2018 (7) TMI 1679 - HC - Service Tax

CENVAT Credit - trading activities - common inputs used for providing taxable services as well as in trading activity - non-maintenance of separate records - Whether the assessee could claim the credit on input which were not services? - extended period of limitation. Held that - Undoubtedly, there cannot be an exact correlation between one kind of input and corresponding. That is the reason the Rules cover situations where assessees provide both exempted and taxable services. Wherever someone undertakes activities that cannot be called a service or which is not manufacture , that activity goes out of the purview of both Central Excise Act as well as Finance Act, 1994. In such cases, an assessee would be ineligible for claiming input-service tax credit on an output which is neither a service nor excisable goods - 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 assessee to segregate the quantum of input service attributable to trading activity and exclude the same from the records maintained for availing credit. In the present case, the assessee s argument that there is no mechanism to reverse credit, once taken, in the opinion of this Court, cannot be accepted. The assessee was well aware of the exact nature and extent of its service tax liability. It was also aware of the eligible service tax inputs. Therefore, when it did claim- successfully and unchallenged input credits in respect of activities that were not subjected to service tax levy, it was aware that the claim was excessive and could not be justified. Extended period of limitation - Held that - Being conscious of its trading activity and that it was not liable to service tax (since it did not include the amounts earned from that business, in its returns) meant that the assessee was aware of what it was doing. It cannot now take shelter under the plea that non-trading activity was expressly exempt from claiming credit, in 2011. That amendment made no difference, given that trading was never taxable under the Finance Act, 1994 - the Revenue was justified in invoking the extended period of limitation in this case. Appeal dismissed - decided against appellant.

Summary

Issues Involved:
1. Entitlement to service tax credit on the entire amount paid versus proportionate amount.
2. Clarificatory versus prospective nature of the Explanation added to Rule 2(e) of the Cenvat Credit Rules, 2004.
3. Applicability of the extended period of limitation for tax, interest, and penalty.

Issue-wise Detailed Analysis:

1. Entitlement to Service Tax Credit on the Entire Amount Paid Versus Proportionate Amount:
The appellant, engaged in sales and services of cars, claimed Cenvat credit on inputs and services. The adjudicating authority held that trading activities, exempt from service tax, should not allow for full Cenvat credit, only proportionate credit. The CESTAT upheld this, stating trading is not a taxable service and thus not covered under Cenvat Credit Rules, 2004. The Tribunal emphasized that trading, being an exempted service post-01.04.2011, should not have allowed for credit on input services used for trading. The High Court agreed, stating the appellant should have segregated and reversed the credit attributable to trading activities.

2. Clarificatory Versus Prospective Nature of the Explanation Added to Rule 2(e) of the Cenvat Credit Rules, 2004:
The appellant argued that the Explanation added to Rule 2(e) effective from 01.04.2011, which included trading as an exempted service, should not apply retrospectively. They cited various case laws to support that amendments affecting vested rights should not have retrospective effect. The High Court, however, found that trading was never taxable under the Finance Act, 1994, and the Explanation merely clarified the existing position. Therefore, the appellant's claim for full credit on inputs used in trading activities was unjustified even before the amendment.

3. Applicability of the Extended Period of Limitation for Tax, Interest, and Penalty:
The appellant contended that the extended period of limitation should not apply as there was no suppression of facts. They disclosed the entire Cenvat Credit availed in their returns. However, the adjudicating authority found that the appellant did not maintain separate accounts for taxable and non-taxable services, leading to wrongful credit availing. The High Court upheld this, stating that the appellant was aware of their trading activities being non-taxable and yet claimed credit, justifying the extended period of limitation. The method of proportionate turnover for calculating credit was deemed reasonable.

Conclusion:
The High Court dismissed the appeal, answering all questions in favor of the Revenue. The appellant was required to segregate and reverse the credit attributable to trading activities, and the extended period of limitation was applicable due to their awareness and actions regarding the non-taxable trading activities.