Reversal of Cenvat credit under rule 6(3A) of Cenvat credit rules 2004 : 3/3

[satish kumar]

Assessee ‘C’ provides following services:

1. Taxable Service - Construction of Flats which are sold before completion

‘C’ pays service tax @ 25% of amount billed/ received from customers after availing abatement of 75%

1. Exempt Service – Interest from bank

C’ receives interest from bank on fixed deposits

‘C’ avails CENVAT credit on common services used for providing abovementioned taxable and exempt services. Hence, ‘C’ needs to reverse proportionate CENVAT credit attributable to provision of exempt services under rule 6(3A) of CENVAT credit rules 2004.

		Option 1	Option 2	Option 3
Particulars	Description of Service	Revenue as per P&L a/c (AS 7) (Rs)	% of Demand on which Service tax is paid (Rs)	Demand raised (Rs)	Remarks
Taxable Service	Construction service	80,000	25,000	1,00,000	Service tax is paid on 25% as per provisions of Notification 26/2012
Exempt Service	Interest on fixed deposit	10,000	10,000	10,000	Covered under Negative list as per section 66D of Finance Act 1994
CENVAT Credit availed on Common services		₹ 25,000
Formula for reversal of CENVAT credit on Common services		Exempt Services provided ------------------------------------ X [ Cenvat Credit availed on Common (Exempt services provided + Services] Taxable services provided)
Cenvat credit to be reversed		10,000 ----------- [10,000 + 80,000] X 25,000 = ₹ 2,778	10,000 ----------- [10,000 + 25,000] X 25,000 = ₹ 7,143	10,000 ----------- [10,000 + 1,00,000] X 25,000 = ₹ 2,273

According to section 65B(51), 'taxable service' means any service on which service tax is leviable under section 66B

Which option is correct and why ?

AI Summary

Assessee 'C' Must Reverse CENVAT Credit for Exempt Services; Option 3 Advised per Section 67, Finance Act, 1994. In a discussion forum, an assessee, referred to as 'C', provides both taxable and exempt services, specifically construction services and interest from bank deposits. 'C' avails CENVAT credit on common services used for both types and must reverse the proportionate credit for exempt services under rule 6(3A) of the CENVAT Credit Rules, 2004. Three options for calculating the reversal are presented, with varying results. A respondent, CA Venkata Prasad Pasupuleti, advises that interest on fixed deposits should not be considered for reversal and suggests Option 3 is correct, as it aligns with Section 67 of the Finance Act, 1994.