The main objective of Rule 6 of CENVAT Credit Rules, 2004 is to ensure that CENVAT credit is not availed in respect of inputs or input services used in or in relation to exempted goods or for exempted services. Rule 6(3) (ii) of the said Rules providing for payment of 5% on exempted services does not apply automatically, if the assessee fails to opt either of the options with respect to reversal of CENVAT credit.

The appellant is engaged in manufacturing activities as well as trading activities (considered as exempt service with effect from 1st April, 2011). In March, 2012, the appellant filed an intimation with respect to their reversal of CENVAT credit along with interest on common input services under Rule 6(3A)(b) of CENVAT Credit Rules for Financial Year 2011-2012. The appellant neither maintained separate records for receipt and consumption of common input services nor availed CENVAT credit only to the extent of taxable activities. The Department denied availment of such option in view of non-observance of conditions of Rule 6(3A) read with Rule 6(3)(ii) on the grounds that intimation for availment of option under Rule 6(3A) was not conveyed giving respective particulars and the amount was not determined and paid provisionally every month. Consequently, huge demand equivalent to 5% of value of exempted services i.e. trading turnover along with interest and penalty was raised in terms of Rule 6(3) (i) of CENVAT Credit Rules. The demand was confirmed on the sole ground of non-observance of conditions provided under the said Rule 6(3A). Since there was no condition of intimation at the beginning of financial year, the appellant stated that they had legally opted to reverse CENVAT credit vide Rule 6(3A). Further, it was contended that manufacturer has to mention the date from which such option is exercised or proposed to be exercised. Therefore, the intention to grant benefit of such option was at the discretion of assessee. The intimation could be filed even after exercising such option. Further, the amount to be paid every month was on provisional basis and the final amount of reversal of CENVAT credit has to be made only before 30th June of next year. Therefore, none of the conditions were violated. Though intimation was not provided in the prescribed format, all the requisite information, directly or indirectly, were either furnished or available with the department. In any case, there was no provision in law that if the procedure as provided under Rule 6(3A) was not followed, automatically Rule 6(3) (i) would apply in such cases. Reliance was placed on the decision of the same Jurisdictional Commissioner in the case of Tata Technologies Ltd., wherein on identical facts, demand was dropped and no appeal was made thereafter.

Held

There are 3 options available to the appellants vide Rule 6(3) of the Rules for reversal of CENVAT credit of common input services used in manufacturing as well as exempted services i.e. trading of goods and they were free to choose any option. Department cannot insist upon the appellants to follow one particular option. The foremost condition of payment of amount vide a formula was fulfilled though belatedly with interest. More or less all the particulars were intimated to department vide returns and letters, though not vide intimation in prescribed format. Though there is no time limit for filing intimation, the appellant should file intimation before exercising the option. Nonetheless, it can be considered a procedural lapse. F.Y. 2011-12 was the initial period for trading being condoned as exempted service. Admittedly, Rule 6(3)(i) of the Rules does not apply automatically if the assessee does not opt for any option available under the said Rules, Rule 6 is not enacted to extract illegal amount from the assessee. Its main objective is to ensure that CENVAT credit is not availed in respect of inputs or input services used in or in relation to exempted goods or for exempted services. The demand was accordingly quashed.