2017 (6) TMI 635 - HC - Service Tax

Reversal of CENVAT credit - Whether in the facts and circumstances of the case, Rule 6(3)(c) of Cenvat Credit Rules, 2002, attracted, in cases, where the service tax on input services are not used in respect of trading activity but used only for taxable services? - Held that - If, the appellant has accepted before us that he was not paying service tax on an activity, then the credit of services vis-a-vis input services could only be taken on a pro-rata basis, as per the formula stipulated in Rule 6(3)(c) - Having regard to the rule position and given the admitted fact that no separate accounts were maintained by the appellant, with regard to the taxable and non taxable services, clause (c) of sub rule 3 of rules 6 of 2004 Rules would apply - appeal dismissed - decided against appellant.

Issues Involved:
1. Applicability of Rule 6(3)(c) of Cenvat Credit Rules, 2002 to input services not used in trading activity but only for taxable services.
2. Classification of trading activity as an exempted service for invoking Rule 6 of Cenvat Credit Rules, 2002 prior to 1-4-2011.
3. Legality of requiring the appellant to reverse any part of the credit on input services when trading was not considered a service or exempted service at the relevant time.

Issue-wise Detailed Analysis:

1. Applicability of Rule 6(3)(c) of Cenvat Credit Rules, 2002:
The court examined whether Rule 6(3)(c) was attracted in cases where the service tax on input services was not used for trading activity but only for taxable services. The appellant was engaged in both trading and commission business, and the audit revealed that the appellant claimed credit for service tax on common input services used for both activities. The appellant paid service tax for the commission agency business but not for trading activity. The audit concluded that the appellant had claimed excess credit contrary to Rule 6(3)(c) of the Cenvat Credit Rules, 2004, resulting in a demand for reversal of the excess credit amounting to ?6,78,459/-. The court upheld the Tribunal's view that the appellant was not eligible for the entire credit availed on common input services and that the excess credit claimed was rightly demanded by the department.

2. Classification of Trading Activity as an Exempted Service:
The court considered whether trading activity could be categorized as an exempted service for the purpose of invoking Rule 6 of Cenvat Credit Rules, 2002 prior to 1-4-2011. The Tribunal had ruled that trading was not a service and could not be considered an exempted service before the amendment on 1-4-2011. The court agreed with this view, stating that the amendment to Rule 2(e) on 1-4-2011, which included trading in the definition of exempted services, was merely clarificatory and did not imply that trading was an exempted service before this date. Consequently, the appellant's argument that Rule 6(3)(c) could only apply post-1-4-2011 was rejected.

3. Legality of Requiring Reversal of Credit on Input Services:
The court addressed whether it was legal to require the appellant to reverse any part of the credit on input services when trading was not considered a service or exempted service at the relevant time. The appellant had not maintained separate accounts for taxable and non-taxable services, which triggered the application of Rule 6(3)(c). The court held that since trading activity was not amenable to service tax during the relevant period, the credit of services vis-a-vis input services could only be taken on a pro-rata basis as per the formula stipulated in Rule 6(3)(c). The court concluded that the appellant was rightly required to reverse the excess credit claimed.

Conclusion:
The court upheld the Tribunal's decision, stating that the appellant was not eligible for the entire credit availed on common input services and that the excess credit claimed was rightly demanded by the department. The court dismissed the appeal, answering the questions of law in favor of the Revenue and against the Assessee.

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