CESTAT Chennai Rules Credit Exclusively Used for Taxable Services Need Not Be Considered for Rule 6(3A) Reversal
Sangeetha Prathap
The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that while computing the amount of CENVAT credit required to be reversed under Rule 6(3A) of the CENVAT Credit Rules, 2004, only the credit attributable to common input services used for both taxable and exempted services is to be taken into account, and not the credit pertaining to input services exclusively used for taxable output services.
The Bench comprising P. Dinesha (Judicial Member) and Vasa Seshagiri Rao (Technical Member) was examining whether, for the purpose of reversal under Rule 6(3A), the total CENVAT credit should include credit of input services exclusively used for providing taxable services, or whether the calculation should be restricted only to the common input service credit. The appeal arose from a demand confirmed after remand proceedings, wherein the Department insisted on computing reversal by considering the entire input service credit.
The appellant, M/s. Sify Technologies Ltd., was engaged in providing a range of services including online information and database access or retrieval services, internet café services, leased circuit services, franchise services, business auxiliary services and advertisement services. During the relevant period, the appellant was also providing certain services which were exempt or non-taxable. Prior to March 2008, the appellant was availing and utilising CENVAT credit on input services used for both taxable and exempted services, without restricting utilisation to 20% of the service tax payable on taxable output services, as contemplated under Rule 6(3) of the CENVAT Credit Rules, 2004.
A show cause notice was initially issued proposing to disallow the entire credit availed on common input services, along with interest and penalty under Rule 15(3) of the CENVAT Credit Rules, 2004. The demand was confirmed by the adjudicating authority, which was challenged before the Tribunal. By an earlier order, the Tribunal remanded the matter to the adjudicating authority for the limited purpose of verifying the allocation of common input service credit between taxable and exempted services and directed that no penalty be imposed in the remand proceedings.
In the remand proceedings, the original authority confirmed a demand of ₹13,36,742 under Rule 14 of the CENVAT Credit Rules, 2004, read with Section 73(1) of the Finance Act, 1994, taking the view that the appellant was required to reverse credit in accordance with the formula prescribed under Rule 6(3A) by considering the entire input service credit. Aggrieved by this order, the appellant approached the Tribunal once again.
Before the Tribunal, the Department contended that since the appellant had opted for reversal of credit attributable to exempted services, it was bound to compute the reversal strictly in terms of Rule 6(3A), which, according to the Department, required taking into account the total CENVAT credit. On the other hand, the appellant argued that such an interpretation would lead to reversal of even that portion of credit which was exclusively attributable to taxable services, which was contrary to the scheme and spirit of Rule 6. It was contended that only the common input service credit, and not the credit exclusively used for taxable services, could be subjected to the reversal formula.
The Tribunal examined Rule 6(3)(ii) of the CENVAT Credit Rules, 2004, which provides that a manufacturer or service provider shall pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in the manufacture of exempted goods or provision of exempted services, subject to the conditions and procedure laid down in sub-rule (3A). The Bench observed that the rule does not contemplate denial or reversal of credit which is exclusively used for taxable output services.
Placing reliance on the decision of the Ahmedabad Bench of the Tribunal in CCE & ST, Rajkot v. Reliance Industries Ltd. [2019 (28) G.S.T.L. 96 (Tri.-Ahmd.)], the Chennai Bench noted that the expression “total CENVAT credit” appearing in the formula under Rule 6(3A) must be read harmoniously with the entire scheme of Rule 6. It observed that the Ahmedabad Bench had categorically held that “total CENVAT credit” for the purpose of the formula refers only to the credit of common input services, and does not include credit of inputs or input services exclusively used for dutiable goods or taxable services. The Bench also noted that this view had been affirmed by the Gujarat High Court.
The Tribunal observed that accepting the Department’s interpretation would result in denial of credit even where input services were wholly used for taxable services, which is not envisaged under any provision of the CENVAT Credit Rules. It further noted that the substitution of Rule 6(3A) was clarificatory in nature and intended to remove anomalies, and not to deny legitimate credit on services used exclusively for taxable outputs.
Following the settled legal position, the Tribunal held that for the purpose of calculating the amount of CENVAT credit to be reversed under Rule 6(3A), only the credit pertaining to common input services is required to be considered, and not the credit of input services exclusively used for taxable services. Consequently, the demand confirmed in the impugned order was held to be unsustainable. In view of the above findings, the Tribunal allowed the appeal, set aside the impugned order, and granted consequential relief to the appellant in accordance with law.
Appearance
Counsel for Appellant/ Assessee: Kiran Manokaran
Counsel for Respondent/ Department: Anandalakshmi Ganeshram
Cause Title: M/s. Sify Technologies Ltd. v. Commissioner of GST & Central Excise
Case No: Service Tax Appeal No.41180 of 2016
Coram: P. Dinesha (Judicial Member), Vasa Seshagiri Rao (Technical Member)
