2025 (10) TMI 329 - AT - Service Tax

Authority rules Rule 6(3) CENVAT doesn't mandate reversal for services to SEZ units; penalties and extended limitation not sustained

M/s Sapient Consulting Pvt. Ltd. Versus Commissioner of Service Tax-Delhi-I

CESTAT CHANDIGARH - AT allowed the appeal and set aside the impugned order, holding that Rule 6(3) CENVAT Credit Rules does not require reversal for ... CENVAT Credit - providing taxable services as well as exempted services - requirement to reverse an amount equal to a percentage of exempted services or the credit attributable to exempted services in terms of Rule 6 (3) of CENVAT Credit Rules - scope of SCN - conditions of the Notification No.09/2009-ST dated 03.03.2009 satisfied or not - invocation of extended period of limitation - levy of penalties. HELD THAT:- On going through the changes in the provisions of the Rules over the period of time, it is seen that the applicability of Rule 6(3) has been excluded by the amendments made by Notification No.03/2011-CX (NT) dated 01.03.2001, inasmuch as supply of excisable goods to SEZ units for their authorized operations; by virtue of introduction of Rule 6A, the provisions were also made applicable to supply services to SEZ units; in terms of Section 144 of Finance Act, 2012, the provisions have been made applicable retrospectively. Therefore, the appellants are not required to reverse any amount in terms of Rule 6(3) for the reason that the services provided by them to SEZ units are exempted. Aslo support found in the CBEC letter no. 334/1/2012-TRU dated 16.03.2012. This Bench in the case of M/s Mercer Consulting India Pvt. Ltd., [2024 (4) TMI 328 - CESTAT CHANDIGARH], involving identical issue held that 'the issue is no longer res integra in view of the retrospective amendment, vide Finance Act 2012, to the effect that Rules 6 (1), (2) and (3) do not apply to Services provided to SEZ.' The Revenue has not made out any case against the appellants and the impugned order is set aside by allowing the appeal of the appellant. ISSUES PRESENTED AND CONSIDERED 1. Whether Rule 6(3) of the CENVAT Credit Rules (CCR) required reversal of credit attributable to exempted services rendered to SEZ units for the period April 2010 to March 2011. 2. Whether the introduction of Rule 6(6A) / Notification No.03/2011-CX(NT) (w.e.f. 01.03.2011) and retrospective operation conferred by Section 144 of the Finance Act, 2012, excludes application of Rules 6(1)-(4) to services supplied to SEZ units, thereby negating any demand under Rule 6(3) for the impugned period. 3. Whether the adjudicating authority exceeded the scope of the show cause notice by invoking conditions of Notification No.09/2009-ST and by confirming extended-period recovery and penalties beyond reversal of credit proportionate to exempted services. 4. Whether supplies to SEZ units amount to 'export' for purposes of exemption from reversal under Rule 6 and related statutory scheme, and whether that principle supports entitlement to CENVAT credit. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Rule 6(3) CCR to services provided to SEZ units Legal framework: Rule 6(3) CCR prescribes reversal of credit attributable to exempted services where inputs/input services are used for both taxable and exempted services; Notification No.03/2011-CX(NT) amended CCR to exclude certain provisions in relation to supplies to SEZs; Section 144, Finance Act, 2012, gave retrospective effect to the exclusion. Precedent Treatment: Tribunal decisions (including cited Tribunal orders) have held that amendments and retrospective application negate requirement to reverse credit for supplies to SEZ units; High Court authority (Repro India Ltd.) has interpreted export-related exceptions in Rule 6 context. Interpretation and reasoning: The Court examined the statutory amendments and explanatory CBEC communication and concluded that amendment by Notification No.03/2011 and retrospective operation under Section 144 removed the applicability of Rule 6(3) to services rendered to SEZ units. The Tribunal reasoned that once the legislature/Executive has carved out an exclusion for SEZ supplies, the reversal machinery of Rule 6(3) cannot be invoked for those supplies during the relevant period. Ratio vs. Obiter: Ratio - Rule 6(3) does not apply to services provided to SEZ units where exclusion/retrospective amendment applies; Obiter - factual observations regarding filing of ST-3 returns and particulars supplied during adjudication. Conclusion: The appellants were not required to reverse any amount under Rule 6(3) in respect of services provided to SEZ units for the impugned period. Issue 2 - Effect of Notification No.03/2011-CX(NT) and retrospective operation under Section 144 of the Finance Act, 2012 Legal framework: Notification No.03/2011 amended CCR to provide that reversal provisions do not apply to supplies to SEZ units/developers; Section 144 confers retrospective effect to amendment for specified earlier period; CBEC letter (334/1/2012-TRU) provided administrative clarification. Precedent Treatment: Prior Tribunal rulings (including Tata Consulting Engineers Ltd. and cited Final Orders) applied the retrospective amendment to nullify reversal obligations; these decisions were relied upon and followed. Interpretation and reasoning: The Tribunal treated Section 144 as legislative confirmation of retrospective non-applicability of Rules 6(1)-(4) to SEZ supplies and accepted the CBEC clarification as corroborative. The Tribunal found that the amendment and retrospective operation meant that during the impugned period there was 'no need to reverse any Cenvat credit' relating to SEZ supplies. Ratio vs. Obiter: Ratio - Retrospective amendment via Section 144 removes liability to reverse credit under Rule 6 for the specified period; Obiter - reliance on administrative circular as supportive, not dispositive, evidence. Conclusion: Notification No.03/2011 together with retrospective operation under Section 144 relieved the appellants of the obligation to reverse credit under Rule 6 for services rendered to SEZ units in the impugned period. Issue 3 - Scope of show cause notice, extended period and imposition of penalties Legal framework: Principles of adjudicatory fairness constrain confirming demands beyond grounds specified in a show cause notice; Rule 14 CCR prescribes recovery where excess credit is found; Finance Act penalty provisions (Sections 77 and 78) permit penalties for contraventions subject to mens rea and statutory limits. Precedent Treatment: Authorities cited by the appellant support the proposition that assessment must be confined to issues canvassed in the notice and that where statutory amendments negate liability adjudication cannot proceed to extended period/penalties merely on pre-amendment footing. Interpretation and reasoning: The Tribunal found the impugned order travelled beyond the scope of the show cause notice by relying on non-satisfaction of Notification No.09/2009-ST conditions and by imposing extended-period recovery and penalties rather than limiting consequence to reversal of proportionate credit (if any). Given the statutory amendment removing reversal obligation, the foundational premise for extended-period invocation and penalties fell away. Ratio vs. Obiter: Ratio - Adjudicating authority cannot confirm demand and impose penalties beyond the scope of the show cause notice and statutory position prevailing after amendment; Obiter - comments on specific procedural omissions by the adjudicating authority regarding examination of ST-3 return details. Conclusion: Extended period invocation and penalties were unsustainable where reversal liability itself was negated; at most, liability would be limited to proportionate reversal where applicable, which was not the case here. Issue 4 - Characterisation of supplies to SEZ as 'export' and consequent exemption from reversal Legal framework: SEZ Act defines supplies to SEZ unit/developer by DTA supplier as deemed 'export'; Rule 6 contains explicit exceptions (e.g., Rule 6(6)(v)) for exports; SEZ Act's Section 50 gives SEZ Act overriding effect over other enactments. Precedent Treatment: High Court and Tribunal authority (Repro India Ltd. and subsequent Tribunal decisions) have treated supplies to SEZ units as exports for purposes of Rule 6 exceptions and entitlement to credit. Interpretation and reasoning: The Tribunal relied on the statutory deeming and the priority of SEZ Act to hold that supplies to SEZ units qualify as 'export' and therefore fall within exceptions to reversal under Rule 6; this line of reasoning reinforces the conclusion reached from the amendment/retrospective provisions. Ratio vs. Obiter: Ratio - Supplies from DTA to SEZ unit/developer are to be treated as exports for Rule 6 purposes, supporting non-reversal of credit; Obiter - linkage to specific rule subclauses as illustrative rather than independently decisive where retrospective amendment also applies. Conclusion: The export characterization of SEZ supplies provides an independent statutory basis (alongside the amendment and retrospective operation) for entitlement to CENVAT credit without reversal. FINAL CONCLUSION OF THE COURT The Tribunal concluded that in view of Notification No.03/2011-CX(NT), the retrospective operation granted by Section 144 of the Finance Act, 2012, and supporting administrative and judicial precedents, the appellants were not required to reverse credit under Rule 6(3) for services provided to SEZ units in the impugned period; consequently, the demand, extended-period invocation and penalties confirmed by the adjudicating authority were set aside. (Order pronounced in open court.)