Rule 6(3A) reversal applies only to common CENVAT credit, including for periods preceding the 2016 amendment.

Bharat Heavy Electricals Limited (“the Appellant”) was registered under the service-tax regime and provided taxable services, including works contract, repair and commissioning services.

It availed CENVAT credit and, in respect of common input services used for taxable and allegedly exempt activities, reversed credit under Rule 6(3A) of the CENVAT Credit Rules, 2004 (“CCR”).

The Appellant calculated the reversal with reference to common CENVAT credit, excluding credit attributable exclusively to taxable output services or dutiable goods.

Following investigation by the DGGI, a show-cause notice dated 17 September 2020 proposed recovery of ₹10,99,10,976 for 2014–15 and 2015–16, alleging that the Appellant ought to have used its total CENVAT credit, rather than common CENVAT credit, in the Rule 6(3A) formula.

The notice also invoked the extended limitation period, interest and penalties.

The adjudicating authority confirmed the demand on the same basis.

1. Whether, for computing the proportionate reversal under Rule 6(3A) of the CCR, “total CENVAT credit” included credit attributable exclusively to taxable output services or dutiable goods, or was confined to common CENVAT credit

2. Whether trading activity could be treated as an exempted service for purposes of Rule 6 of the CCR

3. Whether the extended limitation period could be invoked in the absence of fraud, wilful misstatement, suppression of facts, or intent to evade service tax

The Tribunal applied Rule 6(1), 6(2) and 6(3A) of the CENVAT Credit Rules, 2004, holding that the proportionate reversal mechanism concerns common input-service credit and does not require disallowance of credit exclusively used for taxable output services or dutiable goods.

It relied on CCE & ST v. Reliance Industries Ltd., 2019 (28) G.S.T.L. 96 (Tri.-Ahmd.), which held that “total CENVAT credit” in the Rule 6(3A) formula means the total common credit for the relevant purpose.

The Tribunal treated the 2016 amendment to Rule 6(3A) as clarificatory and therefore retrospective.

It further applied Rule 2(e) of the CCR and Sections 65B(25), 65B(44), 66B and 66D of the Finance Act, 1994, holding that trading or sale of goods is not a service and cannot be treated as an exempted service merely for Rule 6 purposes.

On limitation, the Tribunal applied the settled principle that extended limitation requires deliberate fraud, collusion, wilful misstatement, suppression of facts, or contravention with intent to evade duty; mere omission, negligence, bona fide error, or a different interpretation of law is insufficient.

It relied, inter alia, on Pushpam Pharmaceuticals Co. v. Collector of Central Excise, Bombay, 1995 (78) E.L.T. 401 (S.C.), and G.D. Goenka, Final Order No. 51088/2023.

The Tribunal found that the Appellant had disclosed its CENVAT-credit reversals in its ST-3 returns and had adopted a legally sustainable interpretation of Rule 6(3A).

Credit exclusively attributable to taxable services or dutiable goods could not be included in the denominator for calculating the amount attributable to exempt activities, since doing so would effectively disallow otherwise admissible credit.

The Tribunal also held that the department’s treatment of trading as an exempted service was conceptually and legally incorrect: trading involves transfer of title in goods and is outside the statutory definition of “service”.

As to limitation, the Appellant’s returns disclosed the relevant credit and reversal figures, enabling departmental scrutiny.

The mere fact that the department detected the alleged short-reversal during a later investigation did not establish intentional suppression or an intent to evade tax.

The Tribunal therefore held that the extended limitation period was unavailable.

In light of the correct interpretation of Rule 6 and the absence of suppression, the entire demand, interest and penalties could not be sustained.

It held that only common CENVAT credit was relevant for the proportionate reversal under Rule 6(3A), that trading could not be treated as an exempted service for this purpose, and that the extended limitation period was not invocable without proof of deliberate suppression or intent to evade tax.

The impugned order was set aside, and the appeal was allowed with consequential relief, if any, in accordance with law.