Motorola India Claimed Ineligible Credit: CESTAT orders Recovery of wrongly taken Credit, Allows Reversal of Proportionate Credit with Interest [Read Order]

The Bangalore Bench of the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) directed to recover credit taken wrongly by allowing to reverse proportionate credit along with interest Ineligible Credit Availed by Motorola Mobility India.

The respondent, M/s. Motorola Mobility India Pvt. Ltd. had availed credit on ineligible services. The audit officers on verification found that the respondents were engaged in trading activity involving the purchase and sale of mobiles and their parts. Since Trading is an exempted service from 01.04.2011, the respondent was not eligible to avail of the CENVAT Credit on services used in the trading activities. The respondent had neither maintained a separate inventory nor had opted in terms of Rule 6(2) of CENVAT Credit Rule (CCR), 2004.

In terms of provisions of Rule 6(3)(i) of CENVAT Credit Rules, 2004 wherever an assessee avails cenvat credit on common input services which are used for both taxable and exempted services shall pay an amount equal to 5% /6% of value of the exempted goods/services. Accordingly, Rs.2,84,71,485/- was demanded in terms of Rule 14 of CCR, 2004 read with Section 73(1) of the Finance Act, 1994 along with interest under Section 75 of Finance Act, 1994.

The Commissioner in the impugned Order observed that for the period 2011-2012 and 2012-13, the respondents were predominantly engaged in the provision of taxable services mainly exports and the trading activity was minimal. He also stated that most of the impugned services were utilized for taxable services/exports and not for trading activity.

The respondent taking into account the proportionate credit, reversed the sum of Rs.1,14,64,277/- on 26.04.2016 as per the procedure laid down under 6(3)(ii) read with Rules 6(3A). The Commissioner held that Rule 6(3) provides 3 options and it is up to them to decide as to which option has to be exercised.

The Commissioner has held that since they had sufficient balance in their cenvat credit account throughout the Financial Year 2011-12 and 2012-13 and since the respondent had reversed the proportionate credit immediately after audit observation much before the issue of show-cause notice, the reversal of such credit would amount to not taking the credit and therefore, dropped the interest.

The Authorized Representative for the Revenue referring to the grounds of appeal submitted that as per the amended Rule 6(3)(1) of the CCR, 2004 effective from 01.04.2011 credit shall not be allowed to be used in the exempted services.

It was further submitted that having not exercised an option in writing before the jurisdictional officer, under Rule 6(3)(ii) respondent is bound to pay an amount equal to 5%/6% of the value of the exempted services. The CESTAT has overlooked the fact that as per Explanation-I under Rule 6(3) of the CCR, 2004 if the manufacturer of goods or the provider of exempted services, avails any of the options under sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the Financial Year.

Rule 6 of the Cenvat Credit Rules, 2004 deals with the obligations of a provider of taxable and exempted services. Rule 6(1) states that Cenvat Credit shall not be allowed on inputs/input services exclusively used for providing exempted services.

Rule 6(2) provides that if inputs or input services are used for provision of output services which are chargeable to duty or tax as well as exempted services, then separate accounts are to be maintained for receipt, consumption and inventory of inputs and receipt and use of input services and the provider shall take credit only on inputs used for dutiable output services.

It was found that the petitioner did not maintain separate accounts of the inputs/input services utilized for providing certain taxable and exempted output services. It also did not choose to opt for one of the procedures stipulated in Rule 6(3) set out supra. The petitioner however availed and utilised Cenvat Credit on such inputs/input services which were common to both taxable and exempted output services and the same amounted to Rs. 17,15,489/-.

The second respondent issued show cause notice to the petitioner proposing to choose the option under the aforestated Rule 6(3)(i) on its behalf and calling upon it to explain why it should not be directed to pay an amount of 5%, up to 31-3-2012, and 6%, from 1-4-2012, of the value of the exempted services, aggregating to Rs. 3,52,65,241/-.

High Courts of Telangana and Rajasthan emphasized the fact that the authorities were entitled to recover the credit taken wrongly by allowing them to reverse the proportionate credit along with interest.

A two-member bench of Dr D M Misra, Member (Judicial) and Mrs R Bhagya Devi, Member(Technical) upheld the Commissioner’s order concerning the confirmation of service tax demand of Rs.1,14,64,277/- only. The Revenue’s appeal concerning the demand of interest was upheld and accordingly, interest is to be paid on the above demand of Rs.1,14,64,277/- in terms of Rule 6(3A) of the Cenvat Credit Rules, 2004. 

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