CENVAT - Trading activity, whether to be considered exempted prior to 01.04.2011 and credit is to be reversed - Delhi HC orders pre-deposit of 50% of credit involved without interest
By TIOL News Service
NEW DELHI, OCTOBER 19, 2013: THE Appellant is engaged in business of sale of motor vehicles on commission basis and also provides taxable service of vehicle servicing, repairs etc.It is the stand of the Revenue that the CENVAT credit availed of the Service Tax paid on the rent etc. is not available for the ‘exempted’ activity of Trading.
Two SCNS alleging irregular availment of CENVAT credit during the period 01.04.2008 to 31.03.2011 was issued the assessee. A common adjudication order came to be passed by CCE, New Delhi confirming the amounts of Rs.24,85,530/- and Rs.31,74,799/- besides ordering recovery of interest and penalty.
Before the CESTAT with a Stay application, the appellant submitted that since Rule 2(e) of the CENVAT Credit Rules, 2004 was amended w.e.f. 01.04.2011 by incorporating an explanation whereby "trading" was clarified to be an exempted service, CENVAT credit availed on input services prior to 01.04.2011 cannot be legitimately disallowed. Reliance is also placed on the decision in Orion Appliances Ltd. vs. CST, Ahmedabad (2010-TIOL-752-CESTAT-AHM) wherein it is held: "it is quite clear that since trading activity is nothing but purchase and sales and is covered under state sales tax law, it may not be appropriate to call it a service. Therefore it has to be held that trading activity cannot be called a service and therefore it cannot be considered as an exempted service also".
The Bench adverted to the contrary decision in Metro Shoes Pvt. Ltd. vs. Commissioner of Central Excise, Mumbai-I - (2008-TIOL-417-CESTAT-MUM) wherein it was viewed that the credit availed on the services which are directly attributable to the trading activity is ineligible.
The Bench then observed -
“…The interpretation of the explanation to Section 2(e) of the CENVAT Credit Rules, 2004 states that the explanation is for the removal of doubts and for clarification. Facially therefore and excluding a contrary intention from the text of the clarificatory exercise must be considered, what it is, namely a clarification of the inherent meaning of the existing text. Exempted services as defined in Section 2(e) clearly comprise taxable services which are exempt from the whole of the service tax leviable thereon and services on which no tax is leviable under Section 66 of the Finance Act. A service in relation to a trading activity therefore falls within the genus of exempted services as defined in Rule 2(e), prima facie.”
The Bench also did not find any fault in the manner of computation of CENVAT credit (allegedly irregularly availed) adopted by the adjudicating authority by basing the same on standard accounting principles and disregarding the certificate of the CA which segregated the amounts of CENVAT credit attributable to BAS and Trading activity. On the question of limitation, the Bench mentioned that the same would be considered at the time of hearing of the appeal.
In fine, the Bench directed the appellant to make a pre-deposit of the entire amount of CENVAT credit disallowed including interest thereon. We reported this as (2013-TIOL-1216-CESTAT-DEL).
The appellant took the matter to the Delhi High Court.
The High Court extracted the paragraphs 29 and 30 indicating the computation of the amount as arrived by the adjudicating authority and observed that the issue which falls for consideration is whether the said formula is applicable or some other basis can be applied and is more just, fair or equitable.
Holding that the order of pre-deposit passed by the Bench requires modification, the High Court directed the appellant to make a pre-deposit of 50% of the impugned demand without interest.
(See 2013-TIOL-818-HC-DEL-ST)
