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CENVAT - Consulting Engineering Services used in manufacture of Prototypes which are used in manufacture of MV cleared on payment of duty and also exported – Rule 6(5) of CCR, 2004 excludes 'Consulting Engineer’s services' – Pre-deposit of Rs.157 Crores waived and Stay granted: CESTAT

By TIOL News Service

MUMBAI, JAN 07, 2013: THE applicants are engaged in the manufacture of motor vehicles and motor vehicle parts under Chapter 87 of the CETA, 1985. The applicants are having an Engineering Research Centre (ERC) situated in their premises where R&D activities are being undertaken. The applicants are availing CENVAT credit on input services utilized and consumed in the R&D activities in ERC. In respect of Prototypes manufactured in ERC the applicants are claiming exemption from payment of duty under Notification no. 167/71-CE dated 11.09.1971.

A show-cause notice was issued denying credit of input services i.e Consulting Engineering Services for the period 01.04.2006 to 30.06.2010 on the ground that the same is used in or in relation to manufacture of prototypes and the same are exempted under notfn. no. 167/71-CE. Incidentally, the Consulting Engineering Services are availed from foreign consultants and the service tax is paid by the applicants under reverse charge method.

The CCE, Pune-I confirmed the demand of Rs.156.88 Crores with interest and penalty and, therefore, the applicant is before the CESTAT with a Stay application.

It is submitted that during the period of demand, the applicant manufactured prototype motor vehicles as well as I.C Engines and out of the manufactured prototype motor vehicles, some were cleared for export on payment of duty. Inasmuch as since they had manufactured prototype motor vehicles which are exempted from payment and also cleared the same on payment of duty at the time of export, the CENVAT credit in respect of Consulting Engineers service cannot be denied in view of rule 6(5) of the CCR, 2004.

It is further submitted that prototypes are further used in the manufacture of motor vehicles which are cleared on payment of duty and, therefore, the applicants are entitled for credit of service tax paid in respect of the input services which are used in or in relation to the manufacture of motor vehicles cleared on payment of duty. It is also submitted that whenever the applicants are clearing prototypes of motor vehicles to DTA for their own use, the applicants are paying appropriate duty.

The Revenue representative submitted that as the input services are used in or in relation to the exempted goods i.e prototypes which are exempted from payment of duty under notification no. 167/71-CE the applicants are not entitled for the credit.

The Bench observed -

"8. We find that during the period in dispute, the applicants are manufacturing prototype for use in their R&D division. The applicants are also clearing the same on appropriate duty for export. As per rule 6(1) credit is not available in respect of input services which are exclusively used for exempted goods. However, this rule is not applicable in respect of the services such as consulting engineer's services as provided under sec. 65(105)(g) of the Finance Act if the same is used in or in relation of the manufacture of dutiable as well as exempted goods. As the applicants are clearing the goods during the period in dispute prototypes on payment of duty, therefore, prima facie the applicants have made out a case in their favour. We, therefore, waive pre-deposit of the dues and stay recovery of the same during the pendency of the appeal."

Noting that the amount of duty involved is more than Rs.100 Crores, the Bench directed the registry to list the appeal for regular hearing on 25.02.2013 along with the Revenue appeal.

ERC "Institute" in passing: - Rule 6(5) of CCR, 2004 read -

"(5) 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-clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) 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."

This sub-rule has been omitted by notification 3/2011-CX(NT) dated 01.03.2011.

Also, notfn. 167/71-CE reads -

"...the Central Government hereby exempts all excisable goods produced in a technical, educational and research institute during the course of imparting technical training of an academic or vocational nature or carrying out experiments or research, from the whole of the duty of excise leviable thereon :

Provided that an officer not below the rank of an Assistant Commissioner of Central Excise is satisfied that the goods are produced in such institute during the course of imparting such training or carrying out such experiments or research:"

(See2013-TIOL-40-CESTAT-MUM)


 RECENT DISCUSSION(S) POST YOUR COMMENTS
   
 
Sub: Cenvat credit on consulting engineers in ERC

From the details available in the article, it seems that the assessee is engaged in the manufacture of motor vehicle which he clears on payment of duty. Clearly, the assessee may be taking cenvat credit of input, input services and capital goods used for the manufacture of motor vehicles and other goods which he clears on payment of duty. Now, as the details reveal, the assessee is also having R & D facility inside their premises where they are engaged in R & D work and for it they are claiming exemption Notification No. 167/71-CE dated 11.09.1971. In the R & D , they develop prototype and are availing the exemption notification 167/71 dated 11/9/1971. As per the said exemption notification, the cenvat credit on capital goods is allowed but the credit on input and input services are not allowed. In that, it seems , background the said show cause notice may have been issued. However,as far as the claim of the assessee that they also exported prototypes on payment of duty is concerned, it seems that the assessee is now trying to take a stand that they are engaged in manufacture of dutiable as well as exempted prototype for which the services of consulting engineers is a common service. Clearly, a case is being made out by the assesee that their situation is covered under Rule 6 of the Cenvat Credit Rules,2004 and by doing so , the assessee is making a case of –issue not covered under the present show cause notice, fully aware of the fact that the law will not allow any appellate forum to travel beyond the scope of show cause notice. Now the question arises –whether assessee was following the provisions of rule 6 of the CCR,2004 which they did not reveal, it seems, at the time of investigation or they have just taken this new stand just to avoid their liability . As far as the claim of the assessee that they use the prototype in the manufacture of motor vehicle on which they pay duty is concerned, nobody is denying this fact that the outcome of the R & D will be used for their manufacturing activity. However, this is also a fact that for the said prototype in their ERC, they are taking exemption benefit available for such ERC. In every manufacturing unit, there happens to be a tool room where new tools are designed for use in the manufacture of goods to be cleared on payment of duty. But those tool rooms are not covered under the said notification 167/71.In this background , the assessee’s claim that they use prototype for manufacture of motor vehicles is just to deflate the main issue. In this context , the wording of the exemption notification has to be given a thought- “……, the Central Government hereby exempts all excisable goods produced in a technical, educational and research institute during the course of imparting technical training of an academic or vocational nature or carrying out experiments or research, from the whole of the duty of excise liveable thereon.” From , this , it is clear that the exemption is allowed during the course of carrying out experiments or research and during that period , if any input services and or input is used, the credit thereof is not admissible. Here , in the present case also , it may be the case that the services of consulting engineers are used during the period when the exemption was available. However, the party has taken a stand that they paid duty at the time of clearance. In any case, it was the required follow up action which the assessee followed. This , in no way, makes the availment of exemption null and void to allow benefit of cenvat.



Posted by dhaneshwar choudhary
 

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