SEZ service exclusions and input service credit: Rule 6(3) inapplicable, cab and insurance credits allowed, penalties fall away.

Rule 6(3) of the Cenvat Credit Rules, 2004 did not apply to taxable services provided to SEZ units for authorised operations, because Rule 6(6A) and Section 144 of the Finance Act, 2012 excluded such services retrospectively and prospectively; the demand based on Rule 6(3) was therefore not sustainable. Credit on rent-a-cab and insurance services was allowable where the transport service was used for employee movement at remote factory locations and the insurance service was required by contractual and statutory obligations, with no evidence of personal use or non-business consumption; the credit disallowance was therefore unsustainable. Penalties, being dependent on the failed substantive demand, were also not sustainable.

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Issues: (i) Whether Rule 6(3) of the Cenvat Credit Rules, 2004 applied to services provided to Special Economic Zone units during the relevant period, (ii) whether credit on rent a cab service and insurance service was admissible as input service credit, and (iii) whether penalties were sustainable.

Issue (i): Whether Rule 6(3) of the Cenvat Credit Rules, 2004 applied to services provided to Special Economic Zone units during the relevant period.

Analysis: The relevant amendment inserted Rule 6(6A) with effect from 01.03.2011, and Section 144 of the Finance Act, 2012 gave retrospective effect to the exclusion of Rule 6(1), (2), (3) and (4) for taxable services provided without payment of tax to SEZ units or developers for authorised operations. The retrospective and prospective operation together showed that the restriction under Rule 6(3) did not apply to the SEZ-related services in dispute.

Conclusion: The demand under Rule 6(3) in respect of services provided to SEZ was not sustainable and was rightly set aside.

Issue (ii): Whether credit on rent a cab service and insurance service was admissible as input service credit.

Analysis: The appellant explained that the transport service was used for employee pickup and drop in remote factory locations and that the insurance service was required under contractual and statutory obligations. In the absence of any allegation or evidence of personal use, employee consumption, or inclusion in employees' cost to company, and in view of the authorities relied on, the services were treated as sufficiently connected with provision of output services.

Conclusion: The credit on rent a cab service and insurance service was admissible and the disallowance was unsustainable.

Issue (iii): Whether penalties were sustainable.

Analysis: Once the substantive demands failed, the basis for penalty also failed. The order also noted the approach that penalties were not warranted in the circumstances of the case.

Conclusion: The penalties were rightly set aside.

Final Conclusion: The assessee succeeded on the substantive issues, while the Department's challenge failed. The common order was set aside to the extent contested, with relief granted to the assessee and the Departmental appeal rejected.

Ratio Decidendi: Services provided to SEZ units for authorised operations are excluded from the operation of Rule 6(3) of the Cenvat Credit Rules, 2004 by virtue of Rule 6(6A) as retrospectively reinforced by Section 144 of the Finance Act, 2012, and input service credit is allowable where the services are shown to have a nexus with the output service and are not established to be for personal use.

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