2013 (11) TMI 1422 - AT - Central Excise

Applicability of Rule 6(2) and 6(3) - Separate accounts not maintained Services used for services used in manufacturing and trading activity Held that - The goods which the appellant had traded are imported goods - As per the definition of exempted goods which are exempt from the whole of the duty of excise leviable, and includes goods which are chargeable to Nil rate of duty and goods in respect of which the benefit of an exemption under Notification No. 1/2011-CE dated 01/03/2011 is availed - exempted goods have to be excisable goods - By no stretch of imagination imported goods which are traded can be considered as exempted goods - the question of invoking the provisions of Rule 6(2) and 6(3) for payment of a sum @10%/5% on the value of the exempted goods would not arise at all. The appellant has not availed any CENVAT credit at all in respect of input service relating to the traded goods - question of maintenance of separate accounts does not arise at all - Consequently provision of sub-rule (3) of the said Rule 6 mandating payment of an amount equal to 10%/5% of the value of the exempted goods and exempted service would also not apply - the appellant has availed input service credit on both dutiable/exempted goods and taxable/exempted service, Rule 3A which came into force w.e.f. 01/04/2008 provides for reversal of credit on the input service attributable to exempted goods/services on a proportionate basis based on the turn over. The appellant has precisely done that ab initio and has not taken any credit in respect of input services attributable to the traded goods - in the absence of any evidence led by Revenue proving that the appellant has taken ineligible credit, the question of appellant violating the provisions of Rule 6 of the CCR, 2004 would not arise Following M/s. Orion Appliances Ltd. Versus CST Ahmedabad 2010 (5) TMI 85 - CESTAT, AHMEDABAD - if the assessee reversed input service tax credit attributable to trading activities according to standard accounting principles Decided in favour of Assessee.

Issues Involved:
1. Maintenance of separate accounts for manufacturing and trading activities.
2. Applicability of Rule 6 of the CENVAT Credit Rules, 2004.
3. Invocation of extended period for demand.
4. Proportionate reversal of CENVAT credit.
5. Classification of trading as an exempted service.

Issue-wise Detailed Analysis:

1. Maintenance of Separate Accounts:
The appellant, engaged in manufacturing and trading, did not maintain separate accounts for services used in manufacturing and trading activities. They bifurcated service tax credit based on the turnover ratio of manufacturing and trading sales. The department contended that in the absence of separate accounts, the appellant was liable to pay a sum @10% (up to 06/07/2009) and @5% thereafter on the value of exempted goods, invoking Section 11A of the Central Excise Act and Rule 14 of the CCR, 2004.

2. Applicability of Rule 6 of the CENVAT Credit Rules, 2004:
The appellant argued that they did not take credit for service tax on input services used in trading, thus satisfying Rule 6(1) of CCR, 2004. They contended that sub-rules (2) and (3) of Rule 6, which mandate maintaining separate accounts or paying a percentage of exempted goods' value, were not applicable since they did not avail credit on traded goods. The department's view was that trading should be considered an exempted service, requiring compliance with Rule 6(3).

3. Invocation of Extended Period for Demand:
The appellant highlighted that the department had audited their records in 2008 and approved their method of proportionate credit allocation. They argued that the show cause notice issued in 2011, invoking the extended period, was unsustainable as the department was aware of their practices since 2008.

4. Proportionate Reversal of CENVAT Credit:
The appellant claimed they followed the method outlined in Rule 6(3A) for proportionate reversal of credit. They argued that if the liability was calculated as per the formula in Rule 6(3A), they would owe Rs. 16 lakhs, not Rs. 297 crores. They also cited the Tribunal's decision in Orion Appliances Ltd., which supported proportionate reversal as a legally correct approach.

5. Classification of Trading as an Exempted Service:
The appellant argued that trading was included as an exempted service only from 01/04/2011, thus prior to this date, trading should not be considered exempted. The department, however, maintained that trading should be treated as an exempted service during the material period.

Judgment:
The Tribunal found that the appellant did not take CENVAT credit on input services used for trading, satisfying Rule 6(1). It held that imported goods traded by the appellant could not be considered exempted goods, thus Rule 6(2) and (3) were not applicable. The Tribunal also noted that the department was aware of the appellant's practices since 2008, making the invocation of the extended period unsustainable. The Tribunal concluded that the appellant's method of proportionate reversal was in line with the decision in Orion Appliances Ltd. and that the impugned demands were not sustainable in law, both on merits and on account of time-bar. The appeal was allowed, and the demands were set aside.

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