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TMI Blog2016 (12) TMI 436X X X X Extracts X X X X X X X X Extracts X X X X ..... vel after clearance from factory in respect of manufactured goods and the value addition happening at the depot/office level in respect of traded goods. If the argument of the learned Counsel is accepted and the value addition happening at the stage of manufacture and services used therein need to be considered, then the entire Service Tax credit taken at factory also needs to be apportioned. In view of the above, the argument of the learned Counsel does not hold much water. Formula - method for determination of amount of credit to be reversed - Held that:- it can be seen that even the method prescribed for the period after 1.4.2011 is inherently erroneous. - 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. Extended period of limitation - The appellants have not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellants have claimed that they are not availing credit in respect of services used exclusively for the purpose of trading. The credit that is distributed by the ISDs relates to the services availed commonly for dutiable final products and traded goods at such branches, offices and depots. An audit was conducted and consequently the appellant reversed an amount of ₹ 3,01,987/- along with interest in respect of ineligible services. The appellants also reversed an amount of ₹ 2,41,06,906/- along with interest of ₹ 69,32,127/- as proportionate credit in respect of certain goods. A show-cause notice was issued to the appellant on various counts and demand was confirmed. Aggrieved by the said order, the appellants are in appeal before this Tribunal. 1.1 Learned Counsel for the appellant argued that they are not pressing for issue other than the following three issues: - S.No Particulars Confirmed demand for the period 01.04.2007 to 28.02.2008 (Beyond five years) Confirmed demand for the period 01.03.2008 to Dec. 2011 Total amount Confirmed in the Impugned Order Amount admitted by the Appellant. Amount appealed against A B C D E (C+D) F G (E-F) 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts, shall follow either of the following options, as applicable to him, namely:- (i) the manufacturer of goods shall pay an amount equal to ten per cent of value of the exempted goods and the provider of output service shall pay an amount equal to eight per cent of value of the exempted services; or (ii) the manufacturer of goods or the provider of output service shall pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in, or in relation to, the manufacture of exempted goods or for provision of exempted services subject to the conditions and procedure specified in sub-rule (3A). Explanation I.- If the manufacturer of goods or the provider of output service, avails any of the option under this sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year. Explanation II.- For removal of doubt, it is hereby clarified that the credit shall not be allowed on inputs and input services used exclusively for the manufacture of exempted goods or provision of exempted serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces provided plus the total value of exempted services provided, during the financial year and L denotes total CENVAT credit taken on inputs during the financial year minus H; (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; (d) the manufacturer of goods or the provider of output service, shall pay an amount equal to the difference between the aggregate amount determined as per condition (c) and the aggregate amount determined and paid as per condition (b), on or before the 30th June of the succeeding financial year, where the amount determined as per condition (c) is more than the amount paid; (e) ... (f) .... (g) ……. (h) ………&hellip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect 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 reduced from the amount payable under clause (i) : Provided further that if any part of the value of a taxable service has been exempted on the condition that no CENVAT credit of inputs and input services, used for providing such taxable service, shall be taken then the amount specified in clause (i) shall be five per cent. of the value so exempted. 2.3 It is seen that the said clause permitted the manufacturer or provider of output services, who opted not to maintain separate records, to choose any one of the options provided under the said sub-rule. The said sub-rule does not permit, the provider of exempted services or manufacturer of exempted goods, to avail of more than one option. In the instant case, during this period the appellants were clearing exempted goods to Indian Navy and Coast Guard after paying an amount equal to 5% of the value of exempted goods as prescribed under option (i) of the sub-rule (3) of Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 services provided plus the total value of exempted goods manufactured and removed during the financial year, N 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 P denotes total CENVAT credit taken on input services during the financial year; " The rule needs to be read with Explanation I of the said sub-rule which clarified as follows: - Explanation I. - "Value" for the purpose of sub-rules (3) and (3A),- (a) shall have the same meaning as assigned to it under section 67 of the Finance Act, read with rules made there under or, as the case may be, the value determined under section 3, 4 or 4A of the Excise Act, read with rules made thereunder. (b) ………. (c) in case of trading, shall be the difference between the sale price and the cost of goods sold (d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lkata 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 accounts need to be maintained to arrive at the cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase). In such case some costs of services availed need to be apportioned to traded goods. No such data has been given. 2.3.2 Secondly the formula prescribed in rule 6(3A)(c ) (iii) requires total service tax credit to be taken by the manufacturer/service provider to be taken for such apportionment. The formula prescribed in rule 6(3A)(c) (iii) is as follows (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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 options out of the options provided in the sub rule. The manufacturer has exercised the option (i) in respect of the exempted goods sold to the Navy. It is not open to them to exercise a different option for other goods. In these circumstances we find no merit in the appeal in so far as the first issue is concerned. 3.1 The second issue raised pertains to demand for reversal of proportionate credit from 2007 to 31.3.2011 pertaining to input services covered under Rule 6(5) of Cenvat Credit Rules, 2004. Rule 6(5) of Cenvat Credit Rules, 2004 prior to 1.4.2008 read as follows: - "(5) Notwithstanding anything contained in sub-rules (1), (2) and (3), credit of the whole of service tax paid on taxable service as specified in sub-clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance Act shall be allowed unless such servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) provided by such service provider. For example service tax paid on construction of an office of a service provider (who provides more than one service) cannot be linked with any particular service provided by him as it may be using it for various purposes and for all services provided by him. Thus, these services are similar in nature to capital goods which is a part of fixed assets/cost that cannot be apportioned for maintaining separate records. It is for this reason that there is no restriction in taking and utilization of credit on these services, so far as they are used for providing some taxable services. If the restriction of 20% is applied to these services also, this basic purpose would be defeated. As regards, 'taking' of credit is concerned, that is anyway available to all input services and there would not have been any reason to select these 17 services for placing them under sub-rule (5). They have been pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of specified services, unless such service is used exclusively in or in relation to manufacture of exempted goods or providing exempted service. As noted earlier, even the appellants contention is that they were providing exempted service or not, manufacturing exempted goods, but they were providing trading service. In our view Rule 6(5) is not relevant in the facts of the present case. 3.5 We find that the issue regarding interpretation of sub-rule (5) of Rule 6 of Cenvat Credit Rules, 2004 is no longer res integra. In view of the above, respectfully following the decisions of the Tribunal on the issue, we hold that benefit of Rule 6(5) of Cenvat Credit Rules, 2004 cannot be extended in respect of trading activities. The said credit needs to be reversed in proportion to the trading turnover and the total turnover. 4. The third issue pertains to applicability of the formula prescribed for determination of the credit to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices 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 trading activities. Learned Counsel argued that while apportioning, the Revenue has taken entire sale price of traded goods in the numerator and as a result the entire value of material for trading apart from so called exempted service acts in the numerator. It was argued that only the trading activity should be considered in the numerator. 4.4 Learned Counsel argued that if the multiplier consists of service tax on the common services received, the numerator should consist only of the value of the services (value addition) and should not consist of the value of the material for trading. The common input services contribute only to the value addition of traded goods. He argued that the input services are not used till the stage of purchase of goods and purchase price will not include or comprise of any input service. He argued that any common input service used by the appellant will be after the purchase of goods for sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at a question arose whether Rule 1BB of Wealth Tax Rules, 1957 introduced w.e.f. 1.4.1979 can apply for determination of value of residential house property for assessment year prior to that date also. It was held in the said case that the method prescribed by Rule 1BB was one of the many well recognized modes in vogue, hence, it can be applied for past period also. 4.7 He further argued that formula prescribed 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)] 4.8 Learned Counsel cited Circular No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re three categories of assessees (i) an assessee who exported goods manufactured by him; (ii) an assessee who did not export goods manufactured by him but exported goods manufactured 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 ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies'. Article 13B(d)(4) provides as follows: `Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse: ... (d) the following transactions: ... 4. transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of collectors' items; "collectors' items" shall be taken to mean gold, silver or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest.' Article 13C(b), however, makes it possible for Member States to allow their taxpayers a right of option for taxation in respect of the transactions covered by, inter alia, Article 13B(d). Article 17(3)(c) of the Sixth Directive provides as follows: `3. Member States shall also grant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change rates, and not from profit on any individual transaction. Finally, the currencies exchanged do not constitute consideration one for the other. 42 It should be borne in mind that Article 11A(1)(a) of the Sixth Directive provides that the taxable amount is, in respect of supplies of services, that which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser for such supplies. 43 While they are the subject of a supply, the currencies transferred to a trader by his counterparty in the course of a foreign exchange transaction cannot be regarded as constituting remuneration for the service of exchanging currencies for other currencies or consequently as constituting consideration for that service. 44 Determining the consideration therefore comes down to determining what the Bank receives for foreign exchange transactions, that is to say the remuneration on foreign exchange transactions which it can actually take for itself (see, in this regard, Case C-38/93 Glawe v Finanzamt Hamburg-Barmbek-Uhlenhorst [1994] ECR I-1679, paragraph 9). 45 In this regard, the spread representing the difference between the bid price and the offer pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gods would consist of the following elements: - (a) Value of materials, (b) Value of service used for manufacture, (c) Manufacturing profit, (d) Trading cost, (e) Trading profits. Similarly, in respect of traded goods, the cost would include: - (a) Purchase cost consisting of goods, (b) Manufacturing cost, other costs (it includes all the cost at the hands of appellant) and manufacturing profits (c) Trading cost and trading profits. It can be seen that in the instant case, the common services consist of only services availed at depot/office in respect of trading activity and not manufacturing activity. Thus, these services are used exclusively for trading purposes and post manufacture trading activities. Thus, they are need to be divided in the proportion of the value addition happening at the depot/office level after clearance from factory in respect of manufactured goods and the value addition happening at the depot/office level in respect of traded goods. If the argument of the learned Counsel is accepted and the value addition happening at the stage of manufacture and services used therein need to be considered, then the entire Service Tax credit taken at factory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exempted final products the various components of the sales value would consist of (i) Cost of Raw Materials (ii) Costs of services used at factory (to be apportioned between dutiable and exempted goods) (iii) Manufacturing profits (iv) Costs incurred at the depot (v) Trading profits In respect of trading activity the various components of sales value would consist of (i) Purchase including cost of purchase and service tax piad on services availed on purchase (ii) Costs incurred at the depot (iii) Trading profits The following diagram explains the various components of value addition in the instant case 4.14 As per rule 6(3A)(c) (iii) read with explanation I(c) the amount of service tax credit to be reversed is to be calculated as follows Amount to be reversed = (N1 + N2) X ( L + (S - P)) M + L + (S - P) Where N1 = Service tax credit availed at factory N2 = Common Service tax availed at depots and various offices (other than factory) M = Sales Dutiable L = Sales exempted S = Sales trading P = Costs of goods sold or Purchase including cost of purchase and service tax paid on services availed on purchase 4.15 The formula is not suitable for the following reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tionment of common costs. It is also correct that cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase) is not the same as purchase price of the goods. The words "difference between the sale price and the purchase price of the goods traded", have been substituted by the words 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 moreby the notification 13/11 CE (NT) dated 31.3.11. If detailed accounts are to be maintained for calculating the cost of goods sold in respect of traded goods then what is the need of the formula to estimate the same. The same records will give the real amount of service tax attributable to the trading activity. Thus the formula for estimation, which requires maintenance of detailed records, defeats the purpose of prescribing the formula. 4.16. The learned Counsel has relied on the decision of the Hon'ble Supreme Court in the case of Sharvan Kumar Swarup (supra). Rule 1BB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rily strengthened and placed beyond the pale of rebuttal. Considered from this point of view, it seems rather difficult to accept the theory that whereas a rebuttable presumption is within the domain of the law of evidence, irrebuttable presumption is outside the domain of that law and forms part of the Substantive Law. 25. On a consideration of the matter we are persuaded to the view that Rule 1BB is essentially a rule of evidence as to the choice of one of the well accepted methods of evaluation in respect of certain kinds of properties with a view to achieving uniformity in valuation and avoiding disparate valuations resulting from application of different methods of valuation respecting properties of a similar nature and character. The view taken by the High Courts, in our opinion, cannot be said to be erroneous. It can be seen that in the said decision, it was held that the said method is one of the recognized and accepted method and therefore the same was accepted. In the instant case it can be seen that the method suggested by the learned Counsel is not the method prescribed in law even after 1.4.2011. Learned Counsel is seeking to apply the modified method not prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 goods; (ii) profits relating to export of goods purchased from third party by deducting from the sale proceeds of such goods, the direct and indirect costs attributable to such exports; Learned Counsel relied on the decision of Hon'ble Supreme Court in the case of CIT Vs. Lakshmi Machine Works 2007 (290) ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. It is seen that the said changes in the Income Tax Act, 1961 do not come to the aid of the learned Counsel. The new formula prescribes that the export profits in will be calculated separately and not estimated by a formula. Earlier the formula for 80HHC concessions was export profits= Total business profits x Export turnover Total turnover. The new formula for 80HHCconcession prescribed export profits= export turnover- costs attributable to such exports (direct and indirect) The calculation of costs attributable to such exports direct and indirect) would require maintenance of detailed records. It is like requirement of maintenance of separate records for dutiable and exempted goods. Since the profit is to be calculated, therefore, for the purpose of export profits, the formula adopts the difference between the export turnover and the cost attributable to such exports (direct and indirect) to ascertain export income. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly if detailed records are not maintained. 4.19 Now we examine the method adopted by the revenue. The formula apportions only the common Service Tax credit in respect of services received at depot/offices in proportion to the dutiable manufactured goods and traded good goods dealt at depot/offices. However if the formula is apportioning only the common service tax credit credit it can be done on the basis of sale value as most of the services cost on the basis of the value or volume or weight or turnover. In all these cases the value would be a fair proportion to use for estimation. Thus using sales value for apportioning the common credit is a fair formula. For example in the instant case the various common services in respect of which reversal is sought are (i) Renting of immovable property, storage and warehouse service. It is hired for storing both dutiable manufactured goods and traded goods. Space for depot or godown has to be apportioned on the basis of volume of goods and in absence of volume of goods and value is a fair method of apportionment. Value addition of traded goods has no relevance for apportionment. (ii) Management consultancy service, IT service, telephone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the extended period of limitation and we entirely agree availment of cenvat credit the primary responsibility that the credit has been correctly taken is on the manufacturer or availer of cenvat credit as per Rule 9 (5) and 9 (6). Rule 9 (5) very clearly provides that the burden or poof regarding admissibility of the cenvat credit shall lie upon the manufacturer or provider of output service taking such credit. In view of this position, we have no hesitation in holding that the extended period of limitation has been correctly invoked. We also note the judgement of Hon[ble Madras High Court in the cae of F.L. SmidthPvt. Ltd. (supra). For the same reason, the penalty imposed under Rule 15 of the Cenvat Credit Rules read with Section11AC of the Central Excise Act is in order. We also note, as far as the demand of ₹ 1,11,444/- is concerned, appellant has already admitted that the demand of ₹ 49,731/- as these have nothing to do with the manufacture of goods. As far as the remaining demand is concerned, which is relating to the security broker service, etc. For the reasons stated earlier, the same is upheld. Penalty imposed in respect of the same is also upheld. It is the ..... 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