9911796707
TMI Blog2016 (12) TMI 436X X X X Extracts X X X X X X X X Extracts X X X X ..... ustomers. While factory is located in Mumbai, the Head Office is located in Delhi. The appellants are also engaged in trading of various goods. 90% of their turnover is from cigarettes and cut-tobacco. The traded goods include Pan Masala which is not entitled to CENVAT Credit. All these business are handled by respective business team located in Delhi and other cities and branches and depots of the appellant. The branches, depots and head office are registered as Input Service Distributor (ISD) under Rule 3 of the Service Tax (Registration of Special Category of Persons) Rules, 2005. The appellant being a manufacturer of final products namely, cigarettes and cut tobacco, were entitled to avail credit on inputs, input services and capital goods received in the Andheri factory, used in or in relation to manufacture of final products. In addition to above, the appellants received credit from its branches, depots and head office, distributed by them in terms of Rule 7 of the Cenvat Credit Rules, 2004, under the cover of ISD challans. The appellants availed the credit on the strength of such ISD challans. The appellants have claimed that they are not availing credit in respect of servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2002, on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule (2) 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 receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable. (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 either of the following options, as applicable to him, namely:- (i) the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctured and removed during the preceding financial year, F denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the preceding financial year, and G denotes total CENVAT credit taken on input services during the month; (c) the manufacturer of goods or the provider of output service, shall determine finally the amount of CENVAT credit attributable to exempted goods and exempted services for the whole financial year in the following manner, namely:- (i) the amount of CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods, on the basis of total quantity of inputs used in or in relation to manufacture of said exempted goods, denoted as H; (ii) the amount of CENVAT credit attributable to inputs used for provision of exempted services = (J/K) multiplied by L, where J denotes the total value of exempted services provided during the financial year, K denotes the total value of dutiable goods manufactured and removed plus the total value of taxable services provided plus the total value of exempted services provided, during the financial year and L denotes total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturer or a service provider producing both dutiable and exempted services and using common inputs and input services where separate record has not been maintained. The main clause of sub-rule (3) during 1.4.2011 to 31.12.2011 read as follows: - (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 five per cent. of value of the exempted goods and 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 sub-clauses (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 sub-clauses (i) and (ii) of clause (c) of sub-rule (3A) shall not apply for such payment : Provided that if any duty of excise is paid on the exempted goods, the same shall be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 6(3A) by considering the value of traded goods as equivalent to "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". On that basis, they have concluded that amount of reversal comes to Rs. 10,94,043/-. Clause (c)(iii) of sub-rule (3A) of Rule 6 prescribes the manners in which the manufacture of goods or provider of output services so determined finally the amount of service tax credit attributable to exempted goods / exempted services/ trading activity for the whole financial year. The said clause reads as under: - "c) the manufacturer of goods or the provider of output service, shall determine finally the amount of CENVAT credit attributable to exempted goods and exempted services for the whole financial year in the following manner, namely:- (i) ..... (ii)....... (iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services = (M/N) multiplied by P, where M denotes total value of exempted servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows Table A Statement showing proportionate reversal of CENVAT credit pertaining to traded goods availed during the period 01.04.2011 to 31.12.2011 Year Branch Total Turnover (in '000') Turnover of Traded Good (Sales - COGS) or 10% of COGS whichever is greater (in '000') Ratio trading goods to total Turnover Amount of credit of common to dutiable goods and traded goods Proportionate credit to be reversed 1 2 3 4 5 6 7 2011-12 HO 248,072.71 5,196.11 2.09 41417774.34 865,631 2011-12 Delhi 49,146.32 631.38 1.28 708704.2668 9,071 2011-12 Chandigarh 58,578.49 495.61 0.85 93806.928 797 2011-12 Mumbai 54,094.59 696.88 1.29 779178.9764 10,051 2011-12 Ahmedabad 39,170.44 449.44 1.15 371895.64 4,277 2011-12 Chennai 991.80 44.79 4.52 668528.93 30,218 10,454 Hyderabad 7,632.80 217.82 2.85 366814.424 10,454 2011-12 Kolkata 9,411.20 291.75 3.10 842832.0773 26,128 2011-12 Guntur 20,306.90 1,030.30 5.07 2710355.991 137,415 47,959,892 10,94,043 2.3.1 First of all the mechanism of arriving at the value in column 4 of the table is unknown. For arriving at this value detailed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim of the appellant is without any merit. 2.5 However, these issues become irrelevant in the light of sub-rule (3) of Rule 6 of Cenvat Credit Rules, 2004. The rule 6(3) during the period reads as follows 6(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 five per cent. of value of the exempted goods and 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 sub-clauses (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 sub-clauses (i) and (ii) of clause (c) of sub-rule (3A) shall not apply for such payment : The rule clearly prescribes that the 'the manufacturer of goods or the provider of output service' can avail 'any one' of the opti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calculated by the following formula: - Credit to be reversed = Total credit taken x exempted turnover Total turnover And for the purpose of this, CBE&C has clarified that total credit taken would not include the credit availed under sub-rule (5) of Rule 6 of Cenvat Credit Rules. The learned Counsel also relied the Circular No. 137/203/2007-CX.4 dated 1.10.2007 for the period prior to a.7.2008. The said circular clarified as follows: - Please refer to letter F.No. IV/16-385/CCO/MCX-I/2005 dated 5th September, 2005 from the Chief Commissioner of Central Excise, Mumbai-I Zone on the above subject. The CC, Mumbai-I had sought clarification that while sub rule (5) of Rule 6 of Cenvat Credit Rules, 2004 allows full credit on the specified services (unless they are used for providing exempted services only) whether the restriction of credit utalisation up to 20% would still apply to credit relating to such services. The basic purpose of identifying 17 specified services for special dispensation is that these services are used in relation to the entire activities of the service provider and cannot be co-related or apportioned with any individual service (whether taxable or exempted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as under: - 15. The next contention of the appellant was that the credit relating to categories of services specified in Rule 6(5) of the Cenvat Credit Rules, 2004 shall be allowed. We have gone through the said Rule 6(5). Said sub-rule starts with non-obstanta clause with reference to sub-rule (1), (2) & (3) of Rule 6. Eligibility of credit is defined in Rule 3 read with definition in Rule 2(l). It is only after that various questions in Rule 6, come into play. Rule 6(5) cannot be read in isolation but has to be read in the overall scheme of the things. The overall scheme of CENVAT Credit is with reference to the manufacturing activity or providing of output service. The Cenvat Credit Rules are not with reference to the trading activities. In the present case, the dispute is between the manufacturing activity and that relating to trading activity. We, therefore, outrightly reject the contention of the appellant. In case of Clariant Chemcials, the Tribunal has observed as follows: - 18. Learned counsel for the appellant has submitted that they should be given the benefit of the then Rule 6(5) of the Cenvat Credit Rules, which provides entire credit of service tax in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Cenvat Credit Rules introduced w.e.f. 1.4.2011 should be adopted. Learned Counsel argued that under the existing provisions of the Cenvat Credit Rules at the first instance, assessee takes entire credit of Service Tax paid on common input service and subsequently to the extent credit is to be disallowed/reversed. This is for administrative convenience of assessee as well as of the department. He argued that for this purpose, one has to consider total common input service and multiply by a suitable fraction/percentage. 4.3 Learned Counsel argued that for the period prior to 1.4.2011 also the formula prescribed by Notification No. 3/2011-CE (NT) dated 1.3.2011 needs to be followed. It is seen that instead of the total CENVAT credit, the Counsel suggested apportionment of only common input service credit. He argued that sole purpose of the whole exercise is to identify the portion of the Service Tax paid on the common services attributable to trading activity, so that the said portion of credit of Service Tax so paid on common input service can be disallowed. Thus, the whole approach is to apportion the tax paid on the common input service between the manufacturing activity and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000 35,000 1,20,000 Reversal = Total credit X Exempted Turnover Exempted + Dutiable Turnover Net Credit available Option I-Gross value method 24473 1,55,000 (20,000 + 1,00,000+5000+ 30,000) X 1,50,000 1,50,000 + 8,00,000 1,30,527 (1,55,000 24,473) Option II As per the formula post 2011 2058 35,000 (5000 + 30,000) X 50,000 50,000 + 8,00,000 1,32,942 (1,00,000+35,000-2058) Option III As suggested by Department 5526 35,000 (5000 + 30,000) X 1,50,000 1,50,000 + 8,00,000 1,29,474 (5,000+30,000+1,00,000 -5526) Option IV- Gross value method Credit excluding the credit of inputs used in trading 21315 1,35,000 (1,00,000 + 5000 + 30,000) X 1,50,000 1,50,000 + 8,00,000 1,13,685 (1,35,000-21,315) Option V Net value method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner : (a) where the export is of goods or merchandise manufactured by the taxpayer, the export profits will be computed in the ratio of export turnover to total turnover as is done under the existing formula; (b) where the export is of goods not manufactured by the taxpayer but purchased from a third party (i.e., trading goods), export profits will be computed by deducting from the sale proceeds of export, the direct costs and indirect costs attributable to the export. "Direct costs" means costs directly attributable to such goods including their purchase price. "Indirect costs" means costs other than direct costs allocated in the ratio of the export turnover of trading goods to the total turnover; (c) where the export consists of goods manufactured by the taxpayer as well as of goods purchased from a third party, the export profits will be the aggregate of the following amount : (i) profits relating to export of goods manufactured by the taxpayer computed by allocating the profits of the business net of profits relating to business of exporting third party goods, in the ratio of the export turnover of the manufactured goods to the total turnover of the manufactured g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd interest from deduction on the ground that they did not possess any element of "turnover" even though commission and interest emanated from exports. Goods for export do not incur excise duty liability. As stated above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under Section 80HHC. They were not eligible even without the clarification introduced by the legislature by various amendments because they did not involve any element of turnover. 4.10 He argued that margin alone is consideration of service/supply as held by European Court of Justice. Learned Counsel relied on the decision of European Court of Justice in the case of First National Bank of Chicago Vs. Customs and Excise Commissioners - [1999] 2 W.L.R. 230. The court examined the taxability and valuation of the foreign exchange transactions. The statutory provisions as extracted in the judgment: Article 2 of the Sixth Directive provides as follows: `The following shall be subject to value added tax: 1. the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such; 2. the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat case, while deciding about the consideration for supply for claiming input deduction, it was held that "the consideration therefore comes down to determining what the bank receives for foreign exchange transactions i.e. the remuneration on foreign exchange transactions which it can actually take for itself". It was held as under: 36 By its second question, the High Court of Justice essentially seeks to ascertain the precise nature of the consideration. The question must therefore be understood as seeking to determine the taxable amount. 37 The Bank submits that the consideration is everything which is received in the course of foreign exchange transactions, that is to say the turnover representing the total value of the currencies supplied in the course of foreign exchange transactions. 38 The Commission and the French Government, on the other hand, take the view that the consideration is the amount of exchange profit realised and the other remuneration obtained by the supplier. ................ 40 The Commission explains that it withdrew this proposal for reasons unconnected with that provision. 41 The United Kingdom Government considers that, should the Court take t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase activity. The argument of the learned Counsel is since the common services only contribute to the value addition of the traded goods while computing the proportion of services used in the trading activity, only the value addition of trading needs to be taken. His argument is that, so far as the value of manufactured goods is concerned, the entire value of the manufactured goods needs to be taken to arrive at the correct proportion for apportioning service tax credit. However he argues that as services availed for trading at depot/offices only contribute to value addition in case of traded goods the service tax credit for trading should be apportioned on the basis of value addition in case of traded goods. The argument of the Counsel would be appropriate, if the value of manufactured goods consist only the value addition on account of services consumed. However, that is not a case. The value of manufactured goods not only includes the value of services availed for manufacturing at factory but also consists of the value of raw material used just in the same way as sale value of the traded goods consist of the value of purchase of goods and the value addition thereon. The ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount of service tax credit attributable to trading activity. The rule 6(3A)(c )(iii) after 1.4.2011 prescribes the method for apportionment of the service tax credit attributable to Exempt and trading services as follows "6(3A)(c) the manufacturer of goods and their clearance up to the place of removal or the provider of output service, shall determine finally the amount of CENVAT credit attributable to exempted goods and exempted services for the whole financial year in the following manner, namely:- (i) --- (ii) --- (iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services = (M/N) multiplied by P, where L denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the financial year, M denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the financial year, and N denotes total CENVAT credit taken on input services during the financial year;" The said sub-rule needs to be read with Explanation I of the said rule. The Explanation I (c ) prescribe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value addition, by excluding the cost of raw material from the sale value for such apportionment. b) The rule seeks to apportion the service tax in the ratio of value addition on one side and total value (including the value of raw materials, manufacturing value addition, trading value addition) on the other side. If the criterion is that the services availed only lead to value addition in the case of traded goods the same logic applies to manufactured goods also. Thus the formula should take the value addition of the manufactured goods as well while apportioning the service tax credit. To be appropriate it should apportion the credit on the basis of value addition on both sides. c) Even if we have to follow the formula it cannot be followed in modified form as suggested by learned counsel. The argument of the learned counsel is not to adopt the formula prescribed in the rule 6(3A)(c )(iii) read with explanation I (c ) wherein the amount of service tax credit to be reversed is to be calculated as follows Amount to be reversed = (N1 + N2) X ( L1 + (S - P)) M + L1 + (S - P) But the suggestion of the learned counsel is to adopt the formula without considering the manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the house, if any, by the fraction 100/9. Provided that in relation to a house which is built on leasehold land, this sub rule shall have effect, as if for the fraction 100/8 in Clause (a), or as the case may be, the fraction of 100/9 in Clause (b), the fraction 100/9 and 100/10 respectively had been substituted. The said new rule prescribed the method for arriving at the value of a house under Wealth Tax Act. Hon'ble Supreme Court in the said case observed as under: - 23. We may now turn to the scope and content of Rule 1BB. The said Rule merely provides a choice amongst well-known and well-settled modes of valuation. Even in the absence of Rule 1BB it would not have been objectionable, nor would there be any legal impediment, to adopt the mode of valuation embodied in Rule 1BB namely, the method of capitalisation of income on a number of years' purchase value. The rule was intended to impart uniformity in valuations and to avoid vagaries and disparities resulting from application of different modes of valuation in different cases where the nature of the property is similar. 24. Rule 1BB thus partakes of the character of a rule of evidence. It deems the market value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the period after 1.4.2011 is inherently erroneous. 4.17 Learned Counsel relied on the formula prescribed under Section 80HHC of Income Tax Act, 1961 for the merchant exporter. He further argued that formula prescribed by Parliament in similar context under Section 80HHC of Income Tax Act, 1961 for merchant exporter provided for similar estimation on the basis of margin and not on the basis of turnover of the export. Learned Counsel argued that Section 80HHC deals with deductions in total income of assessee in respect of profits derived from exports business. He argued that prior to 1991, Section 80HHC (3) provided for the following formula: - 80HHC concessions=export profits=Total business profits x Export turnover/Total turnover. Since this formula let certain anomaly, by Finance Act, 1991, Section 80HHC was amended and a new formula was introduced, which reads as under: - 80HHCconcession=export profits= export turnover- costs attributable to such exports (direct and indirect)] Learned Counsel cited Circular No. 621 dated 19.12.1991 of Central Board of Direct Taxes, wherein the following has been clarified: - 32.5 Under the existing provisions of sub-section (3) of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factured by others; and (iii) an assessee who exported manufactured goods as well as trading goods. The formula became complicated in the case of the third category. 15. The principal reason for enacting the above formula was to disallow a part of 80HHC concession when the entire deduction claimed could not be regarded as relatable to exports. Therefore, while interpreting the words "total turnover" in the above formula in Section 80HHC one has to give a schematic interpretation to that expression. 16. Leaned senior counsel appearing for the Department (appellant), submitted that one has to give plain and unambiguous meaning to the word "turnover" in the above formula; that there was no need to call for any rule of interpretation or external aid to interpret the said word; that having regard to the plain words of the section, excise duty and sales tax ought to have been included in the "total turnover". Learned counsel submitted that the word "turnover" even in the ordinary sense would include the above two items. Learned counsel urged that the formula should be read strictly. ..... 17. . We do not find any merit in the above contentions advanced on behalf of the Department.&nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st National Bank of Chicago - [1999] 2 W.L.R. 230. In the said case, it was held that for the purpose of ascertaining the consideration for supply of services in foreign exchange transaction for claiming input deduction in the currency exchange business, the value of currency will not be considered. The said decision gives the following findings. "1. Transactions between parties for the purchase by one party of an agreed amount in one currency against the sale by it to the other party of an agreed amount in another currency, both such amounts being deliverable on the same value date, and in respect of which transactions the parties have agreed (whether orally, electronically or in writing) the currencies involved, the amounts of such currencies to be purchased and sold, which party will purchase which currency and the value date, constitute supplies of services effected for consideration within the meaning of Article 2(1) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes Common system of value added tax: uniform basis of assessment. 2. Article 11A(1)(a) of the Sixth Directive must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce for apportionment. (iv) C&F Agent, transport of goods by road received for both dutiable manufactured goods and traded goods. These services have to be apportioned on the basis of Value/volume/weight of goods and in absence of volume/weight of goods and value is a fair method of apportionment. Value addition of traded goods has no relevance for apportionment. We do not find that for apportioning the service tax credit of common services used between the dutiable manufactured goods and traded goods the Value addition of traded goods has any relevance. The formula prescribed for the period after 1.4.2011 does not provide reasonable estimate of the credit attributable to the exempted and dutiable activities. Furthermore the formula sought to be adopted by the appellants is not the formula prescribed for the period after 1.4.2011. In these circumstances we hold that the credit availed at various places registered as ISD needs to be apportioned in the ratio of the exempted and other sales, as has been done by the Revenue. 5. We find that in the case of Clarient Chemicals (Supra) the tribunal was dealing with similar situation and upheld the invocation of extended period. The tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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