Common input service for both dutiable and exempted final product, whether cenvat credit allowed?

PJ/CASE LAW/2015-16/2952

Case: IPCA LABORATORIES LTD. versus COMMISSIONER OF CENTRAL EXCISE, INDORE

Citation:2015 (40) S.T.R. 771 (Tri. - Del.)

Brief Fact:The appellant are manufacturers of pharmaceutical products. The period of dispute in this case is from May, 2007 to March 2008. During this period, the appellant were using 6 common input services namely, man power recruitment service, telephone services, goods transport agency services, courier services, housekeeping cleaning services and technical testing and analysis service in or in relation to the manufacture of dutiable final product as well as exempted final products. However, they were not taking the Cenvat credit in respect of these input services in proportion to the turnover of the exempted final product. During the period of dispute, they were foregoing the Cenvat credit in respect of the 6 common input services mentioned above to the extent of 70%, based on the ratio of the turnover of dutiable and exempted final product during the previous financial year. During the previous financial year, out of the total turnover, only about 30% turnover was of the dutiable final product and the remaining 70% turnover was of the exempted final products. Accordingly, the appellant during the period of dispute took the credit of only Rs. 4,65,725/- in respect of the 6 common input services mentioned above and had foregone the remaining Cenvat credit. The Department was of the view that since separate account and inventory of the input services meant for dutiable final product and exempted final product had not been maintained as per the provisions of Rule 6(2) of Cenvat Credit Rules, 2004, the provisions of Rule 6(3)(b) would become applicable. It is on this basis that after issue of show cause notice, the Commissioner vide Order-in-Original dated 19-1-2009 confirmed the demand of Rs. 5,75,52,022/- against the appellant under Rule 6(3)(b) read with Rule 14 of the Cenvat Credit Rules, 2004 along with interest thereon under Section 11AB and beside this imposed penalty of Rs. 2,000/- on them under Rule 15(3) of Cenvat Credit Rules, 2004. The Commissioner in this order held that in respect of clearances of the exempted final products, the appellant in accordance with the provisions of Rule 6(3)(b) of Cenvat Credit Rules, 2004 would be liable to pay an amount equal to 10% of the sale price of the goods. In course of proceedings before the Commissioner, the appellant pleaded that they have not taken Cenvat credit in respect of 6 common input services, in question, in proportion to the turnover of the exempted final product during the previous financial year and accordingly out of total Cenvat credit of Rs. 15,52,417/- involved on the common input services mentioned above, they have foregone the credit of Rs. 10,86,692/- and have only taken the credit of Rs. 4,65,725/- in proportion to the use of the common services in or in relation to the manufacture of dutiable final product and hence, the provisions of Rule 6(2) have been complied with and accordingly, the provisions of Rule 6(3)(b) would not be applicable, but this plea was not accepted on the ground that the condition of maintaining separate account and inventory of the input services for use in exempted and dutiable final product has not been maintained. Against this order of the Commissioner, this appeal has been filed.

Appellant contention: Sh. B.L. Narsimhan, Advocate, the ld. Counsel for the appellant pleaded that w.e.f. 1-3-2008 Rule 6(3A) was amended and this amendment gave an additional option to the manufacturer of dutiable and exempted final product, using common Cenvat credit availed input/input services and this additional option was to reverse the proportionate Cenvat credit in respect of inputs/input services used in or in relation to manufacture of exempted final product which was determined as per the provision of Rule 6(3A) that by Finance Act, 2010, the provisions regarding reversal of proportionate credit was made retrospectively applicable, that since, the appellant have not taken the proportionate credit in respect of the input services used in or in relation to the manufacture of exempted final products, the option of paying 10% of the sale value of the final product cannot be forced upon them, that Hon’ble Gujarat High Court in case of Sh. Rama Multitech Ltd v. UOI reported in 2011 (267)E.L.T.153 (Guj.) has held that in view of retrospective amendment to Rule 6(3) by Finance Act, 2010, even when the separate accounts of the input/input services meant for dutiable and exempted final product were not maintained, the manufacturer is entitled to reverse proportionate credit, that in the present case, the Commissioner has not even disputed the quantum of credit foregone but has invoked the provisions of Rule 6(3)(b) and demanded an amount equal to 10% of the sale value of the exempted final product only on the ground that a separate account and inventory of the input services meant for dutiable final product has not been maintained, that this stand of the Department would not be correct in view of retrospective amendment to Rule 6(3) by Finance Act, 2010, which gives the manufacturer an additional option of reversal of the proportionate Cenvat credit attributable to the exempted final product, that when the appellant have already foregone the proportionate credit attributable to the exempted final product, the provisions of Rule 6(3) read with Rule 6(2) stands complied with and hence, the amount equal to 10% of the sale value of the final product cannot be demanded from them. He, therefore, pleaded that the impugned order is not correct.

Respondent contention:Sh. M.S. Negi, the ld. DR defended the impugned order by reiterating the findings of the Commissioner in it. He, in particular, relied upon the judgment of Hon’ble Bombay High Court in case of CCE, Thane-I v. Nicholas Piramal (India) Ltd. reported in 2009 (244)E.L.T.321 (Bom.) wherein it has been held that provisions regarding reversal of the proportionate credit introduced in Rule 6(3) w.e.f. 1-4-2008 is not applicable for the past period.

Reasoning of Judgment:Hon’ble tribunal have considered the submissions from both the sides and perused the records.
The appellant used 6 common input services which are used in or in relation to manufacture of dutiable final product as well as exempted final product. During the period of dispute, the total Cenvat credit attributable to these common input service is Rs. 15,52,417/-. However, there is no dispute that during previous financial year, the proportion of the turnover of exempted final product was 70% and on this basis during the period of dispute, the appellant have foregone 70% of the Cenvat credit in respect of these six common input services and accordingly, have availed Cenvat credit of Rs. 4,65,725/- attributable to the input services used in or in relation to the manufacture of the dutiable final product and have foregone the Cenvat credit of Rs. 10,86,692/- in respect of the services used for exempted final product. The point of dispute is as to whether just because the appellant did not maintain separate account and inventory of the input services meant for dutiable and exempted final product as per the provision of Rule 6(2), the provisions of Rule 6(3)(b) providing for payment of an amount equal to 10% of sale value of the exempted final product would be applicable.
In our view w.e.f. 1-3-2008 Rule 6(3) had been amended to give an additional option to a manufacturer manufacturing dutiable as well as exempting final product by using common Cenvat credit availed input/input services and this additional option was to reverse the proportionate Cenvat credit attributable to input/input services used in or in relation to manufacture of exempted final product. The proportionate amount of Cenvat credit attributable to the input/input services used in or in relation to manufacture of exempted final product was to be calculated as per the formula prescribed in Rule 6(3A). By Finance Act, 2010, the above provisions were made retrospectively applicable. Hon’ble Gujarat High Court in case of Sh. Rama Multitech Ltd. v. UOI reported in 2011 (267)E.L.T.153 (Guj.) has held that even if separate account have not been maintained, in view of retrospective amendment by Finance Act, 2010, a manufacturer using common inputs in or in relation to manufacture of dutiable as well as exempted final product would be entitled to reverse the proportionate Cenvat credit. In view of this position, during the period of dispute the option of paying an amount equal to 10% of the sale value of the exempted goods cannot be forced upon the appellant and the appellant would be entitled to reverse the Cenvat credit attributable to the inputs/input services used in or in relation to the manufacture of the exempted final product. According to the appellant, they have not taken and have foregone the Cenvat credit attributable to the quantum of input services, attributable the turnover of exempted final product and this fact is not disputed. The Commissioner does not even dispute the quantum of the credit foregone. Once, the appellant have foregone the proportionate Cenvat credit in respect of input services used in or in relation of the manufacture of exempted final product, they have to be treated as complied with the provisions of sub-rule (3) of Rule 6 and hence, there cannot be any demand of amount under Rule 6(3)(b). The judgment of Hon’ble Bombay High Court in case of CCE, Thane-I v. Nicholas Piramal (India) Ltd. (supra) is of the period when the retrospective amendment to Rule 6(3) by Finance Act, 2010 had not been made and hence, this judgment of Hon’ble High Court is not applicable to the facts of this case. In view of the retrospective amendment introduced by Finance Act, 2010, the appellant were entitled to reverse the proportionate Cenvat credit attributable to the quantum of input services used in or in relation to manufacture of exempted final product and by foregoing this credit, they have complied with this obligation. In view of this the impugned order is not sustainable. The same is set aside. The appeal is allowed.

Decision: Appeal Allowed.

Comment:The substance of the case is that a manufacturer using common inputs in or in relation to manufacture of dutiable as well as exempted final product would be eligible to reverse the proportionate Cenvat credit. In view of this position, during the period of dispute the option of paying an amount equal to 10% of the sale value of the exempted goods cannot be forced upon the appellant and the appellant would be entitled to reverse the Cenvat credit attributable to the inputs/input services used in or in relation to the manufacture of the exempted final product.

Prepared By:Anash kachaliya

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PJ/CASE LAW/2015-16/2952

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