Rule 6(3) of the Cenvat Credit Rules, 2004 does not apply to the Exempted Lending Service Which is Only a part of the Banking and Other Financial Services: CESTAT [Read Order]

In Ahmednagar District Central Co-op Bank Ltd. vs. Commissioner of Service Tax, the Mumbai Bench of the Customs, Excise & Service Tax Appellate ( CESTAT ) held that Rule 6(3) of the Cenvat Credit Rules, 2004 does not apply to the lending service which is only a part of the banking and other financial services.

The appellant provides banking and other financial services. One of such service includes lending of money. The case of the Department is that interest accrued on lending by financial company has been excluded from the value of taxable services by virtue of sub rule 2 (iv) of Rule 6 of Service Tax (Determination of Value) Rules, 2006.

The contention of the department was that since interest is exempted from payment of service tax, in terms of Rule 6 of Cenvat Credit Rules, 2004 read with sub rule (3A) of Cenvat Credit Rules, 2004, appellant was required to pay an amount equal to 8% /6% on the value of exempted service provided by them. Accordingly, a hefty demand along with interest and penalty were confirmed under Rule 6(3) read with Rule 14 of Cenvat Credit Rules, 2004 and proviso to Section 73(1) as well as under Section 75, & Section 78 of Finance Act, 1994. Aggrieved appeals were filed before the CESTAT.

The Counsel for the appellant argued that appellant had availed cenvat credit only in respect of those services which are specified under Rule 6(5) of Cenvat Credit Rules, 2004 where full credit is available even though the assessee provides exempted and taxable services and therefore Rule 6(3) should not apply. He submitted that as the appellant had already paid an amount of Cenvat credit availed along with interest therefore Rule 6(3) should not apply. He pointed out that option was available to the appellant either to reverse the actual proportionate credit or to pay 6% therefore Revenue couldn’t dictate that whether appellant is required to avail option of 8%/6% payment or actual Cenvat payment.

Allowing the appeal, the Bench comprising of Judicial Member Ramesh Nair & Technical Member Raju observed “In this fact entire basis of Revenue that interest being exempted service therefore Rule 6(3)(ii) is applicable is absolutely incorrect. Rule 6(3)(ii) is applicable only in case when common input service is used in a service which is wholly exempted from payment of service tax. In the present case lending service which is one of the banking and other financial service is taxable only part of the value of such service which represent interest is only exempted therefore Rule 6(3) has no application. Moreover, it is assumed that appellant have reversed the Cenvat credit availed along with interest therefore appellant have availed option of reversal of actual cenvat credit in such case also payment of 8%/6% is not sustainable.”