Rule 6 CENVAT treatment of trading activity pre-amendment sustained reversal, but interest and penalty were deleted.

Trading activity was treated as attracting Rule 6 of the CENVAT Credit Rules, 2004 for the relevant pre-01.04.2011 period, because it was not regarded as an exempted service and common input services used for such activity required reversal of credit. On that basis, the demand for reversal of CENVAT credit was sustained. However, the Tribunal accepted the assessee's bona fide belief on classification of trading activity and the availability of credit balance, and therefore held that interest and penalty were not payable on the facts.

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Issues: (i) Whether Rule 6 of the CENVAT Credit Rules, 2004 applied to trading activity during the relevant period prior to 01.04.2011, and whether the demand based on excess CENVAT credit was sustainable. (ii) Whether interest and penalty under Section 78 of the Finance Act, 1994 were payable.

Issue (i): Whether Rule 6 of the CENVAT Credit Rules, 2004 applied to trading activity during the relevant period prior to 01.04.2011, and whether the demand based on excess CENVAT credit was sustainable.

Analysis: Trading activity was not treated as an exempted service during the relevant period. The settled view relied upon by the Tribunal was that, before the deeming amendment from 01.04.2011, trading could not be regarded as a service or exempted service, and therefore the restrictions and apportionment mechanism under Rule 6 were attracted where common input services were used. On that basis, the appellant's contention that Rule 6 had no application was rejected.

Conclusion: The demand for reversal of CENVAT credit for the relevant period was sustained and decided against the assessee.

Issue (ii): Whether interest and penalty under Section 78 of the Finance Act, 1994 were payable.

Analysis: The Tribunal accepted that the appellant entertained a bona fide belief on the applicable treatment of trading activity and that sufficient credit balance was available during the relevant year. In the circumstances, interest was not warranted on the facts accepted by the Tribunal, and the conditions for penalty under Section 78 were also held to be absent.

Conclusion: Interest and penalty were set aside and decided in favour of the assessee.

Final Conclusion: The demand on merits was maintained, but the consequential levy of interest and penalty was deleted, resulting in partial relief to the appellant.

Ratio Decidendi: Prior to 01.04.2011, trading activity was not an exempted service, so Rule 6 of the CENVAT Credit Rules, 2004 applied to common input services used for such activity; however, bona fide interpretational dispute and availability of credit could justify deletion of interest and penalty on the facts of the case.

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