2025 (6) TMI 1579 - AT - Service Tax

Manner of computation of proportional reversal of credit when common input services are used for both taxable and exempted services - Rule 6(3A) of Cenvat Credit Rules 2004 - HELD THAT - This issue is no longer res integra in as much as various co-ordinate Benches of the Tribunal have clearly held that the total cenvat credit to be taken for the above formula is only the total cenvat credit of common input services. The Principal Bench of CESTAT at New Delhi in the case of E-Connect Solutions (P) LTD. 2020 (11) TMI 282 - CESTAT NEW DELHI in a similar set of facts observed that It would be clear from a conjoint reading of sub-rules 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. Such amendment was also clarified by the Tax Research Unit Circular dated February 29 2016 to apply retrospectively inasmuch 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. Taking into consideration the fact that the appellant has already reversed Rs.4, 64, 55, 214/- along with interest of Rs.69, 02, 858/- the impugned order upheld to the extent of confirming the above demand and the balance demand stands set aside. Taking into consideration the fact that the amounts have been paid on 11.11.2014 along with interest much prior to the issue of show-cause notice the penalty stands set aside. Conclusion - i) The reversal of cenvat credit under Rule 6(3A) must be computed solely on the basis of common input services excluding credits on input services used exclusively for taxable services. The amendment to Rule 6(3A) is clarificatory and retrospective intended to rationalize the reversal process without altering substantive rights. ii) The appellant s reversal of Rs.4, 64, 55, 214/- along with interest was upheld as correct and sufficient under Rule 6(3A). Appeal disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Tribunal was the correct interpretation and application of Rule 6(3A) of the Cenvat Credit Rules, 2004, specifically regarding the manner of computation for proportional reversal of cenvat credit when common input services are used for both taxable and exempted services. The issue centered on whether the "total cenvat credit" in the formula under Rule 6(3A)(c)(iii) should include the entire cenvat credit taken on all input services, including those exclusively used for taxable services, or only the cenvat credit on common input services used for both taxable and exempted services.

2. ISSUE-WISE DETAILED ANALYSIS

Interpretation of Rule 6(3A) of Cenvat Credit Rules, 2004 regarding reversal of credit on common input services

Relevant legal framework and precedents: The Tribunal examined Rule 6(3A) of the Cenvat Credit Rules, 2004, which governs the reversal of cenvat credit attributable to exempted services when input services are used partly for taxable and partly for exempted services. The rule prescribes a formula to calculate the proportion of credit to be reversed. The amendment to sub-rule (3A) by Notification dated March 1, 2016, and the Tax Research Unit Circular dated February 29, 2016, were also pivotal in interpreting the rule's retrospective application and intent.

Several precedents were relied upon, including decisions by coordinate Benches of the Tribunal such as E-Connect Solutions (P) Ltd., JSW Steel Ltd., Toshiba JSW Power Systems Pvt. Ltd., and Reliance Industries. These decisions consistently held that the "total cenvat credit" in the formula refers exclusively to the cenvat credit on common input services and excludes credit on input services used exclusively for taxable services.

Court's interpretation and reasoning: The Tribunal emphasized a "conjoint reading" of sub-rules 6(1), (2), and (3) of Rule 6, concluding that the formula under Rule 6(3A) is intended only to apply to common input services. The amendment to Rule 6(3A) was interpreted as clarificatory and retrospective, aimed at simplifying and rationalizing the reversal process without altering established principles. The Tribunal noted that the purpose of the rule is to deny credit attributable to exempted services, which logically cannot exceed the credit taken on common input services.

The Tribunal further distinguished the instant case from the Revenue's reliance on an interim order in Thyssenkrupp Industries, which was held to have no precedential value as it was a prima facie interim order. The Tribunal instead relied on the more authoritative and reasoned decisions of the Principal Bench and other coordinate Benches.

Key evidence and findings: The appellant admitted to irregular availment of credit on common input services partly used for exempted services. The appellant had reversed Rs.4,64,55,214/- along with interest of Rs.69,02,858/-, which was less than the total demand confirmed by the Commissioner. The Revenue's demand was based on a broader interpretation of "total cenvat credit" including credit on exclusively taxable services, which the Tribunal rejected.

Application of law to facts: Applying the clarified interpretation of Rule 6(3A), the Tribunal held that the appellant's reversal of Rs.4,64,55,214/- along with interest satisfied the reversal obligation. The excess demand of Rs.8,30,64,778/- confirmed by the Commissioner was set aside. The Tribunal also took note that the amounts reversed and interest paid were done much prior to the issuance of the show-cause notice.

Treatment of competing arguments: The Revenue argued for a broader interpretation of "total cenvat credit" to include all input service credits, while the appellant argued for a narrower interpretation limited to common input services. The Tribunal found the appellant's argument consistent with the legislative intent behind the amendment and supported by binding precedents. The Revenue's reliance on an interim order was rejected as lacking precedential value.

Conclusions: The Tribunal concluded that the proper method of calculating reversal under Rule 6(3A) is to consider only the total cenvat credit on common input services. The appellant had already reversed the appropriate amount, and the excess demand was unsustainable. The penalty imposed was also set aside due to the timely payment of amounts with interest prior to show-cause notice.

3. SIGNIFICANT HOLDINGS

"The dispute in the appeal is regarding the interpretation of the term total Cenvat credit provided in the formula in Rule 6(3A)(b)(ii). According to the Department, the total Cenvat credit should include even those services used exclusively in taxable services, including the common service while according to the appellant it should include only common input services and services used in exempted services and not the services used exclusively in rendering taxable output service."

"It would be clear from a conjoint reading of sub-rules 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."

"Such amendment was also clarified by the Tax Research Unit Circular dated February 29, 2016 to apply retrospectively inasmuch 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."

"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 substituted provision of sub-rule (3A) shall have retrospective effect being clarificatory."

"The confirmation of demand, therefore, cannot be sustained."

Core principles established include that the reversal of cenvat credit under Rule 6(3A) must be computed solely on the basis of common input services, excluding credits on input services used exclusively for taxable services. The amendment to Rule 6(3A) is clarificatory and retrospective, intended to rationalize the reversal process without altering substantive rights. Penalties cannot be imposed when the relevant amounts along with interest have been paid prior to issuance of show-cause notices.

Final determinations:

• The appellant's reversal of Rs.4,64,55,214/- along with interest was upheld as correct and sufficient under Rule 6(3A).
• The excess demand of Rs.8,30,64,778/- confirmed by the Commissioner was set aside.
• The penalty imposed was set aside considering prior payment with interest.