2023 (2) TMI 1404 - AT - Service Tax

CENVAT Credit - common inputs used in taxable as well as exempt goods - applicability of Rule 6(3)(i) of the Cenvat Credit Rules 2004 or Rule 6(3A) - HELD THAT - Admittedly the Appellant has not filed any option letter opting to reverse proportionate Cenvat on common inputs used. During the period under consideration the Tribunals have been taking a liberal view that on account of the mistake of non-filing of the option letter which is only a procedural condition the assessee should not be made to suffer by making huge payments in terms of 5%/6% of the value of the exempted services. In the case of Mercedes Benz India (P) Ltd. Vs. CCE-Pune 2015 (8) TMI 24 - CESTAT MUMBAI Mumbai Tribunal has held that 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. If this is the objective then at the most amount which is to be recovered shall not be in any case more than Cenvat Credit attributed to the input or input services used in the exempted goods. It is also observed that in either of the three options given in sub-rule (3) of Rule 6 there is no provisions that if the assessee does not opt any of the option at a particular time then option of payment of 5% will automatically be applied. Therefore we do not understand that when the appellant have categorically by way of their intimation opted for option provided under sub-rule (3)(ii) how Revenue can insist that option (3)(i) under Rule 6 should be followed by the assessee. From the above decision of the Tribunal it is seen that even prior to Rule 6 (3AA) coming into effect from 01/4/2016 they have been taking the view that mere non filing of the option letter should not be used to deprive the assesssee from reversing the proportionate Cenvat Credit. The very fact that the Rule 6 (3AA) has been brought into effect from 1/04/2016 wherein the Adjudicating Authority is empowered to allow the assesse to reverse the Cenvat on proportionate basis on being pointed out shows the legislative intent to allow the assessee to pay proportionate Cenvat Credit as the first option. The demand confirmed for Rs. 15, 86, 088/- in terms of Rule 6(3)(i) i.e. on 5%/6% of value of exempted goods is not sustainable and the same is set aside - the Appellant has correctly reversed Rs. 5, 91, 987/- on proportionate reversal basis in terms of Rule 6(3A). The interest paid by them is not disputed by the Revenue. These two amounts are allowed to be appropriated by the Revenue. Conclusion - i) The demand under Rule 6(3)(i) for reversal of Cenvat Credit on exempted services calculated at 5%/6% of value is set aside. ii) The reversal of proportionate credit under Rule 6(3A) with interest paid by the appellant is accepted and appropriated. Appeal disposed off.

Summary

The core legal questions considered in this judgment are:

1. Whether the appellant, a provider of both taxable and exempt services, is liable to reverse Cenvat Credit on input services used for exempted services under Rule 6(3)(i) of the Cenvat Credit Rules, 2004, or whether proportional reversal under Rule 6(3A) suffices despite non-filing of the mandatory option letter.

2. Whether the demand for Service Tax under the Reverse Charge Mechanism (RCM) basis, including penalty, is sustainable, especially when the appellant has paid the demanded tax and interest prior to issuance of the Show Cause Notice.

3. Whether the penalty imposed under Section 78 of the Finance Act, 1994, on the appellant for alleged non-compliance and non-payment is justified in light of the payments made and procedural aspects.

Issue 1: Reversal of Cenvat Credit for Input Services Used for Exempted Services

Legal Framework and Precedents: Rule 6 of the Cenvat Credit Rules, 2004, governs the reversal of Cenvat Credit where inputs or input services are used partly for taxable and partly for exempted goods or services. Sub-rule (3) provides two options where separate accounts are not maintained: (i) payment of a fixed percentage (5%/6%) of the value of exempted goods/services, or (ii) reversal of proportionate credit under Rule 6(3A), which requires filing an option letter intimating the choice to the Department.

Several Tribunal decisions, including Rathi Daga vs. CCE-Nasik, Mercedes Benz India (P) Ltd. vs. CCE-Pune, Aster Pvt. Ltd. vs. CCE-Hyd-III, and Cranes & Structural Engineers vs. CCE-Bangalore-I, have held that the procedural requirement of filing the option letter under Rule 6(3A)(a) is not mandatory to the extent that failure to file it would automatically disqualify the assessee from availing the proportional reversal option. These rulings emphasize that the substantive right to reverse proportionate credit should not be denied for mere procedural lapses.

Court's Interpretation and Reasoning: The Tribunal observed that the appellant admittedly did not file the option letter required under Rule 6(3A)(a). However, following the precedents cited, the Tribunal held that this procedural lapse does not justify imposing the higher fixed percentage reversal under Rule 6(3)(i). The Tribunal further noted that Rule 6(3AA), introduced in 2016, explicitly empowers authorities to allow proportionate reversal on being pointed out, reflecting legislative intent to favor proportional reversal over automatic fixed percentage payment.

Key Evidence and Findings: The appellant reversed Cenvat Credit amounting to Rs. 5,91,787/- along with interest of Rs. 3,05,179/-. The Department did not dispute the payment of interest. The demand raised under Rule 6(3)(i) for Rs. 15,86,088/- was substantially higher than the amount reversed by the appellant.

Application of Law to Facts: Applying the legal principles and precedents, the Tribunal concluded that the demand under Rule 6(3)(i) is not sustainable because the appellant had reversed the proportionate credit with interest, which should be treated as full discharge of liability despite non-filing of the option letter.

Treatment of Competing Arguments: The Department argued that failure to file the option letter mandated application of Rule 6(3)(i) and that the amendment via Rule 6(3AA) was not applicable for the period 2011-12 to 2014-15. The Tribunal rejected this argument, relying on earlier Tribunal decisions that procedural lapses should not deprive substantive rights and that Rule 6(3AA) merely codified existing judicial approach.

Conclusion: The Tribunal set aside the demand of Rs. 15,86,088/- under Rule 6(3)(i) and upheld the reversal of Rs. 5,91,787/- with interest paid by the appellant. The balance demand and penalty related to this issue were also set aside.

Issue 2: Demand of Service Tax under Reverse Charge Mechanism (RCM) and Related Penalty

Legal Framework and Precedents: Section 73(3) of the Finance Act, 1994, provides that if the tax demanded has been paid before issuance of the Show Cause Notice, no such notice should be issued. Section 78 authorizes imposition of penalty for contraventions.

Court's Interpretation and Reasoning: The appellant paid the entire demand of Rs. 1,32,132/- under RCM along with interest of Rs. 83,686/- before issuance of the Show Cause Notice. The Tribunal held that issuance of the Show Cause Notice itself was improper under Section 73(3) since no suppression or concealment was alleged and the tax was paid timely. The appellant did not contest the tax and interest but only the penalty.

Key Evidence and Findings: The appellant's payment of tax and interest prior to the Show Cause Notice was undisputed. No evidence of suppression or fraud was found.

Application of Law to Facts: Given the full payment and absence of suppression, the penalty imposed under Section 78 was held to be unjustified and was set aside.

Treatment of Competing Arguments: The Department contended that the demand was justified due to non-reversal of Cenvat Credit and audit findings, but the Tribunal found these arguments irrelevant to penalty imposition where tax and interest were paid timely.

Conclusion: The penalty of Rs. 1,32,132/- under Section 78 related to the RCM demand was set aside.

Issue 3: Legality of Penalty Imposed Under Section 78 of the Finance Act, 1994

Legal Framework and Precedents: Section 78 empowers imposition of penalty for failure to pay service tax or comply with provisions of the Finance Act. However, penalty is not automatic and must be justified by evidence of willful default or suppression.

Court's Interpretation and Reasoning: The Tribunal found that the appellant had reversed proportionate credit and paid interest, and had paid the RCM tax and interest promptly. No evidence of suppression or willful default was established. Further, the procedural lapse of non-filing option letter was held to be condonable and not a ground for penalty.

Key Evidence and Findings: Payments made by the appellant, absence of suppression, and reliance on precedents where penalties were set aside for similar procedural lapses.

Application of Law to Facts: The penalty of Rs. 15,86,088/- related to reversal of Cenvat Credit and Rs. 1,32,132/- related to RCM demand were both set aside.

Treatment of Competing Arguments: The Department's reliance on audit findings and procedural non-compliance was rejected as insufficient to sustain penalty.

Conclusion: Penalties imposed under Section 78 were quashed.

Significant Holdings:

"The said Rule does not say that on failure to intimate, the manufacturer/service provider would lose his choice to avail second option of reversing the proportionate credit... The procedure and conditions laid in Rule 6(3A) is intended to make Rule 6(3) workable and not to take away the option available to the assessee."

"The legislator has not enacted any provision by which Cenvat credit, which is other than the credit attributed to input services used in exempted goods or services; can be recovered from the assessee."

"No suppression could have been alleged on their part since the Service Tax paid on RCM basis would be eligible as Cenvat Credit to them."

"On failure to intimate the department, Rule 6(3)(i) would not automatically come into application."

"The demand raised is not legal and proper."

"Penalty imposed under Section 78 of the Finance Act, 1994, is not sustainable in the absence of any willful suppression or default."

The Tribunal's final determinations are:

- The demand under Rule 6(3)(i) for reversal of Cenvat Credit on exempted services calculated at 5%/6% of value is set aside.

- The reversal of proportionate credit under Rule 6(3A) with interest paid by the appellant is accepted and appropriated.

- The balance demand and penalty related to Cenvat Credit reversal are quashed.

- The penalty imposed on the appellant for the RCM tax demand is set aside, as tax and interest were paid timely and no suppression was found.