Trading activity is an exempted activity as such included in the negative list. Is it a benefit to the business fraternity or additional liability?

[SAKTHIVEL PONNUSWAMY]

Trading activity is an exempted activity as such included in the negative list. Is it a benefit to the business fraternity or additional liability?

In today’s business scenario sale as such is very common by the manufacturing organizations.

Meaning of sale as such:- in ordinary course of manufacturing activities purchase of various inputs and raw material are happening for manufacturing purpose. In the course of doing so it may happen that those inputs and raw material are not used in the manufacture either because of the quality issue or change of demand of final product in the market. In such situations there is no alternative but to sell those inputs and raw material as such i..e the same form as purchased. This is called sale as scuh.

There is a provision in the Central Excise Cenvat Credit Rule 6(3) that Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for-

(a) the receipt, consumption and inventory of inputs used-

(i) in or in relation to the manufacture of exempted goods;

(ii) in or in relation to the manufacture of dutiable final products excluding exempted goods;

(iii) for the provision of exempted services;

(iv) for the provision of output services excluding exempted services; and

(b) the receipt and use of input services-

(i) in or in relation to the manufacture of exempted goods and their clearance upto the place of removal;

(ii) in or in relation to the manufacture of dutiable final products, excluding exempted goods, and their clearance upto the place of removal;

(iii) for the provision of exempted services; and

(iv) for the provision of output services excluding exempted services, and shall take CENVAT credit only on inputs under sub-clauses (ii) and (iv) of clause (a) and input services under sub-clauses (ii) and (iv) of clause (b).

(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow any one of the following options, as applicable to him, namely:-

(i) pay an amount equal to six per cent of value of the exempted goods and seven per cent of value of the exempted services; or

(ii) pay an amount as determined under sub-rule (3A); or

(iii) maintain separate accounts for the receipt, consumption and inventory of inputs as provided for in clause (a) of sub-rule (2), take CENVAT credit only on inputs under subclauses (ii) and (iv) of said clause (a) and pay an amount as determined under sub-rule (3A) in respect of input services. The provisions of sub-clauses (i) and (ii) of clause (b) and subclasses (i) and (ii) of clause (c) of sub-rule (3A) shall not apply for such payment:

The Term Sale as such fit into the definition of trading activity.

Meaning of trading activities:- The term ‘Trading' means the act of buying and selling. It involves the selling of goods in the same form as it was purchased. Thus, no further processing is done thereupon.

Is trading activity is a service?

This question first arose in the case of Orion Appliances Limited Vs. CCE, Ahmedabad – 2010 (5) TMI 85 - CESTAT, AHMEDABAD wherein it was held that trading activity is not at all a service. Further the rule 6(2) of cenvat credit rules requires maintaining separate account only in respect of exempted service and dutiable service. Since trading activity cannot be considered a service, the question of maintenance of separate accounts does not arise. Further the Ahmadabad High Court held that

1. Trading activity cannot be called a service and therefore it cannot be considered as an exempted service also.
2. 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.

Hence the tribunal has held that the since trading activity is not a service, credit cannot be taken on the same. Thus, the assessee was ordered to segregate the quantum of input service attributable to trading activity and exclude the same from the Cenvat register.

Also in case of Gannon Dunkerley & Company v State of Madras, 1954 (4) TMI 30 - MADRAS HIGH COURT it was held that if a person buys goods with a view to selling them at profit it is essentially a case of “trade” and that it the transactions are on a large scale it is called “commerce” and that continuous repetition of such transactions will constitutes a “business”.

Also the definition of service under Sec 65B (44) excludes transfer of title in goods or immovable property, by way of sale, gift or any other manner.

Trading activity is a service

In order to remove the ambiguities arising out of such decisions, budget 2011 has included the trading activity in the definition of exempted services.

Further trading activities has been included in the negative list in the chapter 5 of negative list which means it is exempted service.

Plain reading of this appears that some concession /benefits have been extended to the business fraternity by declaring trading activity as exempted service.

However if we going through the relevant provisions of Rule 6 of Cenvat credit rule read with mega exemption chapter 5 of the negative list, it reveals that by giving an exemption additional 7% service tax on value of exempted service (Trading activity) is attracting / generated. This is an intellectual exemption given by the finance ministry.

A manufacturing concern effecting sale as such will be liable for service tax at @ 7% on value of exempted service (i..e trading activity).

What is value of exempted service?

Value” for the purpose of sub-rules (3) and (3A),- in case of trading, shall be the difference between the sale price and the cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase) or ten per cent of the cost of goods sold, whichever is more.

This may not be the intention of the law, with due respect it is submitted that if at all it is a drafting error, normal sale as such can be excluded from the ambit of the service tax by suitable notification.

 

Thanks and Regards,

SAKTHIVEL PONNUSWAMY M.Com, ACA

68, Green Garden, Avalapalli Road, Hosur, Tamil Nadu - 635109

Mobile: +91-9600242441

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or recommendation of author. Author never accepts any liabilities for any loss or damage of any kind arising out of any information in this document nor for any actions taken in reliance thereon.

Readers are advised to consult the professional for understanding and applicability of this newsletter in the respective scenarios. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. No part of this document should be distributed or copied (except for personal, non-commercial use) without author’s written permission.