2025 (4) TMI 1539 - AT - Service Tax

Non-compliance of the obligations imposed on the manufacturer of final products or provider of output service in availment of CENVAT Credit in specified situations mentioned therein under Rule 6 of the CENVAT Credit Rules 2004 - HELD THAT - On plain reading of the legal provisions under Rule 6 of CCR of 2004 it transpires that while providing a comprehensive input credit scheme of the duties and taxes paid on input and input service the Government had provided for an exception of not extending such input credit facility in respect of those inputs and input services used in or in relation to exempted goods or exempted services. The rationale of this provision is evident inasmuch as the CENVAT credit scheme enables the manufacturer or output service provider to use the credit to reduce the cascading effect of tax on input/input service embedded in the duty or tax liability on the final product or output services - the appellant has followed Rule 6(2) ibid inasmuch as the various manufacturing units situated at Aurangabad Mulund Baddi are registered individually with jurisdictional Central Excise authorities and maintained separate records for availing CENVAT credit and have not taken credit on the inputs and input services used in provision of exempted service viz. trading which has been undertaken only by HO and the manufacturing units have taken credit only on the inputs and input services used in manufacture of dutiable goods and not in respect of exempted goods. From the legal provisions of the Finance Act 1994 it is understood that trading is a form of service and no service tax is leviable on it and hence it is an exempted service. Usually the amount one pays to a service provider is the value of the services. For example what one pays for a service the amount paid represent not only the service rendered by trader but also the value of the goods purchased and delivered. The service element cannot be the total turnover of the goods traded but is only a small fraction of the turnover - On reading of the Explanation I(c) to this Rule 6 ibid for both the relevant periods (April 2016 to June 2017 and earlier periods) it clearly specifies that in case of trading service the value of the service is the difference between the buying and selling price or 10% of the traded goods whichever is higher. In the present case the only dispute is regarding the credit on common input services used in their HO unit which was transferred to the field units through ISD invoices. This credit cannot be attributed wholly to either the dutiable goods manufactured or the exempted service rendered viz. trading. This should therefore be apportioned in terms of Rule 7 ibid. The adjudicating authority therefore erred in taking the total credit taken (including credit taken on inputs and input services used exclusively for manufacture of dutiable goods) to calculate the amount of CENVAT credit that must be reversed under Rule 6(3A) ibid. For the period April 2016 to March 2017 this was clearly against the explicit rule position as laid down in Rule 6(3A)(b). Therefore the calculation of CENVAT credit adopted by the learned adjudicating authority does not stand the scrutiny of law. Conclusion - The appellants having exercised the option under Rule 6(3A)(a) and submitted requisite intimation and having maintained separate records for inputs and input services used exclusively for dutiable goods and exempted services are entitled to apply the formula under Rule 6(3A) for proportionate reversal of credit on common input services. The impugned order is set aside - appeal allowed.

Summary

The core legal questions considered in this appeal revolve around the interpretation and application of Rule 6 of the CENVAT Credit Rules, 2004 (CCR 2004), specifically concerning the admissibility and reversal of CENVAT credit attributable to exempted services, the procedural compliance required under Rule 6(3A), and the validity of the departmental demand for reversal of CENVAT credit along with interest and penalties. The issues include:

1. Whether the appellants complied with the procedural requirements under Rule 6(3A)(a) of CCR 2004 by submitting the requisite intimation for reversal of CENVAT credit attributable to exempted services.

2. Whether the appellants were required to maintain separate records for inputs and input services used exclusively for exempted services, and if non-maintenance justifies demand of reversal of credit under Rule 6(3)(i).

3. Whether the departmental authorities erred in calculating the amount of CENVAT credit to be reversed by including credit attributable to inputs and input services used exclusively for dutiable goods, instead of limiting it to common input services as mandated under Rule 6(3A)(b).

4. The legal validity of the Show Cause Notice (SCN) issued without pre-notice consultation as mandated by the Board's Master Circular and whether the SCN falls within exceptions to this requirement.

5. The applicability of extended period of limitation and imposition of interest and penalty under the relevant provisions of the Central Excise Act, 1944.

6. The jurisdictional competence of the authorities to issue the SCN on the centralized registration covering multiple units.

Issue-wise Detailed Analysis:

1. Compliance with Procedural Requirements under Rule 6(3A)(a) of CCR 2004

The appellants contended that they had duly exercised the option under Rule 6(3A)(a) by submitting intimation dated 26.10.2016 to the jurisdictional Superintendent of Central Excise, providing the requisite particulars for reversal of CENVAT credit attributable to exempted services (trading activities) for FY 2016-2017. The department, however, alleged non-compliance due to lack of authentic documentary proof and failure to follow the prescribed methodology for calculating the amount payable under Rule 6(3A).

The Court examined the statutory provisions under Rule 6(3A)(a), which require written intimation specifying details such as registration number, date of exercising option, description of inputs and input services used exclusively for exempted and non-exempted goods and services, and CENVAT credit balances. The appellants had submitted these particulars and followed the formula prescribed under Rule 6(3A)(b) for monthly provisional payment and annual adjustment.

The Court found that the appellants complied with the procedural requirements and submitted the necessary information, as corroborated by the ST-3 returns filed with the department. The department's claim of non-compliance was thus not substantiated by evidence and was rejected.

2. Requirement of Maintenance of Separate Records and Applicability of Rule 6(3)(i)

The department argued that the appellants failed to maintain separate records for inputs and input services used exclusively for exempted services, which is a prerequisite for availing proportionate credit under Rule 6(3A). In absence of such records, the department contended that the appellants must follow Rule 6(3)(i), which mandates payment of a fixed percentage (6% for exempted goods and 7% for exempted services) of the value of exempted goods or services.

The appellants countered that post the 2016 amendment, maintenance of separate records is not a statutory requirement for proportionate reversal under Rule 6(3A), and that they had furnished all requisite details as per Rule 6(3A). They relied on the Tribunal's coordinate bench decision in National Steel & Agro Industries, which held that credit reversal under Rule 6(3A) applies only to common input services, and separate records for exclusive inputs are not mandatory.

The Court analyzed the amendment to Rule 6 effective from 01.04.2016, which limited the applicability of Rule 6(2) to exclusive manufacture or provision of exempted goods or services, and provided options under Rule 6(3) for mixed activities. The Court agreed with the appellants' interpretation and the coordinate bench precedent, holding that separate records are not mandatory for proportionate reversal under Rule 6(3A), provided the option is exercised and proper intimation is given.

3. Calculation of Amount of CENVAT Credit to be Reversed under Rule 6(3A)(b)

The pivotal dispute centered on whether the department correctly calculated the amount of CENVAT credit to be reversed by including credit attributable to inputs and input services used exclusively for dutiable goods, or whether only credit on common input services should be considered under the formula prescribed in Rule 6(3A)(b).

Rule 6(3A)(b) outlines a sequential methodology: total credit (T) is apportioned into ineligible credit (A) attributable exclusively to exempted goods/services, eligible credit (B) attributable exclusively to dutiable goods/services, and common credit (C) which is T minus (A + B). The amount to be reversed (D) is the proportion of common credit attributable to exempted goods/services, calculated as (E/F) x C, where E is value of exempted goods/services and F is total value of exempted and dutiable goods/services.

The appellants demonstrated through ST-3 return data that they had already reversed Rs.44.06 crores out of total credit Rs.56.69 crores, leaving net eligible credit of Rs.12.63 crores. The department's demand of Rs.91.30 crores was based on incorrect calculation, including credit used exclusively for dutiable goods, which is contrary to the explicit statutory formula.

The Court concurred with the appellants and the coordinate bench decision in National Steel & Agro Industries, emphasizing that only credit on common input services is to be considered in the formula, and credit on inputs exclusively used for dutiable goods must be excluded. The department's approach was held to be legally unsustainable.

4. Validity of Show Cause Notice without Pre-Notice Consultation

The appellants challenged the SCN's validity on grounds that the department failed to conduct mandatory pre-show cause notice consultation as per Board's Master Circular dated 10.03.2017. They relied on the Delhi High Court decision in Amadeus India Pvt. Ltd. which held such pre-consultation mandatory and not exempted in cases involving service tax demands.

The department contended that the SCN was issued in a 'preventive/offence related' context, exempting it from pre-notice consultation.

The Court referred to the High Court ruling in Amadeus India Pvt. Ltd., which clarified that service tax demand cases do not fall under exceptions to pre-notice consultation. The Court noted that the department did not establish applicability of any exception and thus the SCN should have been preceded by consultation.

However, since the Court decided the matter on merits of Rule 6(3A) compliance and calculation, it refrained from detailed adjudication on this procedural issue.

5. Applicability of Extended Period and Imposition of Interest and Penalty

The department invoked extended period of limitation and imposed interest under Rule 14 read with Section 11A, and penalty under Rule 15(2) read with Section 11AC of the Central Excise Act, 1944, due to non-payment of the amount determined under Rule 6(3A).

The Court, having found that the demand itself was unsustainable due to erroneous calculation and compliance by the appellants, set aside the demand and consequently quashed the interest and penalty imposed. The Court did not delve into detailed analysis of limitation or penalty provisions as the foundational demand was invalid.

6. Jurisdictional Competence of Authorities to Issue SCN on Centralized Registration

The appellants argued that the SCN issued on the centralized registration (Head Office) covering multiple manufacturing units was beyond jurisdiction since Rule 6 applies individually to each unit with separate registrations.

The Court observed that the appellants' manufacturing units were separately registered and maintained separate records for inputs and input services used exclusively in manufacture of dutiable goods. The HO was registered as Input Service Distributor (ISD) and engaged in exempted trading services.

The Court held that for common input services used at HO level, proportionate reversal under Rule 6(3A) is applicable, but the department erred in aggregating turnover and credit of all units indiscriminately. Thus, the department's jurisdictional approach was flawed in calculation but not in issuing SCN on centralized registration per se.

Significant Holdings:

"Rule 6(3A)(b) clearly mandates that the total CENVAT credit to be considered for reversal is only the credit on common input services (denoted as C), calculated as total credit (T) minus the credit attributable exclusively to exempted goods/services (A) and exclusively to dutiable goods/services (B). The department's approach of including credit on inputs exclusively used for dutiable goods in the reversal calculation is contrary to the explicit provisions of the Rule and is unsustainable."

"The appellants having exercised the option under Rule 6(3A)(a) and submitted requisite intimation, and having maintained separate records for inputs and input services used exclusively for dutiable goods and exempted services, are entitled to apply the formula under Rule 6(3A) for proportionate reversal of credit on common input services."

"The SCN issued without pre-show cause notice consultation in cases involving service tax demands is not in accordance with the Board's Master Circular and judicial precedents, but since the matter is decided on merits, the issue need not be adjudicated further."

"The demand of CENVAT credit reversal, interest and penalty based on erroneous calculation and non-application of the statutory formula under Rule 6(3A) is liable to be set aside."

"Separate registrations of manufacturing units and the Head Office with distinct activities require individual application of Rule 6 provisions, and the department cannot club turnovers and credits indiscriminately across units for demand calculation."

The Court set aside the impugned order dated 11.12.2019 to the extent it confirmed the demand of Rs.91,30,45,071/- and associated interest and penalty, and allowed the appeal filed by the appellants.