2020 (3) TMI 146 - AT - Central Excise

Tribunal rules in favor of appellant on CENVAT credit eligibility and penalty imposition under Rule 6(5).

The Tribunal ruled in favor of the appellant regarding the eligibility of CENVAT credit on common input services under Rule 6(5) of CENVAT Credit Rules, ... Admissibility of CENVAT credit under Rule 6(5) of the CENVAT Credit Rules, 2004 - Apportionment of input service credit under Rule 6(3A)(c)(iii) of the CENVAT Credit Rules, 2004 - Determination of 'value' for trading for purposes of sub-rule (3A) - exclusion of value of goods and inclusion of ancillary/incidentals - Extended period of limitation for recovery of CENVAT credit - Penalty not leviable where credit taken under bona fide interpretation of lawAdmissibility of CENVAT credit under Rule 6(5) of the CENVAT Credit Rules, 2004 - CENVAT credit on common input services used for both taxable and exempted activities - Whether services enumerated in sub-rule (5) of Rule 6 are entitled to full CENVAT credit even when used partly for exempted activity (trading) and partly for taxable manufacture/services - HELD THAT: - The Court examined sub-rule (5) which begins with a non-obstante clause and provides that credit of the whole of service tax paid on specified input services shall be allowed unless such service is used exclusively in or in relation to manufacture of exempted goods or providing exempted services. The Tribunal held, and this Court agrees, that where the listed input services are not used exclusively for exempted activities, the fiction created by sub-rule (5) treats those services as deemed to be used for taxable activity and renders inapplicable the rigour of sub-rules (1)-(3). Consequently, common input services falling within sub-rule (5) are admissible for CENVAT credit unless shown to be used exclusively in relation to exempted goods/services. No contrary finding was recorded that the appellant had used the listed services exclusively for exempted activity; the appellant had reversed credit where exclusivity existed. The Revenue's contention that Rule 3 negates applicability of sub-rule (5) is a misconstruction: eligibility under Rule 3 is a precondition, and Rule 6(5) operates as an exception to the apportionment mechanism where the listed services are not exclusively used for exempted purposes. [Paras 11, 12, 13]Credit on the input services specified in Rule 6(5) is admissible unless such services are used exclusively for exempted goods/services; therefore the appellant's claim to credit on those common input services is sustainable on that ground.Apportionment of input service credit under Rule 6(3A)(c)(iii) of the CENVAT Credit Rules, 2004 - Determination of 'value' for trading for purposes of sub-rule (3A) - Inclusion of ancillary and incidental service costs; exclusion of value of goods - How CENVAT credit attributable to exempted trading activity (import and sale of CBUs) is to be apportioned for the period 01.04.2008 to 31.03.2011 and whether the post-01.04.2011 formula (and its definition of 'value') can be applied retrospectively - HELD THAT: - The determinative controversy is the construction of 'value' for trading in sub-rule (3A)(c)(iii) for apportioning input service credit. For the period 01.04.2008-31.03.2011 there was no specific statutory definition of value for trading in the Rule; the statutory scheme requires that the 'value' of a service ordinarily cannot include the price of goods used in rendering the service (Section 67 principles). Applying that principle, the Tribunal held and this Court endorses that while apportioning credit attributable to trading, the value of trading should not include the value of the imported goods themselves but should include the total of ancillary and incidental services/expenses incurred in effecting the trading transaction. The amendment effective 01.04.2011 (introducing a specific test for trading-value) confirms this approach but is substantive and cannot be mechanically applied retrospectively to alter the statutory position prior to its coming into force. Because the precise month wise computation and inclusion (or exclusion) of items such as taxable output service value and scrap were not carried out below, and the High Court had directed reconsideration of numerator/denominator, the Tribunal remanded the matter to the adjudicating authority to determine finally the amount payable for the normal period by applying the principles set out (i.e., exclude value of goods, include ancillary/incidentals, and give effect to Explanation I principles for the relevant period). The adjudicating authority is also directed to consider inclusion of taxable output service value and scrap where relevant while computing the denominator. [Paras 18, 19, 21, 24]Computation of proportionate CENVAT credit under Rule 6(3A)(c)(iii) for 01.04.2008-31.03.2011 is to be remanded to the adjudicating authority for fresh determination applying the Court's ratio (exclude value of goods; include ancillary/incidental service costs) and taking into account taxable output services and scrap as appropriate.Extended period of limitation for recovery of CENVAT credit - Penalty for wrongful availment where credit taken pursuant to bona fide interpretation - Whether recovery for the earliest show-cause period (01.03.2005-31.03.2009) is barred by extended limitation and whether penalty is leviable - HELD THAT: - The Tribunal examined the facts that trading permission had been disclosed to the Department in 2001 and that the question whether trading attracted Rule 6 reversal was a matter of legal interpretation actively litigated and supported by decisions favourable to the assessee during the relevant period. In those circumstances the Court found that there was no suppression or misdeclaration of facts and that the appellant had taken credit pursuant to a bona fide interpretation of law. Accordingly, invocation of extended limitation and imposition of penalty were held to be unwarranted. The Revenue's appeal for enhancement of penalty was rejected. [Paras 23]Extended period of limitation for recovery is not attracted for the first show-cause period; penalty is not exigible where credit was taken under bona fide interpretation - Revenue's appeal for enhancement of penalty rejected.Final Conclusion: The appeals are disposed by (a) holding that input services specified in Rule 6(5) are eligible for full CENVAT credit unless exclusively used for exempted goods/services, (b) rejecting Revenue's claim to extended limitation and enhancement of penalty on the facts and law, and (c) remitting the question of quantification of proportionate input service credit for 01.04.2008-31.03.2011 to the adjudicating authority to compute the amount in accordance with the legal principles stated (exclude value of goods, include ancillary/incidentals, consider taxable services and scrap), with no penalty to be imposed for the periods considered. Issues Involved:1. Eligibility of CENVAT Credit on common input services under Rule 6(5) of CENVAT Credit Rules, 2004.2. Calculation of proportionate CENVAT Credit attributable to trading of imported cars.3. Inclusion of sale of scrap and value of taxable output services in the denominator while computing the reversal of credit.4. Application of the extended period of limitation for the first Show Cause Notice.5. Imposition of penalty on the appellant.Detailed Analysis:1. Eligibility of CENVAT Credit on Common Input Services under Rule 6(5):The appellant contended that they are entitled to CENVAT Credit on various input services utilized for both taxable output services and trading of imported cars, as specified in Rule 6(5) of CENVAT Credit Rules, 2004. The Tribunal agreed, stating that credit on services listed under Rule 6(5) is admissible even if used for both exempted and taxable services, due to the non-obstante clause in the rule. The Tribunal found no contrary evidence from the authorities to the appellant's claim of reversing credit on services used exclusively for exempted services.2. Calculation of Proportionate CENVAT Credit Attributable to Trading of Imported Cars:The appellant argued that the formula prescribed under Rule 6(3A) of CENVAT Credit Rules, 2004 should consider only the margin of value addition of traded cars, not the total turnover. The Tribunal analyzed the rules and concluded that the value of traded goods should not include the cost of the imported cars but should include the value of incidental and ancillary services incurred in trading. The Tribunal rejected the appellant's argument to limit the value to trade/profit margin, emphasizing that it should also include the value of services related to trading.3. Inclusion of Sale of Scrap and Value of Taxable Output Services:The appellant contended that the value of scrap sold on payment of duty and the value of taxable output services were not considered in the impugned order. The Tribunal noted that this aspect was not addressed by the adjudicating authority and remanded the matter for reconsideration, instructing the Commissioner to include these values in the denominator while computing the reversal of credit.4. Application of the Extended Period of Limitation for the First Show Cause Notice:The appellant argued that the first Show Cause Notice for the period 01.03.2005 to 31.03.2008 was barred by limitation, as the fact of trading was disclosed to the department, and the issue involved interpretation of law. The Tribunal found merit in this argument, noting that the appellant had communicated the trading activity to the department and obtained necessary permissions. The Tribunal concluded that there was no suppression or misdeclaration of facts, and the issue involved a question of law interpretation. Hence, the extended period of limitation was not applicable, and only the normal period could be sustained.5. Imposition of Penalty on the Appellant:Given the Tribunal's findings on the issues of eligibility of credit, calculation methodology, and limitation period, it concluded that the imposition of penalty was unwarranted and unjustified. The Tribunal emphasized that the issue involved interpretation of law and there was no suppression of facts by the appellant.Conclusion:The Tribunal modified the impugned orders, rejecting the Revenue's appeal for enhancement of penalty and remanding the matter to the adjudicating authority to re-determine the quantum of CENVAT Credit attributable to the sale of imported cars, considering the principles discussed and limiting it to the normal period of limitation. The Tribunal clarified that no penalty was imposable in the present circumstances.