Lack of Evidence and Section 11A(4) Misuse: CESTAT quashes ₹2.81 Cr Rule 6(3) Demand over Alleged Common Input Service Usage [Read Order]

The Allahabad bench of  Customs Excise and Service Tax Appellate Tribunal ( CESTAT ) struck down a demand of ₹2.81 Crore against the appellant ruling that the show cause notice ( SCN ) and the order produced by the commissioner of Central Excise and CGST as it was made without evidence and legal merit.

The appellant, Shree Radhey Radhey Ispat Pvt Ltd, engaged in manufacturing and trading activities made use of Central Value Added Tax CENVAT credit on input services at its manufacturing unit in Fatehpur. The Revenue alleged that the appellant also provided exempted services (trading) without maintaining separate bank accounts as required under Rule 6(2) of the CENVAT Credit Rules (CCR), 2004. It argued that the appellant failed to pay 6% of the value of exempted services, calculated as ₹2.81 Crore for the Financial years 2012-13 to 2015-16.

The Commissioner of Central Excise and CGST observed that the appellant was liable to pay ₹2.81 Crores under rule 6(3) of the CENVAT credit rules (CCR) 2004 for failure to maintain separate accounts for input services used in taxable manufacturing and exempted trading activities.

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The demand was further confirmed under Rule 14 of the CCR read with Section 11A(4) of the Central Excise Act. The Commissioner of Central Excise and CGST ordered a penalty of ₹2.81 Crores on the appellant as per the said provisions of the Central Excise Act.

The Commissioner also invoked the extended period of limitation, stating that the appelllant willfully suppressed facts and failed to disclose its trading activities to evade the payment of 6% tax on exempted services as required under Rule 6(3) of CCR.

Aggrieved by the order, the appellant moved to the CESTAT where it contended that the trading activities were conducted entirely from a separate place in Kanpur, distinct from the manufacturing unit in Fatehpur and that separate accounts for trading were maintained which was shown in VAT assessment orders, freight ledgers and invoices.

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The appellant argued that all CENVAT credit was availed exclusively for input services related to manufacturing at the Fatehpur factory. The appellant also asserted that the SCN lacked evidence to establish the use of standard input services for both manufacturing and trading.

The revenue affirmed the Commissioner’s order and held that the appellant had availed CENVAT credit on standard input services for taxable (manufacturing) and exempted (trading) activities. It contended that the appellant’s failure to pay the amount required under Rule 6(3) CCR would attract the said tax demand and penalty.

The CESTAT, on examining both submissions, held that the SCN and the order failed to establish the use of standard input services for trading and manufacturing. The adjudicating authority had not considered kay documents, including VAT orders and freight invoices, which showed the distinction of activities between the Kanpur and Fatehpur entities.

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The tribunal held that Rule 6(3) invocation requires proof of common input service usage, which was absent and that the tax demand relied solely on audit objections without factual analysis or evidence. The tribunal further pointed out that the appellant had demonstrated trading activities to be independently accounted for at the Kanpur facility and that the freight charges for traded goods were exempt.

The two-member bench consisting of P.K Choudhary (Judicial Member) and Sanjiv Srivastava (Technical Member) asserted that the absence of evidence to support allegations of suppression or intent to evade tax shows that there is a lack of legal merit in the case. The tribunal, therefore, set aside the commissioner’s order and reversed the penalties and interest.

To Read the full text of the Order CLICK HERE

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