By TIOL News Service

MUMBAI, MAY 25, 2016: THE appellant is engaged in providing Cargo handling services and availed Cenvat Credit in respect of certain services which were exclusively used for auction of abandoned goods on which services no service tax was discharged. Further, they also availed Cenvat Credit in respect of Insurance Auxiliary service which is used for export cargo.

The Credit was disallowed by the adjudicating authority on the ground that these services were used exclusively for trading activity which is not a taxable service as well as for export cargo which is again not taxable activity.

The Commissioner (Appeals) rejected the appeals and, therefore, the appellant is before the CESTAT.

The appellant submitted that the auction of the abandoned goods is a trading activity on which the appellant is paying VAT. Being a trading activity, it is not an exempted service as the trading activity was covered under the definition of exempted service only w.e.f. 01.04.2011, therefore there is no bar in availing the Cenvat Credit on the input service which is used in trading activity for the prior period. It is also informed that the department had been issuing show cause notices demanding service tax on the auction sale of abandoned goods, therefore, the appellant is entitled for Cenvat Credit on the input services. It is, however, conceded that the proceedings regarding demand of service tax on such activity has been dropped vide Tribunal Order No. A/2340-2342/STBdt. 08.07.2015 and accordingly the activity of auction sale of abandoned goods is not taxable. On limitation, it is emphasized that the SCN dated 03.10.2006 is time barred as the same was issued beyond 1 year period i.e. for the period October 2003 to September 2005; that there is no suppression on the part of the appellant; issue involved is interpretation of law. The decision in Elder Pharmaceuticals Ltd. - 2014-TIOL-2071-CESTAT-MUM is cited in support.

The AR,while reiterating the findings of the lower authority, submitted that only when a output service is provided can credit be taken on Input service; that trading activity was covered in the definition of 'exempted service' only from 01.04.2011; that Board has clarified vide letter F. No. B.11/1/2002-TRUdt. 1.8.2002 that in respect of auction of abandoned cargo by the CFS, no cargo handling service can be said to have been rendered; that since the department was never informed as to the purpose for which the service was used extended period is rightly invoked.

The Bench observed -

Merits:

++ since the services are exclusively used for non-taxable activity (of auction sale of abandoned cargo and export of stuff cargo) the appellant was not entitled for the Cenvat Credit at the first instance that is at the time receipt of the service. Moreover, the input services on which credit was availed were used for non-taxable activity.

++ therefore, the argument of the Ld. Counsel that auction sale being a trading was categorized as exempted service w.e.f. 1.4.2011, therefore prior to that date Cenvat Credit is admissible, has no legs to stand. In my view even prior to 1.4.2011 since no service tax was payable on auction sale of abandoned cargo and export cargo, credit was not admissible on the input service used in such output activity as per the definition of input service.

++ cenvat Credit on the input service used for auction sale of abandoned cargo and export cargo is not admissible to the appellant.

Limitation:

++ the demand proceeding on the auction sale of abandoned cargo itself was alarm to the appellant that whether the Cenvat Credit should be availed on the input service used in the auction sale of abandoned cargo. Therefore despite knowing all the facts, the appellant kept on availing Cenvat Credit. As regard details of availment of Cenvat Credit on the nature of input service is not known to the department therefore it cannot be accepted from the department to issue show cause notice within 1 year unless until the facts are unearthed. Therefore, I am of the clear view that there is a suppression of fact on the part of the appellant therefore extended period in the first show cause notice dt. 3.10.2006 was rightly invoked.

Penalty:

++ section 78 penalty can be imposed only when there is a suppression of fact, fraud, collusion, willful misstatement etc. In the present case, the suppression of fact involved only in the first show cause notice dt. 3.10.2006. However, all the subsequent show cause notices were issued after knowing the fact involved in the first show cause notice, therefore in the subsequent show cause notices it cannot be said that there is suppression of fact on the part of the appellant, nor it can be said that the department had no knowledge about the fact of the case after issuance of first show cause notice. Therefore penalty under Section 78 is not sustainable corresponding to demand of Cenvat Credit for the period after September 2005.

Conclusion:

++ The demand of Cenvat Credit is sustained, penalty under Section 78 for the period October 2003 to September 2005 is upheld. Penalty under Section 78 for the period October 2005 onwards is dropped.

The appeals were partly allowed.

(See 2016-TIOL-1236-CESTAT-MUM)