Proportionate credit under Rule 6(3A)(c) applies only to common input services, not total credit taken

CESTAT Bangalore allowed the appeal regarding calculation of proportionate credit attributable to exempted services under Rule 6(3A)(c) of CCR, 2004. The Tribunal held that factor P in the formula refers only to credit on common input services used for both taxable and exempted services, not total credit including services exclusively used for taxable output services. The adjudicating authority erred in calculating total turnover of traded goods as trading service value instead of following Rule 6 Explanation 1(c), and in considering total credit taken rather than credit on common input services. Since appellant had already reversed the proportionate credit amount as required, the demand was unsustainable.

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Issues Involved:

1. Whether the computation of proportionate credit attributable to exempted services under Rule 6(3A)(c) of the Cenvat Credit Rules, 2004, should include total credit availed on both taxable and common input services or only on common input services.

Issue-wise Detailed Analysis:

1. Computation of Proportionate Credit:

The central issue in this appeal concerns the proper calculation of the proportionate Cenvat credit attributable to exempted services under Rule 6(3A)(c) of the Cenvat Credit Rules, 2004 (CCR). The appellant argued that they have reversed the proportionate Cenvat credit availed on common input services attributable to exempted services, following the formula prescribed under Rule 6(3A) of CCR, 2004. The appellant contended that the total Cenvat credit taken should include only the credit on common input services and not the credit taken on services used exclusively for taxable services.

The Department, however, argued that the computation of proportionate credit should include the total Cenvat credit taken on input services during the financial year, which encompasses both common input services and those used exclusively for taxable services. The Department's position was that the factor 'P' in the formula should denote the total Cenvat credit taken on input services, including credit on taxable services.

The Tribunal, referencing a series of cases, consistently held that the factor 'P' in the formula under Rule 6(3A) should only include the credit taken on common input services used for both taxable and exempted services. It should not encompass credit taken on input services exclusively used for providing taxable output services. The Tribunal cited the case of ThyssenKrupp Industries India Pvt. Ltd., where it was observed that the determination of the value of factors "M", "N", & "P" in the formula should be limited to common input services.

Further, the Tribunal referred to the decision in E-Connect Systems, which clarified that the total Cenvat credit for the purpose of the formula under Rule 6(3A) should only include the credit of common input services and not credit on input services used exclusively for taxable services. The rationale is that Rule 6(1) prohibits credit on input services used for exempted services, thus credit is allowed only for services pertaining to taxable services.

The amendment to Rule 6(3A) in 2016, which was deemed clarificatory and thus applicable retrospectively, further supports this interpretation. The amendment aimed to simplify and rationalize the rule without altering the established principles of reversal of credit, as clarified by the Tax Research Unit Circular.

The Tribunal also referenced the decision in National Steel & Agro Industries Ltd., where it was held that the adjudicating authority erred in including credit on input services used exclusively for taxable services when calculating the amount of Cenvat credit to be reversed. The correct approach is to only consider the credit on common input services.

In conclusion, the Tribunal found merit in the appellant's argument that the computation of proportionate credit should be limited to common input services. Consequently, the impugned order was set aside, and the appeal was allowed with consequential relief as per law.

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