2018 (11) TMI 463 - AT - Service Tax

CENVAT Credit - trading activity or not? - credit availed on purchase of the devices viz., CR-200B device , which was not used for providing any output service but used only for trading purposes - Held that - The arguments of the learned counsel for the appellants that the devices were transferred to the customers on hire/free of cost is not tenable in law because the appellants have issued the invoice on which they have paid VAT under the Karnataka VAT Act - further, the assessee has not maintained the proper record of inventory used and inventory traded - the appellant has also not been able to provide documentary evidence to show CR-200B devices in question have been used to provide output service to their clients - credit cannot be allowed. Penalty u/s 78 - Held that - There was ambiguity in the issue and it relates to interpretation of law - also, the appellants have provided all the information to the audit party and the matter came to the light during the audit only from the records submitted by the appellant wherein they have disclosed the availment of CENVAT credit there - penalty not warranted. Appeal allowed in part.

Summary

Issues:
1. Whether the devices submitted to clients by the appellant on hire/test basis amount to trading activity.
2. Whether the appellants are entitled to CENVAT credit on the devices.
3. Whether penalty under Section 78(1) of the Finance Act is justified.

Analysis:

Issue 1: Trading Activity
The main issue in the appeal was whether the devices provided by the appellant to clients on hire/test basis constituted trading activity. The appellant argued that the devices were necessary for providing output services and were not used for trading. However, the Commissioner (A) found that since the appellant had issued invoices and paid VAT on the devices under the Karnataka VAT Act, it implied a transfer of possession and control to the customers, making it a deemed sale. As a result, the activity was considered trading, which is an exempted service, thus disqualifying the appellant from availing CENVAT credit.

Issue 2: CENVAT Credit Eligibility
The appellant contended that they should be allowed to claim CENVAT credit on the devices as they were used for providing taxable output services. However, the Commissioner (A) noted that the appellant failed to provide documentary evidence showing that the devices were indeed used for providing output services. Additionally, the appellant's lack of proper inventory records further weakened their case. Consequently, the Commissioner (A) upheld the decision that the appellant was not eligible for CENVAT credit on the devices.

Issue 3: Penalty Imposition
Regarding the imposition of penalty under Section 78(1) of the Finance Act, the Commissioner (A) acknowledged the ambiguity in the issue and the appellant's disclosure of CENVAT credit in their returns. Citing a relevant tribunal decision, the Commissioner (A) concluded that the penalty was not warranted due to the interpretation-related nature of the issue. Consequently, while confirming the duty along with interest, the penalty was dropped, and the appeal was partly allowed.

In conclusion, the appellate tribunal upheld the decision that the appellant's activity constituted trading, making them ineligible for CENVAT credit on the devices provided to clients. The penalty under Section 78(1) of the Finance Act was deemed unwarranted due to the interpretational nature of the issue and the appellant's disclosure of relevant information.