2026 (3) TMI 1444 - AT - Central Excise

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 ... Denial of CENVAT Credit of Service Tax paid on various input services - Overriding effect of non-obstante clause - manufacture of dutiable finished goods and exempted goods in factory - Proportionate reversal under retrospective amendment - Extended period of limitation - imposition of penalty under Section 11AC ibid and Rules 15(2) and 15(4) of CCR, 2004 - Whether the credit of service tax paid on input services distributed under ISD, which was taken by the appellant's unit at Waluj as CENVAT credit, was availed properly in terms of Rule 6 of the CCR, 2004, or is it in violation of the said rule. Rule 6(5) specified services - Common use in dutiable and exempted goods - Non-obstante override of Rule 6(3) - Credit of service tax on the disputed input services could not be denied merely because the services were commonly used for dutiable and exempted goods and separate records were not maintained. - HELD THAT:- The Tribunal held that Rule 6(5) of the CENVAT Credit Rules, 2004 granted full credit of service tax paid on the specified taxable services, notwithstanding sub-rules (1), (2) and (3) of Rule 6, unless such services were used exclusively in relation to exempted goods. The disputed services, including maintenance-related services connected with garden, parking area, EPABX, computers and lifts, as well as software development maintenance, were found to fall within the specified categories covered by Rule 6(5). Since the department did not allege exclusive use in exempted goods, the bar under Rule 6(3) could not be invoked. The legal principle applied was that the non-obstante clause in Rule 6(5) overrides the restrictions otherwise flowing from Rule 6(3). [Paras 9] The demand founded on non-compliance with Rule 6(3) was unsustainable, and full credit on the disputed input services was allowable. Retrospective amendment - Proportionate reversal of common credit - Settlement of pending CENVAT disputes - HELD THAT:- The Hon’ble High Court of Punjab & Haryana in the case of Principal Commissioner, CGST Commissionerate, Ludhiana Vs Suraj Solvents & Vanaspati Industries [2023 (3) TMI 7 - PUNJAB AND HARYANA HIGH COURT] have held that even if the assessee had not moved any application to the department while reversing the proportionate credit, since they pursuing their legal remedies it cannot be said that they had not complied with the requirements of retrospective amendment introduced to resolve the disputes of CENVAT Credit Rules, 2001/2002/2004. The Tribunal further held that the retrospective amendment made for the period up to 31.03.2008 permitted proportionate reversal where common inputs or input services were used in dutiable and exempted products, with the object of resolving pending disputes. As the dispute was pending when the Finance Act, 2010 came into force, and the appellants had paid the amount attributable to such credit along with interest and furnished supporting material, the department ought to have examined the claim under that scheme instead of ignoring it. Even on the assumption that any part of the disputed services fell outside Rule 6(5), the continuance of the demand without addressing the benefit of the retrospective amendment was held to be legally untenable. [Paras 10] The alternative basis adopted by the adjudicating authority to sustain the demand could not stand, as the appellants' proportionate reversal with interest required recognition under the retrospective amendment. Final Conclusion: The Tribunal held that the disputed input services were covered by Rule 6(5), whose overriding clause excluded the application of Rule 6(3) restrictions, and that, in any event, the appellants' proportionate reversal with interest required consideration under the retrospective amendment. The impugned demand, interest and penalty were therefore set aside and the appeal was allowed. 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.