Proportionate Cenvat credit reversal applies where trading is treated as exempted service; penalty fails on technical filing error.
Trading was treated as an exempted service for the relevant period, so common Cenvat credit attributable to that activity could not be retained; however, the demand could not stand in the quantified form originally adopted, and liability had to be reworked on a proportionate-reversal basis with interest. The matter was therefore remanded for fresh computation of the credit relatable to the exempted activity. On the return-filing issue, ST-3 returns had been uploaded in time and rejection resulted from a technical portal error, so deliberate default was not established and penalty for non-filing of returns was set aside.
Issues: (i) whether the demand under Rule 6(3) of the Cenvat Credit Rules, 2004 on trading activity as an exempted service was sustainable in the stated form, and whether proportional reversal of credit could be directed instead; (ii) whether penalty for alleged non-filing of ST-3 returns under the Service Tax Rules, 1994 read with the Finance Act, 1994 was sustainable.
Issue (i): whether the demand under Rule 6(3) of the Cenvat Credit Rules, 2004 on trading activity as an exempted service was sustainable in the stated form, and whether proportional reversal of credit could be directed instead.
Analysis: Trading activity was treated as an exempted service for the relevant period, and the appellant could not retain common Cenvat credit attributable to such exempted activity. At the same time, the later position permitting reversal of proportionate credit with interest was taken into account. In place of a straight demand of 6% or 7% on the exempted value, the correct course was to determine the proportionate credit relatable to the exempted activity and rework the liability accordingly.
Conclusion: The demand in the form originally confirmed was not sustained. The matter was remanded for recalculation of proportionate Cenvat credit to be reversed along with interest.
Issue (ii): whether penalty for alleged non-filing of ST-3 returns under the Service Tax Rules, 1994 read with the Finance Act, 1994 was sustainable.
Analysis: The record showed that the returns had been uploaded within time and the rejection was due to a technical error on the portal. In those circumstances, the allegation of deliberate default or suppression for non-filing of returns could not be accepted, and penal consequence under Section 77(2) was unwarranted.
Conclusion: The penalty for non-filing of returns was set aside.
Final Conclusion: The credit demand was not finally affirmed in the quantified form adopted by the department, and the penalty for return default was deleted, leaving only a remand for fresh computation of the proportionate reversal liability.
Ratio Decidendi: Where common credit is taken for taxable and exempted activity, liability must be reworked on a proportionate-reversal basis when the governing scheme so permits, and a bona fide, technically frustrated filing attempt does not justify penalty for non-filing of returns.
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