CESTAT Delhi Quashes CENVAT & Service Tax Demands in Vertiv Energy Pvt. Ltd. Case

Overview of the Decision

The Customs, Excise and Service Tax Appellate Tribunal, Delhi, in Vertiv Energy Pvt. Ltd. Vs Commissioner of CGST & Central Excise, set aside substantial demands relating to CENVAT credit reversal, alleged short payment of service tax, and differential tax on account of rate revision. The Tribunal held that all three components of the demand were unsustainable on merits and consequently annulled the associated interest and penalties.

The ruling is particularly significant on the interpretation of Rule 6(3) of the CENVAT Credit Rules, 2004 (CCR) and the extent of departmental powers in dictating the mode of compliance, as well as on application of the Point of Taxation Rules in the context of rate changes.

Background and Scope of the Appeal

The appeal arose from an order dated 28.01.2018 passed by the Commissioner pursuant to a Show Cause Notice dated 13.12.2016, covering financial years 2011-12 to 2014-15. In that order, the Commissioner had:

  • Ordered recovery of Rs. 12,36,00,000/- under Rule 14 of the CCR read with the proviso to Section 73 of the Finance Act, 1994.
  • Confirmed a service tax demand of Rs. 51,65,712/- under the proviso to Section 73 along with interest under Section 75.
  • Imposed equivalent penalties under Rule 15 of the CCR and Section 78 of the Finance Act, 1994.
  • Levied penalties of Rs. 5,16,571/- under Section 76, Rs. 10,000/- each under Section 77(i) and Section 77(ii), and Rs. 20,000/- under Section 70 of the Act.

Vertiv Energy Private Limited challenged these findings before the Tribunal.

The Tribunal identified three distinct issues for adjudication:

  1. Demand of Rs. 12,36,00,000/- under Rule 6(3) of the CCR, 2004.
  2. Alleged short payment of service tax under the category “erection, commissioning and installation service” for the year 2012-13.
  3. Service tax allegedly short paid due to increase in the tax rate from 10% to 12% with effect from 01.04.2012, during 2011-12.

Facts of the Case

Vertiv Energy Private Limited is engaged in manufacturing and trading of equipment such as uninterrupted power supply systems, DC power systems, precision air-conditioning systems, etc. Its operations are structured into four zones—North, South, East, and West.

The present dispute pertains only to the North Zone, where the assessee was registered with the respondent authorities. The assessee availed CENVAT credit on multiple input services. These fell into three broad buckets:

  • Services attributable exclusively to taxable output services,
  • Services attributable exclusively to exempted services, and
  • Common input services used for both taxable and exempted services.

The Department’s case, in essence, was that:

  • The assessee did not maintain separate records for inputs/input services used for taxable and exempted services, and
  • CENVAT credit was availed on common input services without complying with Rule 6(3) of the CCR.

Because the assessee’s accounts (trial balance) were not separately drawn zone-wise, the Commissioner assumed that the North Zone turnover was 40% of the all-India turnover and used this ratio to compute the amount payable under Rule 6(3) of the CCR.

The assessee, however, asserted that it had only availed proportionate CENVAT credit on common input services relatable to taxable services and had not taken credit to the extent relatable to exempted services. Voucher-wise details of service providers, nature of services, service tax charged, CENVAT credit availed, and percentages were submitted in reply to the Show Cause Notice.

Issue 1: Demand Under Rule 6(3) of CENVAT Credit Rules

Department’s Position

The Department contended that:

  • Since no separate accounts were maintained for inputs/input services used for taxable and exempted services,
  • The assessee was mandatorily required to discharge an amount under Rule 6(3) of the CCR calculated as a percentage of the value of exempted services.

Accordingly, an amount of Rs. 12,36,00,000/- was demanded under Rule 6(3), read with Rule 14 of the CCR and the proviso to Section 73 of the Finance Act, 1994.

Assessee’s Contentions