Service unit wins CENVAT credit dispute after department fails to prove trading activities used input services

The CESTAT Chennai set aside a demand for reversal of CENVAT credit on common input services allegedly used for trading activities. The department failed to establish that the trading units actually availed credit on input services, merely assuming so because trading units mentioned the service unit's registration number on invoices while collecting service tax on installation charges. The tribunal found the department confused output services (installation charges) with input services, and noted the demand calculation applying trading turnover against total service unit credits was factually and technically incorrect. The appeal was allowed as the department could not substantiate its allegations regarding credit availment for trading activities.

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Issues Involved:
1. Whether the appellant availed input tax credit on common input services for trading activities.
2. Whether the appellant maintained separate accounts as required under Rule 6(2) of Cenvat Credit Rules, 2004.
3. Applicability of Rule 6(3) of Cenvat Credit Rules, 2004.
4. Quantification of demand.
5. Invocation of the extended period of limitation.
6. Imposition of interest and penalty.

Summary of Judgment:

1. Availment of Input Tax Credit on Common Input Services:
The department alleged that the appellant availed input tax credit on common input services for trading activities. The appellant contended that they did not avail any credit attributable to their trading segment and maintained separate accounts for different business segments. The Tribunal found that the department failed to establish that the appellant's trading units availed credit on input services.

2. Maintenance of Separate Accounts:
The appellant argued that they maintained separate books of accounts for different segments, and no credit was availed for trading activities. The Tribunal noted that the appellant's accounts were maintained in such a way that expenses pertaining to a particular unit were recorded based on unique plant/unit codes.

3. Applicability of Rule 6(3) of Cenvat Credit Rules, 2004:
The department contended that the appellant was liable to reverse 6%/7% of the value of credit availed on exempted services as per Rule 6(3). The appellant argued that Rule 6(3) was not applicable as their service units did not engage in trading activities. The Tribunal concluded that the department's assumption was based on erroneous perception and factual errors.

4. Quantification of Demand:
The Tribunal found that the quantification of the demand was incorrect. The department applied the turnover of trading units against the total credit availed by service units, which was flawed. The total demand of service tax was Rs. 12,53,61,238/-, whereas the total credit availed by the appellant was Rs. 3,16,72,532/-.

5. Invocation of Extended Period of Limitation:
The Tribunal held that the invocation of the extended period of limitation was not warranted as the issue involved interpretation of complex legal provisions and there was no suppression of facts by the appellant.

6. Imposition of Interest and Penalty:
Since the demand of service tax was found to be unsustainable, the imposition of interest and penalty under Sections 75, 76, and 78 of the Act did not arise.

Conclusion:
The Tribunal set aside the impugned order, allowed the appeal, and granted consequential reliefs. The department failed to establish that the appellant availed credit on input services for trading activities, and the quantification of the demand was incorrect. The extended period of limitation and imposition of penalties were not justified.

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