Pranav B Prem

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand of ₹24.08 lakh and a penalty of ₹10 lakh imposed on Sify Technologies Limited. The Tribunal held that under Rule 6(3A) of the CENVAT Credit Rules, 2004, only the common input service credit—used for both taxable and exempted services—is liable for proportionate reversal, not the entire CENVAT credit availed during the period.

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The two-member bench comprising Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao observed that the entire dispute stemmed from differing interpretations of the formula laid down under Rule 6(3A), and not from any evasion or non-payment of service tax.

The case involved a demand issued by the Commissioner of GST and Central Excise, Chennai LTU, for the financial year 2011–12. The department alleged that Sify wrongly availed CENVAT credit on input services attributable to exempted activities—specifically its trading in software and hardware, which were categorized as exempted services under Rule 2(e) of the CENVAT Credit Rules, 2004.

Sify Technologies, a key player in the Indian IT sector, had exercised the option under Rule 6(3)(ii) in October 2010 to reverse proportionate credit instead of maintaining separate accounts for taxable and exempted services. They continued under this option in 2011–12 without withdrawing it. As per their submissions, the company had reversed an amount of ₹5,40,847 provisionally for the disputed year, based on calculations from the audited figures of the previous financial year. They later contended that this was an excess reversal by ₹1,76,402.

The department, however, took the view that the reversal must be computed based on the entire CENVAT credit of ₹37.04 crore availed during the year. A Show Cause Notice was issued seeking recovery of ₹24,08,193 with interest and also proposed a penalty of ₹10 lakh under Section 76 of the Finance Act, 1994.

Sify challenged the demand, contending that Rule 6(3A) requires only the reversal of common credit, i.e., credit on input services used for both taxable and exempt services. They argued that input services used exclusively for taxable output services cannot be subjected to reversal. In support, they relied on judicial precedents, including decisions of the Tribunal in their own earlier cases, as well as rulings in Reliance Industries Ltd [2019 (28) GSTL 96 Tri Ahmd.], E-connect Solutions Pvt. Ltd [2021 (376) ELT 678 Tri-Del.], and Honda Motor India Pvt. Ltd [CMA No. 1179 of 2018].

The Tribunal noted that the very purpose of Rule 6(3A) is to compute the quantum of ineligible credit attributable to exempted services. It further cited the Madras High Court’s ruling in Honda Motor India Pvt. Ltd., which clarified that only common input services—not total credit—must be considered for reversal. It was also noted that the 2016 amendment to Rule 6(3A), which made this distinction explicit, was merely clarificatory and thus applied retrospectively.

Referring to the earlier decisions in Chennai Petroleum Corporation Ltd. and Reliance Industries Ltd., the Tribunal observed that accepting the department’s interpretation would unjustly deny credit even on services used entirely for taxable outputs—something not intended under the Rules.

The Tribunal also addressed the issue of exempted services, affirming that Secure Socket Layer (SSL) Certificates and Digital Signature Certificates (DSC) supplied by Sify were indeed exempt during the relevant period, relying on its 2018 ruling in Sify’s own case. It was further clarified that even if the company had mistakenly included export turnover twice while calculating provisional reversal, the corrected figures still showed that the company had reversed more credit than necessary.

As for the penalty, the Tribunal found no justification for its imposition. It emphasized that Sify had acted in good faith, maintained transparency, and engaged in dialogue with the department. The fact that the appellant had never claimed credit for input services used exclusively in exempted operations also weighed in its favour. According to the Tribunal, “Whatever the practice of accounting adopted by the Appellant cannot be faulted,” and the services of departments like Finance, HR, and Admin, which were common across various SBUs, had already been subjected to proportionate reversal.

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In conclusion, the Tribunal allowed the appeal and set aside the demand and penalty. However, it directed the matter to be remanded back to the Original Adjudicating Authority to carry out a fresh computation of the common credit that needs to be reversed, in line with the legal position clarified by the Tribunal. The adjudicating authority is expected to complete the exercise within three months, after giving the appellant a reasonable opportunity to be heard.

Appearance

For the Appellant: Mr. G. Natarajan, Advocate

For the Respondent: Mr. N. Satyanarayanna, Authorised Representative

Cause Title: M/s. Sify Technologies Limited V. Commissioner of GST and Central Excise 

Case No: Service Tax Appeal No. 42110 of 2015

Coram: Hon’ble Mr. Vasa Seshagiri Rao [Member (Technical)], Hon’ble Mr. Ajayan T.V. [Member (Judicial)]