2016 (12) TMI 723 - AT - Central Excise

Reversal of cenvat credit - input services commonly used in the manufacture of dutiable as well as exempted products - Held that - Rule 6(3) of the Rules requires that if separate accounts are not maintained for the inputs / input services used for manufacture of dutiable as well as exempted products, the manufacture should reverse an amount at the rate of 10% of the value of the exempted products. However, I find that the amendment in Rule 6 vide N/N.23/2004-CE (NT), dated 10.09.2004 has given an option for proportionate reversal, instead of reversal of 10% of the value of the exempted products. The Notification has also been given retrospective effect for the period from 10.09.2004 to 31.03.2008. I find that the entire demand covered in the present case falls within the time frame covered in the retrospective amendment. It is also on record that the entire input service credit stands reversed along with interest payable thereon. Under the circumstances, the demand does not survive - appeal allowed - decided in favor of appellant-assessee.

Summary

Issues:
Reversal of cenvat credit on input services due to lack of separate accounts for dutiable and exempted products.

Analysis:
The appeal was filed against an Order-in-Appeal concerning the reversal of cenvat credit on input services. The appellant, a manufacturer of various products, availed cenvat credit on inputs and input services. While maintaining separate accounts for inputs used in dutiable and exempted products, they failed to do so for input services. Following a departmental audit, a Show Cause Notice was issued demanding the reversal of credit on input services based on Rule 6(3) of the Cenvat Credit Rules, 2004. The original authority initially dropped the demand after the appellant reversed the credit with interest. However, the Commissioner (Appeals) reversed this decision, upholding the demand and leading to the present appeal.

The appellant argued that they had reversed the entire input credit on service tax with interest and cited a retrospective amendment in Rule 6 of the Rules through Notification No.23/2004-CE (NT) from the Finance Act, 2010. This amendment allowed for a proportionate reversal of credit on inputs/input services used in relation to exempted goods. The appellant claimed entitlement to this benefit, which was extended by the original authority. On the other hand, the Departmental Representative supported the Commissioner (Appeals)'s findings, pointing out that the appellant had not applied for the benefit under the Notification.

After hearing both sides and reviewing the records, the Tribunal focused on the issue of reversal of cenvat credit on input services used for both dutiable and exempted products. While Rule 6(3) mandated a 10% reversal if separate accounts were not maintained, the retrospective amendment in Rule 6 provided an option for proportionate reversal instead. This amendment covered the period relevant to the case. Given that the appellant had already reversed the entire input service credit with interest, the Tribunal concluded that the demand was no longer valid. Consequently, the impugned order was set aside, and the decision of the original authority was upheld, allowing the appeal.