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: maintain separate accounts for such inputs, reverse proportionate Cenvat credit following prescribed apportionment procedure, or reverse a fixed percentage of value for exempted goods. The 2010 retrospective amendment enabled adjustment even where separate accounts were not maintained, permitting reversal of proportionate credit or payment of the fixed-rate alternative for relevant pre-2010 periods. The respondent had reversed proportionate credit for periods from April 2008 onwards and the dispute for earlier periods was covered by the retrospective amendment; the appeal was dismissed and decided in favour of the assessee.

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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.

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