Cenvat credit dispute over common input services and separate accounts u/r 6(3); forced 5/6% payment rejected

Demand under Rule 6(3) of the Cenvat Credit Rules, 2004 for alleged non-maintenance of separate accounts for common input services used for taxable and exempted output services turned on whether the department could mechanically compel payment of the prescribed percentage (5/6%) for exempted services. Relying on HC authority and Tribunal precedent, it was held that even if Rule 6(3) compliance was disputed, the adjudicating authority could only disallow the disputed credit on merits and could not thrust the percentage-payment option on the assessee. The impugned order was set aside and the appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1. Whether, in a case of common input services used for taxable services and trading activity, and where separate accounts under Rule 6(2) of the Cenvat Credit Rules, 2004 were not maintained, the adjudicating authority could confirm demand by mechanically applying the "5%/6% of the value of exempted services" option under Rule 6(3) against the assessee.

2. Whether, once the demand founded on such application of Rule 6(3) was found unsustainable on merits, it was necessary to decide the assessee's limitation challenge (extended period).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability and enforceability of Rule 6(3) option (5%/6% payment) where separate accounts are not maintained

Legal framework (as discussed by the Court): The Court examined Rule 6 of the Cenvat Credit Rules, 2004 as dealing with obligations where inputs/input services are used for both taxable output services and exempted services, including the requirement of maintaining separate accounts under Rule 6(2) and the availability of options under Rule 6(3) if separate accounts are not maintained.

Interpretation and reasoning: The Court treated the controlling principle as settled by the High Court decision it relied upon: Rule 6(3) provides options to the assessee; it does not contemplate the service tax authorities selecting an option on the assessee's behalf and raising demand by applying the 5%/6% mechanism mechanically. If the assessee does not comply with Rule 6(3), the adjudicating authority may reject the assessee's claim to the disputed Cenvat credit and recover wrongly taken/used credit under the appropriate mechanism, but cannot "thrust" the 5%/6% option merely because separate accounts were not maintained.

Conclusions: The Court held the present facts to be squarely covered by the above settled position and concluded that confirmation of demand by applying the 5%/6% Rule 6(3) option against the assessee was not sustainable. Accordingly, the impugned order confirming demand, interest and penalty on that basis was set aside, and the appeal was allowed with consequential relief as per law.

Issue 2: Need to decide extended limitation after allowing appeal on merits

Interpretation and reasoning: Having held that the demand itself could not be sustained on the substantive Rule 6(3) ground, the Court found it unnecessary to examine the assessee's argument on invocation of the extended period of limitation.

Conclusions: The limitation issue was expressly not decided, as the appeal succeeded on merits and the impugned order was set aside.

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