By TIOL News Service

MUMBAI, JULY 03, 2014: THE appellant is a manufacturer of excisable goods and also undertakes trading of furniture, locks, air-conditioners, safes, etc. which are not manufactured by them.

The appellant availed CENVAT credit of the service tax paid on various services such as advertisement, air-travel agent, architect, ATM operations, business auxiliary services, Business exhibition and business support services, insurance services, storage and warehousing services, telecommunication services, and so on. These services were used both for the manufacture of the excisable goods and the trading of non-excisable goods (goods not manufactured but traded by them). However they did not maintain separate accounts for the credit availed by them in respect of taxable activities and non-taxable activities.

A SCN dated 4 th February, 2013 came to be issued to the appellant demanding an amount of Rs.33,47,30,142/- being the ineligible amount of credit availed by them during the period Jan-March 2008, 2008-09, 2009-10 and 2010-11 as trading was not a taxable service at all during the said period. The ineligible amount of credit was worked out on the basis of sales turnover of the traded goods and the manufactured goods and apportioning the total credit taken in the same ratio.

The adjudicating authority noted that w.e.f. 1.04.2011 ‘trading' has been deemed as an "exempted service" and the CCR, 2004 provided for determination of credit of input service attributable to the exempted service under sub-rule (3A) of rule 6 of CCR, 2004.Based on the formula prescribed therein, he arrived at the quantum of ineligible credit asRs.4,24,52,646/- and confirmed the same along with interest and equivalent amount of penalty.

The appellant is before the CESTAT with a Stay application.

The submissions made along with a plethora of case laws are -

+ As credit was used for the trading activities in their capacity of an output service provider the SCN ought to have been issued under Rule 14 of CCR r/w s. 73 of FA, 1994 and not u/s 11A of the CEA, 1944. So also, SCN should have been adjudicated by the Commissioner of Service Tax and not by the Commissioner of Central Excise.

+ SCN does not particularize the services on which credit has been taken for the trading activity and, therefore, is invalid.

+ Quantum of service tax could not have been quantified using a formula which was prescribed in the statute with effect from 01.04.2011.

+ The demand is time barred as the department was aware of availment of credit on trading activity.

The Revenue representative placed reliance on the Tribunal decision in Mercedez Benz India Pvt. Ltd. - 2014-TIOL-476-CESTAT-MUM to justify the departmental action and submitted that the appellant be put to terms.

The Bench observed as under on each of the submissions made by the appellant -

++ SCN, whether correctly issued u/s 11A of CEA, 1944

The contention that the service tax credit should have been recovered under the provisions of section 73 of the Finance Act, 1994 and not under section 11A of the Central Excise Act, 1944, this contention is totally devoid of merits. Recovery of wrongly availed credit is provided for under Rule 14 of CCR, 2004. If the credit is utilized for payment of excise duty, the applicable provisions are Rule 14 read with Section 11A. If the appellant is mainly a service provider, recovery will be made under the said rule 14 read with section 73 of the Finance Act. In the present case, the appellant is a manufacture of excisable goods and the credit taken on input services has been utilized for payment of duty on excisable goods. Therefore, the correct provision for recovery of wrongly availed credit is Rule 14 of CCR, 2004 read with Section 11A of the Central Excise Act, 1944. Therefore, we do not find any infirmity in the legal provisions cited for recovery of credit.

++ Whether CCE, Mumbai is the proper adjudicating authority

The question of jurisdiction raised by the appellant is also incorrect and untenable. Wrongly availed credit has to be recovered from the person who has availed the credit and not from the person who has distributed the credit. In the present case, it is the appellant who is a central excise registrant who has availed the credit and therefore, recovery of wrongly availed credit has to be made from the appellant by the jurisdictional excise authorities. Therefore, we do not find any lack of jurisdiction in the present case.

++ Whether CENVAT credit can be taken in respect of Trading prior to 01.04.2011

Though the CCR 2004 was amended to deem trading as an exempted service, the question is whether prior to 1-4-2011, trading can be considered as an exempted service. It is not in dispute that trading was not a taxable service prior to 1-4-2011 or after 1-4-2011. This matter was examined at length by this Tribunal in the Mercedez Benz case - 2014-TIOL-476-CESTAT-MUM. In the said decision, it was held by this tribunal that trading was not a service and, therefore, cannot be considered as an exempted service prior to 1-4-2011 and the amended provisions with effect from 1-4-2011 will not have retrospective effect. In the said decision, it was further held that the credit of service tax paid on common input services should be apportioned in the same ratio as the turnover of the manufactured goods and traded goods. It was further held that the input service definition under rule 2(l) of CCR covered only the business of manufacturing and not any other business.

++ Case laws cited

All the Case laws cited by the applicant were distinguished on facts as also being Single Member decisions vis-a-vis the Mercedes Benz decision relied by the A.R which is pronounced by a Division Bench. It was concluded that the question of taking credit on input service and its utilization thereof cannot be permitted at all prior to 01.04.2011.

Adverting to the apex Court decision in Maruti Suzuki - 2009-TIOL-94-SC-CX the Bench further held that the appellant could not have taken any credit on common input services used in the manufacture of excisable goods and traded goods prior to 01.04.2011 when trading was not a taxable service. It was, therefore, held that the entire credit attributable to the traded goods is not available to the appellant. The Bench also observed that the fact that the adjudicating authority, instead of denying the entire credit attributable to the traded goods, has allowed part of the input service tax credit based on a formula prescribed for the first time with effect from 1-4-2011, will not make any difference at all to the proposition that the appellant was not eligible for the credit ab-initio.

++ Limitation

On the argument of limitation, the Bench observed that it is not the appellant's case that they had declared to the department the fact of availing credit attributable to the trading activity either in the statutory returns filed or otherwise. Relying on the Gujarat High Court decision in Neminath Fabrics - 2011-TIOL-10-HC-AHM-CX, the Bench held that the invocation of extended period cannot be faulted.

Holding that the interest of the Revenue needs to be protected and no satisfactory explanation was led by the applicant in the matter of financial hardship, the Bench directed the applicant to make a pre-deposit of 50% of the credit disallowed and report compliance.

In passing: Amount demanded - Rs.33.47 Crores. Amount Confirmed: Rs.4.24 Crores. Assessee appeals, pre-deposit ordered of 50%. Revenue appeal…!?

(See 2014-TIOL-1188-CESTAT-MUM)