Case Law Details

Case Name : Orion Appliances Ltd. Vs. CST (CESTAT Ahemdabad)
Appeal Number :
Date of Judgement/Order :
Related Assessment Year :
Courts : All CESTAT (609) CESTAT Ahmedabad (101)

Court: CESTAT (Ahmedabad Bench)

Citation: Orion Appliances Ltd. Vs. CST Ahmedabad 2010-VIL-10-CESTAT-AHM

Background- Since the inception of Cenvat Credit Rules, there has been a debate on the application of Cenvat Credit Rules viz a viz trading activity. The Cenvat Credit Rules do not have any provision to govern a situation where common ‘inputs’/ ‘input services’ are used by an assessee engaged in providing output service/ manufacturing dutiable goods and, at the same time, also undertaking ‘trading activity’.

Certain assesses have been contending that as trading activity is not covered in the definition of ‘exempted services’/’exempted goods’, no restriction applies and full Cenvat credit can be availed on ‘input services’ which are used commonly for providing output service/ manufacturing dutiable goods as well as undertaking trading activity.

On the other hand, the Department has been taking a stand that credit to the extent it relates to trading activity should not be allowed.

Certain orders/ decisions on this issue in the past have held as follows:

• The CESTAT (Mumbai Bench) in the case of Metro Shoes Pvt Ltd v. CCE 2008 (10) STR 382 held that while CENVAT Credit exclusively related to trading was disallowed, credit relating to running of retail showrooms was allowed as it was considered as also related to manufacture of goods (hence common to both manufacture and trading). Later, based on the said ruling, the same Tribunal in the case of the appellants {M/s Metro Shoes Ltd V/s CCE, Mumbai-I (2009-TIOL-1630-CESTAT-MUM)} have prima facie found a good case for the appellants to contest the denial of credit attributable to both manufacturing and trading by the adjudicating authority.

• The CESTAT (Chennai Bench) in an Interim Order in the case of Indian Furniture Products Ltd v. CCE 2010 (250) ELT 38 (Tri-Chennai) took a prima facie view that Cenvat credit is not admissible on ‘input services’ used in relation to traded goods as the Central Government does not have power to make Credit Rules for trading activity.

• The Commissioner (Appeals), Pune in the case of In Re: Faber Heatkraft Industries Ltd. 2008 (12) STR 252 (Commr. Appl.) Pune held that trading activity cannot be equated with ‘exempted goods/ services’ and full credit of those input services which are used in both taxable as well as trading operations should be allowed.

• The Hon’ble High Court of Guwahati in the case of Magus Construction Pvt Ltd V/s Union of India 2008 (11) STR 225 (Gau.) after interpreting the various definitions of the term ‘service’ has held that “…service does not involve supply of goods”

Recently the CESTAT (Ahmedabad Bench) in the case of Orion Appliances Ltd. v. CST Ahmedabad 2010-VIL-10-CESTAT-AHM has passed a detailed decision on this issue. This matter proceeded as follows:

Facts of the case

Orion Appliances Ltd. (Appellant) was engaged in trading operations as well as providing output services. While the Appellants took full credit of common input services used in both the activities on the presumption that there is no specific restriction on trading activities under the Credit Rules, the Lower Authorities took a view that trading activity should be regarded as an ‘exempted services’ and hence should be subject to the restrictions as specified under Rule 6 of the Credit Rules.

Aggrieved by the above position, the Appellants filed an appeal before the CESTAT, putting the following issues for consideration:

• Whether trading activity is a ‘service’

• Whether Rule 6 of Cenvat Credit Rules 2002 and Service Tax Credit Rules 2002 would be applicable when input services are used in respect of trading activity as well as taxable services

• If Cenvat Credit Rules 2002 and Service Tax Credit Rules 2002 are not applicable, the procedure to be followed by the appellant for availing ‘input service’ credit

Decision of the CESTAT

The CESTAT held as follows:

• Trading activity is purchase and sale and is covered under Sales tax law. Hence the same cannot be called a service and therefore cannot also be considered as ‘exempted services’.

• Rules 6 (2), 6(3) of Cenvat Credit Rules 2002 and Rule 3 of Service Tax Credit Rules 2002 cover situations of ‘exempted services’. Since trading activity is not at all a service, these provisions are not applicable.

• The above Rules cover a situation where an assessee is providing both exempted as well as taxable services/ manufacturing dutiable goods. There is no provision in the Rules to cover a situation where an assessee is providing a taxable service and also undertaking another activity which is neither a service nor a manufacturing activity. In such a situation, the correct legal position is to choose and segregate the quantum of ‘input services’ attributable to trading activity and exclude the same from the records maintained for availment of credit.

• The above proportionate reduction can be done once in a quarter or in six months, by applying the standard accounting principles.

Our Comments

• This decision will impact assesses who are engaged in undertaking trading activities along with rendering taxable services/ manufacturing goods. This decision validates the position that in the absence of any prescribed method under the law, an assessee can segregate quantum of ‘input services’ based on standard accounting principles and take proportionate credit so arrived at for set off and utilization.

• This decision does not give any view on treatment of services which are covered under Rule 6 (5) of the Cenvat Credit Rules (on which full credit can be availed). It is not clarified whether an assessee can take full Cenvat credit on such services or tax on these services also has to be segregated in the ratio of trading activity and output services/dutiable goods.

• Being a complex interpretative issue having a wider ramification, we believe that the instant issue may be litigated further at a higher forum. Same of the points in support of the same are as follows:

– Certain decisions in excise laws have allowed taking of full Cenvat credit on ‘inputs’/ ‘inputs services’ commonly used for making excisable goods and non excisable goods on the basis that Rule 6 of the Credit Rules is not applicable in case of non excisable goods. Accordingly, a view may be taken that trading may accorded same treatment as non- excisable goods.

– In the case of Metro Shoes (supra), Cenvat credit was disallowed only in respect of ‘input services’ which were used exclusively for trading activity. The decision in Metro Shoes has impliedly allowed taking of Cenvat credit on ‘input services’ commonly used for providing ‘output service’ and ‘trading activity’.

The development in this regard needs to be closely monitored.

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Category : Excise Duty (4056)
Type : Judiciary (10278)
Tags : Cestat judgments (798)

0 responses to “Rules 6(2) and 6(3) of Cenvat Credit Rules 2002 not applicable when assessee is engaged in ‘trading activity’ and providing ‘output services’- Cestat”

  1. Govind M Suthar says:

    We would like to comment on the above that we are the Registered dealer and pass on the
    CENVAT to Buyer. if it is trading activity then during the activity we are charged the
    commission on sales/trading of goods and hence we have to pay the service tax on commission as Business Auxiliary Service if we are service provider then we can availe the service tax
    on inputs service. of GTO inward , Courier,Banks,telephone,import service, Clearing & Forwarding etc.

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