Common input services – Manufacture of dutiable and exempted P&P medicaments – in view of several contradictory decisions on issue, extended period cannot be invoked: CESTAT

By TIOL News Service

MUMBAI, APR 04, 2010: THE appellants are engaged in the manufacture of P&P medicaments. They manufacture both dutiable and exempted products. On the ground that the appellants had not maintained separate account in respect of input services used in the manufacture of exempted as well as dutiable final products, 10% of the value of the exempted goods was demanded and confirmed under Rule 6(3) of Cenvat Credit Rules, 2004 for the period January 2005 to March 2008 and a penalty equivalent to amount demanded has also been imposed under section 11AC of Central Excise Act, 1944 and interest as applicable has also been demanded.

The applicant is before the CESTAT with a Stay application.

After adverting to the Bombay High Court decision in Nicholas Piramal India Ltd. [2009-TIOL-649-HC-Mum-CX] , where it is held that reversal of proportionate credit with interest attributable to exempted products is not sufficient to fulfill the requirements of sub rule 3 of rule 6 of Cenvat Credit Rules, 2004, the applicant submitted that there were several decisions of the Tribunal, which had taken a view that reversal of proportionate credit subsequently would be sufficient for the purpose of fulfillment of obligation under rule 6 and such reversal would amount to non-availment of credit. A similar view was also taken by the High Court of Allahabad in the case of Hello Mineral Water Pvt. Ltd. [2004-TIOL-57-HC-All-CX] . In fine since there were contrary decisions, extended period of limitation could not be invoked, they submitted.

On merits, the appellants argued thus – “… in terms of sub-rule 2 of Rule 6, significantly when it comes to maintaining of separate accounts, it is required only in respect of the quantity of inputs meant for use in the manufacture of exempted goods or services. He submits that omission of inputs service, which otherwise is found whenever inputs have been referred to shows that the legislature also realized that it may not be possible to quantify services for the purpose of utilization in exempted and dutiable goods and maintain separate accounts. Therefore, it is his submission that in this case if they reversed the entire quantum of credit taken on the inputs service used for both exempted as well as dutiable goods, they would have fulfilled the requirement of Rule 6(3) of Cenvat Credit Rules, 2004. He also submits that the decision of the Hon'ble Mumbai High Court in the case of Nicholas Piramal India Ltd., cited above also has not discussed this aspect as far as inputs services are concerned. The decision in the case of Nicholas Piramal India Ltd. (supra) was considering only availment of Cenvat credit on inputs. In view of the differentiation between inputs and inputs service in the Rule , the decision of the Hon'ble Bombay High Court does not apply in their case.”

However, the appellant offered to pre-deposit an amount of Rs.20 lakhs for the purpose of getting a stay in the matter. This amount, they submitted, is the amount of credit reversible within the limitation period.

The Revenue representative did not agree with the interpretation of Rule 6(2) given by the appellant and submitted that the decision of the Bombay High Court in the case of Nicholas Piramal India Ltd. (supra) clearly laid down that subsequent reversal with interest is not sufficient and cannot be a substitute for maintenance of separate accounts.

The Bench after considering the submissions observed –

“…As regards the extended period, in view of the several decisions and in view of the decision of the Larger Bench which finally settled contradictory views in this case extended period cannot be invoked. Therefore, we find prima facie case in favour of the appellants as regards the invocation of extended period is concerned. Further, details of evidence and other aspects, which have to be considered for invoking extended period would have to be considered at the time of final hearing. On merits, the interpretation given by the Ld. Advocate to sub rule (2) of Rule 6 of Cenvat Credit Rules, prima facie looks very attractive . However, it requires detailed examination and consideration in the light of the several decisions, which have been rendered already in respect of the maintenance of separate accounts. In most of the decisions, which have considered this Rule in the past have proceeded on the assumption that separate accounts are required to be maintained in respect of inputs as well as inputs services. This is a totally new ground, which has been taken and which would be required to be examined during final hearing. Further, we also take note of the fact that the Hon'ble Bombay High Court decision may not be applicable since the Hon'ble High Court was considering only inputs. Therefore, it cannot be said that Hon'ble High Court have considered all aspects as regards the maintenance of separate accounts in respect of inputs service. Further, the contention that the total reversal of credit taken on inputs service found subsequently in case where separate account maintenance is not possible would suffice also requires in-depth consideration. Under these circumstances, we consider that the offer made by the Ld. Advocate if enhanced to Rs.25 lakhs would serve the purpose and hence, we direct the appellants to deposit the same within four weeks from today and report compliance…. On such compliance being reported, the requirement of pre-deposit of balance amount of duty, interest thereon and penalty shall be waived and stay granted during the pendency of the appeal.”

The CESTAT further noted that in view of the fact that substantial revenue was involved and that the issue was recurring, the matter is posted for final hearing on 22.04.2010.

We will keep you posted…but until then take a look at the following –

++ The Joint Secretary (TRU-1) in his letter D.O.F.No.334/ 1/2010-TRU New Delhi, dated the 26th February, 2010 while narrating the important changes brought about by the Finance Bill, 2010 mentioned the following -

“10.2 Other measures

10.2.1 Some of the other procedural simplification measures that are contained in the budget proposals are as under:

++ Benefit of allowing Cenvat credit to be reversed on proportionate basis (when common inputs are used for the manufacture of dutiable and exempt products) is being extended retrospectively for pending cases. Suitable provisions have been incorporated in the Finance Bill, 2010 (clauses 68 to 72).”

As for Rule 6(2) of CCR, 2004 operating during the period of dispute, it read(s) –

“(2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services, 37 [* * *] 37 , and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable.”

37 – words “except inputs intended to be used as fuel” omitted by notification 27/2005-CE(N.T), dated 16.05.2005.

The most beautiful thing that we can experience is the mysterious. It is the source of all true art and science – Albert Einstein, What I Believe.

(See 2010-TIOL-489-CESTAT-MUM in 'Excise')