Relief for Ashok Leyland: CESTAT Holds Sale Through Regional Offices Not ‘Trading’, Sets Aside Excise Demand [Read Order]

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that sale of goods through Regional Sales Offices cannot be treated as “trading” and set aside the excise demand raised.

Ashok Leyland Limited, the appellant, is engaged in the manufacture of motor vehicle chassis and commercial vehicles. The appellant had entered into a job work arrangement with Ashok Leyland Nissan Vehicles Ltd. (ALNVL) for manufacturing light commercial vehicles known as “DOST.”

Under this arrangement, ALNVL supplied inputs and components while the appellant carried out manufacturing and assembly at its Hosur plant and cleared the vehicles on payment of excise duty under Rule 10A of the Central Excise Valuation Rules.

Based on an audit of records, the department formed a view that the appellant was also engaged in trading of vehicles through Regional Sales Offices and treated such activity as “exempted service” under the CENVAT Credit Rules, 2004. It was alleged that the appellant had not maintained separate accounts for input services used in manufacturing and trading, leading to demands under Rule 6(3) of the Rules along with interest and penalties.

The appellant challenged the demands before the Tribunal after the adjudicating authority confirmed them through Orders-in-Original.

The appellant’s counsel argued that the appellant was only engaged in manufacturing activities and not trading. They submitted that the vehicles were manufactured at the Hosur plant and cleared on payment of duty, and the subsequent sale through Regional Sales Offices was part of the normal business chain. The counsel further argued that no specific input services were identified as being used for any alleged trading activity and that the demand was unsustainable.

The revenue counsel argued that the appellant was involved in both manufacturing and trading of vehicles and that sale through Regional Sales Offices amounted to trading, which is treated as an exempted service. They also argued that the appellant had availed CENVAT credit on common input services and failed to maintain separate accounts, making Rule 6 applicable.

The two-member bench comprising Vasa Seshagiri Rao (Technical Member) and P. Dinesha (Judicial Member) observed that trading refers to buying and selling of goods without manufacturing, whereas in the present case it was not disputed that the appellant had manufactured the vehicles and paid excise duty on them. The Tribunal observed that mere sale of goods through Regional Sales Offices after clearance cannot convert a manufacturing activity into trading.

The tribunal further observed that the department had not produced any evidence to show that the appellant independently purchased goods for resale or that any input services were used for an alleged trading activity. In the absence of such evidence, the provisions of Rule 6 of the CENVAT Credit Rules could not be applied.

The tribunal explained that without establishing the existence of exempted service and use of common input services, the demand under Rule 6 cannot be sustained. It also explained that penalties cannot survive when the demand itself fails.

Accordingly, the tribunal set aside the impugned orders and allowed the appeals filed by the appellant with consequential relief.

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