2019 (2) TMI 1361 - AT - Central Excise

CENVAT credit - common input services for dutiable as well as exempt goods - common input services which were used both for those flats on which they have paid service tax and those flats on which they have not paid service tax holding them as not service but as transactions in immovable properties - non-maintenance of separate records - Rule 6 of CENVAT Credit Rules, 2004 - Held that - Rule 6 required reversal of proportionate amount of CENVAT credit wherever the input services or inputs were used both for provision of taxable as well as exempted services. There was no provision during the relevant period for reversal of credit where common inputs or input services were used for provision of taxable services and also activities which do not amount to services at all. It is nobody s case that the appellant has availed credit on the inputs and input services used exclusively in activities which do not amount to service. If that be so, they would not have been entitled to the credit of service tax paid or duty paid in view of Rule 2(l) and Rule 3 of CENVAT Credit Rules, 2004. There was a gap in the law during the relevant period inasmuch as one could have availed complete credit of the common inputs and input services which are used in providing taxable services and not activities which do not amount to service at all and the assessee could have used only a small fraction of common inputs/ input services in providing taxable services and rest in activities which do not amount to service at all and still would have been entitled to full credit of the tax paid. This was rectified by insertion of explanation (3) to Rule 6(1) with effect from 01.4.2016 vide notification 13/2016-CE (NT) dated 01.3.2016. During the relevant period Rule 6(1) did not provide for reversal of CENVAT credit in respect of input services used both in provision of taxable services and for activities which do not amount to service. Appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Dispute over the treatment of common input services used for taxable and non-taxable activities.
2. Interpretation of Rule 6 of CENVAT Credit Rules, 2004 regarding reversal of CENVAT credit.
3. Introduction and applicability of explanation (3) to Rule 6(1) with effect from 01.04.2016.

Analysis:
1. The appellant, engaged in construction of residential complexes, faced a dispute over the treatment of common input services used for flats where service tax was paid and those where it was not due to being transactions in immovable property. The original authority dropped the demand, stating that Rule 6 did not cover the situation before the introduction of explanation (3).

2. The first appellate authority allowed the department's appeal, citing Rule 2(l) and Rule 3 of CENVAT Credit Rules, 2004, asserting that the appellant was not entitled to credit for input services used in non-service transactions. The appellant argued that they were entitled to credit as they used the services for taxable services, even if not exclusively.

3. The departmental representative supported the first appellate authority's decision, emphasizing that the introduction of explanation (3) clarified existing principles that credit is only available for taxable services. The representative argued that the appeal should be dismissed as the explanation merely reiterated the pre-existing legal position.

4. The Tribunal found that during the relevant period, Rule 6 did not mandate reversal of CENVAT credit for common inputs used for both taxable and non-service activities. The insertion of explanation (3) in 2016 did not have retrospective effect and could not be applied to the appellant's case. Therefore, the impugned order was set aside, allowing the appeal and granting consequential relief to the appellant.