Rule 6(2) and 6(3) of CCR, 2004

Niraj,

My views on your query:

As per provisions of Rule 6(1), CENVAT credit shall not be allowed on such input service which is used in:

1.    the manufacture of exempted goods or

2.    for provision of exempted services.

except in the circumstances mentioned in sub-rule (2).

As in your given case, trading activity is not manufacture, nor provision of exempted services (exempted services include services on which no service tax is leviable – Rule 2(e)), it does not come under the ambit of Rule 6.

Rule 4 which provides for conditions for availing CENVAT credit, under sub-rule (7) lays down the condition that (7) the CENVAT credit in respect of input service shall be allowed, on or after the day which payment is made of the value of input service and the service tax paid or payable as is indicated in invoice, bill or, as the case may be, challan referred to in rule 9.

Therefore, the rule doesnot explicitly provide for reversal of proportionate credit.

Hi

There is a judement in case of  "Orion Appliances Ltd" which clearly states about the reversal of cenvat credit but the proportion in which it shall be reversed is not told and even not written in the act..

How to deal with this problem?
 

In the case of Orion Appliances Ltd, the tribunal has concluded that in such a case, amount of CENVAT credit attributable to the trading activities should be reduced from the pool of eligible credit available for utilization as per standard accounting principles.

So, the CENVAT credit allocable to trading activities can be computed on the basis of allocation of the related common input service; and excluded from the pool of eligible credit.