Tribunal rules in favor of cooperative bank on Cenvat credit dispute

The tribunal set aside the demand for payment equal to 8%/6% on the exempted service value by ruling that Rule 6(3)(ii) did not apply as the interest on lending services was only partially exempted. It was held that the appellant, a cooperative bank, providing banking and financial services, had correctly availed Cenvat credit on specified services. The tribunal emphasized that denial of Cenvat credit for input services used in partially exempted services was unjustified. Consequently, the tribunal allowed the appeal, rejecting the Revenue's argument and emphasizing that Rule 6(3)(ii) does not apply to services only partially exempt from service tax.

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Issues:
1. Whether the appellant is liable to pay an amount equal to 8%/6% on the value of exempted service provided by them under Rule 6 of Cenvat Credit Rules, 2004.
2. Whether the appellant availed Cenvat credit only on specified services under Rule 6(5) of Cenvat Credit Rules, 2004, and if Rule 6(3) is applicable.
3. Interpretation of Notification No. 29/2004-ST dated 22-9-2004 exempting interest on lending services from service tax.
4. Application of Rule 6(3)(ii) in cases of exempted services.

Analysis:
1. The case involved the appellant, a cooperative bank, providing banking and financial services while availing Cenvat credit. The department contended that interest accrued on lending services was exempt from service tax, leading to a demand of payment equal to 8%/6% on the exempted service value. The tribunal found that since the main service provided was banking and financial services, including lending, which was partially exempted by Notification No. 29/2004-ST, the application of Rule 6(3)(ii) was incorrect as it applies to wholly exempted services. The tribunal set aside the demand as the interest was only a part of the lending service exempted, making Rule 6(3) inapplicable.

2. The appellant argued that they availed Cenvat credit only on specified services under Rule 6(5) of Cenvat Credit Rules, 2004, and had already paid the Cenvat credit with interest, thus Rule 6(3) should not apply. The tribunal agreed, stating that if the appellant reversed the Cenvat credit along with interest, the option of 8%/6% payment was not sustainable. Additionally, even if the input service was used for exempted services, denial of Cenvat credit was not justified, as per the tribunal's previous judgment in a similar case.

3. The interpretation of Notification No. 29/2004-ST was crucial in determining the exemption of interest on lending services from service tax. The tribunal noted that the notification only exempted a part of the value of taxable service, specifically the interest component. As the lending service was taxable, with only the interest being exempted, the application of Rule 6(3)(ii) was deemed incorrect by the tribunal.

4. The tribunal rejected the Revenue's argument based on a previous judgment, emphasizing that Rule 6(3)(ii) applies when a common input service is used in a service wholly exempt from service tax. Since the lending service was only partially exempt due to interest, Rule 6(3) did not apply. The tribunal cited a similar case to support its decision, highlighting that the service was not fully exempted, but only a portion of the value was exempted, rendering the demand for 8%/6% payment unsustainable. Ultimately, the tribunal set aside the impugned order and allowed the appeal.

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