CESTAT modifies CENVAT credit demand, upholds trading activity restrictions, reduces penalty under Section 11AC

CESTAT Bangalore modified the demand against the appellant regarding CENVAT credit disputes. The tribunal upheld confirmation of inadmissible credit of Rs.79,22,225/- related to trading activities, following HC precedents that credit cannot be claimed for exempt services without separate account maintenance. Extended limitation period was justified as the assessee was aware of improper claims. However, the tribunal set aside demand of Rs.15,83,168/- for credit availed before ISD registration, treating it as procedural irregularity per Karnataka HC ruling. The appellant received 25% penalty reduction benefit under Section 11AC.

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Issues Involved:
1. Admissibility of cenvat credit of Rs.79,22,225/- attributable to trading activity.
2. Admissibility of credit of Rs.15,83,168/- pertaining to Ahmedabad and Pune units before obtaining ISD registration at their Bangalore unit.
3. Whether the extended period of limitation can be invoked.

Summary:

1. Admissibility of Cenvat Credit Attributable to Trading Activity:
The primary issue was whether the appellant could avail cenvat credit on 'Management Consultancy Service' related to their trading activities. The appellant argued that under Rule 6(5) of the Cenvat Credit Rules, 2004, they were entitled to avail such credit unless the service was used exclusively for exempted goods or services. They cited several judgments to support their claim. However, the Hon'ble Delhi High Court in the case of Lally Automobiles Pvt. Ltd. held that credit on services used for trading is not admissible and should be apportioned on a pro-rata basis as per Rule 6(3)(c). The court emphasized that trading was not amenable to service tax during the relevant period, thus triggering the apportionment rule. Consequently, the confirmation of demand with interest by the Commissioner invoking the extended period of limitation on cenvat credit availed on trading activity was upheld.

2. Admissibility of Credit Before ISD Registration:
The second issue concerned the denial of cenvat credit of Rs.15,83,168/- availed at the Bangalore unit, which pertained to units at Ahmedabad and Pune, before obtaining ISD registration. The appellant argued that this denial was not sustainable, citing the judgment of the Karnataka High Court in the case of Hinduja Global Solutions Ltd., which held that credit cannot be denied due to procedural irregularities such as the absence of ISD registration. The court agreed, stating that the procedural irregularity should not result in the denial of credit. Thus, the appellant was entitled to avail the cenvat credit of Rs.15,83,168/-.

3. Extended Period of Limitation:
The appellant contended that the demand notice was barred by limitation and that the extended period could not be invoked as the credit was disclosed in their returns, and there was no suppression of facts. The court, however, upheld the invocation of the extended period of limitation, citing the judgment of the Delhi High Court in Lally Automobiles Pvt. Ltd., which found that the appellant was aware of their trading activity and the ineligibility of the claimed credits, thus justifying the extended period.

Conclusion:
The impugned order was modified to confirm the inadmissibility of cenvat credit of Rs.79,22,225/- attributable to trading activity, with applicable interest of Rs.15,38,789/-. Since the credit and interest were paid before the issuance of the show-cause notice, the appellant was entitled to a 25% penalty benefit under Section 11AC of the Central Excise Act read with Rule 15(4) of CENVAT Credit Rules, 2004. The demand of cenvat credit of Rs.15,83,168/- confirmed with interest and equivalent penalty before ISD registration was set aside. The appeal was disposed of accordingly.

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