By TIOL News Service

MUMBAI, JUNE 05, 2015: THE appellant is providing "Business Auxiliary Services" (BAS) and IT Software Services as well as trading of scrap. They availed Cenvat Credit of service tax paid on common services received for providing output services as well as in trading activities.

As the trading activity is not taxable under Central Excise law or Service Tax law, the benefit of allegedly wrongly availed Cenvat Credit on input services used in trading activity amounting to Rs. 21,05,690/- during the period April 2006 to March2011 was denied by the adjudicating authority, with option to pay 25% of duty as penalty if deposited within 30 days of the receipt of adjudication order in terms of Section 78 of the FA, 1994 r/w Rule 15 (3) of CCR. The credit was disallowed in proportion of trading turnover (i.e. sales price of traded goods) to the total turnover (i.e. trading plus value of output service).

The Commissioner (Appeals) held that since with effect from 01/04/2011 the definition of exempted services was amended to include trading and "method of computation of value" of input services used for trading was prescribed in Rule 6(3A), the same formula can be adopted for the period of dispute to arrive at the quantum of Cenvat Credit used in the trading activities. He accordingly reduced the amount of Cenvat Credit demanded to Rs. 6,97,822/- along with interest under section 75 and imposed penalty under Section 78 amounting to Rs. 3,48,911/-.

Against this order, the appellant as well as Revenue is in appeal, appellant against confirmation of demand and Revenue against reducing the demand as confirmed by the adjudicating authority.

The appellant submitted that during the period under consideration there is no provision in law for disallowing Cenvat Credit, either partially or proportionately, on input services commonly used for providing output services and in trading activities. Further, the inclusion of trading under exempted services was made effective from 01/07/2012 and, therefore, the denial of Cenvat Credit as done is not correct. Inasmuch as in the absence of any provision disallowing CENVAT credit used in trading, the function of legislature cannot be taken over by any other authority, contended the appellant.That the application of the Tribunal decision in Mercedes Benz - 2014-TIOL-476-CESTAT-MUM is also wrong. Reliance is placed on the decision in Ghatge Patil Auto Farm Machinization vs. CCE, Kolhapur – 2014-TIOL-761-CESTAT-MUM. The plea of time bar is also raised by submitting that it was only in 2011 that the definition of exempted service included trading activity and, therefore, since the department itself was not clear on the treatment of trading activity vis-a-vis Cenvat Credit, invoking the extended time period is not justified.

The AR while reiterating the findings of the adjudicating authority emphasized that trading is not a service at all and, therefore, the question of permitting input service credit for providing output activity of trading does not arise at all. Moreover, the Commissioner (Appeals) had gone beyond the show-cause notice in computing the formula in accordance with the Rule 6 and had not put the department to notice in this matter.

The Bench while distinguishing the case laws cited by the appellant assessee and liberally extracting from the decision in Mercedes Benz held that it is inclined to follow the same since being a later judgment and accordingly held that the amount of credit to be disallowed was correctly computed by the adjudicating authority.

The Tribunal further observed – "The department is not imposing a condition which is not in the Rules. Department is merely saying that input credit is available under Service Tax law for providing output services in terms of the definition of input service in the Cenvat Credit Rules whereas the trading activity is outside the purview of service tax law ."

On issue of time bar, the Bench held –

"…, the appellant have not declared in their ST-3 returns that the input service credit was used in relation to trading. This amounts to suppression of facts. Therefore, the extended period of limitation is correctly invoked as the appellants are following self assessment procedure and taking credit on their own against the provisions of law. Therefore, the present case is distinguishable from the case of Landis +GYR Ltd. Reliance is placed on the case of Mercedes Benz (supra) as that judgment involved the same circumstances as far as the issue of time bar is concerned."

In the matter of appeal filed by the Revenue, the Tribunal held –

"I agree with the appeal of Revenue that reducing penalty to 50% of amount confirmed under proviso to Section 78(1) is bad in law because the proviso became effective from 08/04/2011 whereas the period in the present case is from 2006-2007 to 2010-2011. I am also inclined to agree with the learned AR that the department was not put to notice on application of Rule 6(3A) by the Commissioner (Appeals) when the show-cause notice did not state this. I find that principles of natural justice have been violated. However, I have already decided the issue on merits in favour of Revenue. In view of applicability of extended time period for suppression of facts, I uphold the penalty equivalent to amount of Cenvat Credit demanded as held by the adjudicating authority."

In fine, the the appeal filed by the assessee was dismissed and that by Revenue was allowed.

(See 2015-TIOL-1036-CESTAT-MUM)