Admissibility of credit on common input services

PJ/CASE STUDY/2010-11/27

23 October 2010

PJ/Case Study/2010-11/27

Case Study

Prepared By:

CA. Pradeep Jain and

Sukhvinder Kaur LLB [FYIC]

Introduction:

Rule 6 of the Cenvat Credit Rules, 2004 provides that cenvat credit of inputs or input services which have been used for the manufacturing of non-dutiable finished goods or for providing the exempted output service will not be available to the assessee. It is further provided that in case common inputs or input services are used in manufacturing dutiable/non-excisable goods or for provision of taxable or exempted output service then the Rule provides that either the assessee has to maintain separate accounts of input services used in providing the taxable or exempted output service or in case a separate record is not maintained, then the assessee has to pay an amount equivalent to 6%/5% of the value of exempted output service provided.

In the case under study the issue involved was that whether the appellant were liable to avail credit on input service used for providing taxable or exempted output service?

Relevant Legal Provisions:

Rule 6 (1) of Cenvat Credit Rules, 2004: -

6. Obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services.-

(1) The CENVAT credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods or for provision of 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 the manufacture of goods cleared without payment of duty under the provisions of that rule.

Rule 6(3) of Cenvat Credit Rules, 2004: -

(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow either of the following options, as applicable to him, namely:-

(i) the manufacturer of goods shall pay an amount equal to ten per cent. of value of the exempted goods and the provider of output service shall pay an amount equal to eight per cent. of value of the exempted services; or

(ii) the manufacturer of goods or the provider of output service shall pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in, or in relation to, the manufacture of exempted goods or for provision of exempted services subject to the conditions and procedure specified in sub-rule (3A).

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.

Explanation II.-For removal of doubt, it is hereby clarified that the credit shall not be allowed on inputs and input services used exclusively for the manufacture of exempted goods or provision of exempted service.

In the case of M/s Shree Kalyan Technologies

[Order-in-Original No. 567/ST/2009-10, dated 01.07.2010]

Brief Facts:

- The Noticee are registered under the service tax for providing output services under the category of “Commercial training & coaching service” They were regularly filing service tax returns. The appellant was providing two types of services. One is for Commercial coaching classes for training of repairing of mobiles. Secondly, they are providing other commercial coaching classes on which service tax is payable.

- During the scrutiny of ST-3 return filed for the half yearly period ending March 2006, Department alleged that the Noticee was providing taxable and non-taxable service. Therefore, it was contended that the Noticee should either maintain separate account of input services used in exempted/taxable service under Rule 6 (1) of CCR, 2004.If they maintain combined account of taxable and exempted services then as per Rule 6 (3) (c) of CCR, 2004 will come into operation. It can pay upto 20% of service tax liability through Cenvat and remaining 80% is to be paid in cash. But they have used more credit for payment of service tax.

- Thus, it was alleged that the noticee had irregularly used cenvat credit and therefore the Noticee had contravened the provisions of Rule 6 (3) (c) of CCR, 2004.

- Thus, show cause notice was issued demanding service tax with interest. Penalty was also proposed to be imposed under Section 76 of the Finance Act, 1944 readwith Rule 15 (3) of CCR, 2004.

Noticee’s Contentions:

¨ Noticee contended that earlier they had taken credit of service tax paid on the input services which are used either exclusively for exempted services or for both taxable and exempted services. But had later on, they have reversed the same on knowing that they cannot utilize such credit.

¨ It was contended that if cenvat credit wrongly taken is reversed later on, it is deemed as Credit not taken at all.

¨ In support of their contention, reliance was placed on the judgment given by the Apex Court in the case of Chandrapur Magnet Wires (P) Ltd. Vs CCE, Nagpur wherein it was held that when the credit is reversed then it amounts to not taking of Cenvat credit. As such the reversal of Cenvat credit taken on exempted services will amount to not taking of the credit.

¨ But the credit of input services which are exclusively used in dutiable services is allowed.

¨ Thus, it was contended that the show cause notice should be withdrawn and no penalty should be imposed on the Noticee.

Issue Involved:

The issue involved in this case was that

When the Cenvat credit is reversed then it amounts to not taking of cenvat credit. Whether the credit taken on input services used exclusively in dutiable services is allowed.

Decision of the Deputy Commissioner:

Ø The Deputy Commissioner held that the Noticee was providing taxable as well as non taxable service and was maintaining separate account of input services used in providing exempted ot taxable service under Rule 6 (1) of the Cenvat Credit Rules, 2004. Therefore, the availment limit of 20% was not applicable.

Ø It was noted that during the said period, the Noticee had taken cenvat credit on common inputs which were used in exempted or taxable services, therefore realizing this mistake the Noticee had reversed the credit taken and deposited this amount vide Challan on 24.05.2007.

Ø The Deputy Commissioner relied upon the judgment given in the case of Chanderpur Magnet Wires P. Ltd v/s CCE, Nagpur [1998 (81) ELT 3 (SC)] wherein the Apex Court had held that if the cenvat credit wrongly taken was reversed later on then it was deemed as credit not taken at all. Therefore, the mischief of Rule 6 (3) (c) of the CCR, 2004 was not invoked as the Noticee was maintaining separate account of input used in providing taxable or non-taxable service.

Order of the Deputy Commissioner:

Proceedings initiated by impugned show cause notice are dropped.

Conclusion:

The Deputy Commissioner rightly dropped the proceedings. There are three type of credit viz.

1. The credit on input services which is exclusively used in exempted goods. The credit on the same is not allowed. The assessee has reversed this credit in this case.

2. The credit taken on common input services which are used in exempted as well as dutiable goods or taxable and exempted services. When the credit is taken on such services then there are three options. Firstly, to maintain separate inventory. Secondly, to do proportionate reversal under Rule 6(3A). Third option under current rule is to reverse the credit at specified rate. This third option at relevant time was that the service tax upto 20% can be paid from input services and rest is to be paid in cash. But in instant case, the notice has reversed this credit.

3. The credit on input services which are exclusively used for providing output services. The service provider has used only such credit for payment of service tax. When the noticee has taken this credit only then it can be said that he has maintained separate inventory of input services.

The learned Adjudication Officer has rightly visualized this legal position for both the points and given relief to the appellant.

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PJ/CASE STUDY/2010-11/27
23 October 2010

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