While upholding Royal Enfield’s cross-utilisation of eligible service station credit against the manufacturer’s excise duty liability, the Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that credit eligibility arose from the services’ use in providing taxable output services, not from centralised registration itself. Emphasising that audit detection and subsequent reversal did not establish deliberate suppression, the Tribunal set aside the interest demands and penalties.
The Tribunal clarified that Under Rule 2(l) of the Service Tax Rules, 1994, the service station inputs did not qualify under the manufacturing limb, but qualified under the output-service limb because they were used to provide taxable repair and maintenance services. Rules 3(1) and 3(4) permitted Royal Enfield, as both manufacturer and service provider, to record eligible service station credit in its factory account and use it against excise duty.
No one-to-one correlation was required, and recording the credit in ER-1 rather than ST-3 did not defeat entitlement. Hence, the lower authorities erred by overlooking Royal Enfield’s capacity as an output service provider. Further, Tiruvottiyur itself was the centrally registered output service provider and received, accounted for and paid the service station invoices. The amendment making ISD distribution mandatory from April 01, 2016, did not require that registrant to route its own credit through an ISD.
The CESTAT also clarified that marketing and branch office demand failed because the authorities did not rebut the manufacturer’s specific defence. Further, recovery of Rs. 23.77 lakhs in ISD credit failed on merits and limitation, while recovery of Rs. 8.09 lakhs relating to other factories failed solely on limitation. 8588803801
Briefly, Royal Enfield challenged three orders denying CENVAT credit taken at its Tiruvottiyur motorcycle factory. The disputed credit related to services used at its service stations and marketing offices, ISD credit distributed entirely to Tiruvottiyur, and services used exclusively at its Oragadam and Manjambakkam factories. Royal Enfield’s service stations operated under a centralised service tax registration at Tiruvottiyur, where their accounting, invoice payments, returns and service tax payments were handled. The service station credit was recorded in the factory’s ER-1 returns, while the ST-3 returns disclosed no credit and output service tax was paid in cash.
The Division Bench comprising Ajayan T.V. (Judicial Member) and Vasa Seshagiri Rao (Technical Member) observed that the lower authorities had wrongly examined the service station credit only from Royal Enfield’s capacity as a manufacturer, overlooking its separate capacity as a provider of taxable output services. Although services consumed at post-sale service stations did not qualify under the manufacturing limb of Rule 2(l), they qualified under its first limb because they were used to provide taxable repair and maintenance services. Centralised registration did not itself create eligibility; it identified the registered service provider and the place where its credit was accounted for. The Rules did not require input services to be received in the factory.
The Tribunal also found that the authorities had left unanswered Royal Enfield’s plea that its marketing and branch offices were premises from which its motorcycles were sold and that the related services qualified under the manufacturing limb of Rule 2(l). On limitation, discovery during audit and reversal after audit did not, by themselves, establish deliberate suppression with intent to evade duty. The credit had been disclosed in returns, the objections arose from the company’s own records, and the inter-unit credit transactions were revenue neutral.
The Tribunal noted that under Rules 3(1) and 3(4), a person who is both a manufacturer and a provider of output services may validly take eligible input service credit in a common account and use it to pay excise duty, without a one-to-one correlation between the credit and the liability. On these facts, no ISD registration was required at Tiruvottiyur because the centrally registered service provider itself received, accounted for and paid the service station invoices, and there was no transfer of credit from one office to another requiring distribution.
The CESTAT also found that the Revenue had not established the common usage necessary to apply Rule 7(d), and the Tribunal followed the decisions permitting distribution wholly to one unit before April 01, 2016. Recovery of Rs. 8.09 lakhs relating to the other factories failed solely on limitation, since Royal Enfield had conceded the merits of that component. The extended period could not be invoked without establishing the statutory ingredients of deliberate suppression or other conduct attracting Section 11A(4).
