Demand and penalty set aside; assessee may choose Rule 6(3) option; extended limitation not invocable

The CESTAT AT set aside the demand and penalty imposed on the appellant for alleged wrongful availment of CENVAT credit on common input services under rule 6(3) of the CCR for March 2007-March 2008. It held that the extended period of limitation was not invocable since all material facts were already within the department's knowledge from the 2009 audit, and the later contrary view in the 2011 audit did not establish suppression. On merits, following the Telangana HC ruling in TIARA Advertisement, the Tribunal held that Revenue cannot unilaterally impose the 10% option under rule 6(3); the assessee is entitled to choose the appropriate option. The appeal was allowed.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the extended period of limitation could be validly invoked to demand an amount under Rule 6(3) of the Cenvat Credit Rules, 2004, for the period April 2007 to March 2009.

1.2 Whether demand of an amount equal to 10% of the value of exempted goods under Rule 6(3) of the Cenvat Credit Rules, 2004, was sustainable on merits where (a) separate records for inputs used in dutiable and exempted goods were maintained, (b) the only common input service was insurance, with credit of Rs. 1,74,190/-, and (c) such credit had been reversed.

1.3 Whether Revenue could unilaterally choose and enforce a particular option under Rule 6(3) of the Cenvat Credit Rules, 2004, and invoke Rule 14 to recover an amount computed at 10% of the value of exempted goods.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Invocation of extended period of limitation under Rule 14 of the Cenvat Credit Rules, 2004

2.1.1 Interpretation and reasoning

(a) The relevant period was April 2007 to March 2009; the first internal audit was conducted on 08.09.2009 and an Internal Audit Report was issued without any objection regarding non-maintenance of separate records or violation of Rule 6(3).

(b) A second audit report dated 15.07.2011, based on the same records, subsequently raised objection under Rule 6(3), and a show cause notice dated 30.04.2012 invoked the extended period.

(c) The Court held that once all relevant facts are within the knowledge of the department, the extended period cannot be invoked on the ground of suppression; a mere change of view by a subsequent audit team does not constitute suppression by the assessee.

2.1.2 Conclusions

The demand invoking the extended period of limitation was held to be time-barred and unsustainable.

2.2 Sustainability of demand under Rule 6(3) on merits where only a small common input service credit was involved

2.2.1 Legal framework (as discussed)

(a) Rule 6(3) of the Cenvat Credit Rules, 2004, prescribes options to an assessee who does not maintain separate accounts for inputs/input services used in dutiable and exempted goods/services.

(b) Rule 14 of the Cenvat Credit Rules, 2004, provides for recovery of Cenvat credit taken or utilised wrongly, along with interest.

2.2.2 Interpretation and reasoning

(a) It was not disputed that the appellant maintained separate records for inputs used in the manufacture of dutiable and exempted goods.

(b) The only common input service was insurance, on which total Cenvat credit availed was Rs. 1,74,190/-, and such credit could not be practically apportioned between dutiable and exempted goods.

(c) The demand under Rule 6(3) was for Rs. 1,21,20,085/-, being 10% of the value of exempted goods, vastly disproportionate to the common credit of Rs. 1,74,190/-.

(d) The Court noted that, as per the judgment of the Telangana High Court in TIARA Advertisement, Rule 6(3) merely gives options to the assessee; if the assessee fails to follow Rule 6(3), the authorities may reject the disputed credit and recover wrongly availed credit under Rule 14, but cannot forcibly select an option under Rule 6(3) and demand a fixed percentage of exempted clearances.

(e) The Court preferred to follow the view of the Telangana High Court, noting absence of contrary jurisdictional High Court authority, and held that Revenue cannot choose an option under Rule 6(3) on behalf of the assessee or use Rule 14 to recover an amount computed as a percentage of the value of exempted goods.

2.2.3 Conclusions

(a) Since separate records for inputs were maintained, and the only common input service credit was limited and already reversed, demand of 10% of the value of exempted goods under Rule 6(3) was not legally sustainable.

(b) The amount demanded under Rule 6(3), along with equal penalty, was held unsustainable on merits.

2.3 Competence of Revenue to select an option under Rule 6(3) for the assessee and raise demand accordingly

2.3.1 Interpretation and reasoning

(a) The Court, relying on the reasoning of the Telangana High Court, held that Rule 6(3) is an enabling provision that confers options on the assessee and does not authorise the department to make that choice on the assessee's behalf.

(b) If credit is wrongly availed, the appropriate course is recovery of such wrongly availed or utilised credit under Rule 14, not imposition of a liability computed as a fixed percentage of the value of exempted goods by unilaterally applying one of the options in Rule 6(3).

2.3.2 Conclusions

Revenue had no authority to select and apply the 10% option under Rule 6(3) on behalf of the assessee; the resultant demand and penalty were therefore invalid.

2.4 Overall conclusion

The impugned order confirming demand of Rs. 1,21,20,085/- under Rule 6(3) of the Cenvat Credit Rules, 2004, along with equal penalty, was held unsustainable both on limitation and on merits, and was set aside with consequential relief to the appellant.

---