The "P" Factor
LET us imagine "Coffee" is dutiable and "Tea" is exempted. Assessee uses four inputs. Coffee powder, Tea Powder, Milk and Sugar. Since Tea is exempted, no CENVAT credit is admissible on Tea powder, which is exclusively used in manufacture of Tea . (Ref Explanation II of sub-rule 3 of Rule 6 of CENVAT Credit Rules, 2004).
If the assessee does not maintain separate accounts, he has to reverse credit on inputs used in manufacture of exempted goods, i.e., Tea. To make things simple, let us follow a formula. If Tea sales is 20% of his total sales (Coffee plus Tea), the assessee has to pay back 20% of the total CENVAT Credit availed on Sugar and Milk. Now, if someone says he has to pay back 20% of the credit on coffee powder also in addition to milk and sugar, what do you call him? Revenue Officer?
In the recently held Central Excise Tariff Conference, Chennai Zone asked this:
B.19 –Cenvat Credit – Reversal of Credit on Common Input Services:
Issue:
In terms of Rule 6(3) of Cenvat Credit Rules, 2004 [CCR], a manufacturer of goods or the provider of output service, opting not to maintain separate accounts for the receipt and use of input services used in the manufacture of dutiable final goods and exempted goods, or for providing output and exempted services, shall pay an amount equal to 6% of the value of exempted goods or 7% of the value of exempted goods (sic) and exempted services or pay an amount as determined under Sub-rule 3A of Rule 6 of CCR 2004. The above sub rule prescribes a formula for arriving at the amount attributable to input services used for manufacture of exempted goods or providing exempted service. Doubts have been raised by the field formations about the expression "Total cenvat credit taken" used in the formula prescribed in the rule.
2. A manufacturer of goods or provider of output services may use various input services in or in relation to the manufacture of dutiable and exempted final products and for the provision of output and exempted services. Certain input services may be used exclusively for the manufacture of dutiable goods or provision of taxable service viz. "A". Certain other input services may be used exclusively for exempted category viz. "B" and the third category of input services may be used for exempted as well as dutiable / taxable category viz. "C". In terms of Rule 6(1) and (2) of CCR, 2004, Cenvat credit shall not be allowed on such quantity of inputs or input services used for the manufacture of exempted goods or provision of exempted service's. It is clear from the above that Cenvat credit can be taken on input services covered under category "A" and Cenvat credit cannot be taken on input services used in category "B". Therefore, for arriving at the quantum of credit liable to be reversed, common input services referred in category "C" alone should be taken into account while applying the formula prescribed. However, it may be seen that the expression "P" in the formula specifically reads as ‘total cenvat credit taken on input services during the financial year'. Hence, the same is interpreted by some field officers as total of - Cenvat credit on the input services used exclusively in manufacture of dutiable goods and for provision of output services [+] Cenvat credit taken in respect of inputs used exclusively in exempted category [+] Cenvat credit taken on common input services used in both dutiable and exempted categories".
3. In this context, reference is invited to the observations of the Hon'ble CESTAT, Mumbai while passing stay order in the case of Thyssenkrupp Industries Pvt Ltd Vs CCE, Pune reported as 2014-TIOL-1825-CESTAT-MUM, which is reproduced hereunder for reference:
"It is well settled position in law that while interpreting statutes, no word can be added or removed / deleted from the statute. As held by Rowlatt J., "in a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used". If, we apply this principle to the formula prescribed in sub-rule (3A), there is no scope for interpreting the term "P" otherwise. If the formula leads to an anomalous situation, the remedy lies in amending the provisions of statute and judiciary is helpless. In this regard, the decision of the Hon'ble Apex Court in the case of Shakar Raju – 2011 (271) E.L.T. 492 (S.C.) REFERS. In the present case, it is a fact that the total CENVAT credit taken on common input services is only Rs.2.07 Crore (approximately) whereas, if we apply the formula, the amount of credit required to be reversed works out to Rs.8.62 Crore"
4. It may be seen that the Hon'ble CESTAT has noticed in the aforesaid order, an anomalous situation, where an assessee would be required to reverse more than the amount of Cenvat credit taken on common input services, if "P" is to mean total Cenvat credit taken on all the input services by the assessee instead of Cenvat credit taken on ‘common input services'. These are prima facie observations made by the Tribunal in the stay order and the final order is yet to be passed. It was suggested that the intention of the Government is to consider ‘credit taken on common input services' only, as this amount is only sought to be divided into the two categories viz. used for dutiable and exempted categories. Clarification was sought by the zone to avoid disputes on the issue and the divergent practices followed.
Discussion & Decision
The conference noted that the language of the rule is very clear. Further, the rule has been framed keeping the concept of averages in mind. The input and input services have been presumed to be going uniformly in the manufacture of the dutiable and exempted goods. This may lead to situations where some industry may be required to reverse lesser credit than actual usage in exempted goods whereas some other industries may be required to reverse credit more than the actual usage in the exempted goods. As this alternative comes in operation when separate accounts are not maintained, the formula can only be based on ratios of values which is how the formula in the rule is. Conference also noted that the rule is quite clear in terms of language used and has stabilized after a long period of time. Therefore, it was concluded that there was no need to amend or clarify Rule 6 as it exists and should be implemented in terms of clear provisions of the rule as it exists.
The whole purpose of the formula in Rule 6(3A) is to apportion the CENVAT Credit attributable to the exempted goods / services. When the assessee clearly establishes from the records that a particular input service is used only for dutiable goods/taxable service, how the same can be apportioned towards exempted goods / services? How can you ask me pay back part of CENVAT Credit on "coffee powder" because I am also making exempted "Tea"?
Board had clarified earlier vide Circular No 868/6/2008-CX., Dated: May 9, 2008 that:
Whether credit in respect of input services covered by rule 6(5) would be required to be taken into account for determination of amount payable as per formula provided in rule 6(3A).
No, the credit attributable to services mentioned in sub-rule (5), shall not be taken into account for determination of amount under rule 6(3A).
Though the above clarification was issued with reference to input services under erstwhile Rule 6(5), on which full credit was allowed, it emerges from the above clarification that the formula under Rule 6(3A) is intended only to apportion common input services. But the clarification issued by the Tariff conference appears to be otherwise.
Do you think any reasonable person can ask you to reverse credit on coffee powder for selling exempted Tea? The Indian Revenue can!