2018 (5) TMI 1419 - AT - Service Tax

Tribunal Upholds Cenvat Credit Reversal on Trading Activity

The Tribunal held that Cenvat credit is not admissible on input services used for trading activity not considered exempted before 01/04/2011. The ... Cenvat credit on input services - Trading activity not a service prior to 01-04-2011 - Apportionment and reversal of credit attributable to trading activity - Reversal/payback of inadmissible Cenvat credit - Penalty under Section 78 of the Finance Act, 1994 - Benefit under Section 80 of the Finance Act, 1994Cenvat credit on input services - Trading activity not a service prior to 01-04-2011 - Apportionment and reversal of credit attributable to trading activity - Reversal/payback of inadmissible Cenvat credit - Whether Cenvat credit availed on input services common to trading activity is admissible and whether such credit must be reversed for the trading activity - HELD THAT: - The Tribunal followed its earlier decision in Mercedes Benz India Pvt. Ltd. (as affirmed by the Bombay High Court) and subsequent CESTAT precedent that trading was not a service prior to 01-04-2011; therefore input service credit attributable to trading activity was not admissible at the material time. Where input services are used both for taxable output services and for trading (which was not a taxable service before 01-04-2011), the credit attributable to the trading activity must be reversed or paid back in accordance with the Cenvat Credit Rules. The appellant had not maintained the separate accounts required for allocation nor paid the proportionate amount, and the Tribunal found no reason to disturb the demand for reversal of Cenvat credit on input services attributable to trading goods. [Paras 5, 7]The appellant is liable to reverse/pay back the Cenvat credit attributable to trading activity and the order-in-original imposing the same is upheld.Penalty under Section 78 of the Finance Act, 1994 - Benefit under Section 80 of the Finance Act, 1994 - Whether penalty under Section 78 is imposable and whether the appellant is entitled to benefit under Section 80 - HELD THAT: - The Tribunal rejected the appellant's contention that penalty should not be imposed because the Department was aware of the credit claims and because the law was unclear. The Tribunal held that the appellant was aware that Cenvat credit on common input services was admissible only for taxable output services and that trading was not a taxable activity; consequently there was no case for relief under Section 80. However, in exercise of its discretion the Tribunal allowed mitigation by permitting payment of 25% of the imposed penalty if paid within one month of receipt of the order. [Paras 8, 9, 10]Penalty under Section 78 is sustained but may be discharged at 25% if paid within one month of receipt of this order.Final Conclusion: The appeal is dismissed; the demand for reversal of Cenvat credit attributable to trading activity and the penalty under Section 78 are upheld, subject to the concession that the penalty may be discharged at 25% if paid within one month of receipt of the order. Issues:1. Admissibility of Cenvat credit on input services used for trading activity.2. Requirement to maintain separate accounts for input services used in providing exempted or non-taxable services.3. Liability to reverse or pay back input service credit attributable to trading activity.4. Imposition of penalty under Section 78 of the Finance Act, 1994.Analysis:1. The appellant, engaged in providing taxable services as an authorized dealer of motor vehicles, availed Cenvat credit on various input services. The Department contended that Cenvat credit is not admissible on input services used for exempted or non-taxable services. The Tribunal referred to precedents and held that no Cenvat credit is available on input services attributable to trading activity not considered as an exempted service before 01/04/2011. Consequently, the appellant was held liable to reverse or pay back input service credit related to trading activity.2. The Tribunal emphasized the importance of maintaining separate accounts for input services used in providing exempted or non-taxable services. Failure to maintain such accounts may result in the payment of a specified amount or proportionate Cenvat credit attributable to exempted output services. The appellant's failure to maintain separate accounts led to the demand for payment of input service credits attributable to trading activity, as per the Cenvat Credit Rules, 2004.3. Regarding the liability to reverse or pay back input service credit attributable to trading activity, the Tribunal upheld the order-in-appeal, affirming the demand for reversal of Cenvat credit on input services for trading goods. The appellant's argument that penalty under Section 78 of the Finance Act, 1994 should not be imposed was dismissed, as the appellant was aware of the inadmissibility of Cenvat credit on common service inputs for trading activity. The Tribunal did not find grounds for granting the benefit of Section 80 of the Finance Act, 1994.4. The Tribunal concluded that there was no infirmity in the order passed by the Commissioner (Appeals) and dismissed the appellant's appeal. The imposition of penalty under Section 78 of the Finance Act, 1994 was upheld, with the appellant allowed to pay 25% of the imposed penalty within one month of receiving the order. The judgment was pronounced in open court on 22/05/2018.