Case Law Details

Case Name : Ingersoll-Rand Technologies And Services Private Limited Vs Commissioner (CESTAT Allahabad)
Appeal Number : Service Tax Appeal No. 58874 of 2013
Date of Judgement/Order : 18/08/2022
Related Assessment Year :

Ingersoll-Rand Technologies And Services Private Limited Vs Commissioner (CESTAT Allahabad)

Conclusion:  CESTAT held that ‘Explanation’ added to definition of ‘exempted service’ would widen the scope of the provision and will have prospective effect and cannot be applied retrospectively.

Facts: In present facts of the case, the Demands were raised under Rule 6(3)(c) and Rule 6(3)(1) of the Cenvat Credit Rules, 2004. The first demand is for the period from April 2006 to March 2008 and is the amount paid in excess of 20% of service tax payable from the credit account, on account of credit of input services used in manufacture of dutiable goods/taxable services as well as in trading activity (exempted service) while the second demand is for the period from April 2008 to March 2011 @ 8%/6% of the value of traded goods (exempted service) on account of credit of input services used in the manufacture of dutiable goods/taxable services as well as in trading activity (exempted service).

According to the Revenue, for the relevant period from April 2006 to March 2011, the trading activities undertaken by the appellant qualified as exempted service within the meaning of Rule 2(e) of the Credit Rules and that the Explanation added to the definition of exempted service with effect from 01.04.2011 only clarified that trading activities are and were always an exempted service for the purpose of the Credit Rules. Accordingly, the appellant, who was providing the taxable and exempted services (i.e. trading activities) and was utilizing the input services in respect of both taxable and exempted services, had contravened the provision of Rule 6 of the Credit Rules.

The Adjudicating Authority confirmed the Show Cause Notice by making observations that Explanation added to rule 2(e) of Credit Rules has merely clarified that trading is an exempted serviceand the Explanation to rule 2(e) of Credit Rules deserves to be given retrospective effect.

The Hon’ble CESTAT after taking submissions of both sides into consideration observed that in the case of Sedco Forex, 2005 (12) SCC 717, the Hon’ble Supreme Court clarified that if Explanation widens the scope of the main provision, then it would be presumed to have only prospective effect, unless a contrary intention is expressed by the legislature. Further, reliance was placed upon the Judgment of the Hon’ble Tribunal in Trent Hypermarket, Pune-III – 2019 (6) TMI 1327 – CESTAT Mumbai, 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 01.04.2011 and the Explanation added on 01.04.2011 was prospective and not retrospective. The same view was expressed by the Tribunal in Lenovo (India) [2021 (11) TMI 899 – CESTAT Bangalore] and the relevant paragraph is reproduced below:

“7. We find that for the period 01.04.2011, the issue stands decided in the case of Mercedes Benz India Pvt. Ltd. (supra) wherein it was held that trading is not an exempted service prior to 01.04.2011; provisions of Rule 6 requiring reversal of 6% of trading turnover is not applicable.”

On basis of the above, it was observed that that trading was not an exempted service prior to 01.04.2011. The demand confirmed in the impugned order cannot was set aside.

For the period 2006 to 2008, it was observed that demand would not survive as there was no restriction on availment of credit as the restriction was in respect of utilization.

Accrodingly, the appeals of the assessee were allowed.

FULL TEXT OF THE CESTAT ALLAHABAD ORDER

M/s. Ingersoll Rand Industrial Products Private Limited1 has filed this appeal to challenge the order dated 28.03.2013 passed by the Commissioner, Customs, Service Tax and Central Excise, Ghaziabad2.

2. The operative part of the said order is reproduced below:

(i) I confirm the demand amount of Rs. 28,56,667/- (Rs. Twenty Eight Lakhs Fifty Six Thousand Six Hundred & Sixty Seven Only) against the Party under the provisions of Explanation II as appended to Rule 6 (3) (c) of the Cenvat Credit Rules, 2004 read with provisions of Rule 14 of the Cenvat Credit Rules, 2004 and proviso to sub section (1) of Section 73 of the Finance Act, 1994;

(ii) I confirm the demand amount of Rs. 5,98,82,040/- (Rs. Five Crore Ninety Eight Lakhs Eighty Two Thousand & Forty Only) against the Party under the provisions of sub-rule (3A) to Rule 6 and Rule 14 of the Cenvat Credit Rules, 2004 read with proviso to Section 73(1) of the Finance Act, 1994;

(iii) I demand interest at the appropriate rate on the aforesaid amounts, as mentioned against S.No. (i) & (ii) above, under the provisions of Section 75 of the Finance Act, 1994 and;

(iv) I impose a penalty of Rs. 6,27,38,707/- (Rs. Six Crores Twenty Seven Lakhs Thirty Eight Thousand Seven Hundred Seven Only) [Rs. 28,56,667/- + Rs. 5,98,82,040/-], on the Party under the provisions of Section 78 of the Finance Act, 1994.

3. The first demand of Rs 28,56,667/- is under rule 6(3)(c) of the CENVAT Credit Rules, 20043. The second demand of Rs. 5,98,82,040/- is under rule 6(3)(1) of the Credit Rules. The first demand is for the period from April 2006 to March 2008 and is the amount paid in excess of 20% of service tax payable from the credit account, on account of credit of input services used in manufacture of dutiable goods/taxable services as well as in trading activity (exempted service) while the second demand is for the period from April 2008 to March 2011 @ 8%/6% of the value of traded goods (exempted service) on account of credit of input services used in the manufacture of dutiable goods/taxable services as well as in trading activity (exempted service).

4. The appellant is engaged in manufacturing and trading of pneumatic tools, material handling equipment and other related The appellant is also engaged in providing taxable services of management consultants, consulting engineering, management, maintenance & repair.

5. During the relevant period, the appellant received various services for carrying out the above activities of manufacture of dutiable goods, provision of taxable services and undertaking the trading activity. In respect of such input services, the appellant availed CENVAT credit and utilized the same for payment of its outward tax liability.

6. The department believed that for the relevant period from April 2006 to March 2011, the trading activities undertaken by the appellant qualified as exempted service within the meaning of rule 2(e) of the Credit Rules and that the Explanation added to the definition of exempted service with effect from 01.04.2011 only clarified that trading activities are and were always an exempted service for the purpose of the Credit Rules. Accordingly, the appellant, who was providing the taxable and exempted services (i.e. trading activities) and was utilizing the input services in respect of both taxable and exempted services, had contravened the provision of rule 6 of the Credit Rules inasmuch as-

(a) for period from April 2006 to March 2008, the appellant utilized CENVAT credit in excess of 20% of service tax payable on taxable output services from the CENVAT credit account, in violation of rule 6(3)(c) of the Credit Rules; and

(b) for the period from April 2008 to March 2011, the appellant failed to follow the procedure prescribed under the provisions of rule 6(ii) and 6(iii) of the Credit Rules;

7. Accordingly, a show cause notice dated 14.10.2011 was issued to the appellant proposing the following demands.

(a) Demand of Rs. 28,56,667/- under rule 6(3)(c), being amount paid in excess of 20% of service tax payable from the credit account; and

(b) Demand of Rs. 5,98,82,040/- under rule 6(3)(1), being 6%/8% of the value of exempted services;

8. The demand for the period from April 2006 to March 2008 has been computed as under:

Sl. No. Period Total Service Tax Liability (in Rs) Service Tax paid through Cenvat Credit

(Rs.)

Service Tax liability @20% to be paid through Cenvat

Credit in view of provisions of Rule 6(3)(c)

Excess Cenvat Credit utilised beyond the permissible limit of 20% of overall Service Tax liability (in Rs)
1. April, 06 to Sept, 06 24,45,273 24,45,273 4,89,055 19,56,2 18
2. Sept, 06 to March, 07 3,84,564 3,84,564 76,913 3,07,65 1
3. April, 07 to Sept, 07 1,17,782 1,17,782 23,556 94,226
4. Oct, 07 to March, 08 6,23,216 6,23,216 1,24,644 4,98,572
TOTAL 35,70,835 35,70,835 7,14,168 28,56,667

9. The demand for the period from April 2008 to March 2011 has been computed as under:

Sl. No. Financial
Year
Value of the
exempted
services (in
Rs.)
% of the value of exempted
services required to be paid under Rule 6(3)(i) of Credit Rules
Amount required
to be paid under
Rule 6(3)(i) of
Credit Rules
1. 2008-2009 24,54,33,000 8% 1,96,34,640/-
2. 2009-2010 25,75,95,000 8% 2,06,07,600/-
3. 2010-2011 32,73,30,000 6% 1,96,39,800/-
Total 5,98,82,040/-

10. The show cause notice dated 14.10.2011 was adjudicated by order dated 28.3.2013 and the total demand of Rs. 6,27,38,707/- has been confirmed for the following reasons

a) The Explanation added to rule 2(e) of Credit Rules has merely clarified that trading is an exempted service;

b) The definition of exempted service not only includes services which are notified in the Finance Act and have been exempted under any Notification, but also includes services which are not covered under section 66 of the Finance Act. Any service which is not notified and on which no service tax is payable can fall under the category of exempted service;

c) The Explanation to rule 2(e) of Credit Rules deserves to be given retrospective effect; and

d) In order to comply with provisions of rule 6(3A) of Credit Rules, the appellant was under a legal obligation to have given option and worked out and reversed credit in accordance with the formula prescribed under the said rule namely month-wise provisional reversal and thereafter, at the end of close of Financial Year, final calculation of reversal, which the appellant did not do. Thus, this option is not available to the appellant.

11. Shri B.L. Narasimhan, learned counsel for the appellant made the following submissions:

(i) Trading was not an exempted service prior to 1.4.2011 and was added within the ambit of exempted service only on 01.04.2011. The Explanation added to the rule 2(e) is prospective in nature. In this connection reliance has placed on the judgments of the Supreme Court in Sedco Forex International Drill Inc vs. Commissioner of Income Tax4, and Union of India vs. Martin Lottery agencies Limited5, wherein it was held that if the Explanation widens the scope of the main provision, then it is presumed to have only prospective effect, unless a contrary intention is expressed by the legislature;

(ii) In any case, it has been held by the Tribunal in Trent Hypermarket Ltd. Commissioner of Central Excise6 and CCT Bengaluru East vs. Lenovo India Pvt. Ltd.7 that the Explanation added with effect from 1.4.20 11 is prospective and not retrospective;

(iii) In any case, the demand for period 2006 to 2008 does not survive as there was no restriction on availment of credit and was with respect to utilization;

(iv) For not exercising the option under rule 6 of Credit Rules by the appellant, the option of payment of 6/8% of trading of goods (exempted service) cannot be thrust upon the appellant. Hence the demand of Rs.5,98,82,040/- is unsustainable. In support of this contention reliance has been placed on the judgment of the Telangana High Court in Tiara Advertising vs. Union of India8 and the decision of the Tribunal in Agrawal Metal Works Pvt. Ltd. vs. CGST9;

(v) The extended period of limitation could not have been invoked in the facts and circumstances of the case; and

(vi) The appellant was in any view of matter, only required to pay Rs. 8,40,835/- under rule 6(3A) for period 2008-2011 and payment of such amount would tantamount to full compliance of rule 6(3).

12. Shri B. K. Jain learned aurhorised representative appearing for the department however, supported that the impugned order and made the following submissions:

(i) Trading activity is not a taxable activity and so CENVAT credit is not allowable on the common input services attributable to trading activity under rule 6 of Credit Rules before 01.04.2011; and

(ii) Since the appellant is not able to separate the common input services availed on both taxable activity and trading activity, it has to follow the procedure mentioned under rule 6(3) of Credit Rules and to reverse the credit accordingly attributable to trading activity during the relevant period and in support of this contention the learned authorised representative placed reliance on the decision of the Tribunal in Mercedes Benz India Pvt. Ltd. vs. CCE Pune-I10.

13. The submissions advanced by Shri B.L. Narasimhan learned counsel for the appellant and Shri B. K. Jain learned authorised representative appearing for the department have been considered.

14. As noticed above, the demand that has been confirmed is in two The first demand of Rs. 28,56,667/- is under rule 6(3) (c) of the CENVAT Rules for the period from the April 2006 to March 2008, while the second demand for Rs. 5,98,82,040/- is under rule 6(3)(1) of the Credit Rules for the period April 2008 to March 2011.

15. The stand of the department is that for the relevant period from April 2006 to March 2011, trading activities undertaken by the appellant qualified as exempted service within the meaning of rule 2(e) of the Credit Rules and that the Explanation added to the definition of exempted service w.e.f. 01.04.2011 only clarified that the trading activities have always been treated as exempted service for the purpose of the Credit Rules. Thus, the appellant which was providing both taxable and exempted services was utilizing the input services in respect of both taxable and exempted service and, therefore, had contravened the provisions of rule 6 of the Credit Rules in as much as for the period from April 2006 to March 2008, the appellant utilized CENVAT credit in excess of 20 percent of service tax payable on taxable output services from the CENVAT credit account and for the period from April 2008 to March 2011, the appellant failed to follow the procedure prescribed under rule 6(ii) and rule 6(iii) of the Credit Rules.

16. The contention of the appellant is that trading was not an exempted service prior to 01.04.2011 since the Explanation to rule 2(e) of the Credit Rules, as amended on 01.04.2011, is not retrospective in nature.

17. Rule 2 of the Credit Rules deals with definitions and rule 2(e) deals with the definition of exempted service. The definition of exempted service has undergone amendments from time to time and the definition as it stood from 2006 to 01.04.2011 and from 01.04.2011 onwards is reproduced below:

2006 to 1.4.2011

“(e) “exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act”

1.4.2011 onwards

“(e) “exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act and taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken

Explanation- For the removal of doubts, it is hereby clarified that “exempted services” includes trading.”

18. It is clear from the definition of exempted services w.e.f. 01.04.2011 that exempted services included trading. The issue that arises for consideration is whether the Explanation to rule 2(e) is prospective in nature as submitted by the appellant or it merely clarifies that trading activities were always an exempted service, as is contended by the department.

19. To understand the scope of Explanation, it would be useful to refer to the decision of the Supreme Court in Sedco Forex. The Supreme Court clarified that if Explanation widens the scope of the main provision, then it would be presumed to have only prospective effect, unless a contrary intention is expressed by the legislature. The same view was expressed by the Supreme Court in Martin Lottery. The Supreme Court, in effect, held that the use of the phrases, it is hereby declared or removal of doubts, in itself will not enable a presumption to be drawn that the Explanation is retrospective.

20. 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 01.04.2011 and the Explanation added on 01.04.2011 was prospective and not retrospective. The relevant portion of the decision is reproduced below:

“5.5 It is evident from the amending provisions of Cenvat statute w.e.f. 01.03.2011 that a substantive law was enacted to consider the activities of trading as an exempted service. Now the issue remains for resolution, as to whether, such amendment in the statutory provisions is to be construed as retrospective in effect or prospective, in order to be given effect to. In this context, the law is amply clear that if a substantive law is introduced, the date of effect of the instrument through which the decision of legislation was conveyed should be considered as the relevant date, when the same was issued or published in the official gazette for the knowledge of the general public. In this contest, the Hon’ble Supreme Court in the case of Martin Lottery Agencies Ltd. (supra) have ruled that by reason of an explanation, a substantive law may also be introduced and if a substantive law is introduced, it will have no retrospective effect. We find that the Honble Madras High Court in the case of Ruchika Global Interlinks (supra) have held that inclusion in Explanation to Rule 2(e) “trading” was only clarificatory. It is further observed that the arguing counsels before the Honble Madras High Court did not refer to or relied upon the judgment of Honble Supreme Court in the case of Martin Lottery Agencies Ltd. (supra). Since, the law is well settled by the Honble Apex Court in context with retrospective or prospective operation of the statute, the principles enunciated in the case of Martin Lottery Agencies Ltd. (supra) will be considered as the guiding factor for deciding the issue involved in the present case.

5.6 In view of the above discussions, we do not find any infirmity in the findings recorded in the impugned order, holding that amendment to Rule 2(e) by Notification No. 3/2011-C.E.(N.T.) dated 01.03.2011 will have the prospective effect and cannot be applied retrospectively. Thus, we do not find any merits in the appeal filed by the appellant.”

(emphasis supplied)

21. The same view was expressed by the Tribunal in Lenovo (India) and the relevant paragraph is reproduced below:

“7. We find that for the period 01.04.2011, the issue stands decided in the case of Mercedes Benz India Pvt. Ltd. (supra) wherein it was held that trading is not an exempted service prior to 01.04.2011; provisions of Rule 6 requiring reversal of 6% of trading turnover is not applicable.”

22. It is, therefore, clear that trading was not an exempted service prior to 01.04.2011. The demand confirmed in the impugned order cannot, therefore, be sustained and is liable to be set aside.

23. Even otherwise, the demand for the period 2006 to 2008 would not survive as there was no restriction on availment of credit as the restriction was in respect of utilization. In this connection reliance can be placed on the decision of the Tribunal in M/s. Idea Cellular Ltd. vs. The Commissioner of Central Excise, Thane-I11. Thus, the demand of Rs. 28,56,667/- confirmed against the appellant is not sustainable.

24. It also needs to be remembered that for not exercising the option under rule 6 of the Credit Rules, the option of payment of 6/8 percent of trading of goods (exempted service) cannot be thrust upon the appellant. This view finds support from the decision of the Telangana High Court in Tiara Advertising and the decision of the Tribunal in Agrawal Metal Works. Thus, the demand of Rs. 5,98,82,040/- for the period from April 2008 to March 2011 cannot also be sustained.

25. In view of the aforesaid, it is not necessary to examine the contention advanced by the learned counsel for the appellant regarding invocation of the extended period of limitation.

26. Thus, for all reasons stated above, the impugned order dated 28.03.2013 passed by the Commissioner cannot be sustained and is set aside. The appeal is, accordingly, allowed.

(Order pronounced 18.08.2022)

Notes:

1. the appellant

2. the Commissioner

3 the Credit Rules

4. 2005 (12) SCC 717

5. 2009 (14) STR 593 (SC)

6. Pune-III – 2019 (6) TMI 1327 – CESTAT Mumbai

7. 2021 (11) TMI 899 –CESTAT Bangalore

8. 2019 (30) GSTL 474 (Telangana)

9 2022 (7) TMI 924

10 2014 (36) STR 704 (Tri-Mum)

11 2019 (6) EMI 903-CESTAT Mumbai

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