2024 (11) TMI 406 - AT - Service Tax

Calculating the proportionate credit attributable to exempted services under Rule 6(3A)(c) of CCR, 2004 - whether total credit availed in a financial year would include credit on taxable services also or only credit availed on common input services is to be considered? - As alleged that the factor P in the formula denotes the total cenvat credit taken on input services during the financial year was not limited to the common input services on which credit has been availed but also the credit exclusively attributable to taxable service also in the total cenvat credit taken by the appellant during the financial year HELD THAT - We find that this Tribunal in a series of cases, interpreting the provisions of Rule 6(3) of CCR, consistently held that the factor P referred to in the said formula cannot be considered to mean the total cenvat credit taken in a financial year would also include credit taken on input services and exclusively utilised in providing taxable output services; thus, only the credit taken on common input services which are utilised in providing both taxable as well as exempted services to be considered for arriving at the proportionate credit attributable to exempted services when common input services are utilised for providing both taxable as well as exempted services. As decided in M/S. THYSSENKRUPP INDUSTRIES INDIA PVT. LTD. VERSUS COMMISSIONER OF CE ST, PUNE-I 2023 (2) TMI 1343 - CESTAT MUMBAI main basis on which the demands were raised in both the Show Cause Notices have already been dropped by the adjudicating authority since the appellant had reversed proportionate amount of credit. Only the computation of the amount to be reversed is in dispute. The adjudicating authority has erred in (a) taking the total turnover of traded goods as the value of trading service instead of following Explanation 1(c) to Rule 6 to calculate the value of trading service; (b) For the periods covered in both appeals, the adjudicating authority has erred in reckoning the total credit taken instead of credit on common input services in calculating the amount of credit required to be reversed. The impugned orders, therefore, cannot be sustained. Undisputedly and admittedly appellant has reversed/ paid the amount of the CENVAT Credit attributable to trading activities as per the prescribed formula in Rule 6(3A) as interpreted in the above referred orders. The fact of reversal is also noted in the impugned orders. Appeal allowed.

Summary

Issues Involved:

1. Whether the computation of proportionate credit attributable to exempted services under Rule 6(3A)(c) of the Cenvat Credit Rules, 2004, should include total credit availed on both taxable and common input services or only on common input services.

Issue-wise Detailed Analysis:

1. Computation of Proportionate Credit:

The central issue in this appeal concerns the proper calculation of the proportionate Cenvat credit attributable to exempted services under Rule 6(3A)(c) of the Cenvat Credit Rules, 2004 (CCR). The appellant argued that they have reversed the proportionate Cenvat credit availed on common input services attributable to exempted services, following the formula prescribed under Rule 6(3A) of CCR, 2004. The appellant contended that the total Cenvat credit taken should include only the credit on common input services and not the credit taken on services used exclusively for taxable services.

The Department, however, argued that the computation of proportionate credit should include the total Cenvat credit taken on input services during the financial year, which encompasses both common input services and those used exclusively for taxable services. The Department's position was that the factor 'P' in the formula should denote the total Cenvat credit taken on input services, including credit on taxable services.

The Tribunal, referencing a series of cases, consistently held that the factor 'P' in the formula under Rule 6(3A) should only include the credit taken on common input services used for both taxable and exempted services. It should not encompass credit taken on input services exclusively used for providing taxable output services. The Tribunal cited the case of ThyssenKrupp Industries India Pvt. Ltd., where it was observed that the determination of the value of factors "M", "N", & "P" in the formula should be limited to common input services.

Further, the Tribunal referred to the decision in E-Connect Systems, which clarified that the total Cenvat credit for the purpose of the formula under Rule 6(3A) should only include the credit of common input services and not credit on input services used exclusively for taxable services. The rationale is that Rule 6(1) prohibits credit on input services used for exempted services, thus credit is allowed only for services pertaining to taxable services.

The amendment to Rule 6(3A) in 2016, which was deemed clarificatory and thus applicable retrospectively, further supports this interpretation. The amendment aimed to simplify and rationalize the rule without altering the established principles of reversal of credit, as clarified by the Tax Research Unit Circular.

The Tribunal also referenced the decision in National Steel & Agro Industries Ltd., where it was held that the adjudicating authority erred in including credit on input services used exclusively for taxable services when calculating the amount of Cenvat credit to be reversed. The correct approach is to only consider the credit on common input services.

In conclusion, the Tribunal found merit in the appellant's argument that the computation of proportionate credit should be limited to common input services. Consequently, the impugned order was set aside, and the appeal was allowed with consequential relief as per law.