CESTAT confirms Penalty as Assessee Wrongfully availed Credit knowing that ‘ Trading Activity ’ was not a Taxable Activity [Read Order]

In M/s. Varenyyam Motors vs. CCE & ST, the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) upheld the penalty imposed on the assessee for wrongfully availing credit knowing that ‘ Trading Activity’  was not a taxable activity.

The appellant provides taxable services under the category of “Authorised Service Station” and “Business Auxiliary Service‟ as defined under Section 65 (105) of the Finance Act, 1994. They are engaged in the business of trading and servicing of two-wheeler motor vehicles as the authorized dealer of Hero Honda Motors Ltd. They are also availing Cenvat credit of service tax paid by them on various input services as per the provisions of Cenvat Credit Rules, 2004.

The Revenue Department found that as per the provisions of Rule 6 (2) of the Cenvat Credit Rules, 2004 the appellant were availing credit in respect of input services used in providing exempted or non-taxable services and were required to maintain separate account of receipt, consumption and inventory of input services meant for use in the providing output services and quantity of input services meant for use in providing exempted or non-taxable activity and take Cenvat credit only on that quantity of input services which was intended for use in providing output services on which Service Tax was payable and that the appellant had failed to maintain such accounts.

The appellant had not made any payment of input service credits availed commonly for the taxable as well as exempted non-taxable services provided by them and as a result an amount of Rs. 1.9 lacs of input by credit attributable to the trading activity was demanded as per the provisions of Cenvat Credit Rules, 2004 read with Section 73 (1) of the Finance Act, 1994. Aggrieved appellant approached CESTAT.

The Bench comprising of Judicial Member S.K. Mohanty and Technical Member C.L. Mahar observed that the issue was no longer res-integra and that the Tribunal had already decided the issue in Mercedes Benz India Pvt. Ltd. vs. CCE.  Relying on the said decision, the bench held that the appellant was liable to reverse or pay back the input service credit attributable to the trading activity.

Regarding the penalty imposed on the appellant, the Tribunal observed  “We don’t find any force in the arguments of the appellant on the count of imposition of penalty under Section 78 of Finance Act, 1994 because they were aware that Cenvat credit of input services can only be availed on the taxable output service and as the „Trading Activity‟ was not even a taxable activity they could have resisted from availing Cenvat credit of common service inputs and, therefore, there is no case for benefit of Section 80 of the Finance Act, 1994 in this matter. In view of above, we also don’t interfere with the order-in-original with regard to imposition of penalty under Section 78 of Finance Act, 1994, however, we allow the appellant to pay 25% of imposed penalty under Section 78 of the Finance Act, 1994, if same is paid within one month of receipt of this order.”