Tribunal allows appeal on CENVAT credit dispute, upholds redetermination order but sets aside penalty under Rule 6(3AA)

CESTAT Mumbai-AT partially allowed appellant's appeal regarding inadmissible CENVAT credit on input services used for manufacturing dutiable goods and providing exempted trading services. Appellant paid service tax on royalty charges for domestically manufactured and imported bottle closures but failed to maintain separate accounts as required under Rule 6(2) of CCR, 2004. The appellant had already calculated and paid the required amount under Rule 6(3) including interest and penalty before the show cause notice was issued. The Tribunal upheld the Commissioner (Appeals) order directing redetermination of correct CENVAT amount after considering appellant's payment and chosen option under Rule 6(3AA), but set aside the penalty portion.

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Issues Involved:
1. Whether the demand of CENVAT credit towards payment of prescribed amount in respect of exempted services, arising out of trading of goods, for the disputed period, which was also paid by appellants later along with interest and penalty, is proper and in compliance with legal provisions under Rule 6(3) of the CCR, 2004 read with Section 11A of the Central Excise Act, 1944.
2. Whether the amount is required to be redetermined as held in the impugned order.

Issue-Wise Detailed Analysis:

1. Demand of CENVAT Credit and Compliance with Legal Provisions:
The appellants, engaged in the manufacture and clearance of dutiable goods, were observed by the department to have trading sales of imported bottle closures valued at Rs. 7,19,38,951 during the FY 2016-17. The department interpreted this as an exempted service under Section 66D(e) of the Finance Act, 1994. The appellants included the traded value in the royalty value payable to overseas principals and availed credit of service tax paid on such royalty charges. The department concluded that the appellants failed to maintain separate records for input services used in the manufacture of dutiable goods and provision of exempted services, thus requiring them to reverse a prescribed proportion of the value of exempted services under Rule 6 of the CCR, 2004.

The original authority confirmed the demands proposed in the SCN, citing the appellants' failure to maintain separate accounts and disclose the amount of CENVAT credit availed. The authority held that the appellants were guilty of suppression of facts, invoking Section 11A(4) of the Central Excise Act, 1944 read with Rule 14 of the CCR for demand and recovery of CENVAT amount. The quantification of the amount determined as payable involved calculating the maximum of either the difference between the sale price and cost price of the traded goods or 10% of the cost of the traded goods. The original authority found that the appellants were required to reverse 7% of Rs. 71,55,278, amounting to Rs. 5,00,869.

Upon appeal, the Commissioner (Appeals) upheld the order of the original authority but modified it, directing the appellants to submit a calculation sheet for the amount to be paid in terms of Rule 6(3A) of the CCR, 2004 for verification and redetermination of the amount to be reversed.

The Tribunal found that the appellants had duly followed the procedure and conditions prescribed under the CENVAT Credit Rules, 2004, and had complied with the payment of CENVAT credit along with interest and penalty when pointed out by the audit wing. The Tribunal noted discrepancies in the figures used by the authorities below and found that the original order did not record the basis for dealing with the demand as proposed in the SCN. The Tribunal upheld the decision of the Commissioner (Appeals) to redetermine the correct amount of CENVAT to be paid under Rule 6(3) of the CCR, 2004.

2. Redetermination of the Amount:
The appellants argued that they had reversed the proportionate CENVAT credit of Rs. 2,24,435 and paid interest and penalty before the issuance of the SCN. They contended that trading activity should not be considered a service and that there was no element of suppression on their part. The Tribunal found that the dispute lay in determining the correct amount to be paid under Rule 6(3) of the CCR, 2004. The Tribunal noted that the SCN mentioned the disputed period as 2016-2017, while the worksheet provided by the appellants covered only seven months. The Tribunal emphasized the need to take into account the higher of the two amounts indicated under clause (c) of Explanation I to Rule 6(3) of the CCR, 2004 for determining the value in case of trading of goods.

The Tribunal upheld the impugned order directing the original authority to redetermine the actual amount of CENVAT to be paid under Rule 6(3) of the CCR, 2004, after considering the option chosen by the appellants under Rule 6(3AA). The Tribunal also found support in the decisions of the Tribunal in Bisazza India Pvt. Ltd. and BHEL-GE Gas Turbine Services Pvt. Ltd., which held that the discretion of choosing the method of compliance with Rule 6 lies with the assessee and that reversal of CENVAT credit amount towards trading of goods should be construed as no CENVAT credit taken.

The Tribunal set aside the portion of the impugned order imposing a penalty on the appellants, finding no basis for such imposition under Section 11AC of the Central Excise Act, 1944.

Conclusion:
The Tribunal modified the impugned order to the extent that it directed the original authority to redetermine the actual amount of CENVAT to be paid under Rule 6(3) of the CCR, 2004, after considering the option chosen by the appellants. The portion of the impugned order imposing a penalty on the appellants was set aside, and the appeal filed by the appellants was partly allowed.

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