By TIOL News Service

HYDERABAD, APR 11, 2016: THE appellants are engaged in manufacture of leather chemicals. They are also engaged in trading activity. They availed CENVAT Credit on certain input services which are common to both manufacturing and trading activity. Department demanded reversal of credit by applying the provisions of Rule 6 of the CENVAT Credit Rules and by adopting the total sale value of the traded goods as "value of exempted service". Period involved is 2006-07 to 2010-11.

The appellant contended that with effect from 01.04.2011, trading has been defined as exempted service and simultaneously, value of traded goods has also been defined as the difference between the sale price and the cost of goods sold or ten percent of the cost of the goods sold, whichever is more. Therefore, it would be reasonable to adopt the same method for demand for the period prior to 01.04.2011 also. The appellant also contended that the demand is partly barred by limitation.

After hearing both sides, the Tribunal held:

+ The contention of the appellants that the department was fully aware that appellant was engaged in trading activity also is not without force. Prior to 01/04/2011, different views existed whether trading could be categorized as exempted service or not. Rule 6 of CENVAT Credit Rules places an obligation to maintain separate accounts when manufacturer/service provider is engaged in production/providing exempted goods/exempted services also along with dutiable goods/taxable services. It is clear that the issue was contentious, prior to 01/04/2011. In the present case, there is no evidence to establish that there was suppression of facts or willful misstatement on the part of appellants with intention to evade payment of duty. In Krishna Auto Sales case - 2015-TIOL-2994-CESTAT-DEL relied by the appellant, the Tribunal in similar set of facts has held that the extended period is not invokable. Following the dictum laid in the above case, it is held that part of demand which falls within the extended period is not sustainable.

+ In respect of demand covered within normal period, the appellant cannot take credit of input services used for trading, which was neither taxable service or exempted service prior to 01/04/2011. Hence that portion of credit availed on input services used for trading is not admissible. The question is how to arrive at the quantum used for trading when no separate accounts are maintained. The original authority has adopted the formula given in Rule 6(3A)b(iii). This provision deals in situation when there is both dutiable goods/taxable services and exempted goods/exempted services. It does not mention trading. The computation method taken by the appellant to arrive at the figure Rs.2,74,122/- is the method for computing in case of trading w.e.f. 01/04/2011. As this is the formula/method provided by legislature for computing value in case of common inputs/input services used for trading activities when there is no separate accounts, that application of this method to arrive at the value would be more appropriate though it was introduced w.e.f. 01/04/2011 only.

Accordingly, the Tribunal directed the department to compute the value/amount of credit of common input services attributable to trading activity falling within the normal period as per the method provided in Rule 6(3D)(c) of CENVAT Credit Rules as applicable to trading and waived the penalty imposed.

(See 2016-TIOL-856-CESTAT-HYD)