Service tax paid on a non-taxable activity constitutes Cenvat credit reversal, with excess refundable.

The appellant, engaged in mining, contracted with North Eastern Coal Fields to remove hard shale and produce carbonaceous shale under a contract commencing 11 July 2005.

The appellant had taken Cenvat credit on vehicles used for the work in July and August 2005.

By show-cause notice dated 10 March 2008, the department sought to deny that credit on the ground that motor vehicles were not eligible for credit when used to provide site-formation services; the demand and penalty were confirmed on adjudication.

The appellant appealed, contending that its activities were mining services and that it was not liable to service tax for the period in question.

1. Whether the appellant’s activities during July and August 2005 were appropriately classified as site-formation services, such that Cenvat credit on the vehicles used for those activities was inadmissible.

2. Whether service tax paid by the appellant despite having no service-tax liability for the relevant period could be treated as reversal of the disputed Cenvat credit, and whether the amount paid under protest was refundable with applicable interest.

Sections 65(97a) and 65(105)(zzza) of the Finance Act, 1994 define site-formation activities and the corresponding taxable service.

The Tribunal held that the appellant’s activity was appropriately classifiable as mining service, which entered the service-tax net with effect from 1 June 2007; accordingly, the appellant was not liable to service tax on that activity during the period at issue.

The Tribunal relied on Ajinkya Enterprises, 2013 (294) E.L.T. 203 (Bom.), for the principle that, where an activity is not subject to the relevant levy, the amount of duty paid may be treated as reversal of Cenvat credit.

The Tribunal accepted that the appellant’s activity was mining, rather than site-formation service, and noted that mining service became taxable only from 1 June 2007.

The appellant therefore had no service-tax liability on the activity during July and August 2005.

Although motor vehicles were ineligible for credit when used to provide site-formation services, the Tribunal reasoned that the appellant’s payment of tax on an activity not then liable to service tax could be treated as reversal of the disputed credit, applying Ajinkya Enterprises.

It further found that the appellant had paid more tax than the amount demanded as credit reversal and had paid the disputed credit amount in cash under protest.

It allowed the appeal with consequential relief and directed refund of the amount paid under protest, together with applicable interest.