Trading Services Falling outside the purview of Service Tax under the Finance Act, 1994 are Under the Exclusive Jurisdiction of the State Government: CESTAT [Read Order]

The Mumbai bench of Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ) held that the services which are beyond the purview of Finance Act, 1994 lies within exclusive powers of the State Government.

The appellant, Schaeffler India Ltd engaged in the manufacturing of 'ball bearings' and also involved in the sale of similar products, availed tax credit on taxable services under rule 3 of CENVAT Credit Rules, 2004. Despite claiming to have reversed a portion due to the exclusion of certain activities, they received a show cause notice for the recovery of ₹76,17,595/- covering the period from April 2009 to July 2011, along with applicable interest under section 11AA of the Central Excise Act, 1944.

Additionally, a penalty of a similar amount was imposed under section 11AC of the Central Excise Act, 1944. The confirmed demand included ₹66,14,902/- for the period up to March 31, 2011, ₹9,48,265/- for the period from April 2011 to June 2011, and an additional ₹53,428/- attributed to trading activity. The appellant argues that, for the period preceding March 31, 2011, the proportion of credit to be reversed was calculated based on the ratio of the value of traded goods to the total sales of the entity.

Furthermore, the credit availed on services used in common was restricted to ₹23,34,816/- for 2009-10 and ₹42,81,086/- for 2010-11 for the subsequent period. It was alleged that the appellant failed to comply with rule 3A of CENVAT Credit Rules, 2004, and, therefore, the value of traded goods was considered for the purpose of computation.

Appellant contended that trading activity’ had not been incorporated as ‘exempted service’ in rule 2(e) of CENVAT Credit Rules, 2004 till 2011 and, therefore, there was no requirement for them to exclude any service used in common from eligibility for credit. The appellant contended that the amendment carried out, by introduction of Explanation in rule 2(e) of CENVAT Credit Rules, 2004, cannot be deemed as having retrospective effect to cover the period of the dispute.

The appellant further contended that reversal of credit in terms of requirements of rule 6(3) of CENVAT Credit Rules, 2004 precluded recovery of differential determined in the impugned order.

Revenue contended that the services which are beyond the purview of Finance Act, 1994 lies within exclusive powers of the State Government. Revenue further contended that trading cannot be considered an ‘output service’ and, hence, is not eligible for credit to the extent that common input service had been deployed for such activity.

The bench comprising of Ajay Sharma( Member, Judicial ) and C J Mathew( Member, Technical ) observed “We find that the issue lies in the narrow compass of applicability of rule 6(3) of CENVAT Credit Rules, 2004 insofar as the period prior to specific exclusion of ‘trading activity’ is concerned.”

The bench held that there was  no reason for further proceedings except insofar as notice under rule 14 of CENVAT Credit Rules, 2004 and penalty under rule 15 CENVAT Credit Rules, 2004 is to be confined to non-adherence to the terms as set out. The court set aside the appeal.

The appellant was represented by Prakash Shah. Revenue was represented by Sunil Kumar Khatiyar

To Read the full text of the Order CLICK HERE

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