2023 (8) TMI 1140 - HC - Central Excise

Applicability of amendment to Rule 6 CENVAT Credit Rules for common input services allows retrospective reversal or 5% option upheld.

Amendments to Rule 6 of the CENVAT Credit Rules clarified options where common inputs and input services are used for both dutiable and exempted goods: ... Applicability of amendment to Rule 6 of the CENVAT Credit Rules, 2004 with retrospective effect - manufacture of dutiable excisable goods as well as exempted goods, consuming common Cenvated inputs and input services - non-maintenance of separate accounts in respect of input services used / consumed in or in relation to manufacture of excisable and exempted finished goods - procedure specified in sub-rule (3A) of Rule 6 of the CCR 2004 not followed. The periods subject matter of the show cause notice in question are the periods beginning with 10 September 2004 till 31 March 2008 and the subsequent period post 1 April 2008 upto 31 December 2010. HELD THAT:- Rule 6 underwent an amendment in the year 2006, 2007 and in the year 2008. It is relevant to note the amendment as brought about to subrule (3) and incorporation of Rule 3A - It is clearly seen from the reading of sub Rule (3A) of Rule 6 which was introduced for determination of payment of amount payable under clause (ii) of sub-rule (3), that the manufacturer of goods or the provider of output service shall follow the procedure and conditions as set out therein. Further Rule 6 was retrospectively amended by the Finance Act, 2010 which enabled the respondent to make adjustment, namely, that even if the respondent failed to maintain a separate account, in view of the retrospective amendment, it was entitled to reverse the proportionate cenvat credit or option of paying an amount equal to 10% on exempted goods, and that could not have been enforced on the assessee. In the facts of the present case, it is clear from the record and as rightly observed by the CESTAT that under Rule 6 of the CCR, 2004, as amended from time to time, in case of common input services used for manufacture of both exempted and dutiable goods, the respondent had three options available, firstly, to maintain separate accounts in respect of the common inputs and input services used for manufacture of exempted & dutiable goods and taxable and exempted service (Rule 6 (2)); or secondly, to reverse the proportionate Cenvat credit in respect of the inputs and input services used for proving exempted goods and exempted services, by following the procedure as prescribed by Rule 6(3)(ii); or thirdly, to reverse the Cenvat credit at the rate of 5% (earlier 10%) of value of exempted goods under Rule 6 (3)(i) as amended from 1 April 2008. It is clear that the respondent was not maintaining separate account in respect of input services used by it, hence, the available option for the respondent was to reverse the proportionate cenvat credit as applicable either under Rule 6(3)(i) or Rule 6(3)(ii). It is also clear that the benefit of reversing the proportionate credit was extended with retrospective effect in cases where common input and input services were used for dutiable and exempted products. Insofar as the period from 1 April 2008 to 31 December 2010 is concerned, even prior to issuance of a show cause notice, the respondent had reversed the entire amount of proportionate credit alongwith interest due in respect of the said period namely an amount of Rs. 1,22,98,068/- plus Rs. 17,49,730/-. What was imperative was not issuance of a show cause notice but the pendency of dispute relating to adjustment of credit of input used or exemption on final product relating to the period beginning from 10 September 2004 and ending on 31 March 2008 (both days inclusive), being the pending date on which the Finance Bill received assent of the President. It is rightly observed by the CESTAT that when for such period the dispute has arisen only in such event, a show cause notice was issued and hence, the case of the respondent for the period 2007-08 was covered by the amendment made by way of insertion of subrule (7) of Rule 6 of CCR, 2004 by the 2010 Amendment. The respondent would be correct in its contention when it submits that in a similar situation the Division Bench of this Court on applicability of Rule 6 had held against the revenue and in favour of the assessee in the case of THE COMMISSIONER OF CENTRAL EXCISE, MUMBAI VERSUS M/S. IVP LIMITED [2017 (3) TMI 234 - BOMBAY HIGH COURT] as also in the case of THE COMMISSIONER OF CENTRAL EXCISE VERSUS M/S. NICHOLAS PIRAMAL LTD. [2016 (10) TMI 827 - BOMBAY HIGH COURT]. The question is answered in favour of the assessee and against the revenue - appeal dismissed. Issues Involved:1. Applicability of Rule 6 of the CENVAT Credit Rules, 2004, as retrospectively amended by the Finance Act, 2010.2. Requirement to maintain separate accounts for input services used in the manufacture of exempted and dutiable goods.3. Validity of proportionate reversal of CENVAT credit.4. Imposition of penalty and interest for non-compliance with Rule 6 of the CENVAT Credit Rules, 2004.Summary:1. Applicability of Rule 6 of the CENVAT Credit Rules, 2004, as retrospectively amended by the Finance Act, 2010:The primary issue was whether the retrospective amendment to Rule 6 of the CENVAT Credit Rules, 2004, by the Finance Act, 2010, applied to the case. The Court noted that Rule 6 underwent amendments in 2006, 2007, and 2008, and the Finance Act, 2010, allowed proportionate reversal of CENVAT credit retrospectively. The Court found that this amendment was applicable to the respondent's case, permitting proportionate reversal of credit for common inputs and input services used for both dutiable and exempted goods.2. Requirement to maintain separate accounts for input services used in the manufacture of exempted and dutiable goods:The respondent did not maintain separate accounts for input services used in the manufacture of exempted and dutiable goods. The Court observed that Rule 6 provided three options: maintaining separate accounts, proportionate reversal of CENVAT credit, or paying an amount equal to a percentage of the value of exempted goods. The respondent chose to reverse the proportionate credit, which was permissible under the amended Rule 6.3. Validity of proportionate reversal of CENVAT credit:The Court found that the respondent had appropriately reversed the proportionate credit along with interest for the period from 1 April 2008 to 31 December 2010, even before the issuance of the show cause notice. For the period prior to 1 April 2008, the respondent was permitted the benefit of proportionate reversal with retrospective effect. The Court upheld the CESTAT's decision that the respondent's actions were in compliance with the amended Rule 6.4. Imposition of penalty and interest for non-compliance with Rule 6 of the CENVAT Credit Rules, 2004:The Commissioner of Central Excise had imposed a penalty and demanded interest for non-compliance with Rule 6. However, the Court noted that the respondent had reversed the credit and paid the interest as required under the amended rules. Therefore, the imposition of penalty and additional interest was not justified.Conclusion:The Court dismissed the appeal, upholding the CESTAT's decision in favor of the respondent. The retrospective amendment to Rule 6 of the CENVAT Credit Rules, 2004, allowed the respondent to proportionately reverse the CENVAT credit, and the respondent had complied with the requirements of the amended rules. The imposition of penalty and additional interest by the Commissioner was not warranted.