BSNL Vs. CCE

JUDGEMENT

(1.) THIS appeal is against denial of CENVAT credit on capital goods amounting to over Rs. 32 lakhs for the period 2004 -05 and 2005 -06 (upto June, '05). The appellants, M/s. Bharat Sanchar Nigam Ltd. (BSNL, for short) are rendering taxable services including telephone services to their subscribers all over India. For rendering such services effectively, they have divided the country into what are called "Secondary Switching Areas" (SSAs) for short. Some of these SSAs coming within the State of Tamil Nadu are Salem, Coimbatore, Trichy and Kumbakonam. M/s. BSNL have a Central Stores Department (CSD, for short) at Madurai, which caters to the said SSAs by way of purchase and supply of capital goods required for the rendering of the above services. The challenge in the appeal is against the CENVAT credit taken by the appellants in SSA Salem on capital goods supplied by the CSD, Madurai and covered by copies of manufacturer's invoices. Prior to September, 2005, CSD, Madurai had no separate registration as "first stage dealer". The lower authorities denied the credit on the said capital goods to the appellants on the ground that the credit had been taken by SSA Salem without there being invoice issued by registered first stage dealer.

(2.) THE learned Counsel submits that a dealer should be a person who purchases and sells goods and that CSD, Madurai is not a dealer in this sense. The capital goods purchased by CSD, Madurai are transferred to SSAs maintained by M/s. BSNL for being used in rendering the taxable service. According to the learned Counsel, it was open to M/s. BSNL at SSA Salem to take the CENVAT credit in question on the strength of the copies of the manufacturer's invoices wherein CSD, Madurai had purchased the goods for M/s. BSNL. It is also pointed out that the transfer of capital goods from CSD, Madurai to SSA Salem was also covered under 'Stores Issue Note', wherein the quantity of goods so transferred was specified. It is argued that, on these facts, the benefit of CENVAT credit on capital goods ought not to have been denied to M/s. BSNL at SSA Salem on the technical ground that the goods were not supplied to the SSA by CSD, Madurai under registered first stage dealer's invoice. It is argued that a substantive benefit like CENVAT credit should not be denied on procedural grounds. In. this connection, case law has also been cited [TISCO Ltd. v. Commissioner 2001 (133) E.L.T. 761 (Tri. -Kol.)]

(3.) WE have considered the submissions. We note that, from 23.09.2005 (the date on which CSD, Madurai was registered as a first stage dealer), CENVAT credit is being availed by SSA Salem in respect of capital goods received from CSD, Madurai. The dispute is for the period prior to the said date. The CENVAT credit in question has been denied on a technical ground. It is not in dispute that the capital goods were duty -paid and that the credit of that duty was taken by SSA Salem by complying with the further condition that the capital goods was to be used in the rendering of output service. It is settled law that a substantive benefit cannot be denied on a procedural or technical ground where the beneficiary has satisfied the substantive conditions for the benefit. The two substantive conditions relevant to the present case are (a) that the capital goods must be duty -paid and (b) that they should be used in the rendering of output service. Both these conditions were admittedly satisfied by M/s. BSNL in respect of the capital goods received by their Salem SSA from CSD, Madurai prior to September, 2005. The lower authorities, however, denied CENVAT credit to the appellants on the ground that the capital goods were not received by the Salem SSA under cover of "first stage dealer's" invoices. On a perusal of the provisions of Rule 9 of the CENVAT Credit Rules, 2004 read with the definition of "first stage dealer" given under Rule 2 of the said rules, we find that the benefit of CENVAT credit of the duty paid on capital goods is admissible to a provider of output service in respect of capital goods received from a first stage dealer under cover of an invoice issued by the latter. Strictly speaking, a "first stage dealer" is one who has purchased goods from its manufacturer and sells it for a consideration. Undisputedly, in the present case, CSD, Madurai did not sell capital goods to SSA Salem and hence did not fit in the definition of "first stage dealer". Nevertheless, the department has treated them as first stage dealer in respect of similar transactions after 23.09.2005. Apparently, the department chose to go by the factum of registration of CSD, Madurai as "first stage dealer". In other words, since 23.09.2005, the service tax authorities have not been insisting on M/s. BSNL having to satisfy the definition of "first stage dealer" given under Rule 2 of the CENVAT Credit Rules, 2004. They have been insisting only on registration as "first stage dealer". By all means, registration is a mere procedural requirement. In this view of the matter, we hold that, for the period prior to September, 2005, the substantive benefit of CENVAT credit on capital goods, has been denied to the assessee on a procedural ground. The case law referred to by the learned Counsel is relevant to this context.