Exempted service under CENVAT law did not cover abated accommodation and restaurant services, defeating Rule 6 reversal.

Accommodation service taken with abatement under Notification No. 26/2012, subject to non-availment of credit on inputs and capital goods, was not treated as an exempted service because the relevant credit restriction was complied with. Restaurant service, where valuation was statutorily fixed at 40% under Rule 2C of the Service Tax (Determination of Value) Rules, 2006 and credit on specified inputs was restricted, also did not fall within exempted service under Rule 2(e). On that basis, Rule 6 of the CENVAT Credit Rules, 2004 was held inapplicable, and the demand, interest, and penalty were unsustainable.

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Issues: Whether accommodation service and restaurant service, as dealt with in the case, fell within the definition of exempted service so as to attract the requirement of maintaining separate accounts and reversal under Rule 6 of the CENVAT Credit Rules, 2004.

Analysis: The definition of exempted service covers services wholly exempt from service tax, services in the negative list, and services where part of the value is exempted by abatement subject to non-availment of credit on inputs and input services. The accommodation service was availed under Notification No. 26/2012 with abatement on the condition that credit on inputs and capital goods was not taken, and no credit on those items had in fact been availed. For restaurant service, the taxable value was statutorily fixed at 40% under Rule 2C of the Service Tax (Determination of Value) Rules, 2006, with the only relevant restriction being non-availment of credit on specified inputs. Such valuation did not amount to an exempted service within the meaning of Rule 2(e).

Conclusion: Rule 6 of the CENVAT Credit Rules, 2004 was not applicable, and the demand, interest, and penalty were unsustainable.

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