Whether Credit Reversal required when the input services used for clearance of dutiable goods and trading of goods?

PJ/Case Laws/2012-13/1295

Case:-M/s MICRO LABS LTD Versus COMMISSIONER OF CENTRAL EXCISE, BANGALORE

Citation:-2012-TIOL-1451-CESTAT-BANG

Brief Facts:-The Appellant filed appeal for waiver and stay of demands raised by department. Appellant is registered under input service distributor and distributing input services to various manufacturing units and taken Cenvat Credit on the same. Appellant is also buying similar goods from third party and marketing/trading the same. Department said that, Trading activity is as good as exempted service and hence, the assessee should have maintained separate books of accounts related to the input services used for clearance of dutiable goods and those for trading activities. As the appellant is not maintaining separate books of accounts, department issued show cause notices to each manufacturing units for recovery of cenvat credit taken on input services used in relation to the trading activity. Further, extended period of limitation was also invoked under the proviso to section 11A (1) of the Central Excise Act. The Show Cause Notices also proposed penalties on the company (Input Service Distributor) and the manufacturing companies. The appellate authority affirmed all the orders-in-original. Hence the present appeals and the connected stay applications.

Appellant’s Contention:- The Appellant submit that trading activity was not a taxable service and hence not liable to be treated as exempted service. Therefore, the entire credit distributed by the company's Bangalore office was utilized by the eight manufacturing units of the company for payment of duty on pharmaceutical formulations and so no part of the credit was liable to be denied to the manufacturing units.

Respondent’s Contention:-The Respondent submit that it was not open to the sBangalore office of the company to distribute input services to the various units which inter alia were engaged in trading activity also. In this connection, support is claimed from Orion Appliance Ltd. Vs. Commissioner of Service Tax Ahmedabad and also submit that trading activity has ever been an "exempted service" for purposes of the CENVAT Credit Rules 2004 as clarified by the explanation to Rule 2(e). It is clarificatory and hence retrospective in operation. Therefore, all the eight manufacturing units of the company ought to have maintained separate accounts in respect of the common input services.

Reasoning of Judgement:-We have considered submissions and it is found that it is not in dispute that the Bangalore office of the company was a registered input service distributor and it distributed input services under cover of valid invoices to the various manufacturing units, eight in number, which were engaged in the manufacture of pharmaceutical formulations (dutiable final products). Further, this case is not related with the fact that any duty or tax was payable on the trading activity. The entire credit was utilized for payment of duty of excise on the dutiable final products. The input service distributor cannot be found fault with on the basis of any commissions or omissions of the manufacturing units and manufacturing units were lawfully utilizing the entire credit for payment of duty on the dutiable final products. Trading activity was not one of the taxable services under Section 65 of the Finance Act 1994 therefore, there was no question of payment of service tax on that activity by the manufacturing units of the company. The manufacturing units could not have been expected to maintain separate accounts. The show-cause notices appear to disclose self-contradictory stand of the revenue with reference to the fact of this case. Apart from the above, the appellant also seems to have a good case on limitation against the impugned demands. In the result, there will be waiver of pre-deposit and stay of recovery in respect of the adjudged dues.

Decision:-Appeal allowed.

Comment:It is observed from this case that Rule 6 of the Cenvat Credit Rules, 2004 regarding maintenance of separate records of common inputs used in the manufacture of dutiable and exempted goods cannot be made applicable in respect of mere trading of goods. Therefore, full Cenvat Credit is admissible when common input services are used in clearance of dutiable goods and traded goods.
However, this position has changed from April 2011. Trading activity is treated as exempted service after the same. Even the negative list contains the trading activity. The definition of “exempted service” says that all the items listed in negative list will be treated as exempted service. In view of this position of law the assessee has to reverse the cenvat credit henceforth.

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PJ/Case Laws/2012-13/1295

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