Issue on Compliance of Rule 6 of CCR: CESTAT Sets aside Demand Order issued against Mahindra & Mahindra Ltd [Read Order]

The Mumbai bench of the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) set aside the demand order issued against Mahindra & Mahindra Ltd for non compliance of Rule 6 of the Cenvat Credit Rules ( CCR ), 2004. The bench remanded the matter to the original authority for ascertain the fact as to whether, the appellants had reversed the common input services at the time of issuance of invoices by the ISD.

The appellants are engaged in the manufacture of Motor Vehicles, falling under Chapter 87 of the Central Excise Tariff Act, 1985. For catering to the requirements of spare parts market in respect of motor vehicles manufactured by them, the appellants had established the warehouses at Kanhe, Pune. In the Kanhe unit, the appellants receive parts and components from their manufacturing unit. Thereafter, the appellants undertake packing/repacking of such parts & components and subsequently, sell the same to the authorized dealers/stockists on payment of Central Excise duty.

The appellants also receive parts and components in packed form, from their other manufacturing unit located at Uttaranchal, which are availing the ‘area based exemption’, in terms of Notification No. 50/2003-C.E. dated 01.06.2003. In respect of parts and components received by the appellants from their Uttaranchal unit, no further process/activity is carried out on such goods and the same were directly sold to the authorized dealers/stockists without payment of central excise duty.

Audit Smart, Secure Strong: Lead the Digital Safety Frontier - Click here to know more

The appellants’ manufacturing unit located at Pune avail CENVAT Credit of central excise duty paid on inputs and Service Tax paid on the input services. The Head Office of the appellants located in Mumbai is registered with the Service Tax Department as Input Service Distributor (ISD). The input service distributed under the cover of ISD invoices was availed as CENVAT Credit by the appellants’ manufacturing unit located at Pune.

Taking of CENVAT Credit of common input services, as per the ISD invoices issued by the Head Office of the Pune unit was disputed by the Department on the ground that trading activity should be considered as exempted service as per the provisions of Rule 2(e) of the CENVAT Credit Rules, 2004 and as such, the appellants were required to comply with the provisions of Rule 6 of the Rules of 2004 for payment of amount at the prescribed percentage under the said Rules.

The Department had issued the show-cause notices, which were culminated into the common adjudication order dated 22.09.2014, wherein the Commissioner of Central Excise, Pune-I has confirmed the adjudged demands, as proposed for recovery in the show-cause notices dated 11.03.2013 and 05.05.2014.

Audit Smart, Secure Strong: Lead the Digital Safety Frontier - Click here to know more

The appellants submitted that the appellants are not involved in any trading activity inasmuch as supply of goods from the Uttranchal unit to their Pune unit cannot be termed as purchase of goods and as such, mere sale of these goods cannot alter the transaction to consider the same as trading activity, in order to fall within the scope and ambit of Rule 2(e) of the Rules of 2004. He further submitted that for the period April, 2009 to March, 2011, “trading” was not specifically defined as an exempted service and thus, the appellants were not required to comply with the provisions of Rule 6 of the Rules of 2004.

It was argued that no common input services were distributed among manufacturing units under the cover of ISD invoices inasmuch as at the level of ISD itself, the CENVAT credit attributable to the common input services were already reversed by them.

On the other hand, the Revenue reiterated the findings recorded in the impugned order and further submitted that since taking of irregular CENVAT Credit based on ISD invoices had come to the knowledge of the Department through conduct of the audit of the books of account in 2012, issuance of show-cause notice within one year from the date of such knowledge should not be considered as barred by limitation of time.

Audit Smart, Secure Strong: Lead the Digital Safety Frontier - Click here to know more

The period of dispute involved in the present case is from April, 2009 to March, 2013 and April, 2013 to June, 2013. The Department had issued the show-cause notices dated 11.03.2014 and 05.05.2014, seeking for confirmation of the demands in respect of the said period. The appellants in the present appeals have pleaded that the activity of ‘trading’ was not an exempted service prior to 01.04.2011 and there were divergent views with regard to such activity, whether to be considered as ‘exempted service’ or ‘otherwise’. Therefore, they have pleaded that though the CENVAT credit availed on the basis of ISD invoices were reflected in the books of account, but the said particulars were not captured in the periodical returns i.e., ER1 filed before the jurisdictional Central Excise authorities.

A two member bench of S.K. Mohanty, Member (Judicial) and M.M. Parthiban, Member (Technical) observed that since the appellants had bonafide belief that exempted service should not be considered as trading activity for the period prior to 01.04.2011, not entering the CENVAT particulars in the ER-1 return, even though reflected in the internal records, would not call for invocation of the extended period of limitation.

The show-cause notice was required to be issued within the normal period of one year i.e., from the date of taking the CENVAT Credit of the disputed service. Since the show-cause notices were issued beyond the normal period of one year, in our considered view, the same are barred by limitation of time insofar as proceedings were initiated for recovery of wrong availment of CENVAT Credit for the period upto31.03.2011.

Audit Smart, Secure Strong: Lead the Digital Safety Frontier - Click here to know more

The appellants have contended that the CENVAT Credit for the period after 01.04.2011 at the ISD level had already been reversed by their Head Office and as such, it cannot be construed that CENVAT credit on the disputed input services was distributed to the manufacturing unit located at Pune.

The Tribunal found that the adjudicating authority has not specifically discussed this aspect of reversal of CENVAT Credit at the ISD stage, as claimed by the appellants. The bench remanded the matter to the original authority for ascertaining the fact as to whether, the appellants had reversed the common input services at the time of issuance of invoices by the ISD and that such credit was not distributed to the manufacturing unit located at Pune for availment of CENVAT Credit of Service Tax in respect of the common input services. 

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates