2017 (3) TMI 1355 - AT - Central Excise

Reversal of credit on input services proportionate to the trading activity - common input services were used for trading of goods as well as for manufacture. It appeared to Revenue that Rule 6 of CCR 2004 was applicable only when the manufacturer or output service provider as the case may be is engaged in both manufacture of excisable goods and exempted goods or in providing output service and exempted services as the case may be and that trading activity was neither manufacture nor taxable service and further that the Credit of Service Tax paid on Services attributable to trading was void ab-initio and there was no application of Rule 6 to trading activity - recovery u/r 14. Held that - It is very clear that for recovery of Cenvat credit under said Rule 14 first it is to be established that Cenvat credit has been either taken wrongly or utilized wrongly. Further the said Rule 14 has also been provided for recovery of amount mentions in Sub-rule (3) of Rule 6 of CCR under Explanation 2 under Sub-rule 3 of said Rule 6. The provision at Explanation 2 under Sub-rule (3) of said Rule 6 provide for recovery of Cenvat Credit which was admissible at the time of taking credit In the present case admittedly there is no allegation in the said SCN that the appellants had taken credit of any inadmissible Cenvat credit. Further the SCN dated 09/05/2011 states that Rule 6 of CCR 2004 is not applicable in the present case. Therefore the said SCN did not make out a case for invocation of provisions of Rule 14 of Cenvat Credit Rules 2004. Therefore SCN was not sustainable for the reasons that the contention in the SCN did not allow recovery of Cenvat Credit u/r 14 of CCR 2004. Appeal allowed - decided in favor of appellant.

Issues Involved:
1. Whether trading activity can be called a service.
2. Applicability of Rule 6 of Cenvat Credit Rules, 2004 & Service Tax Credit Rules, 2002 to input services used in trading activity.
3. Procedure for availing input service tax credit when input services are used for both manufacturing and trading activities.
4. Validity of the demand for recovery of Cenvat credit, interest, and penalties.
5. Invocation of the extended period of limitation for issuing the Show Cause Notice.
6. Imposition of personal penalties under Rule 26 of Central Excise Rules, 2002.

Detailed Analysis:

1. Whether trading activity can be called a service:
The Original Authority held that trading activity cannot be called a service. This determination was crucial as it influenced the applicability of Rule 6 of the Cenvat Credit Rules, 2004, which pertains to the use of input services for both taxable and exempted services.

2. Applicability of Rule 6 of Cenvat Credit Rules, 2004 & Service Tax Credit Rules, 2002 to input services used in trading activity:
The Original Authority concluded that Rule 6 is applicable only when the output service provider is providing both taxable and exempted services. Since trading is neither a service nor manufacture, Rule 6 could not be applied to the present case. This led to the issue of how to handle input services used for both manufacturing and trading activities.

3. Procedure for availing input service tax credit when input services are used for both manufacturing and trading activities:
The Original Authority suggested that the appellant should segregate the quantum of input services attributable to trading activity and exclude it from the credit records. This segregation should be done periodically (quarterly or biannually) based on standard accounting principles. This approach was derived from the Tribunal's decision in the case of M/s Metro Shoes Pvt. Ltd.

4. Validity of the demand for recovery of Cenvat credit, interest, and penalties:
The Show Cause Notice proposed to recover Cenvat credit of ?45.63 crores under Rule 14 of the Cenvat Credit Rules, 2004. The method adopted for computation was based on the ratio of turnover of manufacturing to trading activities. However, the Tribunal found that the Show Cause Notice did not establish that the appellants had taken or utilized Cenvat credit wrongly. Furthermore, the Show Cause Notice itself stated that Rule 6 was not applicable, making the recovery under Rule 14 unsustainable. Therefore, the demand for recovery of Cenvat credit, interest, and penalties was not upheld.

5. Invocation of the extended period of limitation for issuing the Show Cause Notice:
The appellants contended that there was no suppression of facts as all required information was disclosed in returns filed. They argued that the extended period was not invokable since the department was aware of the issues much earlier, referencing an earlier Show Cause Notice dated 28/08/2008. The Tribunal agreed with the appellants, noting that the extended period of limitation was not justified.

6. Imposition of personal penalties under Rule 26 of Central Excise Rules, 2002:
The appellants argued that the Order-in-Original did not specify under which sub-rule of Rule 26 penalties were imposed. They also contended that since the Show Cause Notice itself was not sustainable, personal penalties were not imposable. The Tribunal found merit in these arguments and set aside the penalties imposed on the individuals.

Conclusion:
The Tribunal set aside the impugned Order-in-Original, allowing all appeals. The appellants were entitled to consequential relief in accordance with the law. The Tribunal emphasized that the Show Cause Notice did not make a case for invoking Rule 14 of the Cenvat Credit Rules, 2004, and thus the proposals for recovery, interest, and penalties were not sustainable.

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