2008 (2) TMI 784 - Commissioner - Service Tax

Cenvat credit of Service tax - Input services - common use in manufacturing and trading activities - Quantum of Penalty - Held that - the manufacturer shall not be allowed to take input service credit when he uses the input services in providing exempted services - Whereas in the present situation the appellant was dealing in trading of similar goods. Therefore trading activity cannot be equated with exempted goods or exempted services used in the manufacture or in providing output services - it is clear that the advertisement and other services were utilized for items manufactured and marketed by the appellant, but incidentally the item imported were also sold. On that basis alone the input service credit availed by the appellant cannot be denied because there is no such situation envisaged under Rule 6 of Cenvat Credit Rules, 2004. Extended period of limitation - penalty - Held that - this is a case of interpretation - the appellant acted with bona fide belief - invocation of longer period and imposition of equal penalty not sustainable. Appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Admissibility of Cenvat credit on input services used in manufacturing and trading activities.
2. Requirement of maintaining separate accounts for input services in manufacturing and trading.
3. Interpretation of Rule 6 of Cenvat Credit Rules, 2004.
4. Validity of Show Cause Notice issued after a year.
5. Imposition of equal penalty.

Analysis:

Issue 1:
The appeal challenged the denial of Cenvat credit on input services used for manufacturing and trading activities. The appellant argued that services like credit rating and share registry, falling under the definition of input services, are rightfully availed for both manufacturing and trading. The department contended that the appellant did not maintain separate accounts for input services used in trading, leading to the suppression of availed credit. The appellant's defense emphasized the nexus between input services and business activities, including marketing, for both manufactured and traded goods.

Issue 2:
The controversy revolved around the requirement of maintaining separate accounts for input services used in manufacturing and trading activities as per Rule 6(2) of Cenvat Credit Rules, 2004. The appellant argued against the applicability of Rule 6 to trading goods, asserting that trading activities do not fall under the purview of exempted goods as specified in the rule. The appellant contended that the department's demand to disallow part of the credit based on the manufacturing-to-trading ratio was unjustified.

Issue 3:
The interpretation of Rule 6 was crucial in determining the admissibility of input service credit for trading activities. The judgment clarified that trading activities of similar goods, whether imported or indigenous, do not align with the concept of exempted goods under Rule 6. The appellant's utilization of input services for marketing both manufactured and traded items was considered legitimate, as the rule did not mandate separate accounts for trading goods.

Issue 4:
The appellant raised the issue of the Show Cause Notice being issued after a year from the department's visit, challenging the sustainability of the demand for a longer period. Citing relevant judgments, the appellant argued against penalization for a bona fide belief in availing services, especially since the notice was issued after a significant delay. The judgment concurred with the appellant, deeming the notice unsustainable due to the delayed issuance.

Issue 5:
Regarding the imposition of an equal penalty, the appellant's argument of acting in good faith and utilizing services for both manufactured and traded goods was upheld. The judgment acknowledged the lack of distinction in advertisements between indigenous and imported items, supporting the appellant's contention of bona fide belief. Consequently, the appeal was allowed, setting aside the impugned order and absolving the appellant of the imposed penalty.