CENVAT Credit Reversal Cannot Include Exclusive Dutiable Credit: CESTAT Sets Aside Service Tax Demand on TNPL [Read Order]

The Customs, Excise and Service Tax AppellateTribunal (CESTAT) Chennai Bench has set aside the demand holding that CENVAT credit reversal under Rule 6(3A) cannot include credit exclusively attributable to dutiable goods.

The Tribunal observed that only “common credit” used for both exempted and dutiable goods/services is liable for proportionate reversal under Rule 6(3A) of the CENVAT Credit Rules, 2004. The inclusion of credit used for dutiable output alone will negate the entire statutory scheme. Therefore, the demand along with interest and penalties was set aside.

The appellant Tamil Nadu Newsprint and PapersLimited (TNPL), is engaged in the manufacture of paper products. Along with this, electricity is also generated through windmills. The appellant is also into trading activities for notebooks.

These activities are treated as exempted services. The Department alleged a deficit in the reversal of CENVAT credit. The Department claimed that TNPL had wrongly applied the formula prescribed under Rule 6(3A) by excluding some values.

The assessee argued that the issue has already been settled on judicial precedents and stated that only common input service credit can be reversed. It argued that credit attributable only to dutiable goods cannot be taken into account for computation.

The assessee also argued that both electricity and trading turnover were taken into account for reversal computation and that demand was raised on audit scrutiny of disclosed records.The Department argued that total CENVAT credit used in the formula includes all credit taken and requested a higher reversal or payment under Rule 6(3)(i).

The Tribunal observed that Rule 6(3A) is a machinery provision and cannot be used to deny legitimately availed credit. It emphasized that loading exclusive dutiable credit into the formula would lead to unintended disallowance.

The Bench comprising Justice Dilip Gupta, President and Mr. Vasa Seshagiri Rao (Technical Member) further held that the adjudicating authority had travelled beyond the show cause notice by reinterpreting the formula and proposing alternative liability. It also ruled that extended limitation was not invocable as the dispute was interpretational and based on disclosed records. Consequently, penalties were also set aside.

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