In the matter of M/s Jagannath Polymers Pvt. Ltd. v. Commissioner, CGST – Jaipur 1, decided by Hon’ble Delhi CESTAT vide Final Order No. 52078/2021 dated 15 December 2021, the issue involved is whether the Appellant is entitled to CENVAT credit and consequential refund of Service tax paid consequent to an audit objection on non-payment of service tax on ocean freight under reverse charge mechanism during GST regime.

The Appellant, in this matter, was importing certain raw materials for the purpose of manufacturing and was subject to Service Tax Audit. An audit objection was raised on 31 January 2019 for non-payment of Service Tax Rs. 61,627/- under reverse charge mechanism (RCM) on ocean freight, as required under S. No. 12 of Notification no. 30/2012-ST as amended by subsequent Notification No. 15/2017-ST dated 13 April 2017, effective from 23 April 2017. On being pointed out, Appellant paid the tax along with Interest. However, as the Appellant could not avail CENVAT Credit of Service tax paid under RCM due to advent of GST, Appellant applied for refund on 30 April 2019.

The refund application of the Revenue was rejected on the ground that the Appellant has deposited the said amount only after being pointed out by the audit and hence, CENVAT credit is not available to them as well as the consequential refund as per Section142(8)(a) of CGST Act, 2017, which debars the admissibility of ITC under the CGST Act in case the tax is paid in pursuance of an assessment or adjudication proceedings. The Adjudicating Order was later upheld by First Appellate Authority.

Being aggrieved, Appellant pleaded before the Hon’ble Tribunal and put forth the ground that as the Appellant was entitled to CENVAT credit of the Service tax payable by them, there was no incentive for them to avoid the payment of service tax. It was also submitted that the said levy was admittedly introduced w.e.f. 23 April 2017 only, and the Appellant had no knowledge of the same and therefore, the Appellant missed to deposit the service tax on ocean freight under RCM.

Hon’ble Delhi CESTAT while allowing the Appeal held that –

• There is no mala fide on the part of the Appellant in not depositing the service tax on ocean freight under the reverse charge mechanism.
• Leviability of service tax on ocean freight has always been highly debatable issue, and the same have travelled to Tribunals as well as before the higher courts.
• Accordingly, it was held that the Appellant is entitled to CENVAT credit of the said Service Tax deposited under RCM in the erstwhile law.
• However, as the CENVAT credit is not available, due to the implementation of GST w.e.f. 1st July 2017, it was held that the Appellant is entitled to claim refund under the transitional provision of Section 142(3) of CGST Act.

One similar matter has also been decided very recently by Hon’ble Chennai CESTAT in the matter of Circor Flow Technologies India (P) Ltd vs Principal Commissioner of GST & Central Excise ([2021] 133 taxmann.com 327 (Chennai – CESTAT) [16-12-2021]), wherein the only difference in facts of the case was in this matter, Appellant deposited Service tax voluntarily under RCM on self-assessment after advent of GST, i.e. without any enquiry/investigation proceedings pending against the Appellant wherein such discrepancy was pointed out. Revenue rejected the refund holding that no credit thereof is eligible under GST regime.

It was observed by Hon’ble Chennai CESTAT that Section 174(2) of the CGST Act provides that the amended GST Act shall not affect any right, privilege, obligation, or liability acquired, accrued or incurred under the amended Act or repealed Acts. It was held by Hon’ble CESTAT that if liability to pay service tax would continue even after introduction of GST, then right to avail credit on the same cannot be denied. It was further held that though credit is not available as ITC under GST law, the credit under the erstwhile CENVAT Credit Rules is eligible to the Appellant and such credit has to be processed under section 142(3) of CGST Act and refunded in cash to the assessee.

Analysis –

There are many instances where pursuant to departmental enquiry/audit or upon self-assessment, a taxpayer has paid Service tax under RCM in GST regime, i.e. after 01 July 2017 and such payment is not attributable to mala – fide intent on his behalf. However, since after introduction of GST regime, CENVAT Credit of Service tax paid under RCM cannot be availed, thus, based on judgements discussed supra and Section 142(3) of the CGST Act, a remedy is available for such taxpayers to claim refund thereof under the transitional provisions. Ergo, such vested right of the taxpayer to claim CENVAT Credit will not lapse and seamless flow of credit will be maintained.