2018 (7) TMI 172 - AT - Central Excise

CENVAT Credit - manufacturing as well as trading activity - Input Service distribution - it was alleged that the appellant has wrongly availed Cenvat credit on the basis of Invoices issued by their ISD as the said Input service are not used in or in relation to the manufacture of their final dutiable goods - validity of proceedings under Rule 14 of the Cenvat Credit Rules, 2004 - exempted service as given under Rule 2(e) & 2(l) of Cenvat Credit Rules, 2004. Held that - The admitted facts are that the appellants availed Cenvat credit on input services and they had considerable turnover and income in trading activities. It is also admitted that the services on which credit have been availed are partly relatable to trading activities also. The appellants contested the reversal of credit, to a proportionate extent, on the ground that trading is not an exempted service prior to the insertion of explanation w.e.f. 1.4.2011. But he has failed to consider that trading is not a taxable service also. In other words, trading is an activity which is not covered under the scope of Cenvat Credit Rules, 2004. The appellants should not have availed any credit on input services when such services are attributable to an activity which is not at all taxable and hence, not covered by the scope of Cenvat Credit Rules, 2004. A deemed fiction is apparently created by naming trading as an exempted service by way of explanation in Rule 2 of Cenvat Credit Rule w.e.f. 1.4.2011. I find that prior 1.4.2011 there was no scope at all even to consider the trading activity to be covered under the credit scheme. After the explanation, the position has become more clear to the effect that the trading activity can be considered as an exempted service for the operation of scheme under Cenvat Credit Rules - the Appellants should not have availed credit for common input services which are used for taxable output service as well as trading activity, as it is imperative to identify and reverse that amount of credit attributable to the trading activity. The ld. Commissioner (Appeals) is justified in the impugned order in holding that this explanation is clarificatory in nature and has retrospective applicability and therefore the explanation inserted vide N/N. 3/2011 dated 1.3.2011 has retrospective effect. Extended period of limitation - Held that - The trading is not an activity or a service covered by the Cenvat scheme prior to the introduction of clarificatory explanation. The appellants have no reason to avail credit on services which they are fully aware were being used for trading activity also. There is no question about the bona fide belief of the appellant contrary to the provisions of law - the Appellant had knowingly utilised the said service in respect of their trading activity and neither the appellant maintained the separate record as required by them as per Rule 6(2) of Cenvat Credit Rules, 2004 nor they availed any option under Rule 6(3) of Cenvat credit Rules, 2004 for the reversal of Cenvat credit taken on common input service - extended period rightly invoked. Appeal dismissed - decided against appellant.

Summary

Issues Involved:
1. Wrongful availment of Cenvat credit on input services used for trading activities.
2. Applicability of Rule 14 and Rule 6 of the Cenvat Credit Rules, 2004.
3. Time-bar and invocation of the extended period of limitation.
4. Retrospective applicability of the explanation to Rule 2(e) of the Cenvat Credit Rules, 2004.
5. Imposition of penalties and interest.

Detailed Analysis:

1. Wrongful Availment of Cenvat Credit:
The appellant, engaged in the manufacture of 'Ceramic Tiles,' availed Cenvat credit on various services based on invoices issued by their Input Service Distributor (ISD). The department found that these services were not used in or in relation to the manufacture of their final dutiable goods but were also attributable to trading activities. The appellant's head office and branch offices distributed the Cenvat credit, which was partly used for traded goods, leading to the calculation of inadmissible credit.

2. Applicability of Rule 14 and Rule 6 of the Cenvat Credit Rules, 2004:
The appellant argued that Rule 14, which deals with the recovery of erroneously taken credit, was incorrectly applied as the dispute was about the quantum of credit, not the eligibility. They contended that Rule 6, which provides for the reversal of credit in such situations, was not mentioned in the show cause notice. The tribunal, however, clarified that trading is not a taxable service and thus not covered under the Cenvat Credit Rules, 2004. The appellant should not have availed any credit on input services attributable to trading activities.

3. Time-Bar and Invocation of the Extended Period of Limitation:
The appellant claimed that the entire demand was time-barred as the show cause notice was issued beyond the one-year period. They argued that there was no suppression of facts or intent to evade duty. However, the tribunal held that trading activities were not covered by the Cenvat scheme prior to the introduction of the explanation in 2011. The appellant's failure to disclose the availment of credit on services used for trading justified the invocation of the extended period of limitation.

4. Retrospective Applicability of the Explanation to Rule 2(e):
The tribunal examined the definition of "exempted services" under Rule 2(e) of the Cenvat Credit Rules, 2004, both before and after the amendment on 1-3-2011. It was held that the explanation, which included trading as an exempted service, was clarificatory and had retrospective applicability. The tribunal cited the High Court's decision in Ruchika Global Interlinks vs. CESTAT, Chennai, which supported the retrospective effect of the explanation.

5. Imposition of Penalties and Interest:
The tribunal upheld the imposition of penalties and interest, stating that the appellant, being a well-organized company with expertise in excise matters, knowingly availed credit on input services used for trading activities. The appellant did not maintain separate records or opt for credit reversal as required by Rule 6(2) and Rule 6(3) of the Cenvat Credit Rules, 2004. This suppression of facts with intent to evade duty justified the penalties and interest.

Conclusion:
The tribunal dismissed the appeal, upholding the findings of the lower authorities. The appellant's arguments regarding the applicability of rules, time-bar, and bona fide belief were rejected. The tribunal confirmed the retrospective applicability of the explanation to Rule 2(e) and justified the imposition of penalties and interest due to the appellant's suppression of facts and wrongful availment of Cenvat credit on input services used for trading activities.