2022 (11) TMI 1070 - AT - Central Excise

Recovery of CENVAT Credit u/r 6 of the Cenvat Credit Rules 2004 along with interest and penalty - common input services used for rendering Erection, Commissioning and Installation Services provided in Jammu and Kashmir - exempt services or not - non-maintenance of separate records - HELD THAT - Undisputedly the appellants have used common input services for providing services in State of Jammu Kashmir and other parts of India. The proviso to sub-clause (2) of Rule 1 of Cenvat Credit Rules states that nothing contained in these rules relating to availment and utilization of credit of service tax shall apply to the State of Jammu and Kashmir . Again, as per Section 64 of the Finance Act, 1994, the Act extends to the whole of India except the State of Jammu Kashmir. Thus, there is no levy of service tax on the services provided in Jammu Kashmir. The Department has construed or rather confused the services rendered in Jammu Kashmir to be exempted services. Sub-clause (2) of Rule 6 of Cenvat Credit Rules, 2004 speaks about the situation when the service provider is rendering output services which are chargeable to tax as well as exempted services. The services rendered in Jammu Kashmir are not chargeable to service tax and therefore, are not taxable services. But this does not make them exempted services also. A service becomes an exempted service when by notification or law, the service tax payable on such service is exempted. Rule 6(2) does not apply to a situation where the service provider renders both taxable services and services which are not subject to service tax. The law is silent in this regard. The Department cannot construe the services provided to Jammu Kashmir as exempted services and press into application, in such situations, Rule 6 of Cenvat Credit Rules, 2004. In the present matter appellant already reversed the proportionate Cenvat Credit attributable to the said disputed service. Therefore, the appellant have complied with the condition prescribed under Rule 6(3)(ii) read with sub-rule (3A) of Rule 6 of Cenvat Credit Rules, therefore demand @ 5% / 6%/ 7% cannot be demanded. The main objective of the Rule 6 is to ensure that the assessee should not avail the Cenvat Credit in respect of input or input services which are used in or in relation to the manufacture of the exempted goods or for exempted services. The Learned Commissioner had rightly dropped the demand and granted the relief to the respondent. Hence, the Revenue has not made out any grounds before us to interfere with the impugned order. Appeal of Revenue dismissed.

Summary

Issues:
1. Liability to reverse credit availed on common input services for services provided in Jammu & Kashmir.
2. Requirement to maintain separate accounts for taxable and exempted services.
3. Interpretation of Rule 6 of Cenvat Credit Rules, 2004 regarding reversal of credit.
4. Compliance with Rule 6(3)(ii) and applicability of demand under Rule 6.

Analysis:

Issue 1: Liability to reverse credit for services in Jammu & Kashmir
The Department contended that the appellant should reverse credit on common input services used for services in Jammu & Kashmir and other parts of India. However, the Tribunal clarified that as per the Cenvat Credit Rules and the Finance Act, no service tax is levied on services provided in Jammu & Kashmir. Thus, the Department's classification of services in Jammu & Kashmir as exempted was deemed incorrect.

Issue 2: Requirement for separate accounts
The Department argued that separate accounts should be maintained for taxable and exempted services. The Tribunal highlighted that the services in Jammu & Kashmir, not being taxable, do not fall under the category of exempted services. Therefore, the obligation to maintain separate accounts did not apply in this scenario.

Issue 3: Interpretation of Rule 6 of Cenvat Credit Rules
The Tribunal analyzed Rule 6 of the Cenvat Credit Rules, emphasizing that the rule pertains to situations where services are both taxable and exempted. Since services in Jammu & Kashmir were not subject to service tax, they did not qualify as exempted services. The Tribunal disagreed with the Department's argument that Rule 6 should be applied in this case.

Issue 4: Compliance with Rule 6(3)(ii) and demand under Rule 6
The appellant had already reversed the proportionate Cenvat Credit for disputed services, meeting the requirements of Rule 6(3)(ii). The Tribunal concluded that the appellant had complied with the rule, and no demand for payment could be justified. The Tribunal upheld the Commissioner's decision to drop the demand, ruling in favor of the appellant.

In conclusion, the Tribunal dismissed the revenue appeal and disposed of the case, affirming the decision in favor of the appellant. The judgment clarified the application of Cenvat Credit Rules in the context of services provided in Jammu & Kashmir and emphasized the importance of accurate interpretation and compliance with the rules.