In a recent case, the Mumbai bench of the Customs , Excise and Service Tax Appellate Tribunal ( CESTAT ) observed that the trading was not an ‘exempted service’ prior to 1-4-2011 and allowed pidilite industries to retain cenvat credit which was sought to be recovered.
M/s Pidilite Industries Ltd , the appellant manufactured ‘adhesives’, ‘chemicals’, ‘paints’ and ‘pigments’ at seven factories and had procured certain services at the head office which was being distributed to different factories, including the four in the jurisdiction of Commissioner of Central Excise, Raigad, during the disputed period. Credit of tax paid on services procured for specific factories, on occasion, were also transferred using the ISD invoice, though, exclusively to those factories.
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Four show cause notices, taking recourse to rule 14 of CENVAT Credit Rules, 2004 for recovery of credit alleged to have been availed without eligibility between 2006-07 and 2010-11 ( upto January 2011 ) and to rule 15 of CENVAT Credit Rules, 2004 for imposition of attendant penalty, were issued to four manufacturing facilities of M/s Pidilite Industries Ltd and the adjudication thereof by Commissioner of Central Excise & Customs, Raigad, in a single order to fasten liability of ₹ 1,33,26,957, taken as credit by each of them upon being distributed as ‘input service distributor ( ISD )’ under rule 7 of CENVAT Credit Rules, 2004 by their head office after payment of tax charged on them by providers of ‘input service’ procured in common and distributed, for being in excess of entitlement in proportion to ‘final products’ manufactured by them, as also the inclusion of ₹ 12,82,542 and of ₹ 15,15,698, paid as tax on ‘input services’ which had been similarly distributed, on the finding of lack of correlation as required for manufacture of ‘final product’ and of not having substantiated usage, directly or indirectly, in the manufacture and clearance of ‘final product’ besides penalties imposed, are under challenge.
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The first of the three was in the context of another factory of the assessee, in Himachal Pradesh, claiming ‘area-based exemption’ on goods manufactured by them and undertaking of ‘trading’ activity which, according to central excise authorities, curtailed entitlement to retain ₹ 2,93,95,754 as CENVAT credit that was ordered for recovery.
Another two appeals lie against order of Commissioner of Central Excise (Appeals) which, though favouring the claim of appellant for eligibility to avail credit of ₹ 1,91,078 charged as tax by provider of ‘construction service’, ‘outdoor catering service’ and ‘works contract service’ for the period upto March 2011, disallowed ₹4256, besides imposing penalty detriment of like amount, for the period from April 2011 to August 2013 owing to the amendment, of 1st April 2011, to definition of ‘input service’ in rule 2(l) of CENVAT Credit Rules, 2004 that excluded the expression ‘activities related to business, such as’.
Counsel for appellant argued that the denial of credit of ₹ 12,82,542 availed on ‘input service’ for not having established correlation with final product and of ₹ 15,15,698 for lack of nexus of such ‘input service’ with final product does not stand the test of judicial scrutiny and is demonstrative of inconsistency inasmuch as adjudication in subsequent proceedings was dropping of demands. He submitted that the impugned services, even with the amendment in the definition continued to be covered and had been consumed in connection with the manufacturing process.
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It was contended that the dispute pertains to the period prior to amendment and, hence, not appropriate basis for the conclusion in the adjudication order. He clarified the nexus and contribution of ‘cleaning service’, ‘outdoor catering service’, ‘authorized service station’, ‘internet café service’, ‘mandap keeper service’, ‘event management service’, ‘photography service’, ‘public relation management service’ and ‘stock exchange service’ to the goods manufactured by the appellant. Likewise, the usage of ‘architect service’, ‘construction service’, ‘air travel agency service’, ‘rail travel agent service’ ‘rent-a-cab operator service’, ‘tour operator service’ and ‘travel agent service’, directly or indirectly, in manufacturing activity was elaborated upon by him.
In view of the precedent decisions of the Tribunal, in relation to availment of credit of tax paid on procurement of impugned services in their own dispute for subsequent periods, the basis on which credit of ₹ 27,98,240 came to disallowed is jeopardized and, having been concluded so without the benefit of subsequent resolution by the Tribunal, it would be appropriate to set that demand aside for fresh decision on considering the applicability to the period in dispute.
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The demand of ₹ 1,33,26,957 rests upon the manner, or limits thereof, on distribution of credit by the head office of the appellant, as ‘input service distributor ( ISD )’, to four factories between April 2006 and January 2011. According to Learned Counsel for appellant, they had not distributed credit of tax paid on services exclusively procured for the factory in Himachal Pradesh and distribution had been effected only of credit taken on payment of tax that was not exclusively used in any one factory.
It was argued that that identical notices issued to the four recipients of ‘distributed credit’, seeking to remedy the alleged failure to restrict the availment to such proportion as did not extend to ‘exempted goods’ and ‘traded’ goods, emanated from inappropriate appreciation of distribution provided for in rule 7 of CENVAT Credit Rules, 2004. Further submitted that the impugned order was unable to establish that the impugned services were used exclusively for manufacture of ‘exempted goods’ or in relation to ‘trading’ especially as the latter was deemed to be a service, and ‘exempted’ at that, only by specific incorporation in rule 2 of CENVAT Credit Rules, 2004 with effect from 1st April 2004 and proportional distribution was not a prescribed requirement until the amendment of 1st July 2012.
The Tribunal in Trent Hypermarket, while dealing with the definition of ‘exempted service’ under rule 2(e) of the Credit Rules, held that trading cannot be treated as an ‘exempted service’ for the period prior to 1-4-2011 and the Explanation added on 1-4-2011 was prospective and not retrospective.
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The two member bench of C J Mathew, Member ( Technical ) and Ajay Sharma, Member ( Judicial ) held that prior to 1st April 2011, ‘trading’ was not an ‘exempted service’ and the appellant was not obliged to comply with the mandate of rule 6 of CENVAT Credit Rules, 2004 for the relevant period.
In the light of decisions, the demands does not survive. Further held that “ As the notices impugned in the dispute pertain to recovery of distributed credit which is a consequence of availment, that is now held as proper, the issue of whether any recovery remains as enforceable needs ascertaining and the original authority is entrusted with such ascertainment in remand proceedings limited to this direction.”
The bench disposed of the appeal for determination in de novo proceedings.
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