Cenvat credit on input services for works contract service could not be denied on presumptions or later partial exemption reasoning.

Cenvat credit reversal could not be sustained on a presumption of common use where the Revenue failed to identify specific common inputs or input services. Site-wise records and a Chartered Accountant's certificate showed that credit was taken only for sites where works contract service tax was paid and not for exempt construction services, so the alleged wrongful availment failed. Credit on input services used for works contract service was also held permissible on the facts, and the later concept of partial exemption could not be applied retrospectively to the period in dispute. The demand and penalties were set aside.

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Issues: (i) Whether the appellant had failed to maintain separate records and wrongly availed Cenvat credit in relation to taxable and exempted services; (ii) Whether Cenvat credit on input services used for works contract service was admissible and whether the concept of partial exemption could be applied to the relevant period.

Issue (i): Whether the appellant had failed to maintain separate records and wrongly availed Cenvat credit in relation to taxable and exempted services.

Analysis: The demand was founded mainly on ST-3 returns and on an assumption that common credit had been taken without identifying the specific common inputs or input services. The appellant produced site-wise records and a Chartered Accountant's certificate stating that credit was taken only for sites where works contract service tax was discharged and that no credit was taken for sites covered by exemption under the relevant notification. The records did not support a finding that credit had been availed for exempted construction services in the manner alleged.

Conclusion: The finding of wrongful availment of Cenvat credit on this basis was not sustainable and was against the Revenue.

Issue (ii): Whether Cenvat credit on input services used for works contract service was admissible and whether the concept of partial exemption could be applied to the relevant period.

Analysis: The relevant definition of exempted services did not then incorporate a concept of partial exemption, and that concept was introduced only later. Under the works contract composition scheme, the restriction was on credit of inputs used in the works contract, not on input services. The appellant's case was that credit on input services was taken only for works contract service and not for exempt construction services, and this position was not effectively rebutted by the show cause notices or the impugned order.

Conclusion: Credit on input services for works contract service was permissible on the facts, and the partial exemption reasoning could not be applied to the period in dispute; this issue was decided in favour of the appellant.

Final Conclusion: The confirmation of demand and penalties could not survive, and the appeals were entitled to succeed.

Ratio Decidendi: A demand of reversal of credit cannot be sustained on presumptions where the record does not identify the specific common inputs or input services and where the assessee shows, with contemporaneous records and professional certification, that credit was not taken for exempt services; a later concept of partial exemption cannot be retrospectively applied to an earlier period.

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