Relief to Larsen & Toubro Limited: Bombay HC confirms Reversal of Credit to Input Services on Usage for Manufacture of Dutiable and Exempted goods [Read Order]

A Division Bench of the Bombay High Court confirmed the reversal of credit to input services on usage for manufacture of dutiable and exempted goods and thereby granting major relief to Larsen & Toubro Limited (HED).

The controversy in the present appeal revolves around the purport and applicability of Rule 6 of the Cenvat Credit Rules, 2004 (for short ‘CCR,2004’) under which the duty demand was raised against the respondent. Rule 6 provides for obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services.

It is the Department’s case that the respondent had manufactured dutiable excisable goods as well as exempted goods, consuming common cenvated inputs and input services as also had maintained separate accounts in respect of raw materials i. e. inputs consumed in excisable and exempted goods, however, it had not maintained separate accounts in respect of input services used / consumed in or in relation to manufacture of excisable and exempted finished goods as required in terms of Rule 6(2) of Cenvat Credit Rules, 2004 (for short ‘CCR,2004’) as also that the respondent had not followed the procedure specified in sub-rule (3A) of Rule 6 of the CCR 2004.

According to the Department, prior to 1 April 2008 as per the provisions of Rule 6(3) of the CCR,2004 and under Rule 6(3)(i) of the CCR,2004 with effect from 1 April 2008, where the manufacturer or the provider of output services, opts not to maintain separate records for excisable and exempted goods, shall pay an amount equal to 5% (10% prior to 7 July 2009) of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product, charged by the manufacturer for the sale of such goods at the time of their clearance from the factory.

The respondent contended that the respondent had correctly availed the Cenvat credit in respect of service tax paid on the common inputs and input services pertaining to exempted goods, and that there was no suppression of facts to evade payment of duty by intentionally availing wrong Cenvat credit. It was contended that the respondent was maintaining project wise record of purchases and input services and that they had reversed Cenvat credit in proportion of turnover of excisable and exempted goods.

The Court of Justices Jitendra Jain and GS Kulkarni observed that “The benefit of reversing the proportionate credit was extended with retrospective effect in cases where common input and input services were used for dutiable and exempted products. This permitted the respondent to proportionately reverse the credit attributable to input / input services used for manufacture of exempted goods, in a case where common inputs or input services were used for manufacture of both dutiable and exempted goods.”

“It is rightly observed by the CESTAT that when for such period the dispute has arisen only in such event, a show cause notice was issued and hence, the case of the respondent for the period 2007-08 was covered by the amendment made by way of insertion of subrule (7) of Rule 6 of CCR,2004 by the 2010 Amendment” the Bench noted.

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