JULY 22, 2014

By S Narayanan, Advocate

1 THERE are assesses who are manufacturers cum service providers availing CENVAT credit inter alia on input services and if they render any exempted services, such as "trading activity" which constitutes “exempted services" then the scenario which emerges is as under:

a) Input services used exclusively for dutiable final product - For which 100 % CENVAT credit can be availed and utilised - as per Rule 3 (1) r/w (4) of CCR 2004.

b) Input services used exclusively for taxable output services - For which 100 % CENVAT credit can be availed and utilised - as per Rule 3 (1) r/w (4) of CCR 2004.

c) Input services used both for dutiable final product / exempted final product and also taxable output services and exempted services - for which an assessee is required to exercise an option under Rule 6 (3) of CCR, 2004 if separate accounts are not maintained.

2 Though there is no mention of word "common input services" anywhere in the said provisions of CCR 2004 particularly in Rule 6 of CCR 2004, yet it is referred as “common input services" in various Board Circulars issued and also various decisions rendered, for the simple reason that such input services gets commonly used for producing dutiable final product / exempted final product and also for rendering taxable output services and exempted services.

3 The assessee who exercise option under Rule 6(3)(ii) opting not to maintain separate accounts u/r 6(2) and also not opting to pay 6 % amount on value of exempted goods or exempted services is allowed to avail 100% CENVAT credit of such “common input services" and then is required to pay pro rata CENVAT credit on provisional basis each month based on last FY turnover and then finalise at the end of the year, before 30 th June, based on actual data for that FY, as per formula provided in Rule 6 (3A) of CCR 2004.

4 Now, while working out the pro rata reversal CENVAT credit u/r 6 (3A) as provided in Rule 6 (3A)(c)(iii), since - "[P] denotes total CENVAT credit taken on input services during the financial year", in some of the Commissionerates such as Pune- I, the department is interpreting that total CENVAT credit taken on input services during the financial year means entire CENVAT credit availed on input services during the year including the Input services used exclusively for dutiable final product and taxable output services, totally ignoring the aspect that such pro rata reversal envisaged in the said provision of Rule 6 (3) (ii) r/w Rule 6(3A) is confined to CENVAT credit initially allowed to be taken 100 % “on common input services" and then pay back pro rata CENVAT credit as per the provisions of said Rule 6 (3)(ii) of CCR 2004.

5 In the above context, let us have a recapitulation of provisions of Rule 6 of CCR 2004

a) Entire Provisions of Rule 6 has been carved out only to specify circumstances and situation, where certain quantum of credit is not available to assessee.

b) Rule 6 (1) refers to credit which is not available to the extent such inputs or input services used for exempted product or exempted services. Thus, for example, the credit used exclusively for trading, credit is not allowed.

c) Rule 6 (2) refers to credit of such input services used for both dutiable goods / taxable services or for exempted goods / exempted services and the CENVAT credit being available only to the extent of services which is used for dutiable goods / taxable services, by maintaining separate accounts for this purpose.

d) Rule 6 (3) refers to cases, where such separate accounts / records is not possible to be maintained u/r 6 (3)(ii), then exercise option -

i) Avail entire credit on such common input services and pay 6 % amount on value of exempted goods / exempted services, as the case may be, or

ii) Avail entire credit on such common input services and pay on pro rata basis to the extent of such credit which is attributable to exempted goods / exempted services, provisionally each month, which needs to be finally determined and paid at the end of the year on or before 30 th June or

iii) Maintain separate records for common inputs and avail CENVAT credit only to the extent of use of such common input services used for dutiable goods as per Rule 6 (3)(2) and exercise option to pay pro-rata only to the extent of common input services used for exempted goods / exempted services.

e) Now, for the purpose of payment of such pro rata CENVAT credit, the formula has been provided in Rule 6 (3A) of CCR 2004 and the input services to be considered which has been indicated at “P" for yearly reversal ( or "G" for monthly provisional reversal ), the said provision envisages credit of input services what is covered under Rule 6 (2) i.e common input services, which is allowed to be availed in full and then pay on pro rata basis what is “attributable" to exempted goods or exempted services, as the case may be.

f) This is the reason, the legislature has been careful to use the word “attributable" out and out, at all the places even in the formula at Clause 6 (3A) ( b) (ii) and 6 (3A)(b)(iii) and Clause 6 (3A) ( c) (ii) and 6 (3A)(c)(iii).

g) Hence, in the matter under reference, the word used at Clause 6 (3A)(c)(iii) - "[P] denotes total CENVAT credit taken on input services during the financial year " and the words used at Clause 6 (3A)((b)(iii) as - "G denotes total CENVAT credit taken on input services during the month" would only mean to consider and confine to the CENVAT credit of Input services (i.e. common input services ) which have been used both for dutiable final product /taxable output services and also in exempted goods / exempted services which is covered by Rule 6 (3)(2) of CCR 2004.

h) The exception in Rule 6 (3)(i) and Rule 6 (3)(ii) which has been specifically carved is to permit initial availment of entire CENVAT credit in the books (though some element is used for exempted goods / exempted services ) and then make pro-rata reversal after ascertaining the data of what is attributable to such exempted goods / exempted services.

i) As it is incumbent on the part of Government, to provide adequate measure wherever an assessee is entitled to some part of the CENVAT credit, the said measure has been so provided but for which provisions of Rule 6 (3) would have been held ultra vires.

6 The provisions of said Rule 6 (3) which starts with - "[(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow [any one] of the following options, as applicable to him, namely :-....." does have reference to what is contained in the said provisions of Rule 6 (1) and 6 (2), which refers to - a) not being entitled to any credit of inputs / input services used for exempted goods /exempted Service and b) credit of input / input service used both for dutiable goods / taxable service and exempted goods/ exempted services, is allowed only to the extent of used in dutiable goods / taxable service.

7 In fact, the “above notwithstanding provisions u/r 6 (3) of CCR 2004" works in favour of subject to state that though there is a prohibition under Rule 6 (1) and 6 (2), by rule of this exception u/r Rule 6 (3), assesses can initially avail full CENVAT credit (which otherwise is regarded as contravention) and later follow either of the option u/r 6 (3)(i) or 6 (3)(ii) of CCR 2004.

8 But as per department, "[(3) Notwithstanding anything contained in sub-rules (1) and (2),..............", is to support their stand to include entire input services credit availed during the year including the input services credit which is used entirely for dutiable goods or input services which is entirely used for taxable services, and this interpretation, in my view, is totally wrong .

9 If such was the intent of legislature, then said clause would have been worded as - "[(3) Notwithstanding anything contained in any of the provisions of CENVAT Credit Rules, 2004,.............." and if it has been so worded then only it gives the right to department to interpret in the manner to state that Rule 6(3A) (c) (iii) at "P" above, has an overriding effect over the enabling provisions of Rule 3(1) r/w Rule 3 (4) of CCR 2004.

10 The said provisions of Rule 6 (3) or 6 (3A) of CCR 2004 cannot have the overriding effect of demolishing the enabling provisions which has allowed the credit of inputs/ input services used exclusively for dutiable goods/ taxable services [for which 100 % CENVAT credit is allowed] and no part of such CENVAT credit can be taken away for any reason more so when the said non obstante provisions of Rule 6 (3) do not even remotely suggest such an interpretation, as it is confined to what is covered only by Rule 6 (1) and Rule 6(2).

It is requested that the Board comes out with an immediate clarification on the issue.