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Trading is an exempted service, Rule 6(3) of CENVAT Credit Rules applies in case credit has been taken on input/input services used in trading activity

Service Tax

The Appellant is a manufacturer of air conditioners and refrigeration products. They also undertake works contract service, erection commissioning and installation service, maintenance and repair service, business auxiliary services and goods transport agency services and have been registered with the service tax department. They availed CENVAT credit on various inputs, input services and capital goods. Some of these services are also used by them for trading activity. Apart from manufacture and the aforesaid services, the Appellant also sells air conditioners and this trading activity was considered by the Department as an exempted service. Since the Appellant had availed CENVAT credit on input services which went into trading activity, the Department raised demand on the Appellant in four show-cause notices alleging that, they have irregularly availed CENVAT credit in violation of Rule 6(3) of the CENVAT Credit Rules, 2004 by using the CENVAT availed input services in rendering an exempted service namely trading.

It is undisputed in present case that, the Appellant has been manufacturing air conditioners and providing services and that the input/input services on which CENVAT credit has been availed has been utilised for trading as well. It is also not in dispute that Rule 6(1) and 6(2) do not apply to the appellant because they have neither avoided taking credit on input services used in trading nor have they maintained separate accounts.

In the case of Lally Automobiles Pvt. Ltd. Vs. CST Delhi, the principal bench of the Tribunal, has held that, trading being not a taxable service is not covered under the scope of CENVAT Credit Rules 2004 and therefore credit needs to be reversed as per Rule 6(3).

It has been well settled that trading is an exempted service and Rule 6(3) applies in case credit has been taken on the input/input services used in trading activity. Trading activity is an exempted service to which Rule 6(3) applies. This position has not changed with the introduction of explanation (3) to Rule 6(1). Trading activity has always been an exempted service both prior to and after introduction of this explanation. Accordingly, the assessee is not entitled to CENVAT credit to that extent.

A plain reading of Rule 6(3)(c) shows that, the restriction on utilisation of CENVAT under Rule 6(3)(c) is not confined to any form of CENVAT credit but is related to the value of output taxable services rendered by the Appellant. The credit cannot be utilised in excess of 20% of the amount of service tax payable on taxable output services. Therefore, if service tax is paid utilising the CENVAT, it does not amount to paying service tax and service tax can be demanded.

A plain reading of Rule 6(5) shows that exception has been made with respect to some services in it and if the services on which the Appellant claimed credit are covered by Rule 6(5), they are entitled to full credit to that extent. In view of fact that, the assessee was not required in their ST-3 returns to declare the breakup of the CENVAT credit availed by them, there is force in the argument of the learned counsel that, extended period of limitation cannot be invoked in their case.

The Appellant had a bona fide belief that they are entitled to the benefit of CENVAT credit even if it is decided against them in the current proceedings, therefore, the penalty imposed upon them under Sections 76 & 78 may be set aside. They had a reasonable cause for their failure in over-using CENVAT credit in violation of Rule 6(3) and thereby not discharging full amount of service tax.

The demand within the normal period is only upheld. The demand for subsequent periods is upheld subject to verification and re-quantification of the credit eligible to the appellant under Rule 6(5) as above. The interest on the demands gets modified accordingly. The penalties imposed upon the appellant are set aside invoking Section 80 of the Finance Act 1994. The appeals are disposed of.

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