2015 (8) TMI 24 - AT - Central Excise

Appellant wins Cenvat Credit reversal case after properly choosing Rule 6(3)(ii) option over Revenue's preferred method

M/s. Mercedes Benz India (P) Limited Versus Commissioner of Central Excise, Pune-I

CESTAT Mumbai-AT ruled in favor of appellant regarding Cenvat Credit reversal under Rule 6 of CCR. Appellant had used common input services for both ... Reversal of Cenvat Credit - various option available as per Rule 6 of CCR - whether appellant is required to pay 5% of total sale value of the goods traded by them in terms of Rule 6(3)(i) when the appellant paid the actual credit attributed to the quantum trading sale in terms of Rule 6(3A) alongwith interest following the option available under Rule 6(3)(ii) - Held that:- Appellant has availed Cenvat Credit in respect of common input services, which has been used in relation to the manufacture of the final product as well as for trading of bought out cars. Therefore they are supposed to pay an amount equivalent to Cenvat Credit which is attributed to the input service used for exempted service i.e. sale of car. In our view, three options have been provided under rule 6(3) and it is up to the assessee that which option has to be availed. Revenue could not insist the appellant to avail a particular option. In the present case the appellant have admittedly availed option as provided under Rule 6(3)(ii) and paid an amount as required under sub rule (3A) of Rule 6. - as per the provision, payment on monthly basis is provisional basis, therefore it is not mandatory that whole amount or part of the amount as required to be paid on every month. The appellant though belatedly calculated the amount required to be paid in terms provided under Rule (3A) of Rule 6, therefore to fulfil the condition, assessee should pay the said amount, which has been complied by the appellant. Rule 6 of the Cenvat Credit Rules is not enacted to extract illegal amount from the assessee. The main objective of the Rule 6 is to ensure that the assessee should not avail the Cenvat Credit in respect of input or input services which are used in or in relation to the manufacture of the exempted goods or for exempted services. If this is the objective then at the most amount which is to be recovered shall not be in any case more than Cenvat Credit attributed to the input or input services used in the exempted goods. It is also observed that in either of the three options given in sub rule (3) of Rule 6, there is no provisions that if the assessee does not opt any of the option at a particular time, then option of payment of 5% will automatically be applied. Therefore we do not understand that when the appellant have categorically by way of their intimation opted for option provided under sub-rule (3)(ii), how Revenue can insist that option (3)(i) under Rule 6 should be followed by the assessee. Demand confirmed by the adjudicating authority has no legs and therefore the same can not be sustained - Decided in favour of assessee. The core legal questions considered by the Tribunal in this appeal are:1. Whether the appellant, engaged in both manufacturing and trading activities, was required to reverse Cenvat credit on input services attributable to the exempted trading activity in accordance with Rule 6 of the Cenvat Credit Rules, 2004.2. Whether the appellant validly exercised the option under Rule 6(3)(ii) read with Rule 6(3A) of the Cenvat Credit Rules, 2004 for reversal of credit attributable to exempted services, and complied with the procedural requirements therein.3. Whether the Revenue was justified in demanding an amount equivalent to 5% of the turnover of exempted services under Rule 6(3)(i) on the ground that the appellant did not comply with the procedural conditions of Rule 6(3A).4. Whether penalty and interest imposed under the Central Excise Act and Cenvat Credit Rules were sustainable.Issue-wise Detailed AnalysisIssue 1: Applicability of Rule 6 of Cenvat Credit Rules on mixed activity of manufacture and tradingThe appellant was engaged in manufacturing motor vehicles and also trading similar vehicles imported directly. The appellant availed Cenvat credit on input services used for both activities. The legal framework under Rule 6 of the Cenvat Credit Rules, 2004, mandates that where inputs or input services are used partly for manufacture of dutiable goods and partly for exempted goods or services, the manufacturer/provider shall either maintain separate accounts or follow prescribed options to reverse credit attributable to exempted goods/services.Explanation to Rule 2(e) of CCR was amended to include trading activity as exempted service effective 1/4/2011, thus requiring reversal of credit attributable to trading.The appellant admitted use of input services for both activities and reversed a portion of credit on their own accord. The department contended that the appellant did not follow the prescribed procedure for reversal and thus demanded 5% of the turnover of exempted services (trading).Issue 2: Validity of appellant's exercise of option under Rule 6(3)(ii) read with Rule 6(3A)Rule 6(3) provides three options for reversal of Cenvat credit where separate accounts are not maintained:(i) Pay 5% of value of exempted goods/services;(ii) Pay amount determined under Rule 6(3A) which calculates reversal based on input services used for exempted services;(iii) Maintain separate accounts and pay amount under Rule 6(3A) only for input services.The appellant claimed to have exercised option (ii), paying Rs. 4,06,785/- plus interest, and intimated the department accordingly.The department argued that the appellant failed to comply with procedural requirements under Rule 6(3A), including intimation at the beginning of the financial year to the jurisdictional superintendent and monthly provisional payments, thereby disentitling them from option (ii).The appellant countered that the Rules do not mandate exercising the option only at the beginning of the financial year; the date of exercising the option can be specified as per Rule 6(3A)(a)(ii). Further, the appellant submitted that the required particulars were intimated through monthly returns and a letter dated 14/3/2012, and interest was paid on delayed payments, fulfilling the procedural conditions.Issue 3: Whether Revenue could insist on application of Rule 6(3)(i) and demand 5% of exempted turnoverThe Revenue contended that since the appellant did not strictly follow the procedure under Rule 6(3A), the option (ii) was unavailable and thus Rule 6(3)(i) mandating payment of 5% of exempted turnover applied.The Tribunal examined the language and intent of Rule 6(3) and found that the appellant had clearly opted for option (ii) and paid the amount determined under Rule 6(3A) with interest. The Tribunal held that the option to choose any of the three alternatives lies with the assessee and the Revenue cannot compel the appellant to follow a particular option.The Tribunal further observed that the monthly provisional payment under Rule 6(3A)(b) is not mandatory in strict terms but a provisional mechanism, and delayed payment with interest satisfies the procedural requirement.Regarding intimation, the Tribunal found that the appellant had furnished all required particulars either by letter or through monthly ER1 returns, which were available to the department, thus fulfilling the intimation requirement.The Tribunal rejected the Revenue's contention that failure to comply strictly with procedural requirements disentitles the appellant from option (ii), noting that no provision in Rule 6 mandates automatic application of option (i) in such cases.Issue 4: Penalty and interest imposedThe Commissioner imposed interest under Section 11AA and penalty under Rule 15(2) read with Section 11AC of the Central Excise Act, 1944, on the ground of non-compliance and short reversal of Cenvat credit.The Tribunal noted that the appellant had paid the amount of credit attributable to exempted services along with interest. Since the demand for reversal beyond the actual credit attributable to exempted services was not sustainable, the penalty and interest imposed on such excess demand also could not be sustained.Key Evidence and Findings- The appellant's letter dated 14/3/2012 intimating reversal under Rule 6(3)(ii) and payment of Rs. 4,06,785/- plus interest.- Monthly ER1 returns filed by the appellant containing relevant particulars.- The admitted turnover figures for manufacturing and trading activities.- The department's failure to demonstrate that the appellant did not furnish required particulars or that the appellant's payment was not in accordance with Rule 6(3A).Application of Law to FactsThe Tribunal applied the provisions of Rule 6(3) and Rule 6(3A) of the Cenvat Credit Rules, 2004, and the relevant amendments to the definition of exempted services to the facts of mixed manufacturing and trading activities. It concluded that the appellant's self-calculated reversal and payment with interest constituted valid exercise of option (ii) under Rule 6(3). The procedural lapses, if any, were procedural in nature and cured by subsequent intimation and payment of interest.The Tribunal rejected the Revenue's attempt to impose the higher 5% reversal under option (i) on the entire trading turnover, which was disproportionate and contrary to the legislative intent of Rule 6.Treatment of Competing ArgumentsThe Tribunal carefully considered the Revenue's reliance on judicial precedents emphasizing strict compliance with procedural requirements to avail benefits under statute. However, it distinguished those precedents on facts and noted that none dealt specifically with Rule 6(3)(ii) and Rule 6(3A) in the context of mixed manufacturing and trading activities and the option exercised therein.The appellant's argument that the choice of option lies solely with the assessee and that the department cannot impose a different option was accepted. The Tribunal also noted the inconsistency in the department's approach, citing a prior order involving similar facts where proceedings were dropped.ConclusionsThe Tribunal concluded that:- The appellant was entitled to exercise option under Rule 6(3)(ii) read with Rule 6(3A) for reversal of Cenvat credit attributable to exempted services (trading activity).- The appellant complied with the procedural requirements by furnishing intimation and paying the amount along with interest, albeit belatedly.- The Revenue was not justified in demanding 5% of the total exempted turnover under Rule 6(3)(i) when the appellant had already paid reversal under option (ii).- The demand for Rs. 24,71,93,529/- and corresponding penalty and interest were unsustainable and liable to be set aside.Significant Holdings'From the perusal of the said letter, we observed that the appellant categorically stated in the said letter that payment of Cenvat Credit which they have made alongwith interest is in accordance with Rule 6 (3A) of Cenvat Credit Rules. With this act of the appellant, it is clear that the appellant opted for the option as provided under Rule 6(3)(ii) of the Cenvat Credit Rules, 2012.''Three options have been provided under rule 6(3) and it is up to the assessee that which option has to be availed. Revenue could not insist the appellant to avail a particular option.''The monthly provisional payment under Rule 6(3A)(b) is not mandatory in strict terms but a provisional mechanism, therefore it is not mandatory that whole amount or part of the amount as required to be paid on every month.''We are of the view that there is no condition provided in the rule that if a particular option, out of three options are not opted, then only option of payment of 5% provided under Rule 6(3)(i) shall be compulsorily made applicable.''Any amount, over and above Rs. 4,06,785/- is not the part of the Cenvat Credit, which required to be reversed. The legislator has not enacted any provision by which Cenvat credit, which is other than the credit attributed to input services used in exempted goods or services; can be recovered from the assessee.''The impugned order is set aside and Appeal is allowed.'