2023 (11) TMI 1031 - AT - Central Excise

Recovery of credit of tax paid on input services - manufacturer of ball bearings - common use in undertaking of manufacturing activity as well as rendering of exempted service - Non-reversal in the manner prescribed in rule 6 of CENVAT Credit Rules, 2004 - mechanism to be adopted for neutralization owing to operation of rule 6(2) of CENVAT Credit Rules, 2004 - HELD THAT - The issue lies in the narrow compass of applicability of rule 6(3) of CENVAT Credit Rules, 2004 insofar as the period prior to specific exclusion of trading activity is concerned. From the very beginning, eligibility for availment of CENVAT credit of tax paid on input service was set out to exclude such as used for undertaking exempt service which incorporates both taxable service subject to exemption and services on which no tax is leviable thereon. Though, trading came to be acknowledged within the framework of CENVAT Credit Rules, 2004 specifically with effect from April 2011, the Explanation incorporating such specifies had to be clarificatory in consequence; such services as are beyond the purview of Finance Act, 1994 such as has been held by the Tribunal, in M/S. ORION APPLIANCES LTD. VERSUS CST AHMEDABAD 2010 (5) TMI 85 - CESTAT, AHMEDABAD , lies within exclusive powers of the State Government and is in conformity by the second limb of the definition. Accordingly, trading activity was always to be treated as having been exempt service within the meaning of rule 2(e) CENVAT Credit Rules, 2004. Consequently, credit availed thereof is to be disallowed to such extent insofar as input services were deployed in common on the activity of manufacturing of, as well as trading in, ball bearings. Mechanism to be adopted for neutralization owing to operation of rule 6(2) of CENVAT Credit Rules, 2004 - HELD THAT - Rule 6(3) of CENVAT Credit Rules, 2004 affords neutralization authorized by law as is evident from the commencement with non obstante qualification. Even within the scheme of such reversal, alternatives are provided with the option of discharging payment through CENVAT credit account by such percentage of value of exempted service as is prescribed or by proportionate reversal. The appellant herein had undertaken proportionate reversal which is not in question and the only issue in contention is the correctness of proportion. While the impugned order has taken the value of manufacturing and value of trading as the factors for such delineation, it is the claim of the appellant that adoption of value of traded goods would distort the principle underlying CENVAT credit scheme. As the appellant had reversed the credit, and rule 14 of CENVAT Credit Rules, 2004 would come into play only when the reversal prescribed in rule 6(3) of CENVAT Credit Rules, 2004 had not been complied with by assessee, we see no reason for further proceedings except insofar as notice under rule 14 of CENVAT Credit Rules, 2004 and penalty under rule 15 CENVAT Credit Rules, 2004 is to be confined to non-adherence to the terms as set out. Appeal disposed off.

Summary

Issues involved: Recovery of credit of tax paid on 'input services' used for manufacturing activity and exempted service, compliance with rule 3A of CENVAT Credit Rules, 2004, applicability of rule 6(3) of CENVAT Credit Rules, 2004, retrospective effect of amendments, mechanism for neutralization under rule 6(2) of CENVAT Credit Rules, 2004, computation of value of traded goods for reversal of credit.

The limited issue in the appeal was the recovery of credit of tax paid on 'input services' used for both manufacturing activity and exempted service by M/s Schaeffler India Ltd, which had not been reversed as per rule 6 of CENVAT Credit Rules, 2004. The appellant claimed to have reversed a portion of the credit but was served with a show cause notice for recovery of the remaining amount, contending that the proportion of credit to be reversed was computed based on the value of traded goods and the total sale of the entity for the relevant periods.

The key contention raised by the appellant was that 'trading activity' was not considered as an 'exempted service' until 2011, and hence, there was no requirement to exclude any service used in common from credit eligibility. The appellant argued that even if the amendment retrospectively covered the period of dispute, the reversal of credit as per rule 6(3) of CENVAT Credit Rules, 2004 should prevent the recovery of the differential amount determined in the impugned order. The appellant also highlighted the amendment to rule 6 incorporating Explanation I and argued for its retrospective effect.

The Tribunal referred to precedents such as Orion Appliances Ltd v. Commissioner of Service Tax, Ahmedabad and Mercedes Benz India Pvt Ltd v. Commissioner of Central Excise, Pune, emphasizing the need for segregating input services attributable to trading activities and excluding them from credit availment records. The issue revolved around the applicability of rule 6(3) of CENVAT Credit Rules, 2004 concerning the period before the specific exclusion of 'trading activity.'

The Tribunal clarified that 'trading activity' was always to be treated as an exempt service under CENVAT Credit Rules, 2004, even before its explicit inclusion in 2011. The mechanism for neutralization under rule 6(2) of CENVAT Credit Rules, 2004 was discussed, highlighting the challenges in segregating services used for different activities. The Tribunal emphasized the need for correct proportionate reversal of credit and the calculation based on the value of traded goods to align with the principles of the CENVAT credit scheme.

The Tribunal found that the service value of trading was incorporated into rule 6 of CENVAT Credit Rules, 2004 from June 2012 and should have retrospective application. It also emphasized the need to limit the value of trading to the difference between selling and purchase prices of traded goods for computation purposes. The matter was remanded to the original authority for verification and adjustment of the demand based on the correct computation method.

The appeal was disposed of with directions to restrict any demand arising from the shortfall in credit reversal. Further proceedings were deemed unnecessary as the appellant had complied with the reversal requirements, and penalties were to be confined to non-adherence to the prescribed terms under the CENVAT Credit Rules, 2004.