2016 Amendment To CENVAT Credit Reversal Formula Clarificatory, Applies Retrospectively: CESTAT Allahabad

The Customs, Excise & Service Tax Appellate Tribunal, Allahabad on Thursday held that the 2016 amendment to the CENVAT credit reversal formula under Rule 6(3A) was clarificatory in nature.

The amendment clarified that, for calculating the credit to be proportionately reversed, credit used exclusively for taxable services or dutiable goods is not to be included; only common CENVAT credit is relevant.

The court observed that Notification No. 13/2016-CE (NT) dated March 1, 2016 substituted the Rule 6(3A) formula “in its entirety so as to bring about clarity in its interpretation”.

It added that the “above amendment is clarificatory in nature”, and therefore applied retrospectively.

The ruling came in Bharat Heavy Electricals Limited's (BHEL) appeal against a ₹10.99 crore demand for alleged short reversal of CENVAT credit.

A coram comprising Judicial Member P. K. Choudhary and Technical Member P. Anjani Kumar set aside the impugned order and allowed the appeal.

BHEL, a public sector undertaking, provides works contract, repair and commissioning and other taxable services. It was availing CENVAT credit under the CENVAT Credit Rules, 2004 and had opted for proportionate reversal under Rule 6(3A).

In simple terms, Rule 6 deals with reversal of credit where common inputs or input services are used for taxable as well as exempt services or goods. BHEL calculated the reversal using only common CENVAT credit and excluded credit relating exclusively to taxable output services or dutiable goods.

The Department alleged that BHEL should have considered its total CENVAT credit while calculating the amount to be reversed. It also treated BHEL's trading activity as an exempted service.

A show cause notice dated September 17, 2020 proposed recovery of ₹10,99,10,976 for 2014-15 and 2015-16. It also proposed interest and penalties and invoked the extended period of limitation.

On limitation, the court held that mere omission, negligence or inadvertence cannot justify the extended period without the requisite intent to evade tax. BHEL had regularly disclosed the credit reversal in its ST-3 returns.

The court observed that the Department could have verified BHEL's calculation by calling for further information. Its failure to scrutinise the returns could not, by itself, justify invoking the extended period.

On the credit calculation, the court followed Reliance Industries Ltd. It held that “total CENVAT Credit” under Rule 6(3A) meant common CENVAT credit and did not include credit on inputs or input services used exclusively for dutiable goods.

The court also rejected the Department's treatment of trading as an exempted service for Rule 6 purposes. It held that trading involves the transfer of ownership of goods and is excluded from the scope of “service”.

The court explained that the taxable event for service tax is the provision of a service, while the sale of goods is a separate taxable event. It therefore observed that “to call trade as service is conceptually improper.”

The court accordingly held that the impugned order could not be sustained and set it aside. BHEL's appeal was allowed with consequential relief, if any, in accordance with law.

For Appellant: Advocate Atul Gupta,

For Respondent: Chitra Srivastava, Authorised Representative