Trading is Not a Service under Cenvat Credit Rules: CESTAT Remands Appeal for Recalculation of Recoverable Credit and Penalty [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) at Hyderabad allowed an appeal by way of remand to the Original Authority for the purpose of computation of the amount of credit required to be recovered, along with interest and applicable penalty.

ITW India Ltd. appealed against the Order-in-Original dated January 16, 2013, whereby the adjudicating authority confirmed the demand of recovery of irregularly availed Cenvat credit and also imposed equal penalty. Based on verification of the record for the period 2006 (October) to 2011 (March), the department noticed that the appellants were engaged in manufacture of excisable goods as well as provision of taxable services and engaged in trading activity, which was considered an exempted service. Therefore, relying on the extant provisions under Rule 2(e) of the Cenvat Credit Rules, 2004 (CCR) as well as CBEC Circular, it was held that they have not utilized credit.

It was alleged that they did not follow the provisions of Rule 6(2) of CCR and Rule 6(3) because they were eligible to utilize the credit only to the extent of 20% of the service tax payable by them. However, they had utilized the said credit in excess of that cap of 20%. On adjudication, it was contended that rules were not applicable to them as the activity of trading cannot be equated with exempted services for the purpose of attracting the mischief of Rule 6(2) or Rule 6(3) of CCR.

Another contention was that they had reversed the credit voluntarily to the extent of a certain percentage (15%) of their trading turnover and this was in the knowledge of the department.

The bench, comprising of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) noted that the issue to be decided is whether the department was right on demanding irregular availment of certain Cenvat credit taken on common inputs or otherwise. In their findings, the bench noted that in the facts of the case, though the appellants had utilized more credit, which was in excess of the cap of 20%, still there was no provision during the material time for it to lapse and therefore, they could have again re-utilized the same during the subsequent period. Hence, they will be liable for payment of interest only to the extent they had exceeded the cap of 20% for discharge of service tax liability.

Relying on the observation of Hon’ble High Court of Delhi in the case of Lally Automobiles Pvt Ltd, which was further upheld by the Hon’ble Supreme Court, the bench found that the appellants were required to reverse the amount proportionate to their trading turnover and in fact, they have apparently done so along with interest. Therefore, they would be required to reverse proportionate amount for the entire period along with applicable interest. With respect to the invocation of extended period, the bench found that adjudicating authority has rightly sustained the invocation of extended period.

To sum up, the Bench held that demand of an amount of Rs.6,88,567/- for the period prior to April 1, 2004 is not sustainable and therefore, set it aside. Further, demand of an amount of Rs.2,14,24,389/- and penalty under section 58 was modified.

The amount required to be recovered would be equal to proportionate credit utilized for trading activity along with interest to be computed by the Original Adjudicating Authority, and the penalty will be applicable on the amount to be re-determined. As a result, the appeal was allowed.

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