By TIOL News Service

MUMBAI, JAN 18, 2016: 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 inasmuch 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 CCR, 2004.

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.

Revenue has demanded 6% of the turnover of the "traded', nay ‘exempted goods'. The CCE, Pune-I confirmed the demand and, therefore, the assessee filed an appeal before the CESTAT.

The main contention of the appellant was 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 was 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 was 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. 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.

While dealing with the stay application pre-deposit was ordered by the CESTAT. We had reported this order as - 2012-TIOL-262-CESTAT-MUM thus –

Manufacturing of motor vehicles and trading activity of imported motor vehicles – common input services – whether rule 6 of the CCR, 2004 applicable – applicant has not made a prima facie case in view of Tribunal decision in Orion Appliances – Pre-deposit ordered of Rs.50 lakhs: CESTAT [para 9]

The appeals were later disposed of by observing –

CENVAT – Appellant, a manufacturer of motor vehicles and also undertaking of trading of motor vehicles imported from their principals abroad – common input services used - Explanation inserted in rule 2(e) of CCR, 2004 clarifying that "exempted services" includes trading is prospective in nature from 01/04/2011 and so also is clause (c) in Explanation I appearing after rule 6(3D) of CCR, 2004 – Trading is not Service prior to 01.04.2011 - for the disputed period credit of Service Tax paid on common input services should be apportioned in the same ratio as the turnover of the manufactured and traded cars – term ‘business' used in definition of input service is relating to the business of manufacture of final products and not relating to trading activity – extended period has been rightly invoked – appeals disposed of: CESTAT

Please see - 2014-TIOL-476-CESTAT-MUM.

Unhappy with this order the appellant had filed an appeal before the Bombay High Court.

After considering the submissions and adverting to the order passed by the CESTAT, the High Court, inter alia , made the following observations –

+ The Tribunal determines whether trading activity could be considered as an exempted service. It refers to series of judgments starting from Orion Appliances Limited. - 2010-TIOL-752-CESTAT-AHM. In all fairness as recorded earlier, it is not disputed even by the Assessee that as far as credit of input service on cars which are imported from the parent company and traded, that is inadmissible.

+ The main contention thereafter was with regard to the apportionment. The Tribunal agrees with the Assessee that the common services are not covered by the definition of "activity" relating to business. The effect of the amendment made in 2011 is then considered. The argument of the Assessee's Advocate that these amendments are substantive in nature and though they are introduced in the form of an explanation, they would cover certain cases prior to the insertion or introduction of the same appears to have been rejected but in the same paragraph it is held that Rules are delegated legislation and the Government has no power to amend them with retrospective effect.

+ The Explanations have been made in Rules by a Notification without giving it retrospective effect and though the same was issued on 1st March 2011 it came into force on 1st April 2011. Thus, it cannot have retrospective effect. The Revenue's action in considering trading as an exempted service for the period from August 2010 to March 2011 and covered by Appeal No. E/1019/2012 and demanding 6% of the trading turnover is not correct. To that extent, the Tribunal agrees with the Assessee and renders a finding against the Revenue. The Revenue has not challenged the same before us.

+ In paragraph 16 onwards after reiterating this conclusion, the Tribunal deals with the apportionment of the credit of the common input service where such input services have been used both in relation to the manufacture of goods and trading activities in respect of the imported goods.

+ The Tribunal comes to a conclusion that clause (c) of Explanation 1 has no application for determining the apportionment of the credit of service tax on input services.

+ However, in paragraph 17 of its order, the Tribunal has misdirected itself completely.

"17. ... In fact, we have gone through clause (c) of Explanation 1 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."

+ The Tribunal must firstly refer to the substantive Rule and as operative prior to 1st April 2011 and then arrive at a conclusion in relation to the Explanation introduced with sub-clauses with effect from 1st April 2011. On its introduction and even prior thereto, we do not find any justification then to hold that the Parliament intended to encourage trading of goods rather than manufacturing of the same.

+ The Parliamentary intent has to be gathered from the language used. If the words are plain, simple and clear, there is no scope for interpretation or applying any principle thereof. Once the Tribunal is bound to decide the controversy in the backdrop of the object and purpose sought to be achieved but has not arrived at any conclusion bearing in mind the same, then, we are required to step in. We cannot sustain this part of the finding and conclusion.

+ We are of the view that as far as working of the denominator is concerned (and even the numerator, technically speaking) and to apportion the input credit, it would be appropriate to send the matter back to the Tribunal.

Nonetheless, the High Court also added –

“…we clarify that the Tribunal should not reopen everything that is concluded in favour of the Assessee… Once the Revenue has not challenged the conclusion in that Appeal by way of a substantive Appeal, we conclude that against it and in favour of the Assessee.”

In passing:  The example given by the CESTAT in paragraph 17 of its order reads -

"...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 ratio 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…."

(See 2016-TIOL-105-HC-MUM-CX)