2019 (8) TMI 429 - AT - Service Tax

Tribunal Upholds Credit Limit, Reviews Entitlement, Waives Penalties

The Tribunal upheld the demand under Rule 6(3) limiting credit utilization to 20% for trading activities, directed a review under Rule 6(5) for full ... CENVAT Credit - common input services used in trading activity/exempt service - periods from September 2004 to March 2011 - Rule 6(3) of the CENVAT Credit Rules - HELD THAT:- The 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 - the assessee is not entitled to CENVAT credit to that extent. Reversal of common credit - HELD THAT:- 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. Credit on banking and financial services, insurance/auxiliary services and security agency services - Rule 6(5) OF CCR - HELD THAT:- On 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. Extended period of limitation - Suppression of facts or not - HELD THAT:- The allegation of suppression of facts does not stand. Considering this fact and that the assessee was not required in their ST-3 returns to declare the breakup of the CENVAT credit availed by them, there is a force in the argument of the learned counsel that extended period of limitation cannot be invoked in their case. Penalty - HELD THAT:- The appellant had a bonafide belief that they are entitled to the benefit of CENVAT credit even if it is decided against them in the current proceedings - 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 - Penalty not warranted. The demand within the normal period is only upheld - demand upheld subject to verification and requantification of the credit eligible to the appellant under Rule 6(5) - interest on the demands gets modified accordingly - appeal allowed in part - part matter on remand. Issues:1. Interpretation of Rule 6(3) of the CENVAT Credit Rules regarding availing CENVAT credit on input services used in trading activity.2. Application of Rule 6(5) of CENVAT Credit Rules to claim full credit on certain specified services.3. Invocation of extended period of limitation for demand raised by the department.4. Imposition of penalty under Sections 76 & 78 for over-utilization of CENVAT credit.Analysis:Issue 1: Interpretation of Rule 6(3) of CENVAT Credit RulesThe appellant, engaged in manufacturing and trading activities, availed CENVAT credit on input services used for trading. The department raised demands alleging irregular availing of credit for trading, considered an exempted service. The appellant argued that trading was not considered a service before the introduction of an explanation to Rule 6(1) in 2016. However, judicial precedents established that trading is an exempted service, and Rule 6(3) applies, limiting credit utilization to 20% of service tax on taxable output services. The Tribunal upheld the demand based on Rule 6(3) and settled case law.Issue 2: Application of Rule 6(5) of CENVAT Credit RulesThe appellant claimed full credit on certain services under Rule 6(5) of CENVAT Credit Rules, which allows credit on specified taxable services unless exclusively used for exempted activities. The Tribunal directed a factual examination to determine if these services fall under Rule 6(5) for full credit entitlement.Issue 3: Invocation of Extended Period of LimitationThe department invoked the extended period of limitation alleging suppression by the appellant for not disclosing the use of common credit for taxable and exempted services. The appellant argued against the invocation, citing past audits and record availability to the department. The Tribunal set aside the extended period of limitation, upholding the demand within the normal period.Issue 4: Imposition of PenaltyThe appellant contended that the penalty under Sections 76 & 78 should be set aside due to a genuine belief in entitlement to CENVAT credit. The Tribunal agreed, considering the appellant's reasonable cause for non-compliance with Rule 6(3) and not discharging the full service tax amount. The penalties were set aside invoking Section 80 of the Finance Act 1994.In conclusion, the Tribunal upheld the demand under Rule 6(3) for limited credit utilization, directed a review under Rule 6(5) for full credit entitlement, set aside the extended period of limitation, and waived penalties based on a reasonable cause.