CENVAT credit allowed for input services used in both taxable services and trading activities under Rule 6

CESTAT Allahabad allowed the appeal concerning CENVAT credit on input services used for both taxable services and trading activities (sale of cars). The revenue authorities incorrectly imposed 5%/6% payment option under Rule 6(3)(i) of Credit Rules without the assessee exercising such option. Following Telangana HC precedent in Tiara Advertising case and CESTAT Allahabad decision in Ingersoll-Rand Technologies, the tribunal held that revenue cannot thrust payment option upon assessee who did not exercise Rule 6 option. The impugned order was set aside without examining extended limitation period contentions.

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Issues Involved:
1. Availment of Cenvat credit on input services utilized for trading activities.
2. Applicability of Rule 6 of the Cenvat Credit Rules, 2004.
3. Invocation of extended period of limitation.

Summary:

Issue 1: Availment of Cenvat credit on input services utilized for trading activities

The appellant, an authorized dealer and service center of M/s Maruti Udyog Ltd., availed Cenvat credit on input services used for both taxable services and trading (sale of cars). The Department contended that trading is not a taxable output service and thus, the appellant's utilization of 100% Cenvat credit on common input services was improper. The audit observed that the appellant did not maintain separate accounts for input services used for taxable and exempted services.

Issue 2: Applicability of Rule 6 of the Cenvat Credit Rules, 2004

The Show Cause Notice (SCN) alleged that the appellant failed to maintain separate accounts or reverse 6% of the value of exempted services, thus requiring a proportionate reversal of Cenvat credit. The appellant argued that the sale of cars is not a service and thus does not fall under exempted services. The Tribunal referred to the Hon'ble Telangana High Court's decision in Tiara Advertising v. Union of India, which clarified that Rule 6(3) of the Cenvat Credit Rules, 2004, offers options to service providers who do not maintain separate accounts, but these options cannot be imposed by the authorities. The Tribunal also cited similar judgments from the Hon'ble High Court of Calcutta and CESTAT Allahabad, reinforcing that trading was not considered an exempted service prior to 01.04.2011, and the authorities could not mechanically invoke a 5% rule on the appellant.

Issue 3: Invocation of extended period of limitation

The appellant contended that the extended period of limitation is not applicable. However, the Tribunal did not find it necessary to delve into this contention due to the resolution of the primary issues.

Judgment:

The Tribunal set aside the impugned order, agreeing with the appellant's arguments and citing relevant case law. It concluded that the authorities could not impose the reversal of Cenvat credit based on Rule 6(3) without the appellant's choice and that trading activities were not considered exempted services prior to 01.04.2011. Consequently, the appeal was allowed with consequential relief as per law.

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