Cenvat credit available only if service utilized in relation to Output service

PJ/Case Laws/2012-13/1053

Case: CCE, RAIPUR Vs M/s G K MOTORS

Citation: 2011-TIOL-1614-CESTAT-DEL

Issue:- Cenvat Credit of service tax will be available only if services are utilized in or in relation to output service provided and not for trading activity.

Brief Facts:- Respondent-assessee is engaged in sales of motor vehicles of M/s FIAT India (P) Ltd as their authorized dealer and is also authorized service station for servicing of vehicles, for which they have taken service tax registration. During the period from 01.04.2005 to 31.03.2006, they took and utilized service tax credit of Rs.84,818/- in respect of GTA service, advertisement services, Insurance services, audit fee, Valuation charges, repair and maintenance, AC machine repairing, Courier service etc. received by them for use in their business.

Department was of the view that since these services are not the input services for their output service i.e. servicing of car as authorized service station., they were not entitled for cenvat credit. Besides this, on scrutiny of their ST-3 returns, it was found that the there was delay in filing of their returns. On this basis, a show cause notice dated 06.08.2007 was issued to respondent for recovery of cenvat credit alongwith interest, penalty u/r 15 of the CCR, Penalty u/s 76 of the Finance Act, and imposition of penalty for delay in filling of ST-3 Return was also proposed to be imposed.

The Assistant Commissioner confirmed the demand with interest and imposed penalties.

In appeal, the Commissioner (A) allowed the cenvat credit on GTA Services, Advertisement Services, Insurance Services, Audit services, Valuation Services, AC Machine repairing, Telephone Services, Cartage charges, Security charges, Courtier Charges but disallowed cenvat credit on hotel bills for lunches and dinners. He also set aside penalties imposed u/Section 76 and Section 77. The Commissioner (A) also upheld the penalty u/Rule 15 of the CCR, 2004 for wrong availment and utilization of cenvat credit.

Against this Assessee and Revenue both have filed appeal before the Tribunal.

Appellant’s Contention:- Revenue pleaded that since the assessee is engaged in trading activity of the cars and car parts and also servicing of the motor vehicles, the services, in question, in respect in which cenvat credit has been taken, cannot be said to be the inputs only for their output service and substantial amount of the services availed by them are in connection with their trading activity and to that extent they would not be eligible for cenvat credit.

Reasoning of Judgment:- The Tribunal noted that assessee is authorized dealer of M/s FIAT India Pvt. Ltd. engaged in sale of cars and car parts and besides this they are an authorized service station for servicing of motor vehicles, which is a taxable service. The services, in question, received by the respondent cannot be said to be exclusively used in or in relation to providing the output service, while they would be eligible for cenvat credit only in respect of those services which are in or in relation to providing their output services of authorized service station. They would not be eligible for cenvat credit in respect of the value of the services which have been received in connection with their trading activity. The Tribunal finds that this aspect has not been discussed in the impugned order. The impugned order is, therefore, set aside and the matter is remanded to the Original Adjudicating Authority for fresh adjudication after verification as to what extent, the services, in question, have been used in or in relation to the providing of output services of authorized service station by the respondent and then cenvat credit would be available only to that extent.

However, as regards the Commissioner (Appeals)'s order setting aside the penalty on the respondent under Section 76, since this is dispute regarding availment of cenvat credit, penalty under Section 76 has is called for, and the same has been correctly set aside.

Decision:- Matter Remanded back for quantification of cenvat credit demand.

Comment:- In this decision, the cenvat credit used in trading activity is being disallowed but there is no provision for the same before Budget 2011. But the analogy given in favour of the same is that the cenvat credit on input service is allowed to the extent, it is used in providing output service. Hence, the quantum of input service used in trading activity is not allowed. But the quantum of input service is very difficult to ascertain. If we have taken the credit on telephone service then no one can establish that which phone has gone for trading and the other has gone for providing service. The only solution is turnover ratio. But it will be totally against the provider of service as can be seen in this case. He is selling cars as well as running service station. The value of car is very high. So, the proportion will be favourable to revenue. They will reverse almost entire credit.

In Budget 2011, the trading activity has been held as exempted service. Though we cannot term “trading” as service but it will take time to be decided by the Courts. However, in case of proportionate reversal, the CBEC has considered our viewpoint and value of exempted service is taken as difference between sale price and purchase price or 10% of cost of goods sold. There is no need to reverse the credit on the basis of turnover. But this amendment has created many problems also. Even “as such removal” is being termed as trading activity by the department. The field formation asks for reversal on cenvat credit even if the goods are returned to supplier due to inferior quality. As a consultant, I always admire the creative mind of field formation. Thanks to them as they always bring work for us.

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PJ/Case Laws/2012-13/1053

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