By TIOL News Service

MUMBAI, MAY 21, 2015: THE appellant is engaged in the manufacture of ball and roller bearings and textile machinery components. Besides manufacture of the said goods, they also undertake trading of similar goods which they normally procure from their associate companies in other parts of the world, as also from SKF Technologies India Pvt. Ltd., Ahmedabad. The appellant has depots/hubs situated in different parts of the country from where they sell the said goods. In India they have two manufacturing units, one located in Pune and the other located in Bangalore. Their main office in India is also located in Pune in the same complex as that of factory.

For the above mentioned two activities, i.e. manufacturing and trading, they are using number of taxable input services and avail credit. Since there is no excise duty or service tax on the trading activities, the entire credit is utilized towards payment of excise duty on the goods manufactured by the appellant. Further, since they have two units i.e. one located in Pune and the other in Bangalore, they are utilizing the said credit in the two units. For purpose of distributing the said credit, the appellant took another registration as an input service distributor in Pune itself and they are distributing the credit of input services between the two units.

The Revenue is of the view that since trading is not a taxable activity appellants are not eligible for availing the entire credit of input services under Rule 3 read with Rule 2(l) of the CCR, 2004.

A SCN came to be issued proposing to recover the excess amount of credit allegedly availed by them, including interest and penalty. The SCN also proposed a separate penalty on the appellant in their role as 'input service distributor' (ISD) under Rule 15A [General Penalty] of the CCR, 2004 as they distributed the allegedly inadmissible cenvat credit.

The CCE, Pune-I confirmed the demand along with interest and penalties. A penalty of Rs. 5,000/- was also imposed on the appellant in their role as ISD.

Aggrieved by the said order, both the appellants (manufacturer and ISD) are before the CESTAT.

It is submitted that -

+ SCN issued to Pune factory is without jurisdiction; that the show cause notice should be issued to ISD and not the factory for the denial of credit. Reliance is placed on the decisions in Godfrey Philips India Ltd. - 2009-TIOL-269-CESTAT-AHM, United Phosphorus Ltd. - 2013-TIOL-793-CESTAT-AHM, Ericsson India Pvt. Ltd. - 2011-TIOL-408-CESTAT-BANG

+ Credit cannot be denied unless the assessement of distribution of credit made at the ISD is set aside. It is submitted that as per Rule 9 (10), the ISD is required to submit half-yearly returns and, therefore, for purpose of denial of credit, the said self-assessment has to be first set aside. Without setting aside the self-assessment, the credit cannot be denied to the main appellant. Reliance is placed on the decisions in Flock India Pvt. Ltd. - 2002-TIOL-208-SC-CX. The Bangalore Bench of Tribunal, in their own case, has set aside the demand vide final order No. 20723-20724/2014 dated 7.5.2014. If the present Bench is of the different opinion, then the matter may be referred to a Larger Bench - Xerox India Ltd. - 2011-TIOL-561-HC-ALL-CX quoted.

+ Credit relating to category of services specified in Rule 6 (5) of the CCR, 2004 should be allowed.

+ Demand needs to be recomputed based on the provisions of Rule 6 (3D) made effective from 1.4.2011 and because there are certain services which are directly used for manufacturing activity.

+ Demand prior to March 2010 is hit by limitation as the issue relates to interpretation of statutory provisions and there was a bona fide belief that in the absence of any reversal provisions, no cenvat credit is to be reversed for trading activity upto March 2011.

The AR submitted that the appellant is one and the same and they have taken registration for manufacturing activity as well as an input service distributor. That both the registrations are in the name of SKF India ltd., Chinchwad, Pune. Functions relating to input service distributor is being carried out from the office which is also located in the same premises as that of the factory. That SCN has been issued to the appellant, both as a manufacturer as also an input service distributor. For both the activities viz. manufacturing and input service distribution, the jurisdiction is that of Commissioner of Central Excise, Pune-I . Under the circumstances, the various contentions raised with relation to jurisdiction not challenging the assessment etc. are of no consequence. While reiterating the order of the lower authority the AR also placed reliance on the decision in Mercedes Benz India Pvt. Ltd. vs. CCE Pune-I - 2014-TIOL-476-CESTAT-MUM wherein a view has been taken that trading is not a service. As for the formula, since the same came into force from 1.4.2011 it cannot be applied for the retrospective period and for the same reason formula prescribed under Rule 6(3D) will be applicable for the future and not the past as it is related to the deeming fiction. In the present case, it is not only the business of manufacture but business of trading and, therefore, the credit of services specified in Rule 6(5) also requires to be disallowed as far as the said services are used in the business of trading. Demand is not time barred as the appellant had never disclosed that they are taking entire credit including the credit of input services used in the trading activities. Decisions in F.L. Smidth Pvt. Ltd. vs. CCE, Tiruchirapalli - 2014-TIOL-2186-HC-MAD-CX, Ratnamani Metals & Tubes Ltd. vs. CCE, Ahmedabad - 2013-TIOL-432-CESTAT-AHM, Pooja Ferro Alloys Ltd. - 2011-TIOL-429-HC-MUM-CX, Balmer Lawrie & Co. Ltd. - 2014-TIOL-69-CESTAT-MUM relied upon.

The Bench after considering the submissions extracted section 69 of the FA, 1994 and after explaining the genesis and rationale behind the same observed -

Jurisdiction

++ In the case in hand, the appellants are located in Chinchwad, Pune and are registered as manufacturer of goods under the Central Excise Act. If this was the only factory, there was no need to get registered as input service distributor. Since they have another unit in Bangalore, they have registration of the Pune unit as an input service distributor also. The purpose of such a registration is that the concerned authority is aware that the registered person is receiving invoices relating to input services used in their both the factories /locations. They normally would be paying excise duty in both the factories and accordingly the credit of input services is distributed among both the factories. It is to be noted that all the functions i.e. receipt of the invoices, distribution of the credit of such invoices, availment and utilization of such credit are done by the same legal entity. The only reason for distribution is that excise duty is paid factory-wise. So credit of duty on input services is also required to be distributed in both the factories.

++ The main objection of the appellant that the show cause notice should have been issued to the ISD and not to the factory and proceedings is, therefore, without jurisdiction, in our view, is not sustainable in the present facts and circumstances of the case as both ISD and the factory are located in one and the same place and the two registrations, one for excise and the other as an ISD, will not make a difference. Both registrations are for the same legal entity. Both the activities are to be dealt by the same Commissioner. The credit in dispute, if eligible, will also be utilized in the factory located within the jurisdiction of the same Commissioner. The case law relating to Godfrey Philips India Ltd. (supra) is distinguishable as in that case the ISD and the factory were not located within the same place. Similar is the position in respect of the other four case laws quoted by the learned counsel for the appellant. These cases are therefore distinguishable. We do not see any reason to refer the matter to the Larger Bench in the facts and circumstances of the present case.

Re-assessment

On the submission made by the appellant that credit cannot be denied unless the assessment of distribution of credit made at the ISD is set aside, the Bench noted -

++ Input service distributor is not an assessee under the Service Tax Law. He is only a distributor. ISD neither provides any service nor pays any service tax as provider of output service and, therefore, there is no question of assessment or self-assessment. No doubt ISD is required to file a half-yearly return. That return only gives the details of credit received and distributed. The relevant part is reproduced below:-x x x

++ This return cannot be called as a self-assessment by the ISD. In fact, it is to be noted that this return is common to the service tax payee as also the ISD and so called as declaration are common for the provider of output service and for the ISD. Concept of self-assessment is relevant for service tax payer alone. Since there is no assessment, the contention of the learned counsel is required to be rejected outright. The judgment of Hon'ble Supreme Court in Flock India Pvt. Ltd. (supra) is altogether in different context and is relating to classification list… In the present case, neither there is any self-assessment nor any assessment is required to be made under any provision of the Service Tax Law. In any case, self-assessment cannot be considered as appealable order passed by an authority. In any case, we find the availment of credit and thereafter the distribution has been challenged in the present show cause notice to the appellant and he cannot be permitted to say that this has not been done to them as an ISD but has been done as factory or vice versa. Factory and ISD, both are one and the same legal entities and are in one place under the jurisdiction of same Commissioner. Two registrations, one as manufacturer and the other for activity as ISD, will not make any difference whatsoever.

In respect of the Bangalore CESTAT decision in the appellants' own case and wherein the demand was set aside, the Bench observed -

++ In the said order, the Tribunal has only remanded the matter. In respect of the Bangalore unit, at least the ISD and the unit were located in different places under jurisdiction of two different Commissioners, In the present case, ISD as well as unit are located in the same complex and, therefore, the ratio of the said case is not applicable. Hence the contention of the appellant is rejected.

Rejecting the submission of the appellant that the CBEC letter dated 10.03.2014 (clarifying that the provision of Rule 14 of the Cenvat Credit Rules, 2004 shall only be invoked for denial of credit), the Bench held that the same is not binding on the CESTAT.

The submission that the decision in the case of Mercedes Benz (supra) is not applicable in the present case was also rejected by the CESTAT by observing that the decision "is 100% fully applicable to the facts of the present case". The other contentions of the appellant that credit relating to categories of services specified in rule 6(5) of CCR, 2004 should be allowed and that the demand needs to be re-computed based on the provisions of rule 6(3D) was also rejected outright by the Bench by relying on the decision in Mercedes Benz (supra) and holding that the amended provision with effect from 1.4.2011 will not have retrospective effect.

Limitation:

Observations of the Tribunal:

"…It is common knowledge that the credit of input or input services is allowed only in order to eliminate the cascading effect of taxes. Thus, for taking credit, the trading activity should be taxable under Service Tax or Excise Law. The credit of input or input services is not allowed in respect of non-taxable activities. Here is a case where the services were used for trading activity. The appellant should have not taken the credit in the first instance itself, which was totally wrong on their part. They did not indicate in the returns that the credit relating to the trading activities was also being availed by them. Therefore, this is a clear case of suppression, and conduct of the appellant in this regard does not take him further and the extended period of limitation has been rightly invoked…."

Adverting to the decisions cited by the AR in the case of F.L. Smidth Pvt. Ltd., Kalpik Interiors and Ratnamani Metals & Tubes Ltd., the Bench concluded -

"…We have no hesitation whatsoever in holding that taking credit in respect of services used in trading activity cannot be considered as bona fide at all. Just because the Government has put a trust in the trade and permitted them to take credit without any reference to tax authorities, it does not imply that the appellant can avail any credit whether permissible or not under the law and the later on, take the plea that the same is not recoverable on the grounds that the issue involves interpretation and hence the extended period of limitation cannot be applied. For similar reasons, penalties have been correctly imposed and we uphold the same."

Holding that there is no merit in the appeal filed by the main appellant (manufacturer), the same was dismissed. The penalty imposed of Rs.5000/- on the co-appellant ISD was also upheld on the ground that the returns filed were not in accordance with law& that the declaration made in the ST-3 returns was not correct.

Stop-Press:

Incidentally, the case was heard and order was reserved on 18.3.2015 and written submissions were handed during the course of hearing by the appellant. Later, on 24.3.2015 they submitted another letter. After going through the said letter the Bench remarked - "We find that the letter contains more than what was submitted during the course of hearing as also in the grounds of appeal filed before this Tribunal. As per Rule 10 of the CESTAT (Procedure) Rules, 1982, the appellant shall, except by the leave of the Tribunal, urge or be heard in support of any grounds not set forth in the memorandum of appeal. The procedure being followed by the learned counsel for the appellant is totally incorrect and we, therefore, refuse to discuss the submissions made in the said letter (even though we have gone through the said letter and find that the submissions made are devoid of even any consideration)."

In fine, both the appeals were dismissed as devoid of any merits.

(See 2015-TIOL-914-CESTAT-MUM)