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Publish Date: 04 Mar, 2011
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Trading is exempted service now!!! published on Taxindiaonline.com

Trading is exempted services now!!!

Prepared By:
CA Pradeep Jain
CA Preeti Parihar
CA Rajani Thanvi

INTRODUCTION:-
 
The term ‘Trading’ means the act of buying and selling. It involves the selling of goods in the same form as it was purchased. Thus, no further processing is done thereupon. There are many manufacturers that are also involved in the trading of goods. Cenvat Credit is allowed only in respect of those inputs/input services which are used in the manufacture of the dutiable final products or for providing the taxable output service. Therefore, credit is not allowed except in these two cases and if taken, it has to be reversed under the provisions of rule 6(3) of the Cenvat Credit Rules, 2004.
 
BRIEF HISTORY:-
 
Though trading activity was not specifically defined as exempted service prior to budget, 2011 yet reversal was demanded by the department if trading activity was involved. This issue arose before the Ahmedabad Tribunal in the case of Orion Appliances Limited Vs. CCE, Ahmedabad [2010(019) STR 0205(Trib. Ahm)] wherein it was held that trading activity is not at all a service. Further the rule 6(2) of cenvat credit rules requires maintaining separate account only in respect of exempted service and dutiable service. Since trading activity cannot be considered a service, the question of maintenance of separate accounts does not arise. But the Ahmedabad tribunal has decided that,
 
(A) trading activity cannot be called a service and therefore it cannot be considered as an exempted service also.”
(B) Where an assessee would not be eligible to take input Service tax credit on an output which is neither a service nor excisable goods and at the same time 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 appellant to choose and segregate the quantum of input service attributable to trading activity and exclude the same from the records maintained for availment of credit.
 
Hence the tribunal has held that the since trading activity is not a service, credit cannot be taken on the same. Thus, the assessee was ordered to segregate the quantum of input service attributable to trading activity and exclude the same from the Cenvat register. In order to remove the ambiguities arising out of such decisions, this budget has included the trading activity in the definition of exempted services.
 
EXEMPTED SERVICES – OLD & NEW DEFINITION:-
 
The term Exempted Services as defined in rule 2(e) of Cenvat Credit Rules, 2004 prior to recent budget 2011 read as follows:-
 
 “exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act;
 
From this budget this definition has been extended as follows:-
 
““exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act and taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken.
 
Explanation- For the removal of doubts, it is hereby clarified that “exempted services” includes trading.”
 
Thus, the scope of exempted services has been extended and now the taxable services whose part of value is exempted on the condition that no credit is taken shall also be included. The Trading activity has been specifically included in the definition of exempted services.
 
IMPACT OF THIS CHANGE:-
 
Since the trading activity is specifically included in the exempted services, the provisions of rule 6 of the Cenvat Credit Rules, 2004 will be attracted. Thus, the manufacturer-trader cannot take the credit on inputs/input services meant for used in trading activity. He is required to maintain separate records for availment and consumption of the inputs/input services meant for trading activity. On failure to comply with this provision, he will be either required to reverse the proportionate credit or will be required to pay an amount equal to 6% of the value of trading activity.
 
The value to be taken for this calculation will be as per explanation to rule 6(3) and (3A) of the Cenvat Credit Rules, 2004 which reads as follows:-
 
“Explanation I. - “Value” for the purpose of sub-rules (3) and (3A),-
(a) ………
(b) ………
(c) in case of trading, shall be the difference between the sale price and the purchase price of the goods traded.”
 
Hence in case of trading activity the reversal will be made on the basis of value calculated by subtracting the purchase price from sale price. An analysis of the provision clears that every manufacturer who is doing trading activity will not be able to avail cenvat credit. If he avails the same, he is required to follow the provisions of rule 6 of the Cenvat Credit Rules, 2004.
 
UNANSWERED QUESTIONS:-
 
Though, the term trading activity has been included in the definition of the exempted services; yet it is not explained as to what will be counted as a “trading activity”. In common parlance, trading activity is the sale of goods in the same form as they are purchased. Thus, if any goods that are purchased are sold as it is, it will be termed as trading activity. So, whether the removal as such of inputs will also come under the trading activity? What will be situation when the inputs/other goods are sent to the sister concern or to another unit of the assessee? Whether such clearance will also come under the trading activity? What will be situation when those goods are traded which are not inputs at all for the assessee? Since these are not inputs, credit is not available at all, so where comes the question of reversing the credit? These are the questions which are required to be answered before the litigation starts.
 
Further, we have come across a objection raised by the department in respect of hotel industry. They have asked us to reverse the cenvat credit on input services relating to sale of food and beverages in the restaurant. We are still fighting on the same. Whether it will be termed as trading activity? But the food is not sold as such. 
 
BEFORE PARTING:-
 
The government has included the trading activity in the definition of the exempted services in order to avoid the conflicts. But whether this inclusion will serve its purpose or will create new ambiguities? As there are various services which are used commonly in the manufacturing as well as trading activities such as telephone services, advertisement, security, courier, professional and banking services etc. The reversal under rule 6(3A) is already very complicated and now the Government has made it more complicated by adding the trading activity in the definition of exempted services. Ek to karela, oopar se neem chadha…

*************

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