CENVAT Credit on Lease Termination Penalty Refundable, Nexus Theory Inapplicable: CESTAT [Read Order]
The tribunal found that since the original adjudicating authority had already accepted that renting the property had a nexus with the appellant's services, the tax paid on the termination charge was also part of the eligible input credit.
Refund - Taxscan
Refund - Taxscan
The Mumbai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) allowed an appeal, holding that the 'nexus theory' is inapplicable for refund of unutilized CENVAT credit on exported services. The tribunal modified a lower order to grant a refund on service tax paid as a penalty for early termination of a lease agreement.
M/s Carnival Support Services India Pvt. Ltd., the assessee filed an appeal against the Order-in-Appeal dated 29.08.2018. The appeal challenged the rejection of a refund claim for ₹3,95,670/-, which was the service tax paid on additional rent for the early termination of a Leave & Licence agreement for its office premises.
The core issue was that while Carnival exported crew-requirement services and claimed a refund of unutilized CENVAT credit, the Refund Sanctioning Authority, upheld by the Commissioner (Appeals), rejected a portion of the claim. The rejection was based on the ground that the payment, termed a 'penalty' in the agreement, had no nexus with the output services exported by the appellant.
The appellant's counsel argued that the payment was compensation for early vacation of the premises, an act of forbearance, and not a penal charge. More importantly, they contended that post the 2012 amendments, specifically Notification No. 27/2012-CE(NT) and a clarifying CBEC Circular, the requirement to establish a direct nexus between each input service and the exported service was dispensed with for formula-based refunds. They relied on several CESTAT precedents to argue that without a separate adjudication under Rule 14 to deny the credit, it could not be rejected at the refund stage.
The department's Authorized Representative supported the lower order, pointing to the language of the rent agreement which explicitly labeled the payment as a 'penalty amount'. He argued that such a charge, by its nature, could not be linked to the provision of the appellant's output services.
The CESTAT bench, comprising Dr. Suvendu Kumar Pati (Judicial Member), sided with the appellant. The tribunal agreed that the 2012 changes had expressly dispensed with the 'nexus' requirement for such refunds. It followed the settled jurisprudence that the department cannot deny a credit at the refund stage unless it has first initiated a separate recovery proceeding under Rule 14 of the CENVAT Credit Rules.
The tribunal found that since the original adjudicating authority had already accepted that renting the property had a nexus with the appellant's services, the tax paid on the termination charge was also part of the eligible input credit. Accordingly, the CESTAT allowed the appeal and modified the Commissioner (Appeals)' order, directing the department to refund the amount of ₹3,95,670/- along with applicable interest within two months.
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