2022 (10) TMI 695 - AT - Service Tax

Reversal of CENVAT Credit - trading activity - exempted service or not - common input service which are used for both dutiable and exempted services - non-maintenance of separate records - Rules 6(3)/6(3A) of Cenvat Credit Rules, 2004 - whether appellant is required to pay 5% or 6% of total sale value of the goods traded by them in terms of provisions of Rule 6(3) when the appellant agree for reversal of actual credit attributed to the quantum of trading sale (trading activity) in terms of Rule 6(3A) following the option available under Rule6(3)? - HELD THAT - The appellant in the present matter agree to reverse to cenvat credit, this is not under dispute. Therefore, the appellant have complied with the condition prescribed under Rule 6(3)(ii) read with sub-rule (3A) of Rule 6 of Cenvat Credit Rules, therefore demand of huge amount on the total value of the trading activity cannot be demanded. Rule 6 of the Cenvat Credit Rules is not enacted to extract illegal amount from the assessee. The main objective of the Rule 6 is to ensure that the assessee should not avail the Cenvat Credit in respect of input or input services which are used in or in relation to the manufacture of the exempted goods or for exempted services. If this is the objective then at the most amount which is to be recovered shall not be in any case more than Cenvat Credit attributed to the input or input services used in the exempted goods/ exempted service. It is also observed that in either of the two options given in sub-rule (3) of Rule 6, there is no provisions that if the assessee does not opt any of the option at a particular time, then option of payment of 5% or 6% will automatically be applied. The demand confirmed by the adjudicating authority is legally not correct and therefore the same cannot be sustained - the appellant are required to reverse the proportionate credit relatable/ attributable to the exempted activity - the matter is remanded for the limited purpose of calculating the proportionate reversal credit in terms of Rule 6 of Cenvat Credit Rules 2004 in this matter - appeal allowed by way of remand.

Summary

Issues:
- Whether the appellant is required to pay 5% or 6% of the total sale value of goods traded by them under Rule 6(3) of the Cenvat Credit Rules.
- Whether the appellant complied with the conditions prescribed under Rule 6(3)(ii) read with sub-rule (3A) of Rule 6 of Cenvat Credit Rules.
- Whether the demand confirmed by the adjudicating authority is legally correct.

Analysis:
1. Issue 1 - Calculation of Reversal Amount:
The department observed that the appellant engaged in both taxable and exempted services, including trading activities, and demanded payment based on Rule 6(3) of the Cenvat Credit Rules. The appellant argued that the calculation method applied by the department was incorrect and illogical. They contended that the reversal of credit should only apply to exempted services, not to credit used for taxable supplies. The appellant cited relevant judgments to support their argument, emphasizing the need for accurate application of Rule 6(1) of the Cenvat Credit Rules.

2. Issue 2 - Compliance with Rule 6(3)(ii) Conditions:
The appellant further argued that even if they were required to reverse credit under Rule 6(3)(i), the amount should not exceed the credit claimed in their returns. They highlighted the legislative provision allowing the assessee to choose an option for credit reversal when not maintaining separate accounts. The appellant stressed that procedural lapses should not deny them the benefits available under Rule 6(3)(ii), citing relevant legal decisions to support their stance.

3. Issue 3 - Legal Correctness of the Demand:
The adjudicating authority demanded 5% or 6% of the total sale value of traded goods from the appellant, citing non-compliance with Rule 6(3A) conditions. However, the Tribunal found that the appellant had reversed credit and produced a Chartered Accountant Certificate. The Tribunal emphasized that the appellant had the right to choose the option under Rule 6(3) and that the Revenue could not compel a specific choice. The Tribunal held that the demand made by the adjudicating authority was legally incorrect, and the appellant was only required to reverse the proportionate credit related to exempted activities. Consequently, the matter was remanded for recalculating the reversal credit amount.

In conclusion, the Tribunal disposed of the appeals by remanding the case to the adjudicating authority for a fresh order on the proportionate credit to be reversed, ensuring a reasonable opportunity for the appellant to be heard.