2017 (9) TMI 631 - AT - Service Tax

Reversal of CENVAT credit - Rule 6 - providing taxable and exempted services - The appellants were earlier availing credit on input services which were used by them for taxable as well as exempted services and were utilizing such credits only to the extent of 20% of the output tax liability in terms of Rule 6 (3) (c) of CCR 2004 during the material time. However from August 2005 they switched over to the present system of availing full credit on such common input services for which no separate accounts were maintained and utilized the full amount of such credits. The appellant claimed that since the full amount of credit available on such common input services (used both in taxable and exempted services) are below the 20% restriction of total service liability of output services they need not restrict utilization in any manner - Rule 6 (3) (c) of CCR Held that - Admittedly the appellants were using inputs / input services which are common for exempted as well as taxable output services. In respect of certain services they have maintained separate accounts in terms of Rule 6(2) which was found to be correct and proper by the original authority. However the dispute is in respect of certain other common input services they have followed the scheme under Rule 6 (3) - It is clear that Rule 6 (1) is a substantive plenary provision - Hon ble Supreme Court in CCE Vs Gujarat Narmada Fertilizers Co. Ltd. 2009 (8) TMI 15 - SUPREME COURT held that sub rule (1) of Rule 6 is plenary. It restates a principle namely that cenvat credit of duty paid on inputs used in the manufacture of exempted final product is not allowable. This principle is inbuilt in the very structure of the cenvat scheme. Sub-rule (1) therefore merely highlights that principle. Sub-rule (1) covers all inputs including fuel whereas sub-rule (2) refers to non-fuel inputs. Sub-rule (2) covers a situation where common cenvated inputs are used in or in relation to manufacture of dutiable final product and exempted final product. The mechanism adopted by the appellant for following both sub-rule (2) and sub-rule (3) in respect of different common input services defeats the very restrictions placed under different conditions of sub-rule (3). As seen in the present case itself that appellant invoked clause (c) of sub-rule (3) and submitted that they were not hit by restriction of 20% in utilizing credit on tax liability of final output services on the ground that total credit availed under sub-rule (3) falls short of the same. We note this claim is misleading and ignoring the fact that they have maintained separate accounts and availed full credit in respect of common input services attributable to taxable output services in terms of sub-rule (2). In other words it would lead to a situation where the asssessee can choose to maintain separate account in respect of common input services under sub-rule (2) and at the same time follow sub-rule (3) in respect of a few of the common input services so that the bar of 20% utilisation of credit on final tax liability can be avoided. We find the present situation is against the basic principle of CCR. The appellants should follow legal provision as per Rule 6. Having not followed they cannot take a plea that there is no provision to deny credit already availed. When the appellants maintained separate accounts for common input services and availed credits under sub-rule (2) of Rule 6 then there is no question of another option for common input services under sub-rule (3) of Rule 6. Scope of present order - Held that - the Tribunal made an open remand of the case for a de novo adjudication. As such original authority examined the issue and passed the order. In the present appeal we have examined the grounds agitated by the appellant and we are in agreement with the final finding of the original authority. Proportionate credit - Held that - during the relevant time there is no such provision available to the appellant. Extended period of limitation - penalty - Held that - the appellants were actually following Rule 6 (3) with restrictions of utilisation upto 20% in terms of Rule 6 (3) (c) upto August 2005. Admittedly they have now knowingly switched over to the present system of selectively following Rule 6 (2) as well as Rule 6 (3) which resulted in the present dispute and proceedings - extended period and penalty upheld. Appeal dismissed - decided against appellant.

Summary

Issues Involved:
1. Validity of availing Cenvat credit on common input services.
2. Compliance with Rule 6 of the Cenvat Credit Rules (CCR), 2004.
3. Scope of remand directions by the Tribunal.
4. Eligibility for proportionate credit attributable to taxable output services.
5. Invocation of extended period and penalty.

Detailed Analysis:

1. Validity of availing Cenvat credit on common input services:
The appellants availed Cenvat credit on input services used for both taxable and exempted services. They claimed that since the total credit on common input services was below the 20% restriction of output service tax liability, they need not restrict utilization as per Rule 6(3)(c) of CCR, 2004. The Revenue objected, arguing that the appellants should not have availed full credit on common input services without maintaining separate accounts.

2. Compliance with Rule 6 of CCR, 2004:
The original authority found that the appellants maintained separate accounts for certain services and availed full credit on common input services, leading to a violation of Rule 6. Rule 6(1) prohibits Cenvat credit on inputs used for exempted services unless separate accounts are maintained under Rule 6(2). Rule 6(3) provides an alternative for those not maintaining separate accounts, but the appellants selectively applied both sub-rules, which was against the principles of CCR, 2004. The Tribunal held that the appellants should either follow Rule 6(2) or Rule 6(3) entirely, not selectively.

3. Scope of remand directions by the Tribunal:
The appellants argued that the original authority's order exceeded the scope of the Tribunal's remand directions. However, the Tribunal noted that the remand was for a de novo adjudication, and the original authority's examination and findings were within this scope. The Tribunal agreed with the original authority's findings.

4. Eligibility for proportionate credit attributable to taxable output services:
The appellants contended they should be eligible for proportionate credit for taxable services. The Tribunal noted that during the relevant period, no provision allowed for such proportionate credit. Hence, this claim was not tenable.

5. Invocation of extended period and penalty:
The Tribunal agreed with the original authority on invoking the extended period and penalty. The appellants knowingly switched to a system that resulted in the dispute, justifying the extended period and penalty.

Conclusion:
The Tribunal upheld the original authority's decision, disallowing the credit availed under Rule 6(3) and dismissing the appeal. The appellants' selective application of Rule 6(2) and Rule 6(3) was against the principles of CCR, 2004, and the Tribunal found no merit in the appeal.