2024 (10) TMI 890 - AT - Central Excise

CENVAT Credit availed on input services used exclusively in the manufacture of dutiable goods - Activity amounting to manufacture or not - packing and labelling of parts of motor vehicles and safety headgears - whether the CENVAT Credit, availed on the input services used exclusively in the manufacture of the dutiable goods, was required to be included in the numerator for apportioning the common credit between the exempted service (trading) and dutiable goods? - levy of interest and penalty. HELD THAT - This issue is no more res integra as it has been held that the CENVAT Credit, which pertains to input services exclusively used in dutiable goods, is not required to be included in the total CENVAT Credit for apportionment between exempted services and dutiable goods. It has been held that for apportionment of CENVAT Credit, only such credit which was availed on input service used commonly in exempted service and dutiable goods has to be taken into consideration. In order to bring parity with the underlying objective of Rule 6, Rule 6(3A) of the Credit Rules was amended vide Notification No. 13/2016-CE (NT) dated 01.03.2016, effective from 01.04.2016, by substituting Rule 6(3A) (b)(ii) of the Credit Rules, to consider only common input services and not total input service credit, for the purpose of computing the amount of reversal. It is observed that such amendment in Rule 6(3A) by virtue of substitution was clarified by the Board vide TRU Circular No. 334/8/2016-TRU dated 29.02.2016, to apply retrospectively. The clarification clearly mentioned that the provisions of Rule 6 providing for reversal of Credit in respect of input services used w.r.t. exempted goods/services, is being redrafted with the objective to simplify and rationalize the same without altering the established principles of reversal of such credit. The modality adopted by the Appellant for reversal of credit on proportionate basis is in accordance with the provisions of Rule 6(3A). Hence, the impugned order by upholding the demand on incorrect understanding of provision is erroneous and not sustainable - the impugned order passed by the Ld. Commissioner (Appeals) is not sustainable and is liable to be set aside. Interest and penalty - HELD THAT - Since the demand of Cenvat Credit itself is not sustainable, penalty is not imposable and consequently, no interest is also recoverable. The impugned order is not sustainable and is accordingly set aside - Appeal allowed.

Summary

Issues Involved:

1. Whether the CENVAT Credit availed on input services used exclusively in the manufacture of dutiable goods should be included in the numerator for apportioning the common credit between exempted service (trading) and dutiable goods.
2. Interpretation of the term "total CENVAT Credit" under Rule 6(3A)(b)(ii) of the CENVAT Credit Rules, 2004.
3. Validity of demand for reversal of CENVAT Credit, interest, and penalty imposed by the lower authorities.

Issue-wise Detailed Analysis:

1. Inclusion of CENVAT Credit on Input Services for Dutiable Goods:

The core issue in this case was whether the CENVAT Credit availed on input services used exclusively for the manufacture of dutiable goods should be included in the numerator for apportioning the common credit between exempted services (trading) and dutiable goods. The Tribunal found that this issue is no longer res integra, as it has been consistently held that CENVAT Credit pertaining to input services exclusively used in dutiable goods is not required to be included in the "total CENVAT Credit" for apportionment. The Tribunal relied on several judicial precedents, including E-CONNECT SOLUTIONS (P) LTD. and Commissioner v. Reliance Industries Ltd., which clarified that for the purpose of apportionment, only the credit availed on input services used commonly in both exempted and dutiable services should be considered.

2. Interpretation of "Total CENVAT Credit":

The Tribunal addressed the Department's interpretation of the term "total CENVAT Credit" in the formula under Rule 6(3A)(b)(ii). The Department contended that it should include all input services, even those used exclusively in taxable services. However, the Tribunal clarified that the "total CENVAT Credit" for the purpose of the formula refers only to the credit of common input services, not those used exclusively for dutiable goods. This interpretation aligns with the objective of Rule 6, as amended by Notification No. 13/2016-CE (NT) and clarified by the Tax Research Unit Circular, which aimed to simplify and rationalize the reversal of credit without altering established principles.

3. Validity of Demand, Interest, and Penalty:

The Tribunal concluded that the modality adopted by the Appellant for reversing credit on a proportionate basis was in accordance with Rule 6(3A) of the CENVAT Credit Rules. Consequently, the demand upheld by the Commissioner (Appeals) was based on an incorrect understanding of the provision and was deemed erroneous and unsustainable. Since the demand for CENVAT Credit was not valid, the Tribunal also held that the imposition of penalty and recovery of interest were unwarranted. Therefore, the impugned order was set aside, and the appeal filed by the Appellant was allowed, granting consequential relief as per law.

In conclusion, the Tribunal's judgment emphasized the correct interpretation of "total CENVAT Credit" and upheld the Appellant's approach to credit reversal, setting aside the lower authorities' orders on demand, penalty, and interest.