A SERVICE NOT COVERED IN DEFINITION OF ‘TAXABLE SERVICE’ IS AN EXEMPTED SERVICE UNDER CENVAT CREDIT RULES, 2004

[Mr. M. GOVINDARAJAN]

In the year the provisions of Rule 6(3) of CENVAT Credit Rules, 2004 (‘Rules’ for short) were omitted and Rule 3A has been inserted.  Rule 3A has provided for option to the manufacturers and service providers.  The first option is to maintain separate accounts in respect of services and inputs used for exempted/dutiable goods manufactured and services provided.   If an assessee opts not to maintain separate records, the Rule provides for another option to which provides for exercising of an option by the manufacturer/provider of output service to pay a certain percentage of tax as provided in the Rule 3A.  The manufacturer or provider of output service has to intimate in writing to the Superintendent of Central Excise giving the particulars mentioned therein.  Rule 6(3A) (b) provides for payment, provisional payment, proportionate payment and reversal of credit in advance etc., 

In ‘Adecoo Flexione Workforce Solutions Limited V. Commissioner of Central Excise, Customs & Service Tax, Bangalore’ – 2015 (11) TMI 1047 - CESTAT BANGALORE the Revenue, while scrutinizing the ST – 3 returns of the appellants for the year 2008-2008, found that the appellant was providing taxable services to SEZ units, which were exempted by Notification No. 4/2004-ST, dated 31.03.2004.  The appellant was also providing services in Jammu & Kashmir region.  After taking note of the ST–3 returns filed by the assessee for scrutiny, the assessee was addressed on 27.04.2009.  The appellants wrote a letter on 26.05.2009 and another letter on 30.07.2009 to the department.  The appellant has not followed the procedures as enshrined in Rule 6(3A) of CENVAT credit Rules.  Therefore proceedings were initiated and confirmed the demand. The original adjudicating authority confirmed the demand for amount with interest and also imposed penalty equal to the amount demanded.

The appellants filed appeal before Commissioner (Appeals).  The Commissioner (Appeals) took the view that the appellant has satisfied the conditions in view of the retrospective amendment as per the Finance Act, 2010 carried out to Rule 6 and set aside the impugned order considering that the appellant had reversed the proportionate credit on the value of exempted services subsequently with interest.

The Revenue filed appeal before the Tribunal and the appellant assessee has filed cross objections.  The Revenue submitted the following before the Tribunal-

• The retrospective amendment to CENVAT credit Rules made in Finance Act, 2010 related to only manufacturers and did not cover services provider;
• The Commissioner (Appeals) could not have allowed the benefit of reversal of proportionate credit made by the in June 2009 for the clearances made in the year 2008 – 09;
• It cannot be said that the omission is technical in view of the fact that the provisions of Rule 6(3)(ii) of CENVAT Credit Rules, 2004 is a substantive requirement in the law to avail the benefit of reversal of proportionate credit when separate accounts in respect of inputs and input services used for providing exempted and dutiable services were not maintained;

The appellant assessee contended the following:

• It cannot be said that the requirement of Rule 6(3)(ii) is a substantive requirement;
• The assessee had the option to make a choice out of the three methods prescribed in the Rules;
• Once credit is reversed it is deemed that the credit is not taken and therefore in this case once they had reversed the credit, it has to be held that credit itself was not taken;
• There was an omission on the part of the legislature to include service providers;
• Therefore the assessee has not contravened any provisions of law.

The Tribunal considered the views of both the parties.  The Tribunal analyzed the findings of the Commissioner (Appeals).  The Tribunal did not accept the findings of Commissioner (Appeals) that in view of the retrospective amendment to CENVAT Credit Rules, 2004 the procedure followed by the assessee can be said to have fulfilled the requirement is not correct.  This is in view of the fact that amendments were carried out and benefit of payment of proportionate credit attributable to exempted goods and services was extended only to manufacturers and not to service providers.  The Tribunal in this regard refuted the contention of the appellant assessee that the omission was on the part of the legislature and there may be no intention to exclude output service providers.  The Tribunal held that unless the words are ambiguous and there is lack of clarity it is not appropriate and proper to read the law differently.  In this case there is no such ambiguity or lack of clarity in the amendments of Finance Act, 2010.

The Tribunal analyzed the second conclusion of the Commissioner (Appeals) that the omission or intention is only technical and reversal has been done as required under the Rule.  The Tribunal held that once the amendment is not applicable, the benefit of subsequent reversal will not be applicable.  The amendment brought out in the year 2010 clearly provided for subsequent reversals by the manufacturers where they had omitted tor reverse the credit earlier and according to law they would have been required to pay 6%/8%/10% as the case may be.

The Tribunal noted that before 01.03.2008 there were simple provisions that either maintain separate accounts or pay a specified amount in the Rule.  The amendment in the year 2010 brought a drastic change and gave a detailed procedure to be followed.

The Tribunal analyzed the decision of the High Court cited by the appellant that once the credit is reversed even if the credit is reversed it amounts to non availment of credit.  The Tribunal held that this is the situation before 01.03.2008.  But the fact that Rule 6(3A) provides a detailed procedure for reversal of credit and also exercising an option to either maintain separate account or follow the procedure.   In such a situation the Tribunal questioned that can it be said that an assessee still has an option to reverse the credit subsequently as and when either the department points out or on assessee’s own initiative.  If it is allowed the provisions of Rule 6(3A) will become totally irrelevant and otiose.  This cannot be the intention of the legislature.

The appellant assessee contended that when the definition of ‘exempted services’ in CENVAT Credit Rules, 2004 is read with the provisions of Section 64 and 66 of the Finance Act, 1994, the conclusion is that if a service is provided to Jammu and Kashmir and even if it is included in the list of servicers in Section 66 of the Finance Act, 1994, it cannot be considered as an exempted service.  This is because in respect of services provided in Jammu & Kashmir, Section 66 and all other sections are not applicable.

The Tribunal did not accept the above contention.  The definition of ‘exempted service’ makes it clear that even if a service in not included in Section 66 at all it will still be considered as an exempted service.   Therefore the service provided to Jammu & Kashmir has to be considered as an exempted service.  In the opinion of the Tribunal, if a non taxable service can be considered as an exempted service, a taxable service provided in J&K has to be considered as exempted service.

The Tribunal observed that the appellant reverse an amount of ₹ 6043/-  and submitted a detail calculation month wise to show the correctness of the amount worked out.  This has not been considered by the Revenue.  On 30.07.2009 the appellant submitted a letter which they submitted that they were not aware of the procedure in Rule 6(3A) and by mistake they have not exercised the option for the financial year 2008 – 09.  They made an undertaking to follow the procedure for the year 2009 – 10 and they shall not withdraw the option during the period 2008 – 09.   It was also requested to condone the lapse which is procedural and they were ready to pay the interest if required.

The Tribunal, as a special case, allowed the request of the appellant assessee.  The Tribunal held that the appellant would be eligible to reverse the proportionate credit attributable to clearances to J&K alone for the year 2008 – 2009 subject to the condition that within 30 days from the date of this order the appellants would file a letter rectifying the deficiencies in the letter of option by them as contemplated in Rule 6(3A).