CESTAT, BANGALORE BENCH
Micro Labs Ltd.
Commissioner of Central Excise, Bangalore
STAY ORDER NOS. 892-899 OF 2012
APPEAL NOS. E/ST/1931-1938 of 2011
& E/3088-3095 of 2011
MAY 25, 2012
1. These stay applications filed by the appellant seek waiver and stay in respect of the demands raised on 8 units of the appellant-company under Rule-14 of the CENVAT Credit Rules 2004 read with Section 11A of the Central Excise Act and also the penalties imposed on the appellant under Rules 15 & 15A of the CENVAT Credit Rules 2004. On a perusal of the records, I find that the appellant-company, registered as input service distributor, was distributing input services to various manufacturing units of theirs during the material period. The various manufacturing units of the company took CENVAT credit on those input services and utilized the same for payment of duty of excise on the pharmaceutical formulations (excisable goods) manufactured and cleared by them. Simultaneously, the said units of the company were also buying similar formulations from third parties and marketing the same. In other words, they were also engaging themselves in a trading activity. The department treated this activity as an ‘exempted service’ and also noted that the said units were not maintaining separate accounts in respect of the input services which were utilized in relation to manufacture of dutiable products (pharmaceutical formulations) and those utilized in relation to the trading activity. On this basis, the department issued show-cause notices to the 8 units of the company for recovery of CENVAT credit taken on input services used in relation to the trading activity. Six show-cause notices also were issued on 12/7/2010 for recovery of CENVAT credit availed in 2008-2009. They invoked the extended period of limitation under the proviso to Section 11 A(1) of the Central Excise Act. These show-cause notices also proposed penalties on the company (input service distributor) and its manufacturing units (recipients of the input services distributed by the company). The demands and other proposals were contested by the noticees. The original authority passed eight separate orders against the eight manufacturing units of the company and those orders were taken in appeal to the Commissioner (Appeals). The appellate authority affirmed all the orders-in-original. Hence the present appeals and the connected stay applications.
2. The learned counsel for the appellant submits that, during the material period, trading activity was not a taxable service and hence not liable to be treated as exempted service. It is submitted that the entire credit distributed by the company’s Bangalore office was utilized by the eight manufacturing units of the company for payment of duty on pharmaceutical formulations and, therefore, no part of the credit was liable to be denied to the manufacturing units. Per contra, it is submitted by the learned Superintendent (A.R.) that it was not open to the Bangalore office of the company to distribute input services to the various units which inter alia were engaged in trading activity also. In this connection, support is claimed from Orion Appliances Ltd. v. CST  27 STT 319 (Ahd. – CESTAT).
3. It is further submitted that trading activity has ever been an “exempted service” for purposes of the CENVAT Credit Rules 2004 as clarified by the explanation to Rule 2(e). Though the explanation was added only on 1/4/2011, it is clarificatory and hence retrospective in operation. Therefore, according to the learned Superintendent (A.R.), all the eight manufacturing units of the company ought to have maintained separate accounts in respect of the common input services.
4. On a careful consideration of the submissions, it appears to me that the show-cause notices were issued by the department in a confused state of mind. It is not in dispute that the Bangalore office of the company was a registered input service distributor and it distributed input services under cover of valid invoices to the various manufacturing units, eight in number, which were engaged in the manufacture of pharmaceutical formulations (dutiable final products). It is not the case of the department that any duty or tax was payable on the trading activity. If that be the case, there is no question of any part of the input service tax credit being used for any purpose associated with the trading activity. The entire credit was utilized for payment of duty of excise on the dutiable final products. In this factual scenario, the case law cited before me is not relevant, nor is the basis of the demand prima facie sustainable in law. The input service distributor cannot be found fault with on the basis of any commissions or omissions of the manufacturing units. Prima facie, the manufacturing units were lawfully utilizing the entire credit for payment of duty on the dutiable final products. Trading activity was not one of the taxable services under Section 65 of the Finance Act 1994 and, therefore, there was no question of payment of service tax on that activity by the manufacturing units of the company. Prima facie, therefore, the manufacturing units could not have been expected to maintain separate accounts. The show-cause notices appear to disclose self-contradictory stand of the revenue with reference to the fact of this case. Apart from the above, the appellant also seems to have a good case on limitation against the impugned demands. In the result, there will be waiver of pre- deposit and stay of recovery in respect of the adjudged dues.