Case Law Details
Pratham Motors Pvt. Ltd. Vs Commissioner of Service Tax (CESTAT Bangalore)
The appeal was filed against Order-in-Original No. 42/2014 dated 05.09.2014 passed by the Commissioner of Service Tax, Bangalore. The appellant, a dealer of Maruti cars, was engaged in providing authorised servicing of Maruti vehicles and also carried on the trading activity of selling Maruti cars. While the servicing activity was taxable, the sale of cars was exempt from service tax. Since the appellant had availed Cenvat credit on services used for both taxable and non-taxable activities, a show-cause notice was issued demanding reversal of Cenvat credit attributable to exempted services. The Commissioner confirmed a demand of ₹1,65,59,881 along with interest and imposed penalties under Sections 77 and 78 of the Finance Act, 1994.
The appellant argued that the Cenvat Credit Rules, 2004 were amended by Notification No. 03/2011-CE (NT) dated 01.03.2011 by inserting an explanation that exempted services include trading. According to the appellant, trading was not a service prior to the amendment and therefore Cenvat credit could not be reversed by treating trading as an exempted service. It was also contended that the amendment was prospective and could not be applied retrospectively. The appellant relied on various judicial decisions in support of this contention.
The appellant further submitted that an earlier show-cause notice dated 02.08.2010 had already been issued for the period June 2005 to March 2010 on the same issue of irregular availment of Cenvat credit. The present show-cause notice dated 20.04.2012 covered the period April 2010 to March 2011. Since the facts alleged in both notices were identical, the appellant argued that there could be no suppression of facts and therefore the extended period of limitation could not be invoked for the second notice.
The Revenue maintained that the appellant was not entitled to avail Cenvat credit on exempted services. It contended that the explanation inserted in the rules was merely clarificatory and not prospective. The Revenue also argued that Cenvat credit was available only in relation to taxable services and, since trading activity was non-taxable, the credit attributable to such activity could not be claimed.
After hearing both sides, the Tribunal held that the extended period of limitation could not be invoked in the second show-cause notice. It observed that the Revenue was already aware of the alleged irregular availment of credit when the first show-cause notice dated 02.08.2010 had been issued. Therefore, the demand for the extended period was unsustainable.
On merits, the Tribunal held that the law permits Cenvat credit only on taxable services. Since trading activity is not a taxable service, credit attributable to such activity could not be availed. The Tribunal observed that the appellant had wrongly taken credit and that the proportionate credit attributable to trading activity was required to be reversed.
In reaching this conclusion, the Tribunal relied upon the decision in Lally Automobiles Pvt. Ltd. v. Commissioner (Adjudication), wherein it was held that activities that are neither services nor manufacture fall outside the scope of the Finance Act, 1994 and the Central Excise Act. Consequently, input service tax credit attributable to such activities cannot be claimed. The decision further held that where separate records are not maintained, a reasonable method such as proportionate turnover-based attribution can be used to determine the amount of credit attributable to trading activity.
The Tribunal noted that the decision in Lally Automobiles Pvt. Ltd. had subsequently been upheld by the Supreme Court, which found no reason to interfere with the High Court’s judgment and dismissed the appeal.
FULL TEXT OF THE CESTAT BANGALORE ORDER
This appeal is filed by the appellant M/s. Pratham Motors, Bangalore against Order-in-Original No. 42/2014 dated 05.09.2014 passed by the Commissioner of Service Tax, Bangalore.
2. The Appellant M/s. Pratham Motors are dealers of Maruti cars engaged in providing authorised services for Maruti cars. They also do the trading activity of selling Maruti cars which is exempted from payment of service tax. Since they had taken cenvat credit for both taxable and non-taxable services, show-cause notice was issued demanding reversal of cenvat credit on the exempted services. The Commissioner in the impugned order confirmed the demand of Rs. 1,65,59,881/- along with interest and imposed penalties under Section 77 and 78 of the Finance Act, 1994. Aggrieved by this order, the appellant is in appeal before us.
3. The Learned Counsel submitted that the Cenvat Credit Rules, 2004 were amended by Notification No. 03/2011-CE NT dated 01.03.2011 wherein an ‘Explanation’ was added clarifying that exempted services includes trading; hence, it is her submission that prior to that trading was not at all a service and hence, the question of reversing of cenvat credit treating it as exempted service is inappropriate. She also submits that the amendment is prospective in nature; hence, cannot be applied retrospectively. Relies on the following decisions to substantiate her above argument.
- Union of India vs. Martin Lottery Agencies Ltd.: 2009 (14) STR 593
- Aphali Pharmaceuticals Ltd. vs. State of Maharashtra: 1989 (44) ELT 613
- Sify Technologies Ltd. vs. CCE and ST: 2011 (21) STR 252
- Mercedes-Benz India Pvt. Ltd. vs. CCE, Pune: 2014 (36) STR 704
3.1 She also submits that show-cause notice dated 02.08.2010 was earlier issued for the period from June 2005 to March 2010 and the present show-cause notice dated 20.04.2012 is issued for the period April 2010 to March 2011. The facts being identical in both the show-cause notices alleging irregular availment of cenvat credit on exempted services, there cannot be suppression to invoke extended period of limitation for the second show-cause notice; hence, the impugned order invoking extended period of limitation cannot be sustained.
4. The learned Authorised Representative (AR) reiterating the findings of the Commissioner in the impugned order submits that the appellant is not eligible to avail cenvat credit on the exempted services; hence, the same is rightly being demanded. The ‘Explanation’ being only a clarification, it cannot be said to be prospective and also submits that cenvat credit is available only to the taxable services since admittedly trading activity is non-taxable service, the question of taking credit does not arise.
5. Heard both sides and perused the records. We are in agreement with the appellant that the second show-cause notice dated 20.04.2012 cannot be sustained for the extended period since the Revenue was aware of the irregular availment of credit when the first show-cause notice dated 02.08.2010 was issued.
5.1 On merit, we find that the law permits credit only on the taxable services and since trading activity is not a taxable service, credit cannot be availed. We are of the opinion that the appellant in the first place cannot take credit on goods/services which are not taxable. Therefore, the credit was taken wrongly and hence, needs to be reversed to the extent it was used in the trading activity. In similar set of facts, the Tribunal in the case of LALLY Automobiles Pvt. Ltd. Versus Commissioner (Adjudication), C. EX.: 2018 (17) G.S.T.L. 422 (Del.) 25-72018 observed as follows:
“16. Therefore, the issue is whether the assessee could claim the credit on input which were not services. Input credits can be used for payment of service on output service provided such services are used to provide output services. Undoubtedly, there cannot be an exact correlation between one kind of input and corresponding. That is the reason the Rules cover situations where assessees provide both exempted and taxable services. Wherever someone undertakes activities that cannot be called a service or which is not “manufacture”, that activity goes out of the purview of both Central Excise Act as well as Finance Act, 1994. In such cases, an assessee would be ineligible for claiming input-service tax credit on an output which is neither a service nor excisable goods. There is no provision to cover situations where an assessee is providing a taxable service and is undertaking another activity which is neither a service nor manufacture. In such a situation, the only correct legal position appears to be that it is for the assessee to segregate the quantum of input service attributable to trading activity and exclude the same from the records maintained for availing credit. This cannot be done in advance as it may not be possible to foretell the quantum of trading activity as compared with taxable activity. The obvious solution would be to ensure that once in a quarter or once in a six months, the quantum of input service tax credit attributed to trading activities according to standard accounting principles is deducted and the balance only availed for the purpose of payment of Service tax of output service.
17. In the present case, the assessee’s argument that there is no mechanism to reverse credit, once taken, in the opinion of this Court, cannot be accepted. The assessee was well aware of the exact nature and extent of its service tax liability. It was also aware of the eligible service tax inputs. Therefore, when it did claim successfully and unchallenged input credits in respect of activities that were not subjected to service tax levy, it was aware that the claim was excessive and could not be justified. If, for instance, input credits were claimed in respect of goods or rents, attributable to retail business, those credits were clearly impermissible. In these circumstances, this Court finds no infirmity with the concurrent findings of the lower authority and the CESTAT, which concluded that show cause notice and recoveries were in order.
18. As regards the method of calculation and invocation of extended period of penalty, the assessee’s contentions again, to the Court’s mind, are groundless. The assessee concededly did not maintain regular separate accounts in respect of non-service tax leviable activities. Therefore, the adjudicating authority adopted the method of proportionate turnover based attribution to the assessee’s liability:
“I find that it was clear in 2008 itself that no Cenvat Credit is available for services used for trading as decided by Hon’ble CESTAT in the Metro shoes case. The noticee has availed the Cenvat Credit used for exempted services namely trading without reversing the proportionate credit. They have never informed the department about taking the wrong credit. This would have been undetected if the facts were not noticed during audit. M/s. Lally Automobiles Private Ltd. have failed to inform the department that they are not maintaining the separate records for input services used for taxable and exempted services. It is already noted that the law requires an assessee to maintain separate records of Cenvat credit received on taxable or non-taxable services. In case the separate records are not maintained, the Cenvat credit is to be reversed as per Rule 6(3) of the Cenvat Credit Rules, 2004;. I find that : M/s. Lally Automobiles Private Ltd. have not reversed the same by suppression of material facts. The excess credit availed utilized by them is liable to be recovered in terms of Rule 14 of Cenvat Credit Rules, 2004 read with proviso to Section 73(1) of Finance Act, 1994.”
19. This Court is of opinion that the lack of any method in the rules in such cases, would only mean that a reasonable and logical principle should be applied, not concededly that what should and could not be claimed as input credit, (but was in fact so claimed) ought to be “left alone” because of the composite nature of the assessee’s business. While any assessee has a right to organize its business in the most convenient and efficient manner, it cannot claim that that such organization is so structured that its tax liabilities cannot be clearly discerned. In this case, the adjudicating authority adopted the proportionate percentage to the turnover method approach, which in this Court’s opinion, is reasonable”.
5.2 The above decision was upheld by the Hon’ble Supreme Court in Lally Automobiles Private Limited v. Commissioner- 2019 (24) G.S.T.L. 3115 (S.C.) dated 01.04.2019. The Hon’ble Supreme Court Bench after condoning the delay, dismissed the Civil Appeal Diary No. 39632 of 2018 filed by Lally Automobiles Private Limited against the Judgment and Order dated 25-7-2018 of Delhi High Court as reported at 2018 (17) G.S.T.L 422 (Del.). While dismissing the appeal, their Lordships passed the following order:
“Delay condoned.
We have heard Learned Counsel appearing for the appellant and perused the impugned order passed by the High Court of Delhi.
In our considered view, the reason assigned by the High Court in passing the impugned order needs no interference as the same is in consonance with law.
Accordingly, there is no merit in the appeal and [it] is dismissed.”
5.3 In view of the above decision by the Hon’ble Supreme Court, we are of the opinion that the appellant was not eligible for cenvat credit used in the goods traded by them; hence proportionate credit needs to be reversed. Since we have held that extended period cannot be invoked, the proportionate credit is to be reversed only for the normal period. We remand the matter for quantification of the proportionate credit for the normal period. All penalties are set aside.
Appeal is allowed by way of remand.
(Order pronounced in Open Court on 26.05.2026.)
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