CENVAT Credit Reversal Cannot Exceed Proportionate Credit Attributable To Exempt Services: CESTAT Kolkata

The Kolkata Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that reversal of CENVAT credit cannot exceed the proportionate credit attributable to exempt supplies, while granting relief to Bank of India and remanding the matter for recomputation of the credit liable to be reversed.

A coram of Judicial Member Ashok Jindal and Technical Member K. Anpazhakan observed that “we agree with the submission of the appellant that the demand for reversal of credit should not exceed the proportionate credit based on the exempt supply made by them. Therefore, we remand the matter to the adjudicating authority for the limited purpose of quantifying the proportionate credit liable to be reversed by the appellant, along with applicable interest.”

The dispute arose after the department issued a show cause notice to Bank of India alleging that the bank, which was providing both taxable and exempt banking and financial services, had not maintained separate accounts for input services used in taxable and exempt activities and had wrongly availed and utilised CENVAT credit in violation of the CENVAT Credit Rules, 2004.

The notice led to multiple demands, including denial of credit on the ground that the appellant had exceeded the 20% utilisation limit, denial of credit distributed by the Head Office as Input Service Distributor, and a demand of service tax calculated at 8% of the value of exempt services for a financial year on the basis that the appellant had not maintained separate accounts.

Before the Tribunal, the appellant contended that the 20% restriction under Rule 6 could not be applied on a monthly basis and that the credit utilised during the relevant financial years as a whole was within the permissible limit. It was also argued that the Head Office had obtained registration as Input Service Distributor earlier and that the demand of 8% of the value of exempt services was unsustainable since the appellant had intended to opt for proportionate reversal of credit attributable to exempt services.

Accepting the submissions on the first issue, the tribunal held that the rules did not prescribe that the 20% limit had to be calculated month-wise and noted that the credit utilised during the financial years as a whole was within the permissible limit. The bench therefore set aside the demand raised on this count.

On the issue of denial of credit distributed by the head office, the tribunal found that the Head Office had obtained registration as Input Service Distributor earlier and that denial of credit merely on the basis of the date of digital registration was not sustainable. The demand on this count was also set aside.

With respect to the demand calculated at 8% of the value of exempt services, the Tribunal held that the appellant's letter showed its intention to opt for proportionate reversal of credit attributable to exempt services and that a clerical error could not compel the assessee to adopt the option of paying a fixed percentage of exempt turnover.

The bench held that the appellant is liable only to reverse proportionate credit relatable to exempt services and directed recomputation on that basis.

The tribunal also noted that the Department failed to produce any corroborative evidence of wilful mis-statement or suppression of facts and accordingly set aside the penalty imposed on the appellant.

In view of these findings, the tribunal set aside the impugned demands to the extent indicated and remanded the matter to the adjudicating authority only for the limited purpose of quantifying the proportionate credit required to be reversed in terms of Rule 6 of the CENVAT Credit Rules.

For Appellant: S.K. Goyal, Chartered Accountant

For Respondent: P. Das, Authorized Representative