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16 九月 2015

The Rule 6 conundrum – Whether ‘Total’ Cenvat credit to be considered for reversal formula?

by Nalin Bajaj

Brief background

An assessee who is a manufacturer of dutiable goods or provider of output service or both invariably receives a number of services on which he pays service tax and is eligible to take credit of the same in terms of Rule 3(1) of Cenvat Credit Rules, 2004. However, such input services may also be used in the manufacture of exempted goods or provision of exempted services in which case the assessee is subjected to the rigors of Rule 6 of Cenvat Credit Rules, 2004.

Rule 6(1) of Cenvat Credit Rules, 2004 provides a bar on availment of credit on those inputs and input services which are used for manufacturing exempt goods or for providing exempt services. Rule 6(2) of Cenvat Credit Rules, 2004 provides a mechanism whereby the assessee can maintain separate accounts for services used in the manufacture of dutiable goods as well of exempted goods and services used in the provision of taxable and exempted services and take credit of only those inputs and input services which are exclusively used in the manufacture of dutiable goods or for provision of taxable services. Rule 6(3) of the Cenvat Credit Rules, 2004 provides for proportionate reversal of credit in case the assessee opts not to maintain separate accounts in terms of Rule 6(2) of Cenvat Credit Rules, 2004.
Rule 6(3) broadly gives the assessee 2 options for reversing Cenvat credit of service tax paid on input services. First option is to pay 6% of the value of exempted goods or exempted services. Second option is to pay an amount determined as per the formula prescribed under Rule 6(3A).

 

The dispute aka bone of contention

It is practically impossible to maintain separate accounts for input services like Security, house-keeping, legal, advertisement, audit, sales promotion, etc., which are essential for the business of the assessee and in respect of which the Cenvat credit is often substantial. Let us assume that the assessee has opted to go for second option under Rule 6(3) and wants to reverse Cenvat credit as per the formula prescribed under Rule 6(3A).

The reversal formula under Rule 6(3A) stipulates that ‘total’ CENVAT credit taken on input services during the month should be considered. The department has been taking a view that since Rule 6(3A) uses the word ‘total’ Cenvat credit, the entire Cenvat credit taken by the assessee should be considered for the purpose of reversal. In other words, even the Cenvat credit of services which are exclusively used in the manufacture of dutiable goods or provision of taxable services should be considered in the reversal formula thereby leading to a far more reversal of Cenvat credit.
On the other hand, the assessee have been taking a view that the reversal formula would apply to only common input services for which separate accounts cannot be maintained.

 

Whose interpretation is correct?

Unfortunately, there seems to be no clear cut answer to this question till date. Even the Chennai and Mumbai Benches of CESTAT seem to be having a difference of opinion on the issue. In Sify Technologies Ltd. v. CCE & ST, LTU, Chennai [2014-TIOL-958-CESTAT-MAD], the Chennai Bench of CESTAT while deciding the stay application appeared to agree with the contention of the assessee and accordingly waived the demand of pre-deposit on the ground that the assessee was maintaining separate accounts for taxable and exempted services and in respect of common services, the assessee was reversing proportionate Cenvat credit. 

However, in Thyssenkrupp Industries (I) Pvt. Ltd. v. CCE [2014-TIOL-1825-CESTAT-MUM], the Mumbai Bench of CESTAT prima facie did not agree with the submission of the assessee and refused to grant an unconditional stay. The Tribunal took a prima facie view that since Rule 6(3A) uses the words ‘Total’ Cenvat credit, there is no reason to assume that the reversal would apply to only common input services.
At this point, it is worth noting that Rule 6(2) and Rule 6(3) are only machinery provisions which seek to achieve the overall objective of Rule 6(1) that no credit should be taken in respect of inputs and input services which are used in the manufacture of exempted goods or provision of exempted services. Further, Explanation II to Rule 6(3) of the Cenvat Credit Rules, 2004 provides that no Cenvat credit shall be allowed in respect of those input services which are used exclusively for manufacture of exempted goods or provision or exempted services.  This explanation thus provides that no credit shall be admissible in respect of inputs or input services used exclusively for manufacturing exempted goods or for providing exempted services.

As a necessary corollary, it must imply that that Cenvat credit of service tax paid on input services exclusively used for taxable services should be allowed in full. In other words, in cases where inputs or input services are exclusively used in the manufacture of dutiable goods or for providing taxable output services, the restriction under Rule 6(1) itself would not be attracted and hence there shall be no requirement to apply the formula under Rule 6(3A) for such input services.

The above interpretation would be in line with the overall objective of Rule 6 that no Cenvat credit of input services used in the manufacture of exempted goods or provision of exempted services should be taken. However, if the department’s contention is upheld, the assessee will have to face difficulty and may well have to forego such Cenvat credit of common input services so as to avoid unnecessary litigation with the department and also losing the otherwise full Cenvat credit of input services which are exclusively used for dutiable goods or taxable services.

[The author is Senior Associate, Lakshmikumaran & Sridharan, Mumbai]

 

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