Applicability of Rule 6 of CCR, 2004

PJ/CASE STUDY/2010-11/28

01 November 2010

PJ/Case Study/2010-11/28

Case Study

Prepared By:

CA. Rajani Thanvi and

Sukhvinder Kaur LLB [FYIC]

Introduction:

The Department should be careful while issuing show cause notice to the assessee. If the show cause notice is issued without verification of facts then frivolous proceedings are started and time and money of the assessee as well as that of the department is wasted. In the case under study also, the show cause notice was issued on the allegations which were baseless and untrue.

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goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year.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 Aakaar Communications

[Order-in-Original No. 719/ST/2009-10, dated 09.08.2010]

Brief Facts:

- Noticee was providing the courier service and was regularly filing ST-3 return.

- During the scrutiny of ST-3 return filed on 25.10.2005 for half yearly ending September 2005, the Department noticed that Noticee was providing both 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 use upto 20% of service tax liability through Cenvat and remaining 80% is to be paid in cash. But they have used more than 20% 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 they were not providing any non-taxable service. They were only providing one taxable service i.e. courier service. Thus, provisions of Rule 6 (1) and Rule 6 (3) (c) of CCR, 2004 were erroneously invoked against them.

¨ It was contended that during the said period they had correctly availed cenvat credit and there was no short payment of service tax.

¨ It was contended that they not provided any exempted service and moreover in the show cause notice it was not clarified as to which exempted service was provided by them.

¨ It was contended that no penalty should be imposed on the Noticee as there was no contravention.

Issue Involved:

The issue involved in this case was that

Whether the Noticee had provided any exempted service while providing taxable service for which Rule 6 (3) (c) was to be invoked?

Decision of the Deputy Commissioner:

Ø The Deputy Commissioner held that from the show cause notice it was not clear as to which exempted service was provided by the Noticee. It was clearly established that the Noticee was only providing taxable service i.e. Courier service. No exempted service was provided by Noticee.

Ø Thus, the mischief of Rule 6(1) and Rule 6 (3) (c) could not be invoked against them.

Ø It was held that during the relevant period, Noticee correctly availed total cenvat credit.

Ø It was held that there was an error in drafting the show cause notice in as much as 20% of its amount i.e. Rs. 11610/- has been shown as irregular use of cenvat credit and rest amount of Rs. 46443/- has been alleged as short payment of service tax and this 20% limit is applicable to service tax payable i.e. service tax liability be discharged by 20% in Cenvat and 80% through cash if it is covered under Rule 6 (3) (c) of CCR, 2004.

Ø In the end it was held that as nothing wrong has been noticed, show cause notice is not sustainable.

Order of the Deputy Commissioner:

Proceedings initiated vide impugned show cause notice were dropped.

Conclusion:

The Deputy Commissioner correctly held that the impugned show cause notice was not sustainable as it was issued without proper application of mind. Such frivolous proceedings should be avoided as it results only in wastage be that be of time or of money and gives unnecessary pestering to the assessee.

********

Comments

PJ/CASE STUDY/2010-11/28
01 November 2010

Post a Comment

Query