An Analysis of Rule 6(5) of the CENVAT Credit Rules, 2004: Scope and Application for Specified Input Services

Introduction

The CENVAT (Central Value Added Tax) credit scheme, governed by the CENVAT Credit Rules, 2004 (hereinafter "CCR, 2004"), has been a cornerstone of the indirect taxation system in India, aiming to mitigate the cascading effect of taxes. A fundamental principle of this scheme is that credit is available only for inputs and input services used in the manufacture of dutiable goods or for the provision of taxable output services. Rule 6 of the CCR, 2004, specifically addresses the complexities arising when a manufacturer or service provider is engaged in activities that are both taxable/dutiable and exempted. While the general tenet of Rule 6 restricts CENVAT credit attributable to exempted activities, Rule 6(5) carves out a significant exception for certain specified input services, allowing full credit under specific conditions. This article undertakes a scholarly analysis of Rule 6(5) of the CCR, 2004, examining its legislative intent, scope, and judicial interpretation, drawing upon relevant case law and legal principles prevalent in India.

The Legislative Framework of Rule 6, CENVAT Credit Rules, 2004

To appreciate the import of Rule 6(5), it is essential to understand its position within the broader structure of Rule 6, which outlines the obligations of a manufacturer or output service provider dealing with both taxable and exempted streams.

General Principle: Restriction of Credit (Rule 6(1))

Rule 6(1) of the CCR, 2004, lays down the foundational principle that CENVAT credit shall not be allowed on such quantity of inputs or input services that are used in the manufacture of exempted goods or for the provision of exempted services. This was affirmed by the Supreme Court in C.C.E.,Vadodara v. Gujarat Narmada Valley Fer. Co. Ltd. (Supreme Court Of India, 2012), which noted that Rule 6(1) is plenary and CENVAT credit for duty-paid inputs used in exempted final products is generally not allowable. The Bombay High Court in M/S. Oil & Natural Gas Corporation Ltd. v. The Commissioner Of Central Excise, Service Tax & Customs, Raigad (Bombay High Court, 2013) (hereinafter "ONGC Ltd.") reiterated this, stating, "Cenvat credit is not admissible on that quantity of input or input service which is not intended for use and is not used in the manufacture of dutiable goods."

Obligation for Separate Accounts (Rule 6(2))

Rule 6(2) mandates that where a manufacturer or output service provider avails CENVAT credit in respect of inputs or input services and is engaged in both taxable/dutiable and exempted activities, they must maintain separate accounts for the receipt, consumption, and inventory of inputs and input services meant for each category. Credit is then to be taken only on the portion attributable to dutiable goods or taxable services (ONGC Ltd., Bombay High Court, 2013; Commissioner of Central Excise v. Dashion Ltd., Gujarat High Court, 2016). The objective is to ensure a clear demarcation and prevent undue credit availment.

Options in Absence of Separate Accounts (Rule 6(3))

Recognizing the practical difficulties in maintaining scrupulously separate accounts for common inputs/input services, Rule 6(3) provides alternative mechanisms for assessees who opt not to maintain such separate accounts. These options typically involve either paying a prescribed percentage of the value of exempted goods/services or reversing credit based on a proportionate formula. The Gujarat High Court in Commissioner of Central Excise v. Dashion Ltd. (Gujarat High Court, 2016) clarified that Rule 6(3) necessarily applies where the assessee is engaged in both taxable and exempt activities and does not maintain separate accounts. It is important to note that these options are for the assessee to choose, and authorities cannot impose an option, as observed in Linkwell Telesystems Pvt Ltd v. Secunderabad - G S T (CESTAT, 2022).

Rule 6(5): The Non-Obstante Provision for Specified Services

Rule 6(5) of the CCR, 2004, stands as a distinct provision, offering a special dispensation for a select category of input services. Its significance lies in its non-obstante clause, which gives it an overriding effect over the general restrictions and obligations stipulated in sub-rules (1), (2), and (3) of Rule 6.

Text and Intent

Rule 6(5), as elucidated in M/S. Oil & Natural Gas Corporation Ltd. (Bombay High Court, 2013) and quoted in Icmc Corporation Ltd. v. Customs, Excise And Service Tax Appellate Tribunal And Others (Madras High Court, 2014) (hereinafter "ICMC Corporation Ltd."), typically reads (subject to amendments over time regarding the list of services):

"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-clauses [e.g., (g), (p), (r), etc.] 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."

The legislative intent behind Rule 6(5) appears to be to allow unrestricted credit for certain commonly used, essential, or specified services that are difficult to apportion or are considered vital for overall business operations, provided they are not exclusively channelled towards exempted activities. This provision simplifies compliance for these services and reduces potential disputes related to their apportionment.

Specified Services

The benefit of Rule 6(5) is confined to a list of taxable services explicitly enumerated within its sub-clauses. This list has undergone changes through various amendments to the CCR, 2004. Assessees claiming benefit under this sub-rule must ensure that the input service in question is indeed one of the services specified therein during the relevant period.

Condition for Disallowance: The "Exclusively Used" Clause

The crucial condition for the applicability of Rule 6(5) is that the specified input service must *not* be "used exclusively in or in relation to the manufacture of exempted goods or providing exempted services." If a specified service is used commonly for both taxable/dutiable and exempted activities, or even partially for exempted activities (but not exclusively), the assessee is entitled to avail the whole of the service tax paid on such service as CENVAT credit. The burden to establish exclusive use for exempted activities, thereby denying credit, would typically lie with the Revenue.

Judicial Interpretation and Application of Rule 6(5)

The judiciary has played a significant role in clarifying the scope and application of Rule 6(5).

Overriding Effect

The non-obstante clause "Notwithstanding anything contained in sub-rules (1), (2) and (3)" has been consistently interpreted to mean that Rule 6(5) operates independently of, and overrides, the general provisions of Rule 6(1), (2), and (3) for the services it covers. In Commissioner Of Central Excise Goa v. V M Salgaonkar Bros Pvt Ltd (CESTAT, 2008), the Tribunal held that where services are covered under Rule 6(5), Rule 6(3) is not the relevant rule to be applied, emphasizing the significance of the "notwithstanding" phrase. This means that for specified services, the requirement to maintain separate accounts under Rule 6(2) or to follow the options under Rule 6(3) does not apply if the "exclusively used" condition is not met. The Bombay High Court in ONGC Ltd. (Bombay High Court, 2013) also highlighted this overriding nature.

"Exclusively Used" Criterion

The interpretation of "exclusively used" is central to Rule 6(5). If a specified input service is demonstrably used solely for exempted goods or services, credit will be denied. However, if there is any use, however minimal, for taxable/dutiable activities, full credit is permissible. The Madras High Court in ICMC Corporation Ltd. (Madras High Court, 2014) upheld the assessee's entitlement to full credit of service tax paid on taxable services specified in Rule 6(5) where the assessee was engaged in the manufacture of both dutiable and exempted goods, implying the services were not exclusively used for exempted goods.

Applicability to Input Service Distributors (ISD)

The benefit of Rule 6(5) has been extended to CENVAT credit distributed by an Input Service Distributor (ISD). In Cus v. Mds Switchgear Ltd (CESTAT, 2014), the Tribunal reasoned that an ISD is an office of the manufacturer and should not be placed in a disadvantageous position. Therefore, if the services specified in Rule 6(5) are routed through an ISD, the manufacturing units receiving such credit can avail the full credit, subject to the "exclusively used" condition at the recipient's end or at an aggregate level, depending on the specific facts and ISD mechanism.

Interaction with Export of Exempted/Nil-Rated Goods

An interesting dimension arises when goods are exported, particularly if such goods are otherwise exempted or chargeable to a nil rate of duty domestically. The Himachal Pradesh High Court in Commissioner Of Central Excise v. M/S Drish Shoes Ltd. (2010 SCC ONLINE HP 1045, Himachal Pradesh High Court, 2010) (hereinafter "Drish Shoes (2010)") and further elaborated in Commissioner of Central Excise v. Drish Shoes Ltd. (Himachal Pradesh High Court, 2010, citing Repro India Ltd.) (Ref 19), held that an assessee manufacturing goods chargeable to nil duty is eligible to avail CENVAT credit on inputs under the exception clause to Rule 6(1) (referring to Rule 6(5) of CCR 2002 / Rule 6(6) of CCR 2004 for goods) if such goods are exported. This principle, by analogy, suggests that input services covered by Rule 6(5) of CCR 2004, used in the manufacture of exempted goods that are subsequently exported, might not necessitate credit reversal, as exports are generally treated as zero-rated supplies. The CESTAT in Ind-Swift Laboratories Ltd v. Cce, Chandigarh-Ii (CESTAT, 2018), citing Drish Shoes (2010), also held that where exempted goods were exported, the appellant was not required to reverse CENVAT credit in terms of Rule 6.

While Rule 6(5) of CCR, 2004 primarily pertains to specified input services, the underlying principle from these judgments is that export activities are often treated differently from domestic exempted supplies, potentially allowing retention of credit that might otherwise be restricted. If a Rule 6(5) specified service is used in producing goods that are exempt domestically but exported, the benefit of Rule 6(5) (i.e., full credit unless exclusively used for domestic exempted goods/services) would likely still apply, and the export itself would not trigger a denial under the "exclusively used" clause if the service also supports dutiable domestic activities or the export is considered a taxable event for credit purposes.

Distinction from General Apportionment for Non-Specified Common Services

The special status of Rule 6(5) services is highlighted when contrasted with the treatment of common input services not specified therein. For non-specified common services, if separate accounts are not maintained, the assessee must resort to the options under Rule 6(3), often involving apportionment formulae like that in Rule 6(3A). Cases like Thyssenkrupp Industrial Solutions India Private Limited v. Nhava Sheva (Appeal) - I (CESTAT, 2022) and Rajkot v. Reliance Industries Ltd (CESTAT, 2019) delve into the complexities of such apportionment, emphasizing that the formula under Rule 6(3A) considers only common input services. Rule 6(5) bypasses these apportionment requirements for its specified services, allowing full credit unless the stringent "exclusively used for exempted activity" test is met.

The case of M/S Treat Convenience Foods v. Cce & St, Kanpur (CESTAT, 2013) also saw the appellant contending the applicability of Rule 6(5) for common maintenance services, highlighting that assessees often invoked this provision for services they believed fell within its ambit to claim full credit.

Challenges and Considerations

Despite its apparent clarity, Rule 6(5) has presented certain challenges. The primary among these is the precise identification of services that qualify as "specified services," especially as the list has evolved. Furthermore, establishing whether a service is "exclusively used" for exempted activities can be a fact-intensive exercise, potentially leading to disputes. The onus is typically on the assessee to demonstrate that the service is not exclusively used for exempted activities, or on the department to prove that it is. The evolution of Rule 6 itself, with various amendments (as noted in Principal Commissioner Of Cgst And Central Excise, Mumbai East Commissionerate v. Larsen & Toubro Limited (hed), Bombay High Court, 2023, regarding retrospective amendments), also requires careful attention to the provisions applicable during the specific period in dispute.

Conclusion

Rule 6(5) of the CENVAT Credit Rules, 2004, represents a significant and pragmatic exception to the general rule of restricting CENVAT credit attributable to exempted goods and services. Its non-obstante clause grants it precedence over other sub-rules of Rule 6, permitting the availment of full credit on specified input services unless they are used exclusively in connection with exempted activities. Judicial pronouncements have consistently upheld this overriding effect and have provided clarity on the interpretation of key terms like "exclusively used" and the rule's applicability in scenarios involving ISDs and exports.

By allowing full credit for certain essential or common services, Rule 6(5) aimed to simplify compliance, reduce litigation concerning apportionment for these services, and further the objective of mitigating tax cascading. While its application requires careful attention to the specific services listed and the factual matrix of their use, Rule 6(5) has been a crucial provision for assessees in India navigating the complexities of CENVAT credit in mixed-activity scenarios.