In a decision that strengthens the rights of taxpayers transitioning into the GST regime, the Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ), Chennai, has ruled in favour of Madura Micro Finance Ltd., allowing a refund of service tax paid under the Reverse Charge Mechanism ( RCM ).
The decision emphasises that taxpayers should not be deprived of transitional credit due to technical or procedural lapses if the underlying eligibility for the credit exists.
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The case concerns Madura Micro Finance Ltd., a non-banking financial company that paid Rs.20,11,196 in service tax under RCM for the period from April 2012 to June 2017. Following an audit conducted by the Audit Wing of the Goods and Services Tax ( GST ) & Central Excise Department, the appellant company made this payment on December 18, 2017, after the GST regime was implemented on July 1, 2017. The company subsequently filed for a refund of Rs.10,05,598, representing 50% of the service tax paid under RCM, claiming it was eligible for this amount as Central Value Added Tax (CENVAT) credit in the GST regime. However, this refund request was denied by the Department, leading to the appeal before the CESTAT.
The appellant, Madura Micro Finance Ltd., represented by Shri K. Manimaran argued that they paid service tax under RCM for the period April 2012 to June 2017 and were eligible for CENVAT credit. They sought a refund of 50% of the tax paid under RCM, which was denied, and appealed for its grant.
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The respondent revenue, Commissioner of GST & Central Excise, represented by Smt. Anandalakshmi Ganeshram contended that the appellant’s refund claim shall be rejected, citing Rule 9(1)(bb) of CENVAT Credit Rules 2004 and Section 142(8)(a) of the CGST Act. They argued that the service tax paid under RCM was not eligible for transition as input tax credit and therefore could not be refunded.
The CESTAT ruling hinged on the interpretation of Section 142 of the CGST Act, which allows for refunds in cases where tax has been paid under the previous regime but cannot be carried forward into the GST framework.
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The bench examined Rules 9(1)(e) and 9(1)(bb) of the CENVAT Credit Rules, 2004, to clarify eligibility. It noted that the rule allows credit for service tax paid under RCM, contrasting with the revenue’s incorrect reliance on Rule 9(1)(bb), which does not apply in RCM cases. CESTAT cited the case of Polygenta Technologies Ltd., which established that Rule 9(1)(bb) does not cover credits for tax paid by recipients under RCM, confirming that Rule 9(1)(e) alone applies.
The bench also referenced the Adfert Technologies Pvt. Ltd. case, which the Supreme Court upheld, where it was held that transitional credit is a vested right that should not be denied on technical grounds. Madura Micro Finance Ltd. had attempted to file TRAN-1, but procedural rejections based on non-declaration in service tax returns led to the denial. However, CESTAT found that this non-declaration was a mere procedural oversight since the service tax returns were filed before the tax audit and subsequent GST transition.
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The single-member bench of the CESTAT comprising Shri M. Ajit Kumar (Technical Member) held that the tax paid qualifies as refundable under Section 142 of the CGST Act, despite procedural rejections, as transitional credits cannot be denied on technical grounds.
The bench concluded that the denial of credit based on procedural grounds was “hyper-technical”, asserting that the appellant is entitled to transitional credit and, in cases where credit cannot be carried forward, a refund. Consequently, the CESTAT directed the Department to process the refund for Madura Micro Finance Ltd.
The judgment highlighted the rights of taxpayers to claim transitional credits despite procedural hurdles, ensuring that eligible taxpayers are not unfairly burdened by procedural rejections.
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