The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) ruled that transitional credit as a vested right cannot be denied based on procedural or technical grounds and approved an appellant’s claim for a service tax refund under the reverse charge mechanism (RCM).
RR Donnelley India Outsource Pvt. Ltd., the appellant is engaged in providing Information Technology Software Services, Business Auxiliary Services, Banking and Financial Services, and Business Support Services, with a focus on 100% export of services.
The appellant filed a refund claim amounting to Rs. 7,49,521 under Section 142(3) of the CGST Act, 2017, for service tax paid under the Reverse Charge Mechanism (RCM) after the implementation of GST.
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During an audit, discrepancies were found between the appellant’s reported tax returns (ST-3) and their financial records for 2016-2017. It was discovered that some imported service transactions were missed, leading to a service tax shortfall of Rs. 7,45,771.
The audit also identified an unpaid service tax of Rs. 3,750 related to cafeteria license fees paid to the Tamil Nadu Revenue Department. Upon notification by the audit team, the appellant immediately paid the outstanding service tax amount of Rs. 7,49,521, including interest, on July 31, 2020.
The appellant’s claim was denied, and the appellant was held liable for the penalty under Section 78 of the CGST Act. It was further ruled that the paid amount did not qualify as “excess or erroneously paid tax” under Section 11(B) of the Central Excise Act, 1944, making it non-refundable under Section 142 of the CGST Act.
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The appellant challenged the penalty and denial of the refund, arguing that the service tax paid under RCM after the audit was eligible for credit under Rule 9(1)(e) of the CENVAT Credit Rules, 2004.
The respondent’s counsel argued that non-disclosure of certain transactions amounted to suppression and there was an intent of evasion, warranting a penalty.
A single bench comprising M. Ajit Kumar (Technical Member) found that the applicable rule for tax paid under the Reverse Charge Mechanism (RCM) was Rule 9(1)(e) of the CENVAT Credit Rules, 2004, which permits credit for RCM payments. Rule 9(1)(bb) cited by the lower authorities applies only to supplementary invoices issued by output service providers and does not cover RCM payments.
The tribunal referenced Adfert Technologies Pvt. Ltd. vs. Union of India and Others [2020 (32) GSTL 726 (P&H)], where the Punjab & Haryana High Court held that transitional credit under GST is a vested right and cannot be denied based on procedural or technical grounds.
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The tribunal emphasized that this decision upheld by the Supreme Court in Union of India & Others vs. Adfert Technologies Pvt. Ltd. [2020 (34) GSTL J138 (S.C.)], supporting the principle that procedural errors or technicalities cannot override a taxpayer’s right to transitional credit if they are eligible.
Therefore, the tribunal set aside the order to deny the refund and dismissed the penalty under Section 78 of the CGST Act. The appellant’s appeal was allowed with consequential relief as per the law.
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