Credit attributable to trading is not admissible.

Case:- COMMISSIONER OF C. EX., BELAPUR VERSUS ELDER PHARMACEUTICALS LTD.

Citation:-2015 (37) S.T.R. 241 (Tri. – Mumbai)

Brief facts:-The appellant Elder Pharmaceuticals Ltd. (Elder in short) and the Revenue had challenged the impugned order wherein two show cause notices (a) dated 4-10-2011 for the period September, 2006 to March, 2010 and (b) dated 21-5-2012 for the period January, 2011 to March, 2012 were adjudicated. Revenue had also filed two appeals, one against the order of the Commissioner (Appeals) wherein the appeal filed by the assessee was allowed and one against the order of the adjudicating authority.
Brief facts of the case were that the assessee was engaged in the activity of manufacturing of Pharmaceutical products and their manufacturing units located at Patalganga in Maharashtra, Selaqui and Langa Road in Uttaranchal and Paonta Sahib in Himachal Pradesh and distributed the same to Nerul, Pawane and Patalganga factories at Maharashtra. The appellant was having their Head Office at Andheri (W), Mumbai. The manufacturing units located at Uttaranchal and Himachal Pradesh was not paying Central Excise Duty. The appellant was also engaged in the activity of trading of goods at their Head Office. The other units were manufacturing dutiable as well as exempted goods. The Head Office at Andheri (West) distributed the Cenvat credit of input services to the units located at Nerul, Pawane and Patalganga. While distributing Cenvat credit the Head Office had distributed credit in proportion of turnover i.e. credit attributable to units exclusively engaged in exempt goods and credit attributable to trading was not distributed. However, Cenvat Credit on input services covered under Rule 6(5) of Cenvat Credit Rules, 2004 was distributed in full so long as it did not pertain to units exclusively engaged in manufacture of exempt goods or trading. Therefore, it was alleged in the show cause notice that in respect of services mentioned in Rule 6(5) of Cenvat Credit Rules, 2004, the ISD could not take 100% credit and distribute it. The adjudicating authority adjudicated the matter and disallowed the credit under Rule 6(5) of Cenvat Credit Rules, 2004 and redistributed the whole of Cenvat credit distributed by ISD. Aggrieved by the said order, the assessee filed appeal.
Revenue filed one appeal on the ground that while re-distributing the credit, the assessee was required to include the turnover of goods manufactured by the assessee from loan licensee units to manufacture the goods on behalf of the assessee.
With regard to another appeal filed by the Revenue against the order of Commissioner (Appeals) the contention was that as per Rule 3 of the Cenvat Credit Rules, 2004 the manufacturer and producer of the final product is entitled to take Cenvat credit of various specified duties paid on inputs or capital goods or any input services. As per Rule 9(5) and (6) of Cenvat Credit Rules, 2004, the burden of proving that the Cenvat credit was in respect of input/capital goods and input services lied upon the manufacturer or producer or provider or the output service taking such credit. As in this case the admissibility of Cenvat credit was on the assessee therefore, whatever they had taken is credit, it was the duty of the assessee to prove that. Therefore, the learned AR prayed that the impugned order was required to be set aside.

Appellant’s contention:-The learned Counsel appearing for the assessee submitted that Rule 6(5) of Cenvat Credit Rules, 2004, grants immunity to specified services; that even if part of such services were used in exempt business, full credit can be availed and utilized. Availing this immunity of Rule 6(5) of the Cenvat Credit Rules, 2004, the assessee had complied with the Rule 6(5) services. He submitted that in the impugned order the learned Commissioner (Appeals) held that such immunity would be available only to manufacturers and not to ISD (input service distributor) as even ISD was indeed an office of the same manufacturer. Therefore, it cannot be said that ISD was not a manufacturer. Therefore, the ISD cannot be put to disadvantageous position than the manufacturer without ISD. The ISD mechanism is only to facilitate smooth transition of credit accruing at one location to another location where it can be used. It was not in dispute that the assessee has fulfilled the conditions of Rule 7 of the Cenvat Credit Rules, 2004 and therefore, the assessee was entitled to avail Cenvat credit distributed by ISD as per Rule 6(5) of the Cenvat Credit Rules, 2004. It was further submitted that the assessee was right in distributing the credit at their discretion based on the provisions of Rule 7 of the Cenvat Credit Rules, 2004 as it existed at the relevant time.
He further submitted that the learned Commissioner without his jurisdiction reallocated the entire Cenvat credit when the show cause notice alleged only for distribution under Rule 6(5) of Cenvat Credit Rules, 2004. Therefore, the impugned order was required to be set aside. In support of his contentions, the learned Counsel relied on the decision in the case of CCE v. Ballarpur Industries Ltd. - 2007 (215)E.L.T.489 (S.C.). He further submitted that the learned Commissioner had no jurisdiction over the assessee’s factory availing credit and so cannot challenge the correctness of credit distributed on by the ISD located in a different jurisdiction. The learned Counsel relied on the following decisions :-
(a)   Castrol India Ltd.v. CCE, Vapi - 2013 (291)E.L.T.469 (Tri.-Ahmd.) = 2013 (30)S.T.R.214 (Tri.-Ahmd.).
(b)   CCE & Cus. v. MDS Switchgear Ltd. - 2008 (229)E.L.T.485 (S.C.)
He further submitted that the Circular dated 10-3-2014 cannot be relied on in the light of the judgment of the Hon’ble Bombay High Court in Sunflag Iron & Steel Co. Ltd. - 2003 (162)E.L.T.105 (Bom.).

Respondent’s contention:- On the other hand, the learned AR appearing for the Revenue supported the impugned order and submitted that the learned Commissioner was having the jurisdiction over the unit of the assessee located in his jurisdiction as a manufacturer and he was entitled to examine the correctness of the Cenvat credit availed by the assessee. Further, it was the burden on assessee to prove that they had correctly taken the Cenvat credit. Therefore, he prayed that the Revenue’s appeal be allowed. He also submitted that while taking credit on specified Rule 6(5) of Cenvat Credit Rules, 2004, the assessee was not entitled to take Cenvat credit attributable to the trading activity as during the relevant period the trading activity was neither the activity covered under the Excise Act nor service activity as exempted service. Therefore, the Cenvat credit attributable to the trading activity is required to be reversed.

Reasoning of judgment:- Considered the submissions made by both the sides.
The learned Counsel for the assessee raised the issue of jurisdiction and relied on the case law of Castrol India Ltd. (supra) and MDS Switchgear Ltd. (supra). The issue was examined by the Tribunal where the facts were that the Cenvat credit was taken had no nexus to the manufacturer and in some cases same have been availed beyond the place of removal. In fact, in this case the issue was that whether the assessee was entitled to take Cenvat credit as per Rule 6(5) of Cenvat Credit Rules, 2004 or not. Further, in the case of MDS Switchgear Ltd. the issue before the Hon’ble Apex Court was that entitlement of duty paid by the supplier (manufacturer). That was not the case before them. In fact, the issue in this case was that whether the assessee was entitled to take Cenvat credit as per Rule 6(5) of Cenvat Credit Rules, 2004 for specified service as a whole or not. This question was to be examined at the end of the assessee; therefore the lower authorities were to examine the correctness of the admissible Cenvat credit to assessee.
The next issue before them was whether for the services covered under Rule 6(5) of Cenvat Credit Rules, 2004, the assessee is entitled to take Cenvat credit in full or in proportionate. We had to go through the Rule 6(5) as it existed during the relevant time, which is reproduced hereunder :-
“(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-clauses (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 service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services.”
As per the said Rule, there was no bar to avail Cenvat credit on the services covered under Rule 6(5) by a unit who was engaged in the activity of manufacturing on both dutiable as well as exempted goods and engaged in dutiable as well as exempted services. Therefore, it was held that in this case the assessee was entitled to take the Cenvat credit of services referred in Rule 6(5) of Cenvat Credit Rules, 2004 for whole of the credit attributable to dutiable as well as final exempted products and for taxable or exempted services but the assessee was not entitled to take Cenvat credit attributable to the activity of trading as during the relevant time, the trading activity was neither excisable nor an exempted service at all. Therefore, the quantification of inadmissible Cenvat credit was required to be done at the end of adjudicating authority to disallow the Cenvat credit attributable to trading activity.
The next issue was that whether the learned Commissioner had jurisdiction to reallocate the Cenvat credit or not. They had gone through the show cause notice wherein the allegation was that the assessee was not entitled to take Cenvat credit referred under Rule 6(5) of Cenvat Credit Rules, 2004 as the same are not covered in Rule 7. Therefore it was held that the learned Commissioner had no jurisdiction to reallocate the Cenvat credit to the assessee in question as there was no such allegation in the show cause notice and he could not go beyond the allegation in the show cause notice to decide the issue. He further found that the issue involved in this case was whether the assessee was entitled to take Cenvat credit on the services covered under Rule 6(5) or not and which was debatable issue therefore, extended period of limitation was not invokable. Therefore, the matter needed examination at the end of the adjudicating authority to quantify inadmissible credit for the normal period of limitation. As the extended period of limitation was not invokable, consequently the penalty on the assessee was not warranted. Therefore, in result we pass the following order:-

(a)   They held that the assessee was entitled to take Cenvat credit on the services covered under Rule 6(5) of the Cenvat Credit Rules, 2004 as prescribed in the manner in the said Rule.
(b)   The assessee was not entitled to take Cenvat credit on the services mentioned in Rule 6(5) of the Cenvat Credit Rules, 2004 which is attributable to their trading activity.
(c)    They held that the extended period of limitation was not invokable.
(d)   The demands pertaining to the extended period of limitation was set aside.
(e)   No penalty was warranted.
(f)    The matter was remanded back to the adjudicating authority for requantification of demands, inadmissible credit on trading activity for the normal period of limitation.

Appeals were disposed of in the above manner.

Decision:-Appeal disposed of.

Comment:- The gist of this case is that the Rule 6(5) of Cenvat Credit Rules, 2004 specified a list of services wherein the credit on certain services was admissible even when part of the service was used in manufacture of exempted goods and provision of exempted service. However, the cenvat credit cannot be availed under Rule 6(5) if the services are used exclusively in the provision of exempted service or manufacture of exempted goods. Moreover, it was held that credit for the service attributable to trading was not available as trading was not a service at that relevant time.

Prepared by:- Prayushi Jain

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PJ/CASE LAW/2015-16/2664

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