CENVAT credit and retrospective reversal amendment: specific service credit prevailed, and pending dispute relief defeated demand and penalty.

CENVAT credit on specified input services was held admissible under Rule 6(5) because its non-obstante clause prevailed over the general restrictions in Rule 6(1), 6(2) and 6(3), and the record did not show exclusive use of those services for exempted goods or services. A retrospective amendment under Section 73 of the Finance Act, 2010 was treated as applicable to pending disputes on common inputs and input services, permitting proportionate reversal for the relevant past period; the assessee's reversal with interest could therefore not be ignored to sustain demand or penal consequences.

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Issues: (i) whether CENVAT credit on the disputed input services was admissible under Rule 6(5) of the CENVAT Credit Rules, 2004 notwithstanding the restrictions in Rule 6(1), Rule 6(2) and Rule 6(3); (ii) whether the retrospective amendment enabling proportionate reversal under Section 73 of the Finance Act, 2010 could validate the assessee's reversal and defeat the demand, interest and penalty.

Issue (i): whether CENVAT credit on the disputed input services was admissible under Rule 6(5) of the CENVAT Credit Rules, 2004 notwithstanding the restrictions in Rule 6(1), Rule 6(2) and Rule 6(3).

Analysis: Rule 6(5) contained a non-obstante clause and allowed credit of the whole of service tax paid on the specified taxable services unless such service was used exclusively in relation to exempted goods or exempted services. The disputed services were treated as falling within the specified categories, including management, maintenance or repair services and consulting engineer service, and the record did not establish exclusive use for exempted goods. In that situation, the limitations in Rule 6(3) could not override the specific allowance under Rule 6(5).

Conclusion: The disputed input service credit was admissible and the demand founded on Rule 6(3) was not sustainable.

Issue (ii): whether the retrospective amendment enabling proportionate reversal under Section 73 of the Finance Act, 2010 could validate the assessee's reversal and defeat the demand, interest and penalty.

Analysis: The amendment was intended to resolve disputes relating to common inputs and input services used for dutiable and exempted goods by permitting proportionate reversal for the relevant past period. The assessee had reversed the disputed amount with interest during the pendency of the controversy and placed supporting documents before the department. In light of the retrospective scheme and the object of settling such disputes, the reversal could not be ignored for sustaining the adjudged demand and penal consequences.

Conclusion: The assessee was entitled to the benefit of the retrospective amendment and the demand with interest and penalty could not be upheld.

Final Conclusion: The adjudication confirming the CENVAT demand, interest and penalty was set aside, and the appeal succeeded for the assessee.

Ratio Decidendi: A specific credit-allowance provision operating with a non-obstante clause prevails over the general reversal mechanism, and a retrospective dispute-settlement amendment permitting proportionate reversal must be applied to pending controversies according to its remedial object.

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