Trading treated as exempted service for CENVAT reversal, but recomputation must use trading margin, not gross sale value.

Trading was treated as an exempted service for CENVAT credit reversal purposes, because the later explanation in the Rules was viewed as clarificatory and trading had always fallen outside taxable service for rule 6. Accordingly, common input service credit relatable to trading was disallowable. For computation, however, the reversal had to be based on the trading margin, that is, the difference between purchase price and sale price, rather than the gross sale value of traded goods. The existing computation was not verified on that basis, so the matter was remanded for recomputation and adjustment of any shortfall after verification.

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Issues: (i) whether trading activity was to be treated as an exempted service for the purpose of reversal of CENVAT credit on common input services for the period prior to its specific inclusion in the Rules; (ii) whether the reversal of credit attributable to trading had to be computed on the basis of the difference between the purchase price and sale price of traded goods, with the matter requiring verification by the original authority.

Issue (i): Whether trading activity was to be treated as an exempted service for the purpose of reversal of CENVAT credit on common input services for the period prior to its specific inclusion in the Rules.

Analysis: The scheme of CENVAT credit excluded credit on input services used for exempted services, and trading was regarded as falling outside taxable service. The subsequent insertion of an explanation treating trading as exempted service was held to be clarificatory in nature. On that basis, trading activity was treated as having always been within the ambit of exempted service for the purpose of rule 6, and common input service credit relatable to trading was liable to disallowance.

Conclusion: Trading activity was rightly treated as an exempted service, and credit attributable to common input services used for trading was not admissible.

Issue (ii): Whether the reversal of credit attributable to trading had to be computed on the basis of the difference between the purchase price and sale price of traded goods, with the matter requiring verification by the original authority.

Analysis: For trading activity, the relevant value was held to be the margin between purchase price and sale price, not the entire sale value of traded goods. The method adopted in the impugned order had not examined this aspect and the computation had not been verified on that basis. The credit reversal already made was to be adjusted accordingly, and only any shortfall, if found on verification, could be recovered.

Conclusion: The computation had to be restricted to the trading margin basis, and the matter was remanded for verification and consequential recomputation.

Final Conclusion: The assessee succeeded on the legal basis for computation, but the matter was sent back for reworking of the demand and related consequences in accordance with the correct valuation method.

Ratio Decidendi: Trading activity is to be treated as an exempted service for CENVAT credit reversal purposes, and where common input services are used, the reversal for trading must be computed on the trading margin rather than the gross sale value of traded goods.

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