopted a ratio of their output taxable service divided by total expenditure incurred during the year and proceeded to restrict the cenvat credit availed alleged on the basis of the said formula. Accordingly, show cause notice proceeded to disallow a total cenvat credit amounting to Rs. 4.42 crore. The Revenue also alleged suppression of facts on the part of the appellant and invoked the extended time limit for raising demand. Proceedings were initiated against the appellant and the impugned order came to be passed in which the adjudicating authority disallowed. Further, penalty was imposed on various grounds of the Finance Act. Aggrieved by the order, present appeal is filed by the appellant.

3. With this background, we heard Sh. Verender Kalra, ld. C.A. for the appellant and Sh. Sanjay Jain, ld. AR appearing for the Revenue.

4. The arguments advanced on behalf of the appellant are summarised below:

(i) Ld. Consultant submitted that the KDMIPE is a unit of ONGC which caters to the requirement of all other units of ONGC and also renders service to outside parties. The cenvat credit availed is in respect of various input services, a significant part of which by way of reverse charge mechanism in respect of services such as Works Contract Service, Sponsorship Service and Manpower Supply Service.

(ii) He submitted that in respect of activities carried out by the Institute for other ONGC Divisions, no consideration is charged or received but each Division of ONGC was a separate cost centre only for purposes of internal accounting. He submitted that in such cases no consideration is separately charged and there is no question of paying service tax. Such activities were included as 'exempted service' only with effect from 01.04.2016 but the amendment carried out in Rule 6(i) of the Cenvat Credit Rule is not relevant since the dispute is for prior period be applicable.

(iii) Ld. C.A. argued that during the course of audit, the Revenue identified only cenvat credit amount to Rs. 1.27 lakh as inapplicable input services pertaining to aquarium, gymnasium etc. The same is not being disputed. Further, an amount of Rs. 33,000/- which has been confirmed is not disputed on certain other grounds. He argued that in respect of all the input services, these are covered by the definition of Section 2(1) of the Cenvat Credit Rules, 2004 and hence the Revenue is not justified in disallowing the same by taking recourse to a formula which does not have any statutory backing. The ld. C.A. also submitted that ONGC as well as Institute is a Public Sector Undertaking whose activities are in the public domain and the Revenue cannot allege any suppression with intent to evade payment of Service Tax on the part of such a Public Sector Undertaking.

5. Ld. AR appearing for the Revenue justified the impugned order. He drew our attention to para 5.13 and 5.14 of the impugned order in which the adjudicating authority has given detailed justification to hold that the appellant has availed cenvat credit irregularly. He further submitted that there is no co-relation between the input services availed with the output service rendered. He argued that other Divisions of ONGC having separate registration and as service rendered to other ONGC units are to be considered as exempt service and hence he justified the reversal of cenvat credit.

6. Heard both sides and perused the appeal record.

7. After hearing both sides and on perusal of record, we note that the Department, vide the impugned order, has sought to disallow the cenvat credit totally amounting to about Rs. 4.42 crore. The Departmental Officers, during the course of audit noticed that the total value of taxable output service was only a very small fraction of the total cost incurred by the appellant in providing such service. It was also noticed that the cenvat credit accumulated was disproportionately high in relation to total service tax liability payable for the output service. Further, as seen from the show cause notice and the impugned order, we note that the Revenue has adopted a thumb rule in determining what would be the allowable amount of input service credit. The Department worked out the ratio of the value of total output service in relation to the total amount of expenditure incurred during the year and proceeded to restrict the cenvat credit allowable in the same ratio. This thumb rule adopted by Revenue has been seriously challenged during the course of this appeal. It has been argued on behalf of the appellant that there is no basis in the statute for adopting such a formula for restricting the entitlement of the cenvat credit on input services.

8. The Cenvat Credit Rule, 2004 specifies by way of definition, what will constitute input service in Rule 2(1) is as under:-

"Rule 2(1) of Cenvat Credit Rules reads as under:

(A) Rule 2(1) of the Cenvat Credit Rules, 2004 reads:

"Input Service means any service, -

(i) Used by a provider of taxable service for providing an output service; or

(ii) Used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal,

And includes services used in relation to modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs and outward transportation upto the place of removal; but excludes"

From the above, we note that any service which is used by the provider of taxable service for providing output service is allowable.

9. After perusal of the relevant show cause notice and the impugned order, we find that the Revenue has not brought on record any ground to allege that the credit availed is in respect of ineligible input services. In the absence of any such ground, we are of the view that the cenvat credit availed cannot be denied to the appellant.

10. The circumstances in which the cenvat credit availed can be restricted or reversed is also specifically spelt out in the Cenvat Credit Rules, 2004. The restriction/reversal of cenvat credit on the basis of the thumb rule/formula adopted by the Revenue has no legal basis. Once the cenvat credit has been availed in respect of input services falling under Rule 2(1) the same cannot be disallowed by taking recourse to any thumb Rule or formula.

11. The adjudicating authority has held that the KDMIPE is a Division of ONGC who also renders service to other ONGC Divisions. In respect of such services no service tax is paid and hence the restriction of cenvat credit has been ordered.

We find no basis for the stand taken by Revenue. The service, if any, rendered to other ONGC Divisions is in the form of service to self and levy of Service Tax is not justified.

12. With effect from 01.04.2016 in Rule 6(1) of the Cenvat Credit Rules stand amended by including Explanation (iii) but such amendment cannot be extended to the prior period. During the course of argument, ld. Counsel for the appellant has conceded the demand in respect of Rs. 1.24 lakh as well as Rs. 33,000/-, the same is upheld as not contested.

13. In view of the above, the impugned order is set aside except the demand admitted as above.

14. In the result, the appeal is disposed of.

(Pronounced on 22.05.2018).

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