CESTAT rules in favor of Vodafone Mobile Services Ltd. on CENVAT Credit limit challenge

The appellant, M/s. Vodafone Mobile Services Ltd., challenged the demand for utilizing CENVAT Credit exceeding the 20% limit under Rule 6(3)(c) of the CENVAT Credit Rules, 2004. The CESTAT ruled in favor of the appellant, holding that the 20% ceiling did not apply to capital goods and specified input services. The demand was deemed unjustified, and the extended period of limitation could not be invoked without evidence of suppression. Consequently, the appeal was allowed, and the order was set aside.

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Issues Involved:
1. Whether the appellant utilized CENVAT Credit in excess of the 20% limit prescribed under Rule 6(3)(c) of the CENVAT Credit Rules, 2004.
2. Whether the consequential demand for recovery of the alleged credit used in excess of 20% is justified.
3. Whether the extended period of limitation can be invoked due to alleged suppression of facts by the appellant.

Summary:

Issue 1: Utilization of CENVAT Credit in excess of 20% limit under Rule 6(3)(c)
The appellant, M/s. Vodafone Mobile Services Ltd., was accused of utilizing CENVAT Credit exceeding the 20% limit prescribed under Rule 6(3)(c) of the CENVAT Credit Rules, 2004, for the period from April 2005 to May 2007. The Revenue alleged that the appellant did not maintain separate accounts for taxable and exempted services, thus violating the rule. The appellant contended that Rule 6(3)(c) did not apply to credit availed on capital goods and certain input services specified under Rule 6(5). The Principal Bench of CESTAT in M/s. Idea Cellular Ltd. v. Commissioner of Central Excise, Rohtak supported this view, stating that the 20% ceiling did not apply to capital goods and specified input services.

Issue 2: Justification of the consequential demand
The Commissioner of Service Tax confirmed the demand based on the assumption that the entire credit utilization pertained to inputs and input services. However, the appellant argued that the demand was incorrect as the restriction under Rule 6(3)(c) did not apply to capital goods credit. The Commissioner had previously dropped a similar demand in another Show Cause Notice (No. 71/2008) but confirmed the demand in the current Show Cause Notice (No. 14/2010) without providing a consistent rationale. The CESTAT found this inconsistent approach unjustified and held that the restriction under Rule 6(3)(c) did not apply to capital goods and specified input services.

Issue 3: Invocation of the extended period of limitation
The appellant argued that the demand was barred by limitation as the extended period could not be invoked without evidence of suppression. The Commissioner had contradictory stands, acknowledging the Department's awareness of the appellant's activities in one instance but denying it in another. The CESTAT found no documentary evidence to support the allegation of suppression and held that mere inaction or failure on the part of the appellant did not justify invoking the extended period.

Conclusion:
The CESTAT concluded that the demand and the impugned order could not sustain either on merits or on limitation grounds. The appeal was allowed, and the order was set aside.

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