By TIOL News Service

MUMBAI, MAR 31, 2014: THE appellant assessee is a manufacturer of motor vehicles and paying excise duty on such vehicles cleared from their factory. They are also paying service tax relating to services rendered by them. They are availing credit of inputs and input services so used in the manufacture or providing the output services.

In addition to the manufacture of motor vehicles, the appellant assessee also undertakes trading of motor vehicles in as much as they import motor vehicles from their principals abroad and sell such motor vehicles in India.

There are certain input services which are common to both manufacturing and trading activity. They have availed CENVAT credit on such input services.

Dispute is relating to such availment of credit on input services in relation to trading of motor vehicles/cars viz. whether entire credit is available or only a part will be available and if only part is available then the criterion for determining the same or determining the liability as per Rule 6 of CENVAT Credit Rules.

The period involved in all the appeals is prior to April, 2011 when the CENVAT Credit Rules, 2004 underwent certain changes.

Nonetheless, the Revenue wants to place emphasis on the Explanation that was inserted w.e.f 01.04.2011 and which reads -

Explanation:- For the removal of doubts, it is hereby clarified that "exempted services" includes trading.

And has demanded 6% of the turnover of the "traded', nay ‘exempted goods'.

The main contention of the appellant is that prior to 1.4.2011 trading was not considered as service or exempted service and trading activity was part of their business and since the definition of ‘input service' as it is stood at the relevant time included " activities relating to business ”, they are entitled to take credit of any service used in connection with their business. Since the trading was not a service or exempted service at the relevant time, they are not required to reverse any part of the credit on input services taken by them.

Reliance is placed on the decisions in Ashok Leyland Ltd. vs. Commissioner of Income Tax - (2002-TIOL-166-SC-IT), Coca Cola India Pvt. Ltd. 2009-TIOL-449-HC-MUM-ST; Orion Appliances Ltd. vs. Commissioner of Service Tax 2010-TIOL-752-CESTAT-AHM.

It is also submitted that since input services were used by them in connection with their business activity and the fact that trading is not a service before 1.4.2011 they are entitled to take credit of the common input services and they are not required to reverse any part of the said credit. Furthermore, amendments made in 2011 are substantive amendments though the amendments have been made in the form of Explanation and the said explanation starts with "For removal of doubts”. Inasmuch as the said explanation cannot be made applicable retrospectively for the reason that the amendments are substantive in nature and is not really any clarification or explanation. Moreover, the said explanation was introduced on 1.3.2011 vide Notification No. 3/11-CE (NT), but the said Notification itself states that the said provision will come into force from 1.4.2011 and hence the said explanation cannot be given retrospective effect.

Another submission made was that if for some reason their main contention that the credit of common input services is not covered by the definition of ‘input services' is not accepted by the Tribunal, in that event their liability to reverse the credit should be determined in terms of clause (c) to Explanation I after Rule 6(3D) even though the said explanation is introduced w.e.f. 1.4.2011. This is because the said explanation has been introduced with effect from 1.4.2011 keeping in view the fact that in trading the value addition by the appellant is only the difference between the sale and purchase price of the goods and within this difference, appellant have to incur all expenditure relating to marketing, sales, transportation, servicing etc. and also make profit and the said explanation is very well-thought of principle and the same should be applied for calculating their liability right from 2005 onwards. That the said explanation should be given retrospective effect as it is only procedural and is not substantive. [ Commissioner of Central Excise & Customs vs First National Bank of Chicago.Judgement of the Court (Fifth Chamber) dated 14.7.1998 in Case C-172/96, Commissioner of Wealth v/s Sharvan Kumar Swarup& Sons ( 2002-TIOL-684-SC-WT) refers ].

The Revenue representative supported the order of the lower authorities and submitted that in view of the fact that the Tribunal has been taking a consistent view that trading activity is not a service before April, 2011, the appellant assessee are not entitled to take credit of input service which are common to manufacturing and trading. Further, common credit of input services should be apportioned between the manufacturing activity and trading activity based upon the turnover of their activities. Reliance is inter alia placed on the decisions in Orion Appliances Ltd. 2010-TIOL-752-CESTAT-AHM; Metro Shoes Pvt. Ltd. - 2008-TIOL-417-CESTAT-MUM; Indian Furniture Products Ltd. - 2010-TIOL-451-CESTAT-MAD.

The Bench extracted at length from the orders passed by the Tribunal in case of Orion Appliances; Indian Furniture Products, Metro Shoes Pvt. Ltd. and observed - "This Tribunal in series of judgments starting from Orion Appliances Ltd. (supra) has been consistently holding that the trading activity is not a service at all and therefore, there is no question of considering the same as an exempted service. The term "service"is not defined in the Finance Act, 1994. In the case of various services, there is a service provider and a service receiver. In this case of trading, there is no service provider or service receiver. Here the appellant assessee purchases goods from their principals and stores it and thereafter sell it to various customers for profit. So in that sense trading is not a service and as has been held so in various judgments… "

In the matter of the argument made by the appellant that the words "activities relating to business" would include "trading”, the Bench said that it was not impressed and after extracting the definition of "input services"inter alia observed -

"…The definition of input service makes it very clear that the input service credit is available to a manufacturer and has to be related to the final products being manufactured by that manufacturer. Thus, if advertisement is relating to the goods manufactured by the manufacturer, then the manufacturer would be entitled for the credit of the same as an input service. Similarly, if the manufacturer's activity relating to accounting, financing, recruitment and quality control etc. are relating to the goods manufactured by him, then the manufacturer would be entitled to the credit of tax paid on input service. In our view the term ‘business' used in the said definition is relating to the business of manufacture of the final products by the manufacturer and not relating to the trading activity… ."

The Bench further observed -

"…In the case of the appellant assessee, there are distinct streams, the first one is manufacturing of cars in India and the second one is importing the cars and selling the cars in the Indian market viz. trading activity. In view of above position, we are of the view that the credit of input services which are used both in the manufacturing and trading cannot be entirely allowed. It will also be interesting to see various common services of which credit has been taken and are matter of dispute in the present case. The main common services on which the credit has been taken are advertisement, event management service, business auxiliary services, business support services. These services are related to sales promotion and are included in the definition before the words "activities relating to business such as…….."In respect of these services, there can be no doubt that these have to be linked with manufactured product (and not the traded goods). We also note that all services used in business are not included in the definition of input service. This part of the definition reads -

activities relating to business such as accounting, auditing, financing, recruitment and……"

Thus the services used in activities such as accounting, auditing, financing, recruitment etc. are only to be allowed. The services under dispute are mainly advertisement, even management, business auxiliary, business support services. None of these services are relating to activities illustrated or enumerated in the definition. On this ground also we do not find any merit in the contention of the appellant assessee that they would be entitled to the credit of common services. We, therefore, hold that the common services are not covered by the definition of activities relating to business."

However, the Bench agreed with the submission of the appellant that the amendments made in 2011 are substantive in nature even though the amendments have been introduced in the form of explanation; the explanation starts with the word "For removal of doubts”;the same cannot be applied retrospectively, particularly, the said view is also supported by the fact that the said Notification was issued on 1.3.2011 and was to come in to force only from 1.4.2011;moreover, Rules are delegated legislation and Government has no power to amend the Rule with retrospective effect;this can be done only by an Act.

Reliance is placed on the decision of the Supreme Court in the case of UOI vs. Martin Lottery Agencies Ltd. 2009-TIOL-60-SC-ST, Sify Technologies Ltd. vs. Commissioner of Cen. Excise & ST. LTU Chennai 2011-TIOL-123-CESTAT-MAD in this regard.

So, the Bench held -

++ Changes made by Explanation are substantive in nature. Explanations have been made in Rules by a Notification without giving it retrospective effect and though notification was issued on 1.3.2011 but came into force only 1.4.2011 and thus it cannot have retrospective effect. Revenue's act as to consider ‘trading' as exempted service for the period Aug. 2010 to March, 2011 and demanding 6% of the trading turnover is not correct.

++ We have come to the conclusion that trading was not a service and therefore, cannot be considered as an exempted service during the period prior to 1.4.2011 and the amended provision with effect from 1.4.2011 will not have retrospective effect.

In the matter of deciding as to how to apportion the credit of input service taken by the appellant, where such input services have been used both in the manufactured goods and trading activities of the imported goods, the Bench observed that the decisions cited by the appellant do not apply to the facts of the case and since the Bench had already held that trading was not a service and therefore cannot be considered as an exempted service before 1.4.2011, therefore, the substantive provision [viz. clause (c) to Explanation I after Rule 6(3D)] itself did not exist before the said date.

The Bench, therefore, set out to answer the said issue in the following manner -

"17. Having come to the conclusion that clause (c) of Explanation 1 has no application for determining the apportionment of the credit of service tax on input services, the question is how to determine the same. We find that the major amount pertains to the services in relation to the advertisement, even management, business auxiliary service and business support service. When the appellant is spending certain amounts for sales promotion such as advertisement of the cars and consequent to the said expenditure he has certain turnover of the cars out of which some of the cars manufactured indigenously while other cars are imported and hence traded. In our view, the credit of tax paid on such sales promotion activities should be apportioned with reference to the turnover of the manufactured cars and turnover of the traded cars. For example, if the turnover in particular period is say Rs.1000 crore out of which turnover of Rs.700 is pertaining to the indigenous cars and turnover of Rs.300 crores pertains to the imported and traded cars then if the input credit of 10 crores is available then 7 crore should be considered for the manufactured cars in India and credit of Rs.3 crore should be considered pertaining to imported and traded cars. If we go by the argument of the Ld.Sr.Advocate then the value of traded cars will have to be taken as Rs.30 crores and total turnover will be considered as Rs.730 crores and credit of Rs.10 crores will have to have apportioned in the ration of 700:30 or 70:3. Obviously, this would be leading to incorrect results. It would amount to 96% expenditure (relating to sales promotion) is for the domestically manufactured goods and approximately 4% expenditure on the imported and traded cars. Similar is the position in respect of event management service. Here again, the event management, service is used both for indigenously manufactured cars and also imported and traded cars. Same reasoning would be equally applicable for business auxiliary and business support service. In view of the above analysis, in our view, it would be appropriate to apportion the credit of service tax on input services in the ration as is the turnover of manufactured cars and imported and traded cars. In fact, we have gone though clause (c) of Explanation I added with effect from 1.4.2011 and are of the view that perhaps the said new method has been adopted to encourage the trading of the goods rather than the manufacturing of the goods (otherwise criterion should have been same viz. based upon turnover or value addition). We therefore hold that for the period under dispute the credit of service tax paid on the common input services should be apportioned in the same ratio as the turnover of the manufactured and traded cars."

On the question of limitation, the Bench held -

The assessee is following the self-assessment procedure and taking credit on its own. They were even taking the credit in respect of input services which were exclusively used in the trading activity. It is also observed that the fact that the appellants were taking credit of service tax in relation to the trading activity has not been disclosed in return or in other document and therefore, the extended period of limitation is correctly invoked. These reasons would be applicable even for penalty under Section 11AC read with Rule 15 of CENVAT Credit Rules.

The appeals were disposed of.

(See 2014-TIOL-476-CESTAT-MUM)