2019 (11) TMI 952 - AT - Service Tax

Proportionate reversal of CENVAT Credit - inputs used in manufacture of exempted products as well as taxable goods - reversal of inputs as such - Rule 6(3) of CCR 2004 - whether the appellant is required to pay amount under Rule 6(3) in respect of exempted service viz trading undertaken by them or they could reverse an amount under Rule 3(5) when the inputs are removed as such? - levy of interest and penalties. HELD THAT - It is found from the rules that both options are open. Rule 3(5) does not make a distinction based on the purpose for which the inputs are removed as such; whether the inputs are removed as such for sale or otherwise makes no difference to the applicability of Rule 3(5) of CCR 2004. It is true that trading is an exempted service and Rule 6(3) covers exempted services. However, having reversed an amount under Rule 3(5) of CCR 2004, the appellant will not be covered by Rule 6(3) because the credit attributable to the inputs removed as such, has already been reversed - the demand on this account needs to be set aside. Demand under Rule 6(3) of CCR 2004 - the inputs which were used for manufacture of the exempted products - Whether the appellant is liable to pay an amount under Rule 6(3)(1) when they have reversed proportionate amount of CENVAT Credit on the inputs used in manufacture of exempted products? - HELD THAT - Rule 6(2) provides the assessee an option to maintain separate accounts for receipt consumption, inventory of inputs used in relation to manufacture of exempted goods and dutiable goods and take CENVAT Credit only on inputs used in manufacture of dutiable goods. In the case of ASTRIX LABORATORIES LIMITED VERSUS COMMISSIONER OF CENTRAL EXCISE, CUSTOMS SERVICE TAX, HYDERABAD-I 2019 (5) TMI 1344 - CESTAT HYDERABAD and MATRIX LABORATORIES LTD VERSUS CCCE ST, HYDERABAD - I 2018 (8) TMI 1440 - CESTAT HYDERABAD , the appellant had taken CENVAT Credit only on the inputs which have gone into manufacture of dutiable goods. A plain reading of Rule 6(2) does not require separate stocks of inputs to be maintained. It also does not require that the inputs should be bought under different invoices. What is required is maintenance of separate accounts. The appellant in this case has, by reversing the proportionate amount of credit as per the standard formula, has, in effect, maintained such accounts. The matter remanded to the original authority for the limited purpose of verification of the amounts reversed - appeal allowed by way of remand.

Summary

Issues Involved:

1. Liability to pay an amount under Rule 6(3) of CCR 2004 for inputs cleared as such for sale.
2. Liability to pay an amount under Rule 6(3)(1) for reversed proportionate CENVAT Credit on inputs used in the manufacture of exempted products.
3. Levy of interest on the demands.
4. Imposition of penalties on the appellant.

Detailed Analysis:

1. Liability to pay an amount under Rule 6(3) of CCR 2004 for inputs cleared as such for sale:

The appellant, a manufacturer of pharmaceuticals, availed CENVAT Credit under CCR 2004 and cleared inputs as such for sale after reversing the CENVAT Credit availed on them under Rule 3(5) of CCR 2004. The Revenue contended that such activity amounts to trading, an exempted service, requiring payment under Rule 6(3). The appellant argued that Rule 3(5) allows for the removal of inputs as such without distinguishing the purpose, and they complied by reversing the credit. The tribunal held that Rule 3(5) does not differentiate based on the purpose of removal and having reversed the credit, the appellant is not covered by Rule 6(3). Thus, the demand on this account was set aside.

2. Liability to pay an amount under Rule 6(3)(1) for reversed proportionate CENVAT Credit on inputs used in the manufacture of exempted products:

The appellant reversed proportionate CENVAT Credit on inputs used in the manufacture of both dutiable and exempted products, claiming compliance with Rule 6(2). The Revenue argued that the appellant did not maintain separate accounts as required and thus fell under Rule 6(3), necessitating payment of an amount equal to 6% of the value of exempted goods or as determined under Rule 6(3A). The tribunal noted that Rule 6(2) does not mandate separate stocks of inputs but requires separate accounts. The appellant effectively maintained such accounts by reversing credit as per a standard formula. The tribunal remitted the matter to the original authority to verify the amounts reversed, holding that if verified, the demand, interest, and penalties are not sustainable.

3. Levy of interest on the demands:

The tribunal did not explicitly address the issue of interest separately but implied that if the reversed amounts are verified, the interest demand would not be sustainable.

4. Imposition of penalties on the appellant:

Similarly, the tribunal implied that if the reversed amounts are verified, the penalties imposed would not be sustainable.

Conclusion:

The appeal was allowed by remanding the matter to the original authority for verification of the amounts reversed by the appellant. If verified, the demands, interest, and penalties would be set aside. The judgment emphasized the appellant's compliance with Rule 3(5) for inputs cleared as such and the effective maintenance of separate accounts under Rule 6(2) through proportionate reversal of credit.