Service tax demand upheld on common input services but excess credit utilization demand dropped under Rule 6(3)(c)

CESTAT Ahmedabad held that dropping demand of Rs. 59,32,265/- for excess 20% credit utilization under Rule 6(3)(c) of Cenvat Credit Rules, 2004 was proper, as post-amendment in 2008, such restrictions were removed making the demand purposeless. However, service tax demand of Rs. 72,18,957/- on common input services used for both taxable and exempted activities (trading) was upheld on merits, but limited to normal period due to lack of suppression evidence. The assessee failed to establish separate usage documentation for common services. Appeal partly allowed with demand restricted to normal limitation period.

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Issues Involved:
1. Appeal by the department regarding the dropping of demand of Rs. 59,32,265/- for the period 2007-08.
2. Confirmation of demand of Rs. 72,18,957/- for the period April 2007 to March 2012.
3. Invocation of extended period for issuing the show cause notice.

Summary of Judgment:

Issue 1: Appeal by the Department on Dropping of Demand of Rs. 59,32,265/-
The first issue concerns the department's appeal against the Original Authority's decision to drop the demand of Rs. 59,32,265/- for the period 2007-08, alleging excess utilization of Cenvat credit beyond the permissible 20% limit under Rule 6(3)(c) of the Cenvat Credit Rules, 2004. The Tribunal referenced prior cases (M/s Duraflex Services and Construction Technologies Ltd. and M/s Tinna Oils and Chemicals Ltd.) where it was held that assessees were not barred from taking credit but only from utilizing it beyond 20%. The remaining 80% could be utilized in subsequent financial years. Given the significant time lapse, the Tribunal found the department's appeal to be purposeless and upheld the Original Authority's decision to drop the demand. Consequently, the department's appeal was dismissed.

Issue 2: Confirmation of Demand of Rs. 72,18,957/-
The second issue involves the confirmation of a demand of Rs. 72,18,957/- for the period April 2007 to March 2012. The department alleged that the assessee used common input services for both taxable services and exempted services (generation/sale of electricity and trading of raw salt). The Tribunal held that the burden of proof was on the assessee to demonstrate that common input services were not used for exempted activities. The assessee's argument that input services were used exclusively in Gandhidham and not for activities in Tamil Nadu was found to be unconvincing. Thus, the issue on merit was decided against the assessee and in favor of the Revenue.

Issue 3: Invocation of Extended Period
On the ground of limitation, the Tribunal considered whether the extended period for issuing the show cause notice was justified. The Tribunal noted that the definition of exempted services was amended to include trading from 01.04.2011, and the show cause notice was issued on 18.10.2012. The Tribunal found that the assessee had disclosed all transactions in their accounts and financial statements, and there was no specific allegation of suppression of facts with intent to evade payment of duty. Citing precedents (M/s Musaddilal Projects LTD., M/s Dynamic Industries Ltd., and M/s ZYG Pharma Pvt. Ltd.), the Tribunal held that the extended period could not be invoked. The demand for the extended period was set aside, but the adjudicating authority was directed to verify and quantify the demand within the normal period. Interest for the normal period was sustained, and penalties were entirely set aside.

Conclusion:
The impugned order was modified to limit the demand and interest to the normal period. The appeal by the assessee was partly allowed, and the appeal by the department was dismissed. The judgment was pronounced in the open court on 19.02.2024.

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