The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Chennai has clarified that non-banking financial companies (NBFCs) availing Cenvat credit under Rule 6(3B) of the Cenvat Credit Rules, 2004 are not liable for denial of input credit merely because such services are used for exempted or reverse charge services. The ruling affirms that the non-obstante clause in Rule 6(3B) overrides restrictive interpretations under Rules 6(1), 6(2), and 6(3), providing a clear, presumptive mechanism for credit reversal without requiring detailed apportionment.
Background & Facts
The Dispute
M/s. Sundaram Finance Ltd., a non-banking financial company (NBFC), was assessed for alleged ineligible Cenvat credit availed on manpower services received from M/s. Aparajitha Corporate Services Pvt. Ltd. and M/s. Aparajitha Dynamic Synergies (P) Ltd. The Department contended that these services were used exclusively for providing insurance auxiliary services and mutual fund distribution services, for which the tax liability fell on the recipient under the reverse charge mechanism or were exempted, thereby disqualifying them as "input services" under Rule 2(l) of the Cenvat Credit Rules, 2004.
Key Facts
- The appellant is engaged in banking and financial services, including home loans, life insurance, general insurance, mutual fund distribution, and customer care services.
- Manpower services were procured from two agencies and used across all business verticals on a rotating basis.
- The agencies issued consolidated bills without separating usage by vertical.
- For the period 2008-09 to 2010-11, the appellant followed Rule 6(3A) to reverse credit attributable to exempted services, including the manpower services, and disclosed this in half-yearly returns.
- From 01.04.2011, Rule 6(3B) came into effect, mandating NBFCs to pay 50% of the total Cenvat credit availed on inputs and input services, irrespective of use.
- From 01.07.2012, insurance auxiliary services became subject to reverse charge under Notification No. 30/2012-ST, and mutual fund distribution services became exempt under Notification No. 25/2012-ST.
- The Department issued a Show Cause Notice (SCN) dated 31.08.2016 proposing demand for ineligible credit for the period 2011-12 to September 2014, along with interest and penalty under Section 78 of the Finance Act, 1994.
- The SCN alleged exclusive use of manpower services for exempted/reverse charge services, ignoring the appellant’s consistent position that services were used across all verticals.
Procedural History
- 31.08.2016: Adjudicating Authority issued Order-in-Original No. LTUC/519/2016-C confirming demand of service tax, interest, and penalty.
- 12.06.2016: Service Tax Appeal No. 42309 of 2016 filed before CESTAT Chennai.
- 06.02.2026: Hearing held before CESTAT Chennai.
- 29.05.2026: Final Order No. 40659/2026 passed.
The Parties' Positions
Appellant (Sundaram Finance Ltd.):
- Contended that manpower services were used across all business verticals, not exclusively for exempted or reverse charge services.
- Relied on Rule 6(3B), which mandates a flat 50% reversal of Cenvat credit for NBFCs, overriding other restrictions.
- Cited TRU Circular D.O.F.No.334/3/2011-TRU dated 28.02.2011, which explains the rationale for Rule 6(3B) as a simplification mechanism.
- Argued that prior litigation (ST/00784/2010, ST/00100/2012, ST/00645/2012) on the same issue was pending, negating any claim of suppression.
- Relied on Union of India v. G.M. Kokil and South Indian Bank v. Commissioner of Customs to establish that Rule 6(3B) overrides Explanation II and III of Rule 6(3).
Respondent (Commissioner of GST & Central Excise):
- Argued that since the manpower services were used for services not taxable by the appellant (reverse charge or exempt), they did not qualify as "input services" under Rule 2(l).
- Invoked Explanation III to Rule 6(3), which bars credit on services not qualifying as input services.
- Invoked Explanation II to Rule 6(1), which bars credit on services used exclusively for exempted services.
- Contended that the appellant suppressed facts by not disclosing the use of manpower services for exempted/reverse charge services in ST-3 returns.
- Relied on Sree Rayalaseema Hi-Strength Hypo Ltd. v. Commissioner to argue that self-assessment liability was breached.
Relief Sought
The appellant sought:
- Setting aside of the impugned order dated 31.08.2016.
- Cancellation of the demand for ineligible Cenvat credit.
- Cancellation of penalty under Section 78.
- Cancellation of interest.
- Declaration that extended period of limitation under Section 73(1) was not invokable.
The Legal Issue
Whether an NBFC availing Cenvat credit under Rule 6(3B) of the Cenvat Credit Rules, 2004 is liable for reversal of credit on input services used for exempted services or services subject to reverse charge, when the rule mandates a flat 50% reversal irrespective of usage?
Arguments Presented
For the Appellant
The appellant relied on the non-obstante clause in Rule 6(3B), which states: "Notwithstanding anything contained in sub-rules (1), (2) and (3)..." This clause, they argued, overrides all restrictive provisions including Explanation II (exclusive use for exempted services) and Explanation III (services not qualifying as input services). They cited Union of India v. G.M. Kokil to establish that non-obstante clauses are legislative tools to override contrary provisions. The TRU Circular of 28.02.2011 confirmed that Rule 6(3B) was introduced to simplify compliance for NBFCs, acknowledging the impracticality of apportioning credit between taxable and non-taxable services. The appellant further relied on South Indian Bank v. Commissioner of Customs (2020), where CESTAT (Larger Bench) held that once 50% reversal is made under Rule 6(3B), the entire credit is deemed compliant, regardless of how the services were used. The prior litigation on the same issue negated any claim of suppression.
For the Respondent
The Respondent contended that Rule 2(l) defines "input service" as one used for providing a taxable output service. Since the appellant did not pay service tax on insurance auxiliary or mutual fund distribution services (the recipient did under reverse charge or the service was exempt), the manpower services could not qualify as input services. They relied on Explanation III to Rule 6(3), which bars credit on services not qualifying as input services. They further argued that the appellant’s failure to disclose usage in ST-3 returns constituted suppression, justifying invocation of the extended period of limitation under Section 73(1). Reliance was placed on Sree Rayalaseema Hi-Strength Hypo Ltd. to assert that self-assessment obligations were violated.
The Court's Analysis
The Tribunal conducted a detailed statutory interpretation of Rule 6(3B) and its interaction with other provisions of the Cenvat Credit Rules, 2004. It observed that the Department’s entire case rested on the assumption that the manpower services were used exclusively for exempted or reverse charge services - an assumption directly contradicted by the appellant’s consistent position and the adjudicator’s own findings.
"The adjudicator has clearly recorded that the manpower supply services provided were used by the appellant in providing Insurance Auxiliary Services to various Insurance Companies and Business Auxiliary Services to Mutual Funds also... the stand of the appellant of having used the input services commonly for all its business verticals... is clearly vindicated."
The Tribunal emphasized that Rule 6(3B) was introduced precisely because of the difficulty in ascertaining the quantum of credit attributable to taxable versus non-taxable services. The Central Board of Excise and Customs, in its TRU Circular dated 28.02.2011, explicitly stated that the 50% reversal was a "presumptive" mechanism to avoid complex apportionment.
The Tribunal then examined the legal effect of the non-obstante clause. Citing Union of India v. G.M. Kokil, it held that such clauses are designed to override contrary provisions, including those in the same enactment. Rule 6(3B) explicitly overrides Rules 6(1), 6(2), and 6(3), including their Explanations II and III. Therefore, even if the services were used for exempted or reverse charge services, the statutory compliance under Rule 6(3B) - paying 50% of the total credit - is sufficient.
"Rule 6(3B)... overrides all the prohibitions imposed under sub-rules (1), (2) and (3) of Rule 6, including that provided in the Explanations II and III to Rule 6(3)..."
The Tribunal further relied on the Larger Bench decision in South Indian Bank v. Commissioner of Customs, which held that once 50% reversal is made under Rule 6(3B), the bank or NBFC is deemed to have complied with the CCR, and the credit on all input services - including those used for exempted services - is valid.
On the issue of extended period of limitation, the Tribunal held that the Department was fully aware of the appellant’s position during the earlier proceedings (2008-11), which were pending before the Tribunal. The SCN for the current period included the same credit amounts already under dispute. Therefore, there was no suppression. The Tribunal cited Nizam Sugar Factory v. Collector of Central Excise and Uniworth Textiles v. CCE to affirm that mere interpretational disputes or failure to disclose a position already litigated cannot constitute suppression.
"When there was scope for entertaining doubt and taking a particular stand as the appellant has done, that in itself rules out invoking the extended period of limitation."
The Tribunal also noted that the Department had previously accepted the appellant’s position in an order dated 04.03.2022 for the period April 2016 to June 2017, and had not appealed. The principle of consistency barred the Department from taking a contrary stance.
The Verdict
The appeal was allowed. The impugned order dated 31.08.2016 was set aside. The demand for ineligible Cenvat credit, interest, and penalty under Section 78 was cancelled. The extended period of limitation was held to be inapplicable. The appellant’s compliance with Rule 6(3B) by paying 50% of the Cenvat credit availed was deemed sufficient, and no further reversal was required. The Department was directed to close the proceedings with no further demand.
What This Means For Similar Cases
Rule 6(3B) Overrides All Restrictive Provisions
- Practitioners representing NBFCs and banks can now confidently rely on Rule 6(3B) to defend Cenvat credit claims even when input services are used for exempted or reverse charge services.
- The 50% reversal under Rule 6(3B) is a complete compliance mechanism - no apportionment or separate accounting is required.
- Any demand based on Explanation II or III of Rule 6(3) is legally unsustainable if Rule 6(3B) applies.
Extended Period of Limitation Cannot Be Invoked for Interpretational Disputes
- Mere failure to disclose a position that is already under litigation does not constitute suppression.
- If the Department was aware of the taxpayer’s stance during prior proceedings, invoking extended limitation is barred.
- Interpretational disputes, especially on complex tax rules, cannot attract penalty or extended limitation unless wilful evasion is proven.
Consistency in Departmental Adjudication Is Legally Binding
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If the Department has accepted a taxpayer’s position in a prior order and failed to appeal, it cannot later take a contrary stance in a subsequent assessment.
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Practitioners should cite prior favorable orders as binding precedent under the doctrine of consistency.
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The ruling reinforces that presumptive compliance mechanisms like Rule 6(3B) are designed to reduce litigation burden - not to be undermined by technical disallowances.
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Taxpayers must retain records of all prior litigation, circulars, and departmental orders to support their position in future assessments.
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This judgment is binding on all CESTAT benches and will influence similar cases involving banks, NBFCs, and other entities covered under Rule 6(3B).
