2019 (2) TMI 1382 - AT - Service Tax

CENVAT Credit - proportionate credit attributable to exempted services - taxable service hypothecation and loan activity - Rule 6(3A) of the CENVAT Credit Rules 2004 - determination of the amount that has to be reversed by the appellants when common inputs/input services are used for providing output services - appellants have maintained separate records with regard to the common inputs used for the exempted as well as taxable output services - Held that - The dispute in this case is with regard to the exemption given by Notification No. 04/2006 dated 01.03.2006 wherein 90% of the amount of interest received in granting loans and financing services is exempted. By such Notification, service tax is required to be paid on a value equal to 10% of the total amount representing interest; balance 90% thus enjoys exemption from payment of service tax. The Show Cause Notice has been issued alleging that the appellant has to consider the 90% which enjoys exemption from payment of service tax as exempted services and include this value for arriving at the amount that has to be reversed - The formula prescribed in Rule 6(3A) also uses the word exempted services and is not qualified by saying exempted services as well as that part of the services which are exempted. Therefore, for applying the formula, only those services which are wholly exempted from service tax can be included to indicate the value of exempted services. The assessing officer shall carry out the computation afresh and requantify the liability, if any - Appeal allowed in part.

Summary

Issues:
Determining the correct value of taxable service "hypothecation and loan activity" for calculating proportionate credit under Rule 6(3A) of CENVAT Credit Rules, 2004.

Analysis:
The appellants were engaged in financing various services and were registered under different categories. The Department alleged that the appellants did not correctly calculate the proportionate credit attributable to exempted services. The adjudicating authority held that 90% of the taxable service was exempted from service tax, leading to a demand of recovery with interest and penalties. The appellants argued that a previous CESTAT order favored their position, stating that the exempted value should not be included in the formula for credit reversal.

The dispute revolved around whether the 90% exempted value should be considered as exempted services for credit reversal. The appellants contended that since 10% of the interest amount was subject to service tax, the services were not wholly exempted. The Tribunal analyzed the definition of "exempted services" and ruled that only services wholly exempted from service tax could be included in the formula for determining credit reversal.

The Tribunal referred to Rule 6(3A) which provides a formula for reversing credit attributable to common inputs used for exempted and dutiable services. It highlighted that the exemption under Notification No. 04/2006 exempted only 90% of the interest amount, making the services partially taxable. The Tribunal agreed with the appellants' argument that the 90% exempted value should not be included in the formula for credit reversal.

The Tribunal directed the assessing officer to follow the directions in a previous order, granting the appellants the benefit of the 90% exemption. However, it noted that the balance 10% should be taxable, requiring a reevaluation of the tax liability. The assessing officer was instructed to recalculate the liability, considering the appellant's claims and providing a reasonable opportunity for compliance. The appeal was allowed and partly remanded for further assessment.

This judgment clarifies the interpretation of "exempted services" and provides guidance on calculating credit reversal for common inputs used in both exempted and taxable services. It emphasizes the importance of consistency in applying formulas and ensures that only wholly exempted services are considered for credit reversal.