2020 (11) TMI 282 - AT - Central Excise

Reversal of CENVAT Credit - common input services used by the appellant for providing both taxable output services and exempted services - non-maintenance of separate records - telephone mobile services - banking financial services - C F agent services - annual maintenance services - legal professional services - manner of computation of proportionate reversal of credit determined under rule 6(3A) of the Rules - HELD THAT - It would be clear from a conjoint reading of sub-rule 6(1), (2) and (3) of rule 6 that the total CENVAT credit for the purpose of formula under rule 6(3A) is only total CENVAT credit of common input service and cannot include CENVAT credit on input service exclusively used for the manufacture of dutiable goods - This position is also clear from the underlying object of the amendment made in rule 6(3A) of the Rules by Notification dated March 1, 2016, to consider only common input services and not total input service credit, for the purpose of computing the amount of reversal. Such amendment was also clarified by the Tax Research Unit Circular dated February 29, 2016 to apply retrospectively in as much as the clarification clearly mentions that the provisions of rule 6 providing for reversal of credit in respect of input services used in exempted services, is being redrafted with the objective to simplify and rationalize the same without altering the established principles of reversal of such credit. It has been further clarified at paragraph (iv) of the Circular that the purpose of the rule is to deny credit of such part of the total credit taken, as is attributable to the exempted services and under no circumstances this part can be greater than the whole credit. The confirmation of demand, therefore, cannot be sustained - Appeal allowed - decided in favor of appellant.

Issues Involved:

1. Whether the total CENVAT credit for the purpose of proportionate reversal should include input services used exclusively for taxable services.
2. Interpretation of the term "total CENVAT credit" under Rule 6(3A) of the CENVAT Credit Rules, 2004.
3. Applicability of the amended Rule 6(3A) and its retrospective effect.
4. Validity of the extended period of limitation and imposition of penalty and interest.

Issue-Wise Detailed Analysis:

1. Whether the total CENVAT credit for the purpose of proportionate reversal should include input services used exclusively for taxable services:

The appellant contended that the CENVAT credit availed on input services used exclusively for taxable services should not be included in the total CENVAT credit for the purpose of proportionate reversal under Rule 6(3A). The Department, however, argued that the total CENVAT credit should include all input services, including those used exclusively for taxable services. The Tribunal held that the total CENVAT credit for the purpose of the formula in Rule 6(3A) is only the total CENVAT credit of common input services and cannot include CENVAT credit on input services used exclusively for taxable services.

2. Interpretation of the term "total CENVAT credit" under Rule 6(3A) of the CENVAT Credit Rules, 2004:

The Tribunal examined Rule 6 of the CENVAT Credit Rules, 2004, particularly sub-rules (1), (2), and (3), to interpret the term "total CENVAT credit." The Tribunal concluded that the term "total CENVAT credit" in Rule 6(3A)(b)(ii) should only include common input services and not services used exclusively for taxable services. This interpretation aligns with the underlying objective of Rule 6, which aims to deny credit for input services used in exempted services.

3. Applicability of the amended Rule 6(3A) and its retrospective effect:

The Tribunal noted that Rule 6(3A) was amended by a Notification dated March 1, 2016, effective from April 1, 2016, to consider only common input services for the purpose of computing the amount of reversal. The Tax Research Unit Circular dated February 29, 2016, clarified that the amendment was intended to simplify and rationalize the rule without altering the established principles of reversal. The Tribunal referred to the decision in Reliance Industries Ltd., which held that the amendment to Rule 6(3A) is clarificatory and should be applied retrospectively.

4. Validity of the extended period of limitation and imposition of penalty and interest:

Given the Tribunal's finding that the Department's interpretation of "total CENVAT credit" was incorrect, the confirmation of the demand, including the extended period of limitation, penalty, and interest, could not be sustained. The Tribunal did not find it necessary to examine the remaining contentions regarding the extended period of limitation, penalty, and interest, as the primary issue was resolved in favor of the appellant.

Conclusion:

The Tribunal set aside the impugned order dated July 18, 2018, passed by the Commissioner (Appeals), and allowed the appeal. The Tribunal's decision clarified that the total CENVAT credit for the purpose of proportionate reversal under Rule 6(3A) should only include common input services and not services used exclusively for taxable services. The amended Rule 6(3A) was deemed to have retrospective effect, aligning with the established principles of reversal of credit.

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