Utilisation of credit on input services falling under Rule 6(5) of CCR, 2004

PJ/CASE STUDY/2010-11/30

20 November 2010

PJ/Case Study/2010-11/30

CASE STUDY

Prepared By:

CA Pradeep Jain and

Sukhvinder Kaur, LLB [FYIC]

Introduction: -

In Rule 6 of the Cenvat Credit Rules, 2004 it has been provided that credit cannot be availed on inputs or input services in the manufacture of exempted goods or in providing non-taxable services. However, in Rule 6 (5) exception has been provided that in case specified input services are used then 100% credit can be utilized for discharging service tax liability. In the case under study the issued involved was whether the Noticee was using the input services falling under Rule 6 (5) of the said Rules making them eligible for using 100% credit for paying service tax.

Relevant Legal Provisions: -

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 five per cent. of value of the exempted goods and the provider of output service shall pay an amount equal to six 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goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year.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.

Rule 6 (5) of the Cenvat Credit Rules, 2004:

(5) Notwithstanding anything contained in sub-rules (1), (2) and (3), credit of the whole of service tax paid on taxable service as specified in sub-clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance Act shall be allowed unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services.

In the case of M/s Hotel Rawal Kot (The Indian Hotels Pvt Ltd), Jodhpur

[Order-in-Original No. 644/ST/2009-10, Dated: 27.07.2010]

Brief Facts: -

- Noticee is engaged in Hotel Business and is registered under the Service Tax Department.

- On scrutiny of the ST-3 filed for half-year ending March 2006, Department alleged that Noticee is providing both taxable and non-taxable service and is not maintaining separate accounts. Therefore, it was contended that as per Rule 6(3) (c) of the Cenvat Credit Rules, 2004 the Noticee could use 20% Cenvat credit to pay the service and the remaining 80% was to be paid in cash.

- It was alleged against the Noticee that they have irregularly used cenvat credit to discharge their service tax liability which was to be discharged in cash and thereby have contravened the provisions of Rule 6 (3) (c).

- Thus, show cause notice was issued for recovery of amount irregularly used from cenvat credit with interest and penalty was also sought to be imposed.

Noticee’s Contentions: -

· The Noticee admitted that they were providing taxable as well as non-taxable service.

· It was however, contended that they were taking cenvat credit on two type of input services. One type of input services were mentioned in Rule 6(5) of the CCR, 2004. The other is normal input services. On this second type of input services, the clause of Rule 6(3)( c) is applicable and it can be used upto 20% of service tax payable on output services. The second type of services were listed in Rule 6(5) and these were used for providing taxable as well as exempted services. The Rule 6(5) says that Rule 6(1), 6(2) and 6(3) is not applicable to this rule. This implies that the input services listed in rule 6(5) then we can use the 100% Cenvat credit. The limit of use of Cenvat credit upto 20% of output service mentioned in Rule 6(3) during the relevant period is not applicable in this case.

· It was contended that since limit of 20% was not applicable on these input services. Hence the show cause notice should be dropped.

Issue Involved: -

The issue involved in this case is that

Whether the Noticee is taking Cenvat credit of input services which are specified in Rule 6 (5) of CCR, 2004 and whether 100% credit can be used for paying the service tax.

Reasoning of the Order: -

Ø The Deputy Commissioner noticed that the Noticee had taken cenvat credit on input services which were specified in Rule 6 (5) of CCR, 2004 and these input services were also used in providing taxable services.

Ø Accordingly, it was held that as per Rule 6 (5) of CCR, 2004, against the service tax liability, the Noticee could use 100%credit from cenvat account instead of 20%.

Ø It was held that since the ceiling of 20% is not applicable in Noticee’s case, the mischief of Rule 6 (3) (c) is not applicable.

Order: -

Proceedings initiated by the impugned show cause notice is set aside.

Conclusion: -

The Deputy Commissioner has rightly held that Noticee can use 100% credit for payment of service tax on input services listed under Rule 6 (5) of CCR, 2004. Even in current rule also, this list is still there. The proportionate reversal or separate inventory or payment of service tax @ 6% on exempted services is not applicable if the credit is taken on services listed in Rule 6(5) of Cenvat credit Rules, 2004.

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PJ/CASE STUDY/2010-11/30
20 November 2010

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