By TIOL News Service

MUMBAI, NOV 27, 2013: ALMOST a year ago when we reported the Stay order passed by the CESTAT in this case we mentioned about the fetish for numbers that the Revenue officers have.

In this case, a demand of Rs.297,77,33,460/- (no mistake here) was confirmed by the CCE, Thane-I against the appellant along with equivalent penalty and interest on the premise that the applicants are not maintaining separate accounts for input services which have been used by them for their manufacturing and trading activities.

The genesis of this order is a show-cause notice dated 07.10.2011 issued for the period September, 2006 to August, 2010.

The facts of the case are that the appellants are a manufacturer of electronic goods such as colour TVs, LCDs, telephone parts, washing machines, split air-conditioners. The company also undertakes trading activity in goods such as mobile phones, air-conditioners, washing machines, which are imported from abroad.

The applicants are maintaining separate accounts for inputs which are used in the manufacturing units and there is no dispute. But for input service credit, the applicant has adopted the following method for availment of credit:

(a) Input service exclusively attributable to the manufacturing the goods, the applicant is taking full credit.

(b) Input service credit attributable to trading activity, no credit is taken.

(c) For common input services, the applicant adopted a formula to take credit proportionately attributable to manufacturing activity. The amount of input service credit was calculated on the basis of the sale.

The above facts were presented by the appellant before the CESTAT while seeking a stay in the matter. It was also submitted that in the year 2008 an audit was conducted and verification of the method for availment of input service credit was ordered and it was found that the method adopted by them in taking the credit on manufacturing activity is correct. Inasmuch as since the non-availment of input service proportionate credit on the trading activity was known to the department in 2006, the extended period is also not invokable.

The Revenue representative submitted that the adjudicating authority had done the right thing.

The CESTAT while ordering an unconditional Stay (2012-TIOL-1832-CESTAT-MUM) observed -

"9. ...On perusal of the records, we find that the applicants are not taking proportionate credit on input service attributable to trading activity.

10. In view of these observations, we are of the view that as the applicant has not taken credit of common input service attributable to trading activity. In these circumstances, the applicants have covered under Rule 6(1) of CENVAT Credit Rules, 2004 and the provisions of Rule 6(2) of CENVAT Credit Rules, 2004 are not applicable. Therefore, they are not liable to pay 10%/5% of the value of the traded goods.”

The appeal was heard recently.

Inter alia , the appellant submitted that –

++ w.e.f 01/04/2011, rule 2 of CCR, 2004 was amended by adding an explanation wherein it was clarified that “exempted services includes trading”; that since these amendments came into force w.e.f. 01/04/2011 for the period prior to that, trading cannot be considered as an exempted service and, therefore, the appellant should not have been asked to pay an amount of 10%/5% on the value of the exempted service.

++ Some of the services on which the credit has been taken, namely, security charges, management consultancy services, banking and financial services, insurance and auxiliary services, technical services, etc. are specified in sub-rule (5) of rule 6, and, therefore, when these services are used both in the dutiable and exempted goods/services, reversal of credit is not required.

++ Further, Rule 6(3A) provides for method of determination and payment of amount payable under sub-rule (3) and as per this, if common services are used for both the taxable as well as exempted services, then the credit attributable to the exempted services should be computed on the basis of a formula and if the liability is worked out as per this formula, it can be seen that they will required to pay an amount of Rs.16 lakhs and not Rs.297 crore as alleged in the show cause notice. If benefit of services as specified in sub-rule (5) of Rule 6 is given, the appellant would not be required to pay any amount at all towards the input services used in the manufacture of trading activity.

++ Reliance is also placed on the decisions in Orion Appliances Ltd. vs. Commissioner of Service Tax, Ahmedabad - 2010-TIOL-752-CESTAT-AHM in support of their stand.

The Revenue had sought the services of a Special Consultant for arguing their three hundred crores case. Apart from reiterating the findings of the adjudicating authority it is submitted that the activity of trading could be considered as services and since during the material time it was not a taxable service, it should be construed as “exempted service”. Inasmuch as the appellant has not maintained any separate account in respect of the dutiable/taxable goods/services and exempted goods/services, the only option available to the appellant is to pay an amount equal to 10%/5% of the value of the exempted services as provided in sub-rule (3) of Rule 6. Reliance is placed on the Bombay High Court decision in Nicholas Piramal (India) Ltd. - 2009-TIOL-649-HC-MUM-CX in support of this contention. The Special Consultant also suggested that the matter could be remanded back to the adjudicating authority for fresh consideration.

The Bench observed -

“5.1 …, in the show cause notice, in para 8 thereof it has been alleged as follows:

 “8. Accordingly, it appears from the foregoing facts that it is clear that the assessee had not maintained separate accounts for receipt, consumption and Inventory of “input service” meant for use in manufacture of dutiable and exempted goods and take Cenvat credit only on that quantity of input service which was intended for use in manufacture of dutiable final products or in providing output service on which service tax was payable as envisaged in Rule 6(2) of the Cenvat Credit Rules, 2004.”

 5.2 The goods which the appellant had traded are imported goods. As per the definition of exempted goods which are exempt from the whole of the duty of excise leviable thereon, and includes goods which are chargeable to ‘Nil' rate of duty and goods in respect of which the benefit of an exemption under Notification No. 1/2011-CE dated 01/03/2011 is availed. Thus, exempted goods have to be excisable goods. By no stretch of imagination imported goods which are traded can be considered as exempted goods. If that be so, the question of invoking the provisions of Rule 6(2) and 6(3) for payment of a sum @10%/5% on the value of the exempted goods would not arise at all. On this ground alone the impugned notice and the order is not sustainable in law.

 5.3 Secondly, as per Rule 6(2) maintenance of separate accounts is envisaged only when a manufacturer or provider of output service avails CENVAT credit. In the present case, the appellant has not availed any CENVAT credit at all in respect of input service relating to the traded goods. Therefore, question of maintenance of separate accounts does not arise at all. Consequently provision of sub-rule (3) of the said Rule 6 mandating payment of an amount equal to 10%/5% of the value of the exempted goods and exempted service would also not apply. Even assuming but not admitting that the appellant has availed input service credit on both dutiable/exempted goods and taxable/exempted service, Rule 3A which came into force w.e.f. 01/04/2008 provides for reversal of credit on the input service attributable to exempted goods/services on a proportionate basis based on the turn over. In the present case, the appellant has precisely done that ab initio and has not taken any credit in respect of input services attributable to the traded goods. Calculation done by the appellant has not been disputed by the Revenue and the Revenue has not shown that the credit taken by the appellant in respect of input services in relation to manufactured goods was in excess of what was eligible to be taken. Therefore, in the absence of any evidence led by Revenue proving that the appellant has taken ineligible credit, the question of appellant violating the provisions of Rule 6 of the CCR, 2004 would not arise at all.”

Holding that the demand is not sustainable in law, both on merits as also on account of time-bar, the Bench set aside the order passed by CCE, Thane-I and allowed the appeal.

Neighbour's envy, owner's pride!

(See 2013-TIOL-1761-CESTAT-MUM)