Whether service provided in J&K treated as exempted service for Rule 6?

Case:ADECCO FLEXIONE WORKFORCE SOLUTIONS LTD. VERSUS C.C.E., C. & S.T., BANGALORE

Citation:2016(42) S.T.R. 202 (TRI.- BANG.)

Brief Facts:During scrutiny of the ST3 Returns for the year 2008-2009, it was observed that the appellant was providing taxable services to SEZ units and the same were exempted vide Notfn. No. 4/2004-S.T., dated 31-3-2004. The appellant was also providing taxable services in Jammu & Kashmir Region. Since the appellant was providing taxable as well as exempted services, they were required to maintain separate accounts for receipt and consumption of input services meant for use in providing output services and avail credit only on the quantity of input services which is intended for use for providing taxable output services as per provisions of Rule 6(2) of Cenvat Credit Rules, 2004. Further as per provisions of Rule 6(3) of Cenvat Credit Rules, 2004 if the provider of output service, opting not to maintain separate accounts, (i) shall either pay an amount equal to 8% of the value of the exempted services or (ii) shall pay (reverse) an amount equivalent to the Cenvat credit attributable to the input services used for providing the exempted services on monthly basis subject to the conditions and procedures specified in sub-rule (3A).

On finding that appellant had not followed the procedure laid down, proceedings were initiated culminating in confirmation of demand for the amount as per the provisions of Rule 6(3)(i) of Cenvat Credit Rules, 2004 on the value of exempted services which worked out to Rs. 14,50,720/- (Rupees fourteen lakhs fifty thousand seven hundred and twenty only). As a result of the proceedings, the original adjudicating authority confirmed the demand for the amount with interest and also imposed penalty equal to the amount demanded. On an appeal filed by the assessee, the Commissioner (Appeals) took the view that the appellant has satisfied the conditions in view of the retrospective amendment as per the Finance Act, 2010 carried out to the provisions of Rule 6 and set aside the impugned order taking note of the fact that appellant had reversed the proportionate credit on the value of exempted services subsequently with interest. Revenue is in appeal against this decision. Appellant-assessee has filed cross objections.

Appellant Contention:Learned CA on behalf of the appellant would submit that it cannot be said the requirement of Rule 6(3)(ii) is a substantive requirement and he relies on the decision in the case of Foods, Fats & Fertilisers Ltd.v. CCE, Guntur [2011 (22) S.T.R. 484 (Tri.-Bang.) = 2009 (247) E.L.T. 209 (Tri.-Bang.)]. Further he also relies upon the decision in the case of J.B. Mangharam Foods Pvt. Ltd.v. CCE, Indore [2010 (258) E.L.T. 575 (Tri.-Del.)] to submit that the assessee had the option to make a choice out of the three methods prescribed in the Rules. Further he relies on the decision of the Hon’ble High Court of Karnataka in the case of CCE, Bangalore-IIv. ETA Technology Pvt. Ltd. - [2010-TIOL-569-HC-KAR-CX] to submit that once credit is reversed it is deemed that the credit is not taken and therefore in this case once they had reversed the credit, it has to be held that credit itself was not taken and therefore the assessee has not contravened any provisions of law.

Respondent Contention:Learned DR would rely upon the decision in the case of CCE, Thane-I v. M/s. Nicholas Piramal (India) Ltd. reported in [2009-TIOL-649-HC-MUM-CX = 2009 (244) E.L.T. 321 (Bom.)] wherein it was held by the Hon’ble High Court of Bombay that reversal of credit is no substitute for payment of 8%.

The learned AR would submit that the retrospective amendment to Cenvat Credit Rules made in Finance Act, 2010 related to only manufacturers and did not cover service providers. Therefore, Commissioner (Appeals) could not have allowed the benefit of reversal of proportionate credit made by them in June, 2009 for the clearances made in the year 2008-2009. He would also submit that it cannot be said that the omission is technical in view of the fact that the provisions of Rule 6(3)(ii) of Cenvat Credit Rules, 2004 is a substantive requirement in the law to avail the benefit of reversal of proportionate credit when separate accounts in respect of inputs and input services used for providing exempted and dutiable services were not maintained.

Reasoning of Judgment:The Tribunal has considered the submissions made by both the sides. Commissioner’s conclusion in the impugned order that in view of the retrospective amendment to Cenvat Credit Rules, procedure followed by the assessee can be said to have fulfilled the requirement in my opinion is not correct. This is in view of the fact that amendments were carried out and benefit of payment of proportionate credit or Cenvat credit attributable to exempted goods and services was extended only to manufacturers and not to service providers. It was submitted by the learned CA that this was an omission on the part of legislature and there was no intention to exclude output service providers. Unless the words are ambiguous and there is lack of clarity it is not appropriate and proper to read the law differently. In this case there is no such ambiguity or lack of clarity in the amendments or Finance Act brought out in the year 2010. Therefore, Tribunal is unable to consider this submission. The second conclusion the Commissioner has reached is that the omission or intention is only technical and reversal has been done as required under Rule 6(3)(ii) of the Cenvat Credit Rules, 2004. In view of the amendment in 2010, once the amendment is not applicable, the benefit of subsequent reversal will not be available. The amendment brought out in the year 2010 clearly provided for subsequent reversals by the manufacturers where they had omitted to reverse the credit earlier and according to the law they would have been required to pay 6%/8%/10% as the case may be.

At this juncture it would be appropriate to take note of the fact that it was in the year 2008 that the provisions of Rule 6(3) were omitted. This amendment provided for option to the manufacturers and service providers. The first option is to maintain separate accounts in respect of services and inputs used for exempted/dutiable goods manufactured and services provided. If an assessee opts not to maintain, the Rule provides for another option to which provides for exercising of an option by the manufacturer/provider of output service in accordance with provisions of Rule 6(3A). Rule (3A) provides that the manufacturer or provider of output service has to be intimated in writing to the Superintendent of Central Excise giving the particulars mentioned therein which are namely, name, address and registration No., date from which option is exercised, description of dutiable goods/taxable services, description of exempted goods/exempted services, Cenvat credit of inputs and input services laying in balance as on the date of exercising the option. Thereafter under Rule 6(3A)(b), the Rule provides for payment, provisional payment, proportionate payment and reversal of credit in advance, etc. It can be said that provisions of Rule (3A) provided detailed procedure to be followed by a manufacturer or an output service provider who does not opt for maintenance of separate account. It is not necessary to reproduce the Rule (3A) and the sub-rules because they are very detailed and even give the formula for calculation of proportionate credit, etc. Therefore, the situation after the amendment of the Rules w.e.f. 1-3-2008 underwent a drastic change as far as the provisions of Rule 6(3) are concerned. Prior to this date, there were simple provisions that either maintain separate accounts or pay a specified amount in the Rule.

In relation to the period prior to 1-3-2008 there were several decisions of the Tribunal as well as different High Courts in the country taking a view that once the credit is reversed even if it is reversed subsequently, it amounts to non-availment of credit. The decision of the Hon’ble High Court cited by the learned CA is one such decision and there is no dispute that that was the situation prior to 1-3-2008 and wherever credit was reversed irrespective of the date of reversal, a view was taken that such reversal has to be considered as having not availed the Cenvat credit at all. But the fact is that sub-rule (3A) of Rule 6 of Cenvat Credit Rules provides a detailed procedure for reversal of credit and also exercising of an option to either maintain separate account or follow the procedure. In such a situation can it be said that an assessee still has an option to reverse the credit subsequently as and when either the department points out or on assessee’s own initiative? If we accept that even after 1-3-2008 that would be the situation, we will be rendering the provisions of sub-rule (3A) of Rule 6 of CCR, 2004 totally irrelevant and otiose. This cannot be the intention of the legislature. In such a situation applying the decision which was rendered prior to 1-3-2008 and taking a view that option can be exercised at any time or reversal can be made subsequently would be totally against the law as well as the intention of the legislature.

The other decisions cited by the learned CA also relate to the period prior to 1-3-2008 and therefore, it may not be appropriate to consider them in view of the observations made by Tribunal hereinabove.

The Tribunal is the last fact finding authority and the law has to be applied to the facts of each case. Therefore, it would not be appropriate for me to apply the law blindly to the case and reject the claims of the assessee straightaway. Therefore, it would be appropriate to take note of certain facts which have not been brought out while explaining the brief facts of the case.

In this case after taking note of the ST3 Returns filed by the assessee for scrutiny, the assessee was addressed on 27-4-2009 and thereafter the appellants wrote a letter on 26-5-2009 and another letter on 30-7-2009. It is the letter dated 30-7-2009 which is being relied upon by the learned CA to submit that this letter dated 30-7-2009 can be treated as an option exercised by the assessee as per the provisions of Rule 6(3A) of CCR, 2004. It was submitted that out of nearly Rs. 1.9 crore (Rupees one crore nine lakhs approximately) of exempted services, about Rs. 1.01 crore (Rupees one crore one lakh approximately) is attributable to clearances to SEZ which is covered by the provisions of Rule 6(3A) and therefore, that cannot be considered as an exempted service but as an export. Therefore, the credit need not have been reversed by the appellant. As regards the balance amount it relates to the clearance to Jammu & Kashmir and United Nations. As regards United Nations clearance once again it cannot be considered as exempted services. Therefore, amount of tax payable is required to be computed only on the clearances to Jammu & Kashmir and Tribunal agreed with this submission.

As regards the letter dated 30-7-2009 and submission that it should be considered as an option, Tribunal have to observe that it is not in the format which as proposed does not give all the details which are required to be given as per the provisions of Rule 6(3A). It is the submission of learned CA that this was the first year when the new procedure was introduced and therefore, this omission of not incorporating all the details and the reasons for consideration of the letter has not fulfilled all the provisions of Rule 6(3A) may be accepted as a special case. He also submits that assessee would submit another letter with all the details required so that the deficiency in their letter dated 30-7-2009 can be made good. I am inclined to allow this. This is because the Tribunal is a creature of the statute and unless the statute provides for exempting or overlooking certain things, it may not be appropriate for the Tribunal to follow that process. Moreover in this case there is no precedent decision to be followed.

Another submission that was made by the learned CA was as per the definition of ‘taxable service’ clearance to Jammu and Kashmir were exempt from payment of service tax in view of the fact that provisions of Section 64 excludes Jammu & Kashmir for the purpose of levy of service tax. For better appreciation the Section is reproduced.

“Section 64. Extent, commencement and application. -

(1)        This Chapter extends to the whole of India except the State of Jammu and Kashmir.”
(2)        It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint.
(3)        It shall apply to taxable services provided on or after the commencement of this chapter.”

Further the Cenvat Credit Rules defined ‘exempted services’ and in the definition it is specifically provided that for the purpose of Cenvat Credit Rules, exempted services would include services which are not taxable. According to Rule 2(e) of Cenvat Credit Rules, “exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under Section 66 of the Finance Act;

Learned CA submitted that when the definition is read with the provisions of Section 64 and Section 66 of Finance Act, 1994, the conclusion is that if a service is provided to Jammu & Kashmir State and even if it is included in the list of services in Section 66 of Finance Act, 1994, it cannot be considered as an exempted service. This is because in respect of services provided in Jammu & Kashmir, Section 66 and all other Sections of Finance Act, 1994 are not applicable.

Tribunal did not agree with this submission. The definition of ‘exempted service’ as reproduced makes it clear that even if a service is not included in Section 66 at all it will still be considered as an exempted service. It is not the case that the service provided by the assessee in this case has not been included in Section 66. In fact the provision that even if a service is not included in Section 66, it has to be considered as an exempted service would show that in respect of services provided to Jammu & Kashmir State, it has to be considered as an exempted service. In my opinion, if a non-taxable service can be considered as an exempted service, a taxable service provided in Jammu & Kashmir has to be considered as exempted service. Learned CA submitted that after 1-7-2012, the definition of service tax provided in Section 66 of Finance Act, 1994 specifically provides that when the service is provided in taxable territory and not included in negative service list it is liable to tax. Tribunal think that the inclusion of word ‘taxable territory’ in the definition does not makes any difference to the earlier definition available in Cenvat Credit Rules.

Tribunal also agree that the submission that in respect of clearances to SEZ United Nations, there was no need for reversal of Cenvat credit or payment of the percentage of the amount prescribed under Rule 6(3) of Cenvat Credit Rules, 2004. The question that arises therefore is whether the assessee can be given an option to consider the letter given by them on 30-7-2009 as a letter exercising the option to reverse the proportionate credit or not and if so whether they can be allowed to credit good and make good the deficiencies in the letter. Tribunal find that even on 3-7-2009, the assessee had taken a stand that they would opt for reversal of proportionate credit and opt to follow the procedure for the Financial Year 2009-10. Relevant paragraph is paragraph 2 of the letter dated 3-7-2009 and the same is reproduced.

“2. As regards availing Cenvat credit on common input services used both in exempted and taxable services; we submit that the value shown in the ST-3 Returns as the value of exempted services includes the value of services provided to SEZ units. As per Rule 6(6), the provisions of sub-rules (1), (2), (3) and (4) is not applicable if the exempted clearances are to the clearances to SEZ units. The only exempted service we have is the services rendered in the state of Jammu and Kashmir. In this regard we wish to submit that Rule 6(3) of Cenvat Credit Rules has been amended effective from 1-3-2008 and the amended provision provides that where the assessee opts not to maintain separate accounts for the services used both for taxable as well as the exempted output services, the assessee can either reverse proportionate credit attributable to the exempted services, or opt to pay 8% of the value of the exempted services provided. The explanation also provides that assessee shall opt for any one of the options, and he shall not withdraw the option during the remaining part of the financial year. We submit that we opt to reverse the proportionate credit attributable towards the exempted output services worked out on the basis of finalized accounts figures for 2008-09. The credit attributable towards exempted services works out to Rs. 6043/- (calculations attached) which we have reversed on 30-6-2009. We have also reversed the credit for the month of April, May and June, 2009. We undertake to follow the procedure for 2009-10, and we shall not withdraw the option during this period. We request you to condone the lapse which is procedural. We are ready to pay the interest if required to be paid.”

They reversed an amount of Rs. 6043/- (Rupees six thousand forty three only) and submitted a detailed calculation month-wise to show the correctness of the amount worked out. This has not been considered by the Revenue. Thereafter on 30-7-2009 they submitted another letter. In this letter they submitted that they were not aware of the procedure and by mistake they have not exercised the option for the Financial Year 2008-09. They also took a stand that option could be exercised even at the end of the financial year. This submission was made before me today also. For this purpose the learned CA relied upon the explanation (I) to Rule 6(3) of Cenvat Credit Rules, 2004. For better appreciation the explanation is reproduced as under :

“Explanation I.- If the manufacturer of goods or the provider of output service, avails any of the option under this sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year.”
It was submitted that the Rule does not say that option should be exercised in the beginning of the financial year or before end of the financial year. In fact no time limit has been prescribed under the Rule.

The learned DR countered this by submitting that the fact that the explanation provides that it shall not be withdrawn during the remaining part of the financial year shows that it has to be exercised within the same financial year. However it is difficult to come to the conclusion that because of this particular clause, the explanation has to be understood to mean that option should be exercised within the financial year.

The discussion above would show that the issue is highly arguable, debatable and involves complex legal problems. Even though Tribunal have held against the assessee as regards provision of services in Jammu and Kashmir and the interpretation of the provisions of law by them and by the assessee and also have taken a view that the exact conclusion regarding explanation is difficult to arrive. In view of the facts and circumstances in this case and in view of the fact that Commissioner (Appeals) has already allowed benefit wrongly and further in view of the complexity of the nature, in my opinion as a special case, the assessee can be allowed to regularize the activity undertaken by them by submitting a detailed letter as contemplated in sub-rule (3A) of Rule 6 of Cenvat Credit Rules. Whether it is rectifiable or not is another complicated question which in my opinion goes in favour of the assessee mainly because of the discussion given above and entire facts and circumstances of this case.

In view of the discussion above, it is held that appellant would be eligible to reverse the proportionate credit attributable to clearances to Jammu & Kashmir State alone for the year 2008-09 subject to the condition that within 30 days from the date of this order they will file a letter rectifying the deficiencies in the letter of option given by them as contemplated in Rule 6(3A) of Cenvat Credit Rules, 2004.

Decision: Appeal disposed of.

Comment:The gist of this case is that no need to reverse credit in respect of service provided to SEZ and United Nations as they are not treated as exempted services for invoking provisions of Rule 6 of Cenvat Credit Rules, 2004. Secondly, tribunal also held that non-taxable service can be considered as an exempted service, a taxable service provided in Jammu & Kashmir has to be considered as exempted service and accordingly, liable to reverse credit of Service Tax on the same under Rule 6 of CCR, 2004.

Prepared by: Prayushi Jain

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PJ/CASE LAW/2016-17/3124

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