2014 (4) TMI 12 - AT - Central Excise

CENVAT Credit - simultaneous manufacturing and trading activity - whether trading activity is exempt service - appellant assessee undertakes trading of motor vehicles in as much as they import motor vehicles from their principals abroad and sell such motor vehicles in India - availment of credit on input services in relation to trading of motor vehicles/cars. Held that - trading was not a service and therefore, cannot be considered as an exempted service during the period prior to 1.4.2011 and the amended provision with effect from 1.4.2011 will not have retrospective effect. Appropriation of credit between manufacturing and trading and import of cars - Held that - though clause (c) of Explanation I added with effect from 1.4.2011 and are of the view that perhaps the said new method has been adopted to encourage the trading of the goods rather than the manufacturing of the goods (otherwise criterion should have been same viz. based upon turnover or value addition) - for the period under dispute the credit of service tax paid on the common input services should be apportioned in the same ratio as the turnover of the manufactured and traded cars. Extended period of limitation - Held that - The assessee is following the self assessment procedure and taking credit on its own. They were even taking the credit in respect of input services which were exclusively used in the trading activity. It is also observed that the fact that the appellants were taking credit of service tax in relation to the trading activity has not been disclosed in return or in other document and therefore, the extended period of limitation is correctly invoked. These reasons would be applicable even for penalty under Section 11AC read with Rule 15 of Cenvat Credit Rules including the demand of the normal period issued in the first show-cause notice - Decided against the assessee.

Issues Involved:
1. Whether trading activity can be considered as an exempted service.
2. Applicability of the amended provisions of Cenvat Credit Rules post-1.4.2011 retrospectively.
3. Determination of the method for apportioning the credit of input services used for both manufacturing and trading activities.
4. Validity of the extended period of limitation and imposition of penalties.

Detailed Analysis:

1. Trading Activity as an Exempted Service:
The Tribunal consistently held that trading activity is not a service and thus cannot be considered as an exempted service. This was supported by previous judgments, including Orion Appliances Ltd. and Indian Furniture Products Ltd., which clarified that trading is essentially purchase and sale covered under sales tax law and not a service under the Finance Act, 1994. Consequently, Rule 6 of the Cenvat Credit Rules, which deals with exempted services, does not apply to trading activities.

2. Applicability of Amended Provisions Post-1.4.2011:
The Tribunal agreed with the appellant that the amendments made in 2011, which included trading as an exempted service, are substantive in nature and cannot be applied retrospectively. This is supported by the fact that the notification itself stated that the provisions would come into force from 1.4.2011. The Tribunal referenced the Supreme Court's judgment in UOI vs. Martin Lottery Agencies Ltd., which held that explanations that widen the tax net cannot be retrospective unless explicitly stated by legislative enactment.

3. Method for Apportioning Credit of Input Services:
The Tribunal rejected the appellant's argument to use the method prescribed in clause (c) of Explanation I after Rule 6(3D) for the period prior to its introduction on 1.4.2011. Instead, it held that the credit of input services used both in manufacturing and trading should be apportioned based on the turnover of manufactured and traded goods. This method ensures a fair distribution of credit based on actual business activity rather than the value addition method proposed by the appellant, which could lead to skewed results.

4. Extended Period of Limitation and Penalties:
The Tribunal upheld the invocation of the extended period of limitation, noting that the appellant had not disclosed the credit of input services used in trading activities in their returns. This non-disclosure indicated an intention to evade duty, justifying the extended period and penalties under Section 11AC read with Rule 15 of the Cenvat Credit Rules.

Conclusion:
- The Tribunal dismissed the appeals E/370/11-Mum and E/385/11-Mum filed by the appellant.
- It allowed the appeal E/456/11-Mum filed by the Revenue.
- For appeal E/1019/12-Mum, the Tribunal directed the adjudicating authority to re-compute the liabilities based on the turnover ratio of manufactured and traded goods, after granting an opportunity of hearing to the appellant.

Disposition:
The appeals and cross objections were disposed of in the above terms, with the judgment pronounced in court on 20.02.2014.

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