The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has clarified that while computing the amount of CENVAT credit to be reversed under Rule 6(3A) of the CENVAT Credit Rules, 2004, only the credit attributable to common input services used for both taxable and exempted services can be considered. Credit relating to input services exclusively used for taxable output services cannot be included in the reversal calculation.
The Bench comprising P. Dinesha, Judicial Member, and Vasa Seshagiri Rao, Technical Member, was dealing with a dispute on the scope of the expression “total CENVAT credit” in the formula prescribed under Rule 6(3A). The core issue was whether the computation should include the entire input service credit or be restricted to common input service credit alone.
The appeal was filed by M/s. Sify Technologies Ltd., which was engaged in providing several taxable services such as online information and database access or retrieval services, internet café services, leased circuit services, franchise services, business auxiliary services, and advertisement services. During the relevant period, the company also provided certain exempt or non-taxable services. Before March 2008, it had availed and utilised CENVAT credit on input services used for both taxable and exempted services without restricting utilisation to 20 per cent of the service tax payable on taxable output services, as contemplated under Rule 6(3).
A show cause notice was issued proposing to disallow the entire credit availed on common input services along with interest and penalty. The demand was confirmed, but on appeal, the Tribunal remanded the matter to the adjudicating authority for the limited purpose of verifying the allocation of common input service credit between taxable and exempted services, with a clear direction that no penalty should be imposed in the remand proceedings.
In the remand order, the adjudicating authority confirmed a demand of ₹13.36 lakh, holding that the appellant was required to compute the reversal under Rule 6(3A) by taking into account the entire input service credit. This led to the present appeal before the Tribunal.
The Department argued that once the assessee opted for reversal under Rule 6(3A), the formula had to be applied strictly, which according to it required consideration of the total CENVAT credit. The appellant, however, contended that such an approach would result in reversal of credit even for input services used exclusively for taxable services, which was contrary to the scheme of Rule 6.
After examining Rule 6(3)(ii) and Rule 6(3A), the Tribunal observed that the rules do not envisage denial or reversal of credit that is exclusively used for providing taxable output services. The Bench relied on the Ahmedabad Tribunal’s decision in CCE & ST, Rajkot v. Reliance Industries Ltd. [2019 (28) G.S.T.L. 96 (Tri.-Ahmd.)], where it was held that the term “total CENVAT credit” in the Rule 6(3A) formula must be read in harmony with the overall scheme of Rule 6 and refers only to common input services. This interpretation, the Bench noted, had also been affirmed by the Gujarat High Court.
The Tribunal held that accepting the Department’s view would lead to denial of legitimate credit on services wholly used for taxable outputs, which is not contemplated under the CENVAT Credit Rules. It also observed that the substitution of Rule 6(3A) was clarificatory in nature and intended to remove anomalies, not to curtail valid credit.
Accordingly, the Tribunal ruled that for the purpose of reversal under Rule 6(3A), only the credit attributable to common input services is to be considered. Credit on input services exclusively used for taxable services cannot form part of the calculation. The impugned demand was therefore set aside, and the appeal was allowed with consequential relief to the assessee.
