2017 (8) TMI 833 - AT - Service Tax

CENVAT credit - activity of trading - Rule 6 (3) of CCR, 2004 - Held that - the Cenvat Credit Scheme is available only in respect of an assessee, who is either manufacturing dutiable final products or providing taxable output service. Admittedly, during the relevant time, trading is not categorized as service at all. It is only in 2011, the explanation was inserted under Rule 2 (e) of CCR, 2004 to the effect that exempted service includes trading . Prior to that date, trading is not even considered as exempted service . Going by this fact, it is clear that no credit is available on any input service attributable to trading during the material time. When no such credit is eligible, the respondent cannot avail the benefit of cenvat credit scheme. The Revenue s appeal will succeed to an extent of reversal of cenvat credit for normal period along with applicable interest - appeal allowed - decided partly in favor of appellant.

Issues:
1. Whether the respondent is liable to reverse Cenvat credit attributable to trading activity on a proportionate basis.
2. Whether the explanation inserted under Rule 2(e) regarding exempted services including trading is applicable for the period prior to 01/04/2011.
3. Whether the respondent can avail the benefit of the Cenvat credit scheme for trading activities without maintaining separate accounts.
4. Whether the demand for reversal of Cenvat credit is legally sustainable.

Issue 1:
The main issue in this case was whether the respondent is liable to reverse Cenvat credit attributable to trading activity on a proportionate basis. The Revenue contended that since trading is not liable to payment of service tax and falls within the category of exempted services, the respondent is required to reverse Cenvat credit. The Tribunal held that the respondent, being a trader as well as an output service provider, cannot claim the benefit of full credit on common input services without maintaining separate accounts. It was decided that the respondent is liable to reverse the credit attributable to trading activities based on legal interpretations and precedents.

Issue 2:
The second issue revolved around the applicability of the explanation inserted under Rule 2(e) regarding exempted services, including trading, for the period prior to 01/04/2011. The Revenue argued that the demand for reversal of Cenvat credit under Rule 6(3) of CCR, 2004 is valid even for the period before 01/04/2011. However, the respondent cited Tribunal decisions stating that the explanation is applicable only for the period on or after 01/04/2011. Ultimately, the Tribunal held that prior to 01/04/2011, trading was not considered an exempted service, and no credit on input services used for trading activities could be availed.

Issue 3:
The third issue addressed whether the respondent could avail the benefit of the Cenvat credit scheme for trading activities without maintaining separate accounts. The Tribunal emphasized that no credit is available on input services attributable to trading during the relevant time when trading was not categorized as a service. It was concluded that the respondent must avail only the credit attributable to taxable output services, and in the absence of separate accounts, the credit for trading activities must be reversed.

Issue 4:
Lastly, the issue of the legal sustainability of the demand for reversal of Cenvat credit was discussed. The Tribunal ruled that the demand for reversal was legally sustainable, as no credit on input services used for trading activities could be availed when trading was not considered an exempted service. The decision was based on the principle that credit is only available when there is a taxable output service, and in this case, the respondent was liable to reverse the credit attributable to trading activities. Additionally, it was noted that since the issue involved legal interpretation and conflicting decisions, the demand was restricted to the normal period without imposing any penalty on the respondent.

In conclusion, the Tribunal allowed the Revenue's appeal partly, directing the reversal of Cenvat credit for the normal period along with applicable interest.

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