Computation of 'exempted value of services' for 'trading activity' - CBEC should intervene
SEPTEMBER 16, 2014
By S Narayanan, Advocate
1 WITH effect from 1.4.2011, for the purpose of Cenvat Credit Rules, 2004 (CCR 2004), Government regarded trading activity as "exempted services" by adding an explanation to the definition of "input services" contained in Rule 2 (e) of CCR, 2004 as per Notification No.3/2011-C.E. (N.T.), dated 1-3-2011.
2 Simultaneously, in the Explanation dealing with "Value" for the purpose of sub-rules (3) and (3A) of Rule 6 of CCR, 2004, clause (c) got substituted by Notification No.13/2011-C.E. (N.T.), dated 31-3-2011 which also provided a measure for exempted value of services, in case of such trading activity, and read - "shall be the difference between the sale price and the cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase) or ten per cent of the cost of goods sold, whichever is more ". These amendments brought into effect from 1.4.2011 are actually two sides of the same coin.
3 Needless to mention, "trading of goods", as such is not regarded as "taxable service" either prior to 1.4.2011 or afterwards and even in negative list of services effective 1.7.2012 it has been so included to keep it outside the purview of service tax levy, as per Section 66 D(e) of Finance Act, 1994.
4 The amendment defining 'trading' as 'exempted services' prompted the Audit wing in the Central Excise department to swing into action and recover from some of the assessees amounts under Rule 6 (3) of CCR, 2004. These assesses are manufacturers who also carrying out trading activity, by using certain inevitable common input services, such as security, insurance, telephone, mobile, internet services, advertisement, common office and resources and utilities, for which separate records/accounts cannot be maintained under Rule 6 (2) of CCR 2004 to avail cenvat credit only to the extent which is attributable to dutiable final product.
5 Keeping aside the argument that even now 'trading' has not yet been recognized as 'output service' so how could it be regarded as 'exempted service' and, therefore, whether rule 6(3) whip can be exercised, the fact of the matter is that it would have been prudent on the part of the Board to issue a clarification that the said "measure of value of exempted services for such trading activity" provided under Notification No. 13/2011-C.E. (N.T.) (supra) is applicable for determination of proportionate reversal under Rule 6 (3) of CCR, 2004 for the period prior to 1.4.2011 also, as it is after-all only a measure/method of computation.
6 The audit department, in certain metros, for computing pro-rata turnover working of "exempted services on account of trading" (for the period prior to 1.4.2011) have considered total turnover sales (including cost of purchases) instead of restricting it to only difference between the sale price and the cost of goods sold as provided in Notification No. 13/2011-C.E. (N.T.), dated 31-3-2011, on the ground that said amendment to Explanation does not operate retrospectively.
7 The following example demonstrates the difference it makes on account of such a computation.
Let us assume : (A) Rs. 6 Crores is manufacturing Turnover (All dutiable goods) (B) Trading Turnover Rs. 4 Crores (C) Cost of goods sold (without including the expenses incurred towards their purchase) - Rs. 3 Crores (D) Credit availed on Common input services - Rs. 10 lakhs.
7.1 As per department, the computation proportionate percentage is as under: Total Turnover = Rs. 10 Crores (Manufacturing + Trading). Thus, Proportionate % of trading will be - Rs. 4 Cr/ Rs. 10 Cr x 100 = 40 % and hence proportionate reversal on common input services credit works out to = 40 % of Rs. 10 lakhs i.e 4 lakhs.
7.2 As per computation provided in Notification No. 13/2011-C.E. (N.T.), dated 31-3-2011: Value of Exempted services for Trading will be - Sales price of trading less Cost of Goods sold, which will be - Rs. 4 Crores less Rs. 3 Crores = Rs. 1 Crore . Hence, Total Turnover for the purpose of Rule 6 (3) will be - Rs. 6 Crores (manufacturing Turnover) + Rs. 1 Crore (Exempted services for Trading) = Rs. 7 Crore and not Rs. 10 Crores. Hence, proportionate % of trading will be - Rs. 1 Cr/ Rs. 7 Cr x 100 = 14.29 %. The pro rata reversal would work out to Rs. 1,42,900/- ( 14.29 % of Rs. 10 lakhs) as against Rs. 4 lakhs.
8. At the same time, the Board should be commended for drafting the notification No.13/2011-C.E. (N.T.) which is fair and not regressive. Nonetheless, the Board would be doing a yeoman service if it carries the fruits of its labour in drafting the impugned notification to the years preceding 01.04.2011. This can be achieved with nothing more than a nimble Circular to convey to the assessees at large that they would like to follow the mantra - Minimum government, Maximum governance!
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(1) Explanation to the effect “exempted services” includes trading, as introduced by Notification No. 3/2011-CE (NT) dated 1.3.2011 does not exist after substitution of Rule 2(e) of Cenvat Credit Rules, 2004, vide Notification No. 28/2012-CE(NT) dated 20.6.2012 w.e.f. 1.7.2012. However, from the same date, “trading of goods” is covered under Negative list of services, under Section 66D(e) of the Finance Act, 1994. Consequently, trading of goods is covered under the definition of “exempted service”, being a service on which no service tax is leviable, as defined at the substituted Rule 2(e)(2).
(2) Prior to 1.3.2011, trading was not covered under any definitions of “taxable service”, “exempted service” or “output service”. So, the INDIVISIBLE PORTION of common input services like insurance, telephone etc. (not covered under the inclusive portion of the definition of “input service”), which was used for trading, could not be considered as “input service” at all and so no Cenvat credit was admissible on that INDIVISIBLE PORTION. If assessee takes Cenvat credit on such common input services, there was no prescribed method to calculate pro-rata reversal of credit attributable to such INDIVISIBLE PORTION. The solution to this situation has been given by CESTAT in the case of Orion Appliances Ltd. 2010-TIOL-752-CESTAT-AHM, which is as under:
“The only obvious solution which would be legally correct appears to 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.”
It is not known which are the ‘standard accounting principles’ applicable to work out such credit attributed to trading. Perhaps audit objection referred by the author is based on the aforesaid case.
These are personal views.
Posted by Shvetal Parikh
Sub: trading activity and cenvat reversal
concept of 20% as gp would be correct. we should be allowed to reverse an amount maximum to the tune of 20% of the cost of goods sold or 15% of the trading sales value.
Posted by Navin Khandelwal
Sub: credit not eligible
These are personal views.
It has been observed for last 2 to 3 years that list of “credit not eligible” is going on increasing eg., credit on construction not allowed, credit on jobwork services taken at job workers premises and payment made by principle manufacture not allowed. If one goes to list litigation cases it can be seen that most of the cases are based on Cenvat / service tax credit. Till today after 65 years the Indian BABUS are not able to settle the basic FUNDA of any VALUE ADDED TAX i.e., CREDIT. No wonder if we are not able to settle such a simple issue, one can assume what will be state of other larger issue like corruption cases, criminal offences, land and revenue etc. etc.
One can understand the wish of new PM to have limited litigation as he is trying to set up the different courts to deal with cases of politicians, he need to set up the courts for taxation on similar lines. We on day to day basis see the cases which are uploaded on this site and reading the case of WESTERN COALFIELDS LTD it is surprising that some body is asking for service tax on the amount for which excise duty is paid, god save our country, where we are heading may be he also knows, and if God comes down on the earth to save, no wonder these BABUS may ask service tax from him on account that such services are not covered under negative list, exempted list etc. and receiver will also not be able to avail credit as this will not be in relation to…
After all this the question arises is that if this a real so call “Cen VALUE ADDED TAX”???? because exclusion is increasing than eligibility, as manufacturing in India is rapidly changing, BABUS need to cope up with it. It will take time may is another 65 years because for availement of credit another barrier is already in place i.e., SIX months from the date of invoice.
HEY RAM…
Posted by Purushottam Sandye
Sub: Regarding Trading
It would be much appreciated if the department would clarify its intent of removing "Trading" from the explanation to rule 2 (e) at the same time making it covered under Sec 66D(e), and the related effects on the computation prescribed under Rule 6.
The moot question is can trading be even considered a "service" under 65B(44)? ; making 66D(e) redundant.
Posted by Unnikrishnan Mohan
Sub: Trading Activity
Before 01.04.2011 going by the judgment apended the trading turnover in total was to be considered as exempted service for the purpose of calculation of reversal. the amendment wef 01.04.2011 is a relief as only 10% or profit has to taken into account for reversal
2014-TIOL-476-CESTAT-MUM
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
WEST ZONAL BENCH, MUMBAI
COURT NO.1
Appeal No.E/370, 456, 385/11-Mum & E/1019/12-Mum
Arising out of Order-in-Original No.19/CE/2010 Dated: 30.11.2010, 12/CX/2012 Dated: 30.3.2012
O/A No. PI/RKS/169/2011 Dated: 15.12.2011
Passed by the Commissioner of Central Excise, Pune.I, Commr. Of Customs (A), Pune. 1)
Date of Hearing: 3.1.2014
Date of Decision: 20.2.2014
MERCEDES BENZ INDIA PVT LTD
Vs
COMMISSIONER OF CENTRAL EXCISE, PUNE-1
COMMISSIONER OF CENTRAL EXCISE, PUNE-1
Vs
MERCEDES BENZ INDIA PVT LTD
Appellants Rep by: Shri V Sridharan, Adv. with Shri Ashish Philips, Adv.
Respondent Rep by: Shri Shobha Ram, Commissioner (AR)
CORAM: S S Kang, VP
P K Jain, Member (T)
CENVAT – Appellant, a manufacturer of motor vehicles and also undertaking of trading of motor vehicles imported from their principals abroad – common input services used - Explanation inserted in rule 2(e) of CCR, 2004 clarifying that "exempted services" includes trading is prospective in nature from 01/04/2011 and so also is clause (c) in Explanation I appearing after rule 6(3D) of CCR, 2004 – Trading is not Service prior to 01.04.2011 - for the disputed period credit of Service Tax paid on common input services should be apportioned in the same ratio as the turnover of the manufactured and traded cars – term ‘business' used in definition of input service is relating to the business of manufacture of final products and not relating to trading activity – extended period has been rightly invoked – appeals disposed of: CESTAT
Posted by Amit Agarwal
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