Bank Guarantee Charges for Raw Material Procurement Covered Under Input Service u/r 2(l): CESTAT allows Bajaj's CENVAT Claim [Read Order]

The Mumbai bench of the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) granted relief to Bajaj Auto Ltd. and allowed the assessee to claim CENVAT credit of Rs. 28.83 lakhs on disputed service, noting that bank guarantee charges for raw material procurement is covered under input service under Rule 2(l) of the CENVAT Credit Rules, 2004.

During the course of audit proceedings, the departmental authorities found that the appellants wrongly availed CENVAT credit on 'Bank Guarantee Commission' for VAT refunds during 2016-2017 and 2017-2018 (up to June 2017), deeming it ineligible under Rule 2(l) of the CENVAT Credit Rules, 2004.

A Show Cause Notice (SCN) dated 02.12.2016 was issued, leading to an Order-in-Original dated 22.07.2019, disallowing credit of Rs. 28,83,253 with interest and imposing a Rs. 2,88,325 penalty. The Commissioner (Appeals), Nashik, upheld this order on 03.12.2020.

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The appellant who were aggrieved by the above order approached CESTAT for relief.

The appellant’s counsel submitted that the appellants used to regularly obtain bank guarantees to submit to the Sales Tax Department for processing sales tax refund applications on raw material purchases, and this was necessary as they exported 45% of their total turnover.

The counsel further submitted that before also,  an SCN for 2011–2016 on the same issue was ruled in favor of the appellants by the Commissioner (Appeals) on 14.01.2020, confirming that bank services qualify as "financing" under Rule 2(l) of the CENVAT Credit Rules, 2004. The department accepted this decision without further appeal. Since the current dispute concerns a later period on the same matter, the appellants argue that the Commissioner (Appeals) cannot now take a different stand.

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The department’s counsel contended that the input credit availed in respect of the banking commission paid for obtaining bank guarantee with respect to export-related VAT refunds is in no way related to the manufacturing operation of the final product of the appellants.

The tribunal noted that bank charges for guarantees are linked to raw material purchases for manufacturing. This qualifies as an "input service" under Rule 2(l) as the definition includes services related to procurement, financing, and other business needs.

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The bench noted that all ‘the services that have a relation with raw materials have been used, either directly or indirectly, in the manufacture of final products, and only upon such final products having been exported, the VAT setoff was given, and therefore the bank commission/charges for obtaining bank guarantee is with respect to such usage of raw materials in the final products and not per se directly relating to its exports.’

The CESTAT, comprising M.M. Parthiban (Technical Member) set aside the impugned order and allowed the assessee’s appeal.

To Read the full text of the Order CLICK HERE

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