Only Input Credit Used For Both Taxable and Exempt Activities Must Be Reversed: CESTAT Chennai

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) at Chennai has held that while reversing CENVAT credit under Rule 6(3A) of the CENVAT Credit Rules, 2004, only common credit used for both taxable and exempted activities needs to be considered and not credit used exclusively for dutiable goods.

The tribunal set aside the demands, interest, and penalties against Tamil Nadu Newsprint and Papers Ltd.

Rule 6(3A) of the CENVAT Credit Rules, 2004, provides a formula-based, actionable method for manufacturers and service providers to reverse proportionate input credit when they use common inputs/services for both taxable and exempted products/services without maintaining separate accounts.

The Division Bench comprising President Justice Dilip Gupta and Technical Member Vasa Seshagiri Rao observed that the statutory scheme of Rule 6 clearly permits availment of credit on inputs and input services used exclusively for dutiable goods, and any interpretation expanding the formula under Rule 6(3A) to include such credit would lead to unintended denial of legitimately availed credit.

The appellant is engaged in the manufacture of printing and writing paper falling under Chapter 48 of the Central Excise Tariff.

The appellant generated electricity in windmills and also undertook trading of notebooks, both treated as exempted activities for the purposes of Rule 6 of the CENVAT Credit Rules, 2004.

The appellant availed CENVAT credit on inputs and input services used commonly and opted for proportionate reversal under Rule 6(3A).

The department alleged that the appellant had incorrectly applied the formula by restricting it to common input services and by not properly including the value of electricity and traded goods, and contended that the appellant was liable either to pay 5%/6% of the value of exempted goods under Rule 6(3)(i) or to reverse a higher amount under Rule 6(3A).

The department contended that the assessee ought to have either paid 5%/6% of the value of exempted goods or reversed a higher amount by including total credit in the computation.

However, the Tribunal found that the assessee had correctly identified common input services and reversed proportionate credit in accordance with the prescribed formula.

The bench noted that "The statutory scheme thus makes it evident that only credit attributable to exempted goods or exempted services is required to be neutralised, and there is no legislative intent to deny credit legitimately availed and exclusively used in the manufacture of dutiable goods."

It also held that once the assessee had opted for reversal under Rule 6(3A), the department could not compel adoption of an alternative method under Rule 6(3)(i), as the options under Rule 6 are mutually exclusive.

The bench opined that "once the appellant has opted for reversal under Rule 6(3A) and followed the prescribed mechanism, the department cannot compel payment under Rule 6(3)(i) at 5%/6% of the value of exempted goods/services. The options under Rule 6(3) are mutually exclusive. The impugned order itself proceeds to rework the amount under Rule 6(3A), thereby accepting that Rule 6(3A) governs the field."

The Tribunal further held that the appellant has correctly applied Rule 6(3A) by confining the computation to common credit and by including the value of electricity generated and trading turnover for the purpose of determining proportionate reversal.

The bench stated that "the entire demand arises from an audit objection concerning interpretation of Rule 6(3A) and computation methodology. All relevant figures relating to electricity generation, trading turnover and CENVAT credit were reflected in statutory returns and financial records. There is no allegation or evidence of any positive act of suppression, wilful misstatement or intent to evade duty."

On limitation, the Bench ruled that the extended period under Section 11A could not be invoked as the entire demand was based on audit scrutiny of disclosed records and involved a purely interpretational issue.

Consequently, the Tribunal also set aside penalties, observing that in the absence of fraud, wilful misstatement, or suppression, penalty under Section 11AC read with Rule 15(2) cannot be sustained.

The bench held that "....the appellant has correctly exercised the option under Rule 6(3A) and reversed proportionate common credit; that electricity and trading activity are relevant only for computation under Rule 6(3A) and no demand under Rule 6(3)(i) is sustainable..."

Allowing both appeals, the tribunal quashed the impugned orders and granted consequential relief to the assessee.

For Appellant: Advocate M.N. Bharathi

For Respondent: M. Selvakumar, Authorized Representative