2018 (9) TMI 317 - AT - Service Tax

CENVAT Credit - common input services which were used by them for taxable as well as exempted services - Rule 6 (3) (c) of CCR 2004 - 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. 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. 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). 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. Regarding submission of the appellant that the present order is beyond the scope of remand directions of the Tribunal vide final order dated 29.09.2008, we note 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. 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 - extended period and penalty rightly invoked. Appeal dismissed - decided against appellant.

Issues Involved:
1. Conflict of interest due to the involvement of a Technical Member who issued the Show Cause Notice.
2. Legitimacy of availing CENVAT Credit on common input services.
3. Compliance with Rule 6 of CENVAT Credit Rules, 2004.
4. Scope of remand directions by the Tribunal.
5. Eligibility for proportionate credit.
6. Invocation of extended period and penalty.

Issue-wise Detailed Analysis:

1. Conflict of Interest:
The Hon’ble Madras High Court remanded the case for a de novo decision due to a conflict of interest. The Technical Member who issued the Show Cause Notice was part of the earlier Tribunal Bench, which was not disclosed during the hearing. The case was re-heard on 06.08.2018 and 09.08.2018.

2. Legitimacy of Availing CENVAT Credit:
The appellants availed CENVAT Credit on input services used for both taxable and exempted services. They claimed that since the credit on common input services was below the 20% restriction of total service liability, they need not restrict utilization. The Revenue objected, arguing that full credit on common input services without restriction was improper.

3. Compliance with Rule 6 of CENVAT Credit Rules, 2004:
The original authority found that the appellants maintained separate accounts for certain input services and availed full credit for taxable services. However, for common input services, they followed Rule 6(3) selectively, which was against the provisions. Rule 6(1) prohibits availing credit on input services used for exempted services unless separate accounts are maintained as per Rule 6(2). Rule 6(3) provides an option for those not maintaining separate accounts, but both rules cannot be applied selectively.

4. Scope of Remand Directions by the Tribunal:
The appellants argued that the original authority’s order went beyond the Tribunal’s remand directions. However, the Tribunal had made an open remand for de novo adjudication, allowing the original authority to re-examine the issue comprehensively.

5. Eligibility for Proportionate Credit:
The appellants contended they should be eligible for proportionate credit attributable to taxable output services. The Tribunal noted that during the relevant period, no provision allowed for such proportionate credit.

6. Invocation of Extended Period and Penalty:
The original authority invoked the extended period and imposed penalties, finding that the appellants knowingly switched to a system of selectively following Rule 6(2) and Rule 6(3), which led to the dispute. The Tribunal agreed with this finding, noting that the appellants’ actions were against the principles of the CENVAT Credit Rules.

Conclusion:
The appeal was dismissed, and the Tribunal upheld the original authority’s findings. The appellants were found to have improperly availed CENVAT Credit on common input services by selectively applying Rule 6(2) and Rule 6(3), which was against the legal provisions. The invocation of the extended period and penalties was justified due to the appellants’ deliberate actions.

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