Option Under Rule 6(3)(ii) of Cenvat Credit Rules Mandates Compliance with Payment Obligations

Marudhar Hotels Pvt. Ltd. Vs Commissioner of Central Excise (CESTAT Delhi)

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi, recently issued a ruling in the case of Marudhar Hotels Pvt. Ltd. Vs Commissioner of Central Excise. The case revolved around the appellant’s compliance with Rule 6 of the Cenvat Credit Rules, 2004, pertaining to services provided and corresponding Cenvat credit availed.

Case Background

Marudhar Hotels Pvt. Ltd. operates as a provider of taxable services, including Mandap Keeper Service, Internet Café Service, and Renting of Immovable Property Service. Additionally, the company also offers exempted services.

During audits for the financial years 2010-11 and 2012-13, the Central Excise department identified discrepancies in the calculation and utilization of Cenvat credit. Alleging short-payment of Cenvat credit attributable to exempted services, the department issued a show-cause notice for recovery of ₹73,35,333 along with interest and penalties.

The appellant contested the department’s calculations and brought the matter before CESTAT, challenging the Order-in-Original issued in November 2016.

Key Issues Raised

1. Applicability of Rule 6(5) of Cenvat Credit Rules, 2004
   The appellant argued that the department erroneously included credits availed for management consultancy services. Rule 6(5) of the Cenvat Credit Rules, 2004, permits full credit on certain services, including management consultancy, even if they are partially utilized for exempted services.
2. Inaccuracies in Departmental Calculations
   The appellant highlighted errors in the figures considered for calculating short payments, particularly for the period April 2012 to June 2012.
3. Wi-Fi Services Categorization
   The appellant claimed that Wi-Fi expenses for the period July 2012 to March 2013 were incurred solely for taxable services, thus exempting them from proportionate reversal of Cenvat credit.

Observations by CESTAT Delhi

1. Financial Year 2010-11
   The tribunal observed that the department misapplied the provisions of Rule 6(5) after its omission in April 2011. Since the period under review was prior to the rule’s omission, CESTAT ruled that Marudhar Hotels was entitled to claim 100% credit on management consultancy services.
2. April to June 2012
   CESTAT examined departmental records and upheld the appellant’s contention regarding the erroneous inclusion of re-credited amounts in Cenvat calculations. Consequently, the demand for this period was modified.
3. July 2012 to March 2013
   The tribunal agreed with the department’s findings, noting that Wi-Fi services were used for both taxable and exempted services. Since the appellant had opted for proportionate credit reversal under Rule 6(3)(ii), full credit could not be claimed.

Ruling and Implications

Based on its findings, CESTAT Delhi delivered the following verdicts:

• Demand for FY 2010-11: The demand attributable to management consultancy services was set aside, providing significant relief to Marudhar Hotels.
• Demand for April to June 2012: The claim was partially upheld, with modifications based on recalculated figures.
• Demand for July 2012 to March 2013: The tribunal upheld the department’s determination, reiterating that the appellant was bound by Rule 6(3)(ii).

The tribunal partially allowed the appeal, modifying the original adjudicating authority’s order and pronouncing the decision in open court on November 29, 2024.

Analysis

This case highlights the complexities in applying Rule 6 of the Cenvat Credit Rules, especially when businesses provide both taxable and exempted services. The judgment emphasizes the importance of maintaining clear and accurate records to avoid disputes during audits.

For businesses in the service sector, the ruling underscores the need to stay updated on amendments to tax regulations, such as the omission of Rule 6(5). Compliance with procedural requirements under Rule 6(3A), including proportionate credit reversal, remains crucial to mitigate liabilities.

Conclusion

The CESTAT Delhi ruling in Marudhar Hotels Pvt. Ltd. Vs Commissioner of Central Excise offers clarity on the application of Cenvat Credit Rules and provides partial relief to the appellant. While the decision brings attention to procedural errors, it also reinforces the importance of adhering to statutory requirements for credit utilization.

FULL TEXT OF THE CESTAT DELHI ORDER

M/s. Marudhar Hotels Pvt. Ltd. i.e. the appellants herein are engaged in providing taxable service, namely, Mandap Keeper Service, Internet Café Service, Renting of Immovable Property Service, etc. They are also providing the exempted services and had availed the option under sub-clause (ii) of sub rule 3 of Rule 6 of the Cenvat Credit Rules, 2004. During the audit of their records, department observed that the appellant has Cenvat credit of Rs.1,11,22,936/- during the Financial Year 2010-11 and of Rs.1,42,31,299/- during 2012-13. The Cenvat credit on the said amounts have been worked out at Rs.28,42,027/- and Rs.32,22,660/- for the respective financial year. However, department has worked out the same at Rs.97,67,158/- and Rs.36,32,862/- (Rs.20,17,121 + Rs. 16,15,741/-) respectively. Based on these observations, it is alleged that the appellant has short paid an amount equivalent to Cenvat credit attributable to exempted services amounting to Rs.73,35,333/- during the Financial Year 2010-11 and 2012-13 thereby contravening the provisions of sub rule 2 and 3 of Rule 6 of Cenvat Credit Rules, 2004. The excess credit availed of Rs.73,35,333/- is proposed to be recovered from the appellant along with the interest vide Show Cause Notice No. 115/2015 dated 06.08.2015. The said proposal has been confirmed vide Order-in-Original No. 39-16-17 dated 07.11.2016. Being aggrieved, the appellant is before this Tribunal.

2. We have heard Shri Sanjiv Agarwal, learned Chartered Accountant for the appellant and Shri Rajeev Kapoor, Authorized Representative for the respondent.

3. Learned Chartered Accountant for the appellant has mentioned that the short paid Cenvat credit has been worked out by the department for three different periods i.e. 2010-11, from April 2012 to June 2012 and from July 2012 to March 2013. Learned Chartered Accountant has submitted separately for each of these periods. With respect to the short payment of Rs.69,25,131/- during the Financial Year 2010-11, it has been submitted that while computing the said amount, the department has failed to take into consideration Rule 6(5) of Cenvat Credit Rules, 2004, according to which 100% credit on the services of management consultancy as defined under Section 65(105)(r) of the Finance Act, 1994 is specifically allowed. Even if it is partially used in providing the exempted services, thus credit taken on Management Consultancy Service it was not liable for proportionate reversal. Total Cenvat credit availed in the Year 2010-11 is Rs.1,11,22,936/- out of which substantial amount of  Rs.78,86,394/- pertains to Management Consultancy Services. Hence, the substantial demand on this account is liable to be set aside.

3.1 With respect to the alleged short payment of Rs.3,87,671/- for the period from April 2012 to June 2012, it is submitted that the figures taken by the department for calculating the said shortcoming do not tally with the figures reflected in the appellant’s record. Learned Chartered Accountant further mentioned that during this period, an amount of Rs.4,46,651/- has been included in the credit availed of Rs.15,77,123/- despite the fact that the former amount pertains to the re-credit taken in the month of June 2012 in respect of the excess credit debited during the previous year under Rule 6(3A) of Cenvat Credit Rules, 2004. The inclusion of said amount is not justified and the demand of Cenvat credit for this amount is therefore not sustainable.

3.2 Finally submitting with respect to the alleged short payment of Rs.22,531/- for the period July 2012 to March 2013, it is submitted that the said income pertains to Wi-Fi expenses which are solely incurred for the provisions of taxable services. Hence, Rule 6 of Cenvat Credit Rules, 2004 is not applicable. The demand for this period is also liable  to   be set aside. With these submissions, learned Chartered Accountant has prayed for the order under challenge to be set aside and the appeal is prayed to be allowed.

4. Learned Departmental Representative on the other hand has reiterated the findings arrived at by the Commissioner in the order under challenged. Impressing upon no infirmity in the order, the appeal is prayed to be dismissed.

5. Having heard both the parties and perusing the case record, we observe following to be the admitted facts:

(i) Appellant is holding service tax registration for providing various taxable services like Management Consultancy Services, Internet Cafe Services and Mandap Keeper Services.

(ii) The appellant is also rendering few services which are exempted from payment of tax.

(iii) The appellant is not maintaining the separate register for the inputs used in providing taxable as well as exempted services like Food Sale in Restaurants, Boarding and Lodging facilities of guests

(iv) Sub-clause (ii) of Rule 6(3) of Cenvat Credit Rules, 2004 has been complied with by the appellant.

(v) While applying Rule 6(3A) of Cenvat Credit Rules, 2004 appellant had reversed the proportionate Cenvat Credit of Rs.28,42,027/- for the Year 2010-11 with an intimation thereof to the department vide letter dated 30.06.2011 and has also reversed the proportionate Cenvat credit of Rs.28,32,413/- for the Year 2011-12 under intimation to the department vide letter dated 29.06.2012.

6. We also observe that the period in question has been divided into three vis-à-vis the respective demand as follows:

7. Period wise observations in the light of above admitted facts are as follows:

7.1    Financial Year 2010-11

7.1.1 Appellant has claimed the applicability of Rule 6(5) of Cenvat Credit Rules, 2004. The provision is perused. It reads as follows:

“Notwithstanding anything contained in sub-rules (1), (2) and (3), credit of the whole of service tax paid on taxable service as specified in sub-clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance Act shall be allowed unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services.”

7.1.2  The perusal makes it clear that the provisions of Rule 6 of Cenvat Credit Rules, 2004 are not applicable on 16 services as mentioned in the said provision. One of such services is of Management Consultancy Service defined under Section 65(105)(r) of Finance Act, 1994. According to the said provision 100% credit on the Management Consultancy Service is specifically allowed even if it is partially used in providing the exempted services. The rule clarifies that the credit taken on Management Consultancy Service is not liable for proportionate reversal under Rule 6 of Cenvat Credit Rules, 2004. We accordingly hold that the amount of Cenvat credit was not supposed to be reversed vis-à-vis Management Consultancy Services. The original adjudicating authority also in Para 4.4.1 in sub-para 2 has held that appellant to be entitled to avail 100% credit of the same irrespective of their utilization in taxable or non-taxable service during the period under question. However, relief has been denied as the said sub-rule (5) was omitted vide Notification No. 3/2011. However, we observe that the said notification is dated 01.03.2011 which omits sub-rule (5) of Rule 6 of Cenvat Credit Rules, 2004 w.e.f. 01.04.2011. The period in question is March 2010 to March 2011 which means the notification has wrongly been applied by the adjudicating authority for denying the availment of 100% credit on the Management Consultancy Services.

7.2 April 2012 to June 2012

7.2.1 We observe that the amount of Rs.4,65,651/- as claimed as re-credit by the appellant against excess reversal in previous Financial Year has already been denied to be subjected to proportionate reversal in the ratio of exempted services provided in the subsequent period. As has been observed in Para 4.5 of the Order-in-Original/order under challenge, the already reversed Cenvat credit under intimation to the department has also been acknowledged by the adjudicating authority in the said para itself. The proportionate value of Cenvat credit has already been reduced. We do not find any reason to interfere with those findings.

7.3 July 2012 to March 2013

7.3.1 The submission of appellant with respect to the demand for this period is that the Wi-fi Services availed during this period were exclusively used in providing the taxable services. Provisions of Rule 6 of Cenvat Credit Rules, 2004 do not apply. However, in the light of the above observed admitted facts, the appellant was providing taxable as well as exempted services and was not maintaining the separate register of the proportionate inputs used for both kind of services. The said argument of the appellant is not sustainable. The adjudicating authority in Para 4.6 of the order under challenge has held that use of Wi-Fi Service by its very nature is not restricted to providing only taxable services. The use of Wi-Fi Services in providing number of exempted services has not been denied by the assessee. Rather the assessee themselves had exercised the option under Rule 6(3)(ii) of Cenvat Credit Rules, 2004 for payment of proportionate amount attributable to exempted services as they were not in a position to identify a particular input service with a particular output service. In the light of the said admitted facts, it has been held that there is no justification in showing use of a particular input service exclusively in taxable output service and to claim full Cenvat credit on a subsequent occasion without having withdrawn the option availed of Rule 6(3) of Cenvat Credit Rules, 2004. We find no reason to differ from these findings. Accordingly, we hold that once the appellant exercised option to pay under Rule 6(3)(ii) of Cenvat Credit Rules, 2004 they were under legal obligation to pay the amount as determined under the said rule.

8. In the light of the entire above findings, the demand for the period 2010-11 vis-à-vis the amount of Cenvat credit availed on Management Consultancy Services is hereby set aside. The demand from April 2012 to June 2012 stands modified as discussed above. The order with respect to demand for the period July 2012 to March 2013 is also upheld. Consequent thereto, the order under challenge is hereby modified and the appeal stands partly allowed.

[Order pronounced in the open court on 29.11.2024]