Reversal formula of ITC on exempted supplies applicable to 'common input tax' credit

The Hon'ble CESTAT, New Delhi in the case of M/s National Steel & Agro Industries Limited v. Principal commissioner [Final Order Nos. 51518-51519/2021 decided on May 25, 2021] quashed the demand under Rule 6(3)(i) of the CENVAT Credit Rules, 2004 ('the CCR') as the assessee has followed Rule 6(2) of the CCR and maintained separate records and not taken credit on inputs/input services used for exempt services i.e., trading.  Further, held that nothing in the CCR prohibits an assessee from following Rule 6(2) of the CCR in respect of the inputs and input services where it is feasible to maintain separate records and follow Rule 6(3A) of the CCR in case of such inputs or input services where it is not feasible to do so.

Facts

M/s National Steel & Agro Industries Limited ('the Appellant') is engaged in manufacturing of CR coils, CR galvanized sheets, CR galvanized color coated coils, etc. and has been discharging Central Excise duty on the manufactured goods. The Appellant avails CENVAT credit of duty paid on inputs and service tax paid on input services under the CCR.

The Department felt that the Appellant availed inadmissible credit on input services used for exempted services, viz., trading of goods and issued Show Cause Notice dated March 27, 2018 ('SCN 1') demanding payment of an amount of Rs. 13,84,44,474/- for the Financial year 2015- 2016 under Rule 6(3)(i) of CCR. This demand was partly confirmed by the Principal Commissioner ('the Respondent') to the tune of Rs. 6,21,72,263/- vide Order-in-Original dated February 22, 2019 ('Impugned OIO 1').

Another Show Cause Notice dated March 18, 2019 ('SCN 2') was issued for period April 2016 to June 2017 demanding an amount of Rs. 21,35,06,000/- under Rule 6(3)(i) of CCR. This demand was also partly confirmed by the Respondent to the tune of Rs. 7,57,07,862/- Order-in-Original dated November 20, 2019 ('Impugned OIO 2').

Both the Impugned OIO 1 and OIO 2 were confirmed on the ground that the computation of the reversal of credit on account of exempted services was incorrect.

Issue

• What is the value of service in case of trading?
• Whether only the CENVAT credit taken on common input service should be considered or the entire CENVAT credit taken should be considered for calculating the proportionate amount of CENVAT to be reversed as per Rule 6(3A) of the CCR.

Held

The Hon'ble CESTAT, New Delhi in Final Order Nos. 51518-51519/2021 decided on May 25, 2021 held as under:

• Noted that trading is a form of service and no service tax is leviable on it and hence it is an exempted service. Unlike other services, the amount transacted in trading represent not only the service rendered by trader but also the value of the goods delivered. The service element cannot be the total turnover of the goods traded but is only a small fraction of the turnover. This turnover represents the value of the goods plus the value of the service rendered by the trader and Explanation 1(c) after sub-rule (3D) to Section 6 of the CCR clearly specifies that in case of trading service, the value of the service is the difference between the buying and selling price or 10% of the traded goods whichever is higher.
• Thus, there was a mistake on the part of adjudicating authority as it did not take this explanation into account while calculating the amount required to be reversed as per Rule 6(3A) of the CCR and reckoning the total trading turnover as the value of the exempted services rendered.
• Observed that the Appellant has followed Rule 6(2) of the CCR and maintained separate records and has not taken credit on inputs or input services used exclusively for exempted services and had taken credit only on the inputs and input services used in manufacture of dutiable goods. The only dispute is regarding the credit on common input services used in their headquarters which was transferred to the field units through ISD invoices. This credit cannot be attributed wholly to either the dutiable goods manufactured, or the exempted service rendered viz., trading. This should, therefore, be apportioned.
• The only option in respect of such services is to divide the credit on such input services in proportion to the value of the dutiable goods and exempted services and deny credit to the extent it is attributable to the exempted services using the formula under Rule 6(3A) of the CCR.
• Therefore, the total credit taken in the formula under Rule 6(3A) of the CCR can only refer to such credit as is not covered by Rule 6(2) of the CCR, i.e., credit on common input services. Only such an interpretation is harmonious with the restriction on credit laid down under Rule 6(1) of the CCR and the provision for maintenance of separate records under Rule 6(2) of the CCR.
• Held that nothing in the CCR prohibits an assessee from following Rule 6(2) CCR in respect of the inputs and input services where it is feasible to maintain separate records and follow Rule 6(3A) of the CCR in case of such inputs or inputs services where it is not feasible to do so. It would have been a different situation if the Appellant had not followed Rule 6(2) of the CCR at all and took credit on all the inputs and input services regardless of whether they are attributable to the manufacture of dutiable goods or provision of exempted services. Then the total CENVAT credit taken during a year would have included all the CENVAT credit taken.
• Since the Appellant has followed Rule 6(2) of the CCR and has not taken any CENVAT credit on the input services which were used exclusively for providing exempted services, the formula under Rule 6(3A) of the CCR can only be used to only proportionately divide the credit taken on common input services and deny credit to the extent it is attributable to the exempted service viz., trading during the periods relevant to both appeals, viz., 2015-16 and April 2016 to June 2017.
• Set aside the Impugned OIO 1 and Impugned OIO 2.

Relevant provisions

Rule 6(2) of the CCR (during the period from April 2016 to June 2017)

'(2) A manufacturer who exclusively manufactures exempted goods for their clearance upto the place of removal or a service provider who exclusively provides exempted services shall pay the whole amount of credit of input and input services and shall, in effect, not be eligible for credit of any inputs and input services.'

Rule 6(3A)(B) of the CCR (during the period from April 2016 to June 2017)

'6. Obligation of a manufacturer or producer of final products and a provider of output service-

(3A) For determination of amount required to be paid under clause (ii) of sub-rule (3), the manufacturer of goods or the provider of output service shall follow the following procedure and conditions, namely-

(b) the manufacturer of final products or the provider of output service shall determine the credit required to be paid, out of this total credit of inputs and input services taken during the month, denoted as T, in the following sequential steps and provisionally pay every month, the amounts determined under sub-clauses (i) and (iv), namely :- 

(i) the amount of CENVAT credit attributable to inputs and input services used exclusively in or in relation to the manufacture of exempted goods removed or for provision of exempted services shall be called ineligible credit, denoted as A, and shall be paid; 

(ii) the amount of CENVAT credit attributable to inputs and input services used exclusively in or in relation to the manufacture of non-exempted goods removed or for the provision of non- exempted services shall be called eligible credit, denoted as B, and shall not be required to be paid; (iii) credit left after attribution of credit under sub-clauses (i) and (ii) shall be called common credit, denoted as C and calculated as,- 

C = T - (A + B); 

Explanation. - Where the entire credit has been attributed under sub-clauses (i) and (ii), namely ineligible credit or eligible credit, there shall be left no common credit for further attribution. 

(iv) the amount of common credit attributable towards exempted goods removed or for provision of exempted services shall be called ineligible common credit, denoted as D and calculated as follows and shall be paid, - 

D = (E/F) x C; 

where E is the sum total of - 

(a) value of exempted services provided; and 
(b) value of exempted goods removed, during the preceding financial year; 

where F is the sum total of - 

(a) value of non-exempted services provided, 
(b) value of exempted services provided, 
(c) value of non-exempted goods removed, and 
(d) value of exempted goods removed, during the preceding financial year'

Explanation 1(c) under Rule 6 of the CCR (during the period from April 2016 to June 2017)

'Explanation I. - "Value" for the purpose of sub-rules (3) and (3A), -

(c) in case of trading, shall be the difference between the sale price and the cost of goods sold(determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase) or ten per cent. of the cost of goods sold, whichever is more;'

Rule 6(3A)(c)(iii) of the CCR(during the Financial year 2016-16)

'(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods and their clearance upto the place of removal or provision of exempted services = (M/N) multiplied by P, where M denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the financial year, N denotes total value of output and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the financial year, and P denotes total CENVAT credit taken on input services during the financial year;'