CENVAT Credit on Sub-Contractor’s Services Denied as Not Input for Cement Manufacture: CESTAT Upholds Service Tax Demand on Mining Services [Read Order]

The assessee, Prism Johnson Limited, a manufacturer of cement, was issued a Show Cause Notice (SCN) covering the period 01.10.2014 to 30.06.2017.

The dispute arose from limestone mining operations at Ramasthan Mines, leased by the Government of Madhya Pradesh to one Shrawan Kumar Pathak. The lease expressly prohibited transfer without prior government approval.

Although no transfer was sanctioned, Shrawan entered into three agreements with the assessee that include the Operator Agreement, Commercial Agreement, and Agency Agreement through which the assessee carried out mining operations and purchased the limestone.

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The Revenue alleged that the assessee rendered mining services to Shrawan without service tax registration and the consideration was adjusted by Shrawan selling limestone to the assessee at prices far below the market rate.

The assessee also availed CENVAT credit of ₹7,70,01,957 on service tax paid by its sub-contractor, AR Transport, who had carried out excavation and transport of limestone. The department held that such services were not “input services” for the manufacture of cement and therefore credit was inadmissible.

The assessee contended that the mine was effectively captive, that limestone was sold outright by Shrawan under advance consideration of ₹6 crore, and hence no taxable service was rendered. It was further argued that CENVAT credit was rightly taken as the services were linked to cement manufacture.

The tribunal held that the mining licence remained with Shrawan, and the assessee was only appointed as an operator to carry out mining on his behalf. Thus, the assessee had indeed rendered taxable mining services to Shrawan and suppressed facts by not obtaining service tax registration or filing returns.

The Tribunal sustained the service tax demand with interest and penalties against PJL and upheld penalties on responsible officials under Section 78A of the Finance Act, 1994.

The bench comprising Justice Dilip Gupta (President) and P.V.Subba Rao (Technical Member) found that the services of AR Transport were related to quarrying and transporting limestone for Shrawan, not to the manufacture of cement by the assessee, and hence could not qualify as “input services” under Rule 2(l) of the CENVAT Credit Rules, 2004.

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The tribunal ordered the credit to be recovered, but only within the normal period of limitation, as ER-1 returns did not require disclosure of service-wise credit details, and suppression could not be alleged. Also, the penalties under Rule 26(2)(ii) of the Central Excise Rules imposed on the officers were also set aside.

Accordingly, the Tribunal dismissed the service tax appeal and sustained the demand of service tax with penalties, but partly allowed the excise appeal by restricting recovery of CENVAT credit to the normal period and also set aside the penalties.

The assessee was represented by Devesh Tripathi along with Mohd. Faraz Anees and Presenjit Pathak, while Shyam Raj Prasad along with Harsh Vardhan and Rakesh Agarwal represented the revenue.

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