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SIFY Technologies Ltd. Versus Commissioner of Service Tax, LTU, Chennai

2017 (9) TMI 631 - CESTAT CHENNAI

Reversal of CENVAT credit - Rule 6 - providing taxable and exempted services - The appellants were earlier availing credit on input services which were used by them for taxable as well as exempted services and were utilizing such credits only to the extent of 20% of the output tax liability in terms of Rule 6 (3) (c) of CCR 2004 during the material time. However, from August 2005, they switched over to the present system of availing full credit on such common input services, for which no separat .....

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tput services. In respect of certain services, they have maintained separate accounts in terms of Rule 6(2) which was found to be correct and proper by the original authority. However, the dispute is in respect of certain other common input services they have followed the scheme under Rule 6 (3) - It is clear that Rule 6 (1) is a substantive plenary provision - Hon'ble Supreme Court in CCE Vs Gujarat Narmada Fertilizers Co. Ltd. [2009 (8) TMI 15 - SUPREME COURT] held that sub rule (1) of Rule 6 .....

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product and exempted final product. - The mechanism adopted by the appellant for following both sub-rule (2) and sub-rule (3) in respect of different common input services defeats the very restrictions placed under different conditions of sub-rule (3). As seen in the present case itself that appellant invoked clause (c) of sub-rule (3) and submitted that they were not hit by restriction of 20% in utilizing credit on tax liability of final output services, on the ground that total credit ava .....

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the common input services so that the bar of 20% utilisation of credit on final tax liability can be avoided. We find the present situation is against the basic principle of CCR. - The appellants should follow legal provision as per Rule 6. Having not followed, they cannot take a plea that there is no provision to deny credit already availed. When the appellants maintained separate accounts for common input services and availed credits under sub-rule (2) of Rule 6, then there is no question .....

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vision available to the appellant. - Extended period of limitation - penalty - Held that: - the appellants were actually following Rule 6 (3) with restrictions of utilisation upto 20% in terms of Rule 6 (3) (c) upto August 2005. Admittedly, they have now knowingly switched over to the present system of selectively following Rule 6 (2) as well as Rule 6 (3) which resulted in the present dispute and proceedings - extended period and penalty upheld. - Appeal dismissed - decided against appe .....

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pellants are registered with the department for discharging service tax under different categories like online information and data base access / retrieval, internet cafe, leased circuit services, franchise service etc. They were also rendering certain services on which service tax is not payable. The appellants were availing cenvat credit of tax paid on various input services used by them, in terms of Cenvat Credit Rules, 2004. The period involved in the present appeal proceedings is 1.4.2005 t .....

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n services listed in Rule 6 (5) and cenvat credit on capital goods were fully availed and utilized. 4. The appellants were earlier availing credit on input services which were used by them for taxable as well as exempted services and were utilizing such credits only to the extent of 20% of the output tax liability in terms of Rule 6 (3) (c) of CCR 2004 during the material time. However, from August 2005, they switched over to the present system of availing full credit on such common input servic .....

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iction in terms of utilization as envisaged under Rule 6 (3) (c). 5. The Revenue objected to their availing full credit on common input services and utilizing the same without any restriction. The appellants, as already mentioned above, had treated different input services for different manner of accounting. The credit on input services which are exclusively used for taxable output services were fully availed. In respect of services which are common for both taxable and exempted services and wer .....

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ing finding : (a) He allowed the claim of the appellant that they have not availed any input service tax credit when such were utilized exclusively for providing exempted services. He recorded that the appellants have satisfied the condition under Rule 6(1). (b) The original authority also held that in respect of input services used for both non-taxable and taxable services they have maintained separate accounts and taken credit only in respect of input services relatable to taxable services. It .....

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eciate the facts as examined by the original authority along with his reasoning, it is necessary to reproduce the relevant portion of the impugned order which is as under : "22. Next, I find that the taxpayer have argued that they are eligible for full credit of those services mentioned under Rule 6(5), which do not require maintenance of separate books of accounts, notwithstanding anything contained in sub-clauses (2), (3) of (4) of Rule 6 of CCR, 2004. They have given details of such cred .....

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put services and its utilisation restricted to 20% of taxable output service under Rule 6(3) of CCR 2004. 23. In this regard, I note that as per Rule 6(3) of CCR, 2004, which begins with a non-obstante clause, regarding provisions contained in sub-rules (1) and (2), the manufacturer or the provider of output service, opting not to maintain separate accounts, shall follow either of the following conditions, as applicable to him, namely:- (a)…… (b)…… (c) the provider of .....

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isaged under the provisions of Rule 6(2) of CCR, 2004, in which case, they cannot avail credit in respect of common input services, as there cannot be a situation of common input services, when separate accounts are maintained. Further, I find that in this case, the common input services have been used by the Finance, accounting corporate and administration SBUs of the taxpayer, which though not render any taxable / exempt services, but render services to all the SBUs including the e-learning SB .....

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of the SBU rendering exempted services, by the SBUs rendering common services. In the absence of such bifurcation among the common input services, the eligibility even to the availment of such credit on common input services, does not arise, leave alone, its utilisation within the 20% limit. Further, 20% limit on service tax payable was prescribed only in case where no separate accounts are maintained and all input services are common, which cannot be made applicable to a situation where both s .....

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s and common accounts for certain taxable and exempt services, then such benefit could be given, as the 20% limit can be reckoned only to the value of taxable and exempt service for which common accounts are maintained. However, in the present case, the common input service credit taken by the SBUs, Finance, administration, accounts and corporate, do not provide any taxable / non-taxable service, but in turn provide services to the all other SBUs that provide taxable / exempt services and the 20 .....

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had no accumulation of the same much against the intention of the legislature. 26. Hence, it infers from the provisions of Rule 6 of Cenvat Credit Rules, 2004 that only either of the option under Rule 6(2) or under Rule 6(3) is allowable and since the taxpayer has all along argued in their submissions that they are maintaining separate accounts for taxable and non-taxable service with supporting accounting details and not availing credit on services exclusively relating to exempted / non-taxabl .....

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ervices used in exempted services. The same are therefore not discussed in detail as the fact that the taxpayer is maintain separate accounts has been accepted as discussed in the above paras and credit taken exclusively relating to taxable services have also been held to be eligible in the paras discussed above. They have also relied on the decision in the case of M/s. Royal Sundaram Alliance Insurance Company, wherein, the Commissioner dropped the demand vide OIO no.LTUC/28/2009-C dt. 3.2.2009 .....

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he basis of premium from taxable and exempted services and their exempted services were only 0.1% of total services. However, in the present case, the income from taxable and exempt services or their ratio to the total are not known and the taxpayer has not taken proportionate credit relating to taxable services, but taken the entire credit on common input services and utilised the same within the limit of 20% of total taxable output services. The circumstances in the present case are different .....

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ey have maintained separate accounts in respect of common input services in terms of Rule 6 (2). There is no bar in availing credits as per mechanisms as provided under Rule 6 (2) as well as Rule 6 (3). (b) It is only in respect of inputs / input services where an assessee is unable to maintain separate books of accounts, they have taken recourse to the mechanism under Rule 6 (3). Thereafter they have followed the provisions of Rule 6 (3) (c) and have not violated the said provision since the 20 .....

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put service which is against the provisions of Rule 6(3). When they have followed full requirements of the said sub-rule, the credit cannot be denied. (e) Without prejudice to the above, cenvat credit cannot be denied on any input service as there is no provision for such denial when they have used common input service both for taxable as well as exempted output services. Ld. counsel, with a calculation chart and certain case laws, further elaborated his above submissions. In essence, what is su .....

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He also submitted a credit chart to illustrate that the action of the appellant with reference to common input service is against the basic priciple of Rule 6. They chose to maintain separate accounts in respect of certain common input services and in respect of other common input services they have not maintained separate accounts and followed provisions of Rule 6 (3). Such type of selective application of Rule 6 (2) and 6 (3) has, in fact, resulted in a situation where they have effectively av .....

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exempted output services. Such practice is against the basis of CCR 2004. 9. We have heard both the sides and perused appeal records. The facts of the case are not in dispute. It is only the application of provisions of Rule 6 to the facts of the case which are in dispute. Admittedly, the appellants were using inputs / input services which are common for exempted as well as taxable output services. In respect of certain services, they have maintained separate accounts in terms of Rule 6(2) which .....

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ut service which is used in the manufacture of exempted goods or exempted services, except in the circumstances mentioned in sub-rule (2): Provided that the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12AA of the Central Excise Rules, 2002, on the ground that the said inputs are used in manufacture of goods cleared without payment of duty under the provisions of that rule. (2) Where a manufacturer or provider of output service avails of CENVAT credit in respect .....

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ervices and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable. (3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer or the provider of output service, opting not to maintain separate accounts, shall follow either of the following conditions, as applicable to him, namely:- (a)... .... .... .... (b)… … .... .... (c .....

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of exempted goods or exempted services, except in the circumstances mentioned in sub-rule (2): Provided that the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12AA of the Central Excise Rules, 2002, on the ground that the said inputs are used in manufacture of goods cleared without payment of duty under the provisions of that rule. (2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services and manufact .....

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quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable. (3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer or the provider of output service, opting not to maintain separate accounts, shall follow either of the following conditions, as applicable to him, namely:- (a)… …. .... .... (b)…. .... .... .... (c) the provider of output service shal .....

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able. This principle is inbuilt in the very structure of the cenvat scheme. Sub-rule (1), therefore, merely highlights that principle. Sub-rule (1) covers all inputs, including fuel, whereas sub-rule (2) refers to non-fuel inputs. Sub-rule (2) covers a situation where common cenvated inputs are used in or in relation to manufacture of dutiable final product and exempted final product. 11. In fact, the appellants also rely on this principle laid down by the Hon'ble Supreme Court. However, the .....

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e simultaneously. We are not in agreement with such proposition. Both sub-rule (2) and (3) of Rule 6 talks about "manufacturer" or "provider of output services". The said sub-rules do not talk about the service wise maintenance of accounts. It is with reference to "manufacturer or "provider of output service". As already noted, sub-rule (1) absolutely prohibits availing cenvat credit on input service which is used in the manufacture of exempted goods or exempte .....

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ods. A combined reading of provisions of Rule 6 makes it clear that cenvat credit shall not be allowed for input services used for exempted service except where the manufacturer using common input services, both for exempted as well as taxable output services maintains separate accounts in respect of consumption of such input services on which credit is availed. 12. Sub-rule (3) of Rule 6 is another option to the manufacturer who opts not to maintain separate accounts under sub-rule (2). Thus su .....

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e manufacturer / service provider to maintain separate accounts, and the manufacturer / output service provider can opt not to maintain separate accounts by following sub-rule (3). Thus sub-rule (2) takes care of manufacturer / service provider who can maintain separate accounts for common inputs / input services and sub-rule (3) takes care of manufacturer / service provider who is not able to maintain separate accounts. However, the options are left open to both categories by the use of non-obs .....

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defeats the very restrictions placed under different conditions of sub-rule (3). As seen in the present case itself that appellant invoked clause (c) of sub-rule (3) and submitted that they were not hit by restriction of 20% in utilizing credit on tax liability of final output services, on the ground that total credit availed under sub-rule (3) falls short of the same. We note this claim is misleading and ignoring the fact that they have maintained separate accounts and availed full credit in r .....

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R. We are of the considered opinion that in respect of common input services for which the appellant is entitled to credit they have an option either to follow sub-rule (2) or sub-rule (3). Following both selectively in respect of selective common input services is against the basic principle and the legal bar under sub-rule (1). Accordingly, we hold that the original authority is correct in disallowing the credit which was availed by the appellant under sub-rule (3). 14. The appellants submitte .....

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