2018 (2) TMI 678 - AT - Central Excise

CENVAT credit - input service distributor - distribution of credit without excluding that proportion of tax paid on input services attributable to trading in goods which, being an exempt activity, was not within the scope of entitlement - Held that - There is no dispute that the headquarters of the appellant carries on trading and that the services procured there cannot but have been used in relation to trading also. The appellant has failed to maintain separate set of accounts and is unable to compute the value of input services that was rendered to them for such activity. Therefore, the availment, and the distribution thereof, are not in accordance with law - appeal dismissed - decided against appellant.

Summary

Issues:
Recovery of alleged CENVAT credit for distribution by the head office without excluding tax on input services attributable to 'trading'; Confirmation of demand, interest, and penalty by original authority; Claim of appellant regarding exclusion from availment of credit for 'trading' activity; Prospective application of Explanation in CENVAT Credit Rules, 2004; Failure to maintain separate accounts for trading activity; Eligibility of 'trading' as a service; Bar of limitation.

Analysis:
The case involved the appellant, a manufacturer of dyes, being proceeded against for the recovery of alleged CENVAT credit availed between 2006 and 2011 for distribution by the head office, registered as an 'input service distributor', without excluding the proportion of tax paid on input services attributable to 'trading'. The original authority confirmed the demand, imposed interest under section 11AA, and penalty under section 11AC of the Central Excise Act, 1944. The first appellate authority upheld this decision, leading to the current appeal.

The appellant's primary argument was that the exclusion of credit for tax on input services related to 'trading' was not in accordance with the law, as 'trading' could not be classified as either manufacturing or service. The appellant contended that the insertion of an Explanation in rule 2(e) of the CENVAT Credit Rules, 2004, effective from March 1, 2011, was meant to be prospective in nature.

The Tribunal noted that the appellant's headquarters engaged in trading activities, and the services procured there were used in relation to trading. However, the appellant failed to maintain separate accounts to determine the value of input services used for trading. As a result, the availment and distribution of credit were deemed non-compliant with the law. The Tribunal highlighted that even before the Explanation was inserted, it was evident that 'trading' was not an eligible service, as it was not included in the relevant legislation at the time.

Ultimately, the Tribunal found no merit in the appellant's appeal and dismissed it. The decision was based on the failure to maintain separate accounts for trading activities, the ineligibility of trading as a service, and the lack of compliance with the law regarding the availment and distribution of credit. The Tribunal rejected the appellant's argument regarding the prospective application of the Explanation in the CENVAT Credit Rules, 2004, emphasizing that the exclusion of credit for trading activities was valid even before the rule amendment.