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2019 (29) G.S.T.L. 625 (Guj.) [12-04-2019]

2019 (29) G.S.T.L. 625 (Guj.)

Cenvat credit - Common inputs/input services for taxable and exempted services - Sale of flats after completion
certificate - Demand of 6%/8%/10% - Sustainability - Assessee, a builder of residential flat complex, after availing credit
in respect of entire project, selling some flats after obtaining completion certificate on which Service Tax not payable -
Tribunal holding that demand as above not sustainable as assessee, though not maintained separate records, had
reversed credit proportionally based on per sq. feet formula - HELD : It is not a case where assessee was not entitled to
avail credit because at time of receipt of inputs/input services, entire activity of construction of flats was a taxable service
- Thus availing of credit by assessee cannot be faulted - It was only subsequently that some unbooked flats were sold after
completion of project and obtaining completion certificate, an activity not liable to Service Tax or a non-taxable service -
Prior to 13-4-2016, definition of exempted services under Cenvat Credit Rules, 2004 did not include non-taxable service -
Thus mischief of paying amount on exempted services, as above, not applicable prior to aforesaid date at all - Even after
amendment ibid, assessee had taken proportionate credit on taxable services by reversing credit pertaining to flats sold
after obtaining completion certificate in a scientific method of arriving this amount on per sq. feet basis - Said calculation
was duly backed by CA certificate - After reversal of credit ibid, assessee has availed credit only in respect of taxable
output services and not non-taxable output service - Demand of amount on rates ibid on non-taxable/exempted service
not sustainable - No infirmity or perversity in Tribunal’s order - Rule 6(3) of Cenvat Credit Rules, 2004. [paras 13, 14, 15,
16, 17]
Cenvat credit - Exempted output service - Recovery thereof - Scope - While law does not intend to allow any
undue benefit of obtaining credit to a service provider for providing non-taxable service, scope of its recovery is limited to
extent of specific legal provisions - Credit entitlement is on date of receipt of inputs/input services if output activity is
taxable - Unlike inputs, there is no provision of recovery of credit of input services, if a part of output service became
exempted later on - Rules 6 and 11(4) of Cenvat Credit Rules, 2004. [para 17]
Appeal dismissed
REPRESENTED BY : Shri Ankit Shah, for the Appellant.
[Judgment per : Bhargav D. Karia, J. (Oral)]. - Revenue has filed this appeal under Section 35G of the Central Excise Act, 1944
read with Section 174(2) of the Central Goods and Services Tax Act, 2017 raising the following question of law stated to be substantial
question of law from Final Order No. 12229-12232/2018, dated 23-10-2018 rendered in Appeal No. ST/10018/2018 passed by the Customs,
Excise and Service Tax Appellate Tribunal (CESTAT), Western Zonal Bench, Ahmedabad (“the Tribunal” for short) [2019 (28) G.S.T.L. 71
(Tri. - Ahmd.)] :

“Whether the Final Order passed by CESTAT can be said to be an order passed in accordance
with law wherein the Tribunal has granted relief without taking cognizance of the provisions of the
Rule 6(1) of Cenvat Credit Rules, 2004 on admissibility of Cenvat credit, Rule 6(2) of Cenvat
Credit Rules, 2004 regarding maintenance of separate records for providing taxable service and
exempted service, and the procedures to be followed under the provisions of Rule 6(3) of the
CCR, 2004 when failed to maintain separate records for taxable and exempted services and also
not taken into cognizance the Rule 2(1) of Cenvat Credit Rules, 2004 pertains to “input service”.
2. The respondent was engaged in providing taxable services within the meaning of the Finance Act, 1994 including construction of
residential complex, commercial or industrial complex, special services provided by builders, renting of immovable property, maintenance and
repair services, business support services, etc. The respondent was registered with Service Tax department and also availing the facility of
Cenvat credit as per Cenvat Credit Rules, 2004 (“the Rules” for short).
 3. The respondent had paid service tax under works contract service category for the residential units sold to various customers from
time to time. On 24-7-2014, the residential project of the respondent was awarded completion certificate and as on date of obtaining such
completion certificate, approximately 32% of the residential apartments remained unsold for which no bookings were made. Therefore,
whenever such property would be sold in future, no service tax would be payable thereon. The respondent had given due intimation to
jurisdictional service tax authorities that they shall be availing only proportionate Cenvat credit on input services received by them after
obtaining completion certificate, on the basis of square feet area, which suffered the levy of service tax as compared to the area which was
converted into immovable property and on which no service tax would be paid.
4. Thereafter, during the course of audit conducted by service tax authorities, the respondent was compelled to reverse Cenvat credit
amounting to Rs. 1,17,68,904/- which the respondent reversed under protest towards the proportionate Cenvat credit availed by it during the
period 2010-2011 till obtaining completion certificate, at which time output service activity of the respondent was wholly taxable on the
ground that after receipt of completion certificate, the property had become immovable property and in case of future sale thereof, no service
tax would have been payable and credit in proportion to “area which did not attract Service Tax” compared to the entire property area.
5. The respondent thereafter, filed a refund claim of Rs. 1,17,68,904/-, of Cenvat credit reversed, which was paid under protest as no
show cause notice was issued by the revenue authorities in this regard.
6. However, subsequently the revenue authorities issued show cause notice demanding 6%/8%/10% amount of sale of immovable
property after obtaining completion certificate on the ground that no service tax was paid by the respondent and that it had availed Cenvat
credit and provided taxable as well as exempt services i.e. sale of immovable property and it had not maintained separate accounts and the
amounts paid under protest for input services received during the period 2010 till obtaining completion certificate for Rs. 1,17,68,904/-, was
sought to be appropriated against such demands. The Commissioner of Service Tax confirmed such demands against the respondent under Rule
6 of the Rules. The refund claim of the respondent was also rejected and such rejection of refund came to be upheld by the appellate authority
on the ground that such credit was correctly reversed and was not required to be refunded.
7. The respondent therefore, being aggrieved by the order passed raising the demand under Rule 6 of the Rules as well as rejection of
the refund claim by the revenue authorities preferred appeal before the Customs, Excise & Service Tax Appellate Tribunal, West Zone,
Ahmedabad (hereinafter referred to as the “Tribunal”). The Tribunal allowed the appeal of the respondent.
8. Learned Advocate for the appellant submitted that the Tribunal has committed an error in holding that the respondent was justified
in availing only proportionate Cenvat credit considering square foot area where service tax was paid and balance area where service tax will
not be paid after completion certificate contrary to Rule 6(2) and 6(3) of the Rules. It was submitted that after holding that after receiving
completion certificate the output activity was ‘non-service’ as per provisions of Section 65B of the Finance Act, 1994 read with definition of
term ‘exempted service’ under Rule 2(e) of the Rules, the Tribunal has erred in allowing the availment of Cenvat credit to the respondent on
proportionate basis. It was further submitted that the Tribunal has not considered the provisions of Rule 6(1) of the Rules on admissibility of
Cenvat credit read with Rule 6(3) of the Rules regarding maintenance of separate records for providing taxable service and exempted service
and also not taken into consideration Rule 2(l) of the Rules pertaining to ‘input service’ in proper perspective.
9. The Tribunal has considered the question whether the respondent was liable to reverse any portion of the Cenvat credit availed by
them after receipt of completion certificate for the projects, since thereafter, they will not be discharging service tax liability on properties sold
thereafter, where no advance was received prior to receipt of completion certificate at all. The Tribunal found that the respondent was paying
service tax in case of properties which were not yet sold by way of sale deed even after obtaining completion certificate, however, where
advances were received for such properties prior to the date of obtaining such completion certificate, the Tribunal noted that the respondent
availed only proportionate Cenvat credit determined on scientific basis considering square foot area where service tax was paid and balance
area where service tax will not be paid after completion certificate, the respondent had not only given due intimation in this regard at the time
of obtaining completion certificate but also produced CA certificate to support their case in this regard. The Tribunal therefore, framed the
following legal issues :
“(a) Whether receipt of consideration for residential units sold as immovable property after receipt of completion certificate amounts to
providing exempted service and Rule 6 of the CCR, 04 is applicable in such case and as such, whether the Appellants are liable to pay
8%/10% amount of exempted value under Rule 6 of the CCR, 04?
(b) Whether credit can be allowed to the Appellants under Rule 3 of the CCR, 04 in such circumstances?
(c) Whether the Appellants can be said to have “maintained proper separate accounts” as required under Rule 6 of the CCR, 04?
(d) Whether the Appellants are required to reverse Cenvat credit availed during the period when output service was taxable before receipt of
Completion Certificate, since such services were availed to construct entire property, and portion of such property did not attract Service
Tax after receipt of Completion Certificate?
(e) Connected to the question (d), whether the Appellants are eligible to seek refund of the amount paid under protest towards credit availed
from 2010 till receipt of completion certificate, based on CERA audit objection wherein such credit was sought to be reversed based on
considering square foot area where Service Tax was paid and balance area where Service Tax will not be paid after Completion
Certificate.”
10. The Tribunal after considering the facts of the case and relevant provisions of the Act arrived at following conclusion :
“(a) For the above reasons, the Appellants are not liable to pay 8%/10% amount of value of service became exempted after receipt of
completion certificate under Rule 6 of the CCR.
(b) The Cenvat credit on input services received after obtaining Completion Certificate cannot be wholly allowed to the Appellant, and since
they had availed only proportionate credit by maintaining separate accounts, the same is therefore sufficient compliance of the legal
obligation cast upon them.
(c) The Appellants can be said to have “maintained proper separate accounts” as required under Rule 6 of the CCR, 04, having availed credit
only to the extent input services in taxable activity, on the scientific basis after obtaining Completion Certificate.
(d) The Appellants are not required to reverse Cenvat credit availed during the period when output service was wholly taxable before receipt
of Completion Certificate, in accordance with law.
(e) Connected to (d) above, the Appellants are eligible to seek refund of the amount paid under protest towards credit availed from 2010 till
receipt of completion certificate, based on CERA audit objection wherein such credit was sought to be reversed based on considering
 square foot area where Service Tax was paid and balance area where Service Tax will not be paid after Completion Certificate, in
accordance with law.”
11. In order to understand the controversy in proper perspective it would be necessary to refer to Rule 2(e) of the Rules which
defines the term “exempted service” and reads as under :
“e. “exempted service” means a -
(1) taxable service which is exempt from the whole of the service tax leviable thereon; or
(2) service, on which no service tax is leviable under Section 66B of the Finance Act; or
(3) taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing
such taxable service, shall be taken;
but shall not include a service -
(a) which is exported in terms of rule 6A of the Service Tax Rules, 1994
(b) by way of transportation of goods by a vessel from customs station of clearance in India to a place outside India.”
Upon receipt of completion certificate for the projects, the output activity of sale of residential units becomes “non-service” as per the
provisions of Section 65B(44) of the Finance Act, 1994 which reads as under :
“65(44) ”service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall
not include -
(a) an activity which constitutes merely -
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the
Constitution; or
(iii) a transaction in money or actionable claim”
12. For the purpose of invoking provisions of Rule 6 of the Rules in facts of the present case, the output service must first be exempt
from service.
“6. (1) The CENVAT credit shall not be allowed on such quantity of input as is used in or in relation to the manufacture of exempted
goods or for provision of exempted services or input service as is used in or in relation to the manufacture of exempted goods and their
clearance upto the place of removal or for provision of exempted services and the credit not allowed shall be calculated and paid by the
manufacturer or the provider of output service, in terms of the provisions of sub-rule (2) or sub-rule (3), as the case may be :
Provided that the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12AA of the Central Excise Rules,
2002, on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule.
Explanation 1. - For the purposes of this rule, exempted goods or final products as defined in clauses (d) and (h) of rule 2 shall include
non-excisable goods cleared for a consideration from the factory.
Explanation 2. - Value of non-excisable goods for the purposes of this rule, shall be the invoice value and where such invoice value is
not available, such value shall be determined by using reasonable means consistent with the principles of valuation contained in the Excise Act
and the rules made thereunder.
Explanation 3. - For the purposes of this rule, exempted services as defined in clause (e) of rule 2 shall include an activity, which is not
a ‘service’ as defined in section 65B(44) of the Finance Act, 1994 (provided that such activity has used inputs or input services.”
13. From the above provisions, it is clear that with effect from 13-4-2016, Explanation 3 was amended specifically dealing with a
situation as in the present case, where a deeming fiction was created that for the purposes of Rule 6 of the Rules, exempted services as defined
in clause (e) of Rule 2 shall include an activity, which is not a service as defined in Section 65B(44) of the Finance Act, 1994 provided that
such activity has used inputs or input services. However, there was no such stipulation prior to 13-4-2016 in law and prima facie, such situation
was not to be treated as exempted service and did not attract the mischief created under Rule 6 of the Rules. Therefore, for the period prior to
13-4-2016, the situation would be governed by Rule 3 of the Rules for availing Cenvat credit till such time i.e. till the time Rule 6 was
specifically made applicable by virtue of the deeming fiction created.
14. As per Rule 3 of the Rules, Cenvat credit of service tax paid on input services used to provide output service, is eligible. In the
facts of present case, it is evident that the respondent has started taking only proportionate credit after receipt of completion certificate which
was after due intimation to the Revenue Department and also certified by independent CA. Therefore, Rule 6 of the Rules in toto cannot apply
prior to 13-4-2016 to the facts of the case since sale of immovable property is not exempt service at all. Therefore, in the light of the provisions
of Rule 3 of the Rules, respondent cannot avail full Cenvat credit on input services received after obtaining completion certificate. Hence, the
respondent cannot be expected to pay an amount equal to 8%/10% of sale price of immovable property after obtaining such completion
certificate where no service tax is paid as if it is sale of immovable property since Rule 6 of the Rules per se does not apply to the present case
until 13-4-2016 at all.
15. Even after 13-4-2016, since the respondent had availed only proportionate credit, the respondent was not legally required to pay
8%/10% amount under Rule 6(3) of the Rules, since it can be said to have maintained separate accounts as required under Rule 6(2) of the
Rules. As respondent has taken only proportionate credit on input services after receipt of completion certificate, duly backed by CA certificate
and certified work sheets for the proportionate credits availed after completion certificate, it has fulfilled its obligation under Rule 3 of the
Rules read with Rule 6 thereof and therefore, no liability to pay any amount equal to 8%/10% of the sale price of immovable property can be
fastened after receipt of completion certificate under Rule 6 of the Rules. While the law does not intend to allow any undue benefit to a service
provider in terms of Cenvat credit of service tax paid on input services used in providing non-taxable output activity, however, once it is legally
and validly availed, the same cannot be denied and/or recovered unless specific provisions exist for the same and credit entitlement is on the
date of receipt of inputs when the output activity was wholly dutiable and merely because the finished goods eventually became exempt later
on, the credit availed on inputs which were contained in semi-finished/finished goods state was held as not deniable.
16. The Tribunal therefore, on a harmonious reading of Rule 3 of the Rules read with Rules 6 and 11(4) of the Rules held that
eligibility/entitlement to credit has to be examined only at the time of receipt of input service and once it is found to be availed at a time when
output service is wholly taxable, and the said credit is availed legitimately, the same cannot be denied and/or recovered unless specific
machinery provisions are made in this regard. Sub-rule (7) of Rule 4 of the Rules held that the assessee is not required to wait till output
service is sold to the service recipient and the assessee can take the credit immediately after the day on bill/challan of input service is received.
In facts of the case, there is no dispute that the respondent availed the credit after receipt of bill/challan in respect of input service and,
therefore, it was legally entitled to take the credit on the date after the receipt of service bills/challans. Therefore, the availment of Cenvat
credit by the respondent is absolutely legal and correct and in accordance with Rule 4(7) of the Rules. As at the time of taking credit, there was
no existence of any exempted service, therefore, there is no application of Rule 6. That part of the service was exempted only after obtaining
completion certificate and thereafter, the respondent was not required to avail the Cenvat credit on the input service, if any, received after
obtaining the completion certificate. The respondent did not avail the Cenvat credit in respect of the services received after obtaining the
completion certificate in respect of exempted service or avail proportionate credit attributed to the taxable output service. Therefore, Rule 6 has
application for the period after obtaining the completion certificate. Rule 11(1), (2) and (3) of the Rules applicable to provision for
manufactured goods to hold that in case of service becomes exempted at a later stage, there is no such provision in respect of the service. The
only provision for the service is provided under sub-rule (4) of Rule 11 of the Rules which reads as under :
“11(4). A person provider of output service shall be required to pay an amount equivalent to the CENVAT credit, if any, taken by him
in respect of inputs received for providing the said service and is lying in stock or is contained in the taxable service pending to be provided,
when he opts for exemption from payment of whole of the service tax leviable on such taxable service under a notification issued under Section
93 of the Finance Act, 1994 (32 of 1994) and after directing the said amount from the balance of CENVAT credit, if any, lying in his credit, the
balance, if any, still remaining shall lapse and shall not be allowed to be utilized for payment of duty on any excisable goods, whether cleared
for home consumption or for export or for payment of service tax on any other output service, whether provided in India or exported.”
17. From the above sub-rule (4), it is clear that even if an output service provider avails the credit and output service becomes
exempted in such case the credit only in respect of inputs lying in stock or is contained in taxable service is required to be paid whereas there is
no provision for payment of Cenvat credit equivalent to the input services used in respect of exempted service. Therefore, Cenvat credit availed
in respect of input service is not required to be paid back under any circumstances and therefore, the respondent was not legally required to
reverse any credit which was availed by them during the period 2010 till obtaining completion certificate i.e. during the period when output
service was wholly taxable in their hands, merely because later on, some portion of the property was converted into immovable property on
account of receipt of completion certificate and on which no service tax would be paid in future.
18. The Tribunal therefore, rightly held that once the respondent are not required to reverse any credit availed by them on valid input
services availed during the period 2010 till obtaining of completion certificate, the said amounts reversed by them under protest cannot be
retained by the revenue authorities and have to be refunded to the respondent.
19. In the light of the aforesaid discussion, it is not possible to state the Tribunal has committed any legal error so as to warrant
interference. No question of law, as proposed or otherwise, much less, substantial question of law, can be stated to arise out of the impugned
order of the Tribunal. The appeal is, accordingly dismissed with no order as to cost. No order on Civil application as appeal is dismissed.
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