2010 (5) TMI 85 - AT - Service Tax

Cenvat Credit Trading Activities applicability of rule 3 and 6(3) - As per the cenvat credit return filed along with the ST-3 returns, it was observed that the appellants were availing the credit on advertising, security, courier, telephone and banking services. These services were not entirely used in providing Maintenance and Repair services but also used in trading activity. Credit of input services, which were entirely used in trading activity, was not available to the appellants for payment of service tax. Held that It is not correct to apply rule 3 or 6(3) in relation to trading activity since trading activity is not at all a service - we have a situation where an assessee would not be eligible to take input service tax credit on an output which is neither a service nor excisable goods and at the same time there is no provision to cover situations where an assessee is providing a taxable service and is undertaking another activity which is neither a service nor manufacture. In such a situation the only correct legal position appears to be that it is for the appellant to choose and segregate the quantum of input service attributable to trading activity and exclude the same from the records maintained for availment of credit. The matter is remanded to the Original Adjudicating Authority before whom the appellants shall present the details relating to service tax paid on input services attributable to trading activity and other services separately and after verification if felt necessary, the adjudicating authority shall quantify the amount to be reversed or payable by the appellant.

Summary

Issues:
1. Whether trading activity can be called a service.
2. Whether Rule 6 of Cenvat Credit Rules, 2002 and Service Tax Credit Rules, 2002 would be applicable when input services are used in respect of trading activity as well as taxable services.
3. If Cenvat Credit Rules and Service Tax Credit Rules are not applicable, the procedure to be followed by the assessee for availing input service tax credit.

Analysis:

Issue 1:
The Tribunal considered whether trading activity could be classified as a service. It was determined that trading activity, being primarily sales and purchases, falls under sales tax laws and is not considered a service. Therefore, trading activity cannot be labeled as a service or an exempted service.

Issue 2:
Regarding the applicability of Rule 6 of Cenvat Credit Rules and Service Tax Credit Rules, the Tribunal analyzed the provisions of Rule 6(2) of Cenvat Credit Rules, emphasizing the requirement for maintaining separate accounts for input services used in dutiable and exempted goods or services. It was noted that since trading activity is not a service, the provisions of these rules do not apply to such activities.

Issue 3:
The Tribunal addressed the procedure for availing input service tax credit when trading activity is involved. It was highlighted that if an assessee is engaged in activities that are not services or manufacturing, they must segregate the input services attributable to trading activity and exclude them from credit availment records. The Tribunal suggested periodic adjustments based on standard accounting principles to ensure correct credit utilization for taxable services.

In conclusion, the Tribunal remanded the matter to the Original Adjudicating Authority for the appellants to present details of service tax paid on input services related to trading activity separately. The Authority was directed to quantify any amount to be reversed or paid by the appellants after verification, with the opportunity for revision granted to the appellants if necessary. The decision aimed to ensure compliance with legal requirements and proper utilization of service tax credits in scenarios involving trading activities.