CENVAT credit on shared input services used partly for trading: proportionate reversal required; extended limitation partly upheld

CENVAT credit on common input services attributable to trading was held inadmissible because trading is neither a taxable service nor an activity of manufacture; therefore, proportionate reversal was legally required even for periods prior to 01.04.2009. Finding the assessee's departmental intimations misleading and inconsistent, and noting absence of evidence of bona fide belief, the Tribunal held that suppression was established and the extended period of limitation was invocable for 2006-07 and 2007-08; consequently, recovery of proportionate credit for the pre-01.04.2009 period was upheld. For 2009-10 and 2010-11, once audit had detected the issue and reversal commenced, extended limitation was held inapplicable; recovery, if any, had to be within the normal period. Demand with interest was sustained.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether the extended period of limitation could be invoked to recover CENVAT credit taken on common input services attributable to trading activity, on the allegation of suppression/wilful non-disclosure.

(ii) Whether, on the facts found, the demand for reversal/recovery of such CENVAT credit and interest was liable to be sustained.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Invocability of the extended period of limitation for credit attributable to trading activity

Legal framework: The Court/Tribunal examined limitation with reference to the statutory scheme of extended limitation for recovery where non-payment/short-payment is attributable to fraud/suppression/wilful misstatement/contravention with intent to evade, and the assessee's obligations under the CENVAT credit regime when common input services are used for taxable/manufacturing activity and non-taxable trading activity.

Interpretation and reasoning: The majority accepted that CENVAT credit attributable to trading was inadmissible during the relevant period and focused on whether the assessee had disclosed the trading activity and the taking of common input service credit in a manner negating suppression. On the factual appraisal of correspondence and returns, the majority found that the trading activity (forming a substantial part of turnover) was not clearly disclosed to the Department prior to the Department's visit/verification, and that there was no clear contemporaneous disclosure in returns that common input service credit was being taken with a portion attributable to trading. The majority also rejected the plea of "conflicting views" as a basis to negate extended limitation for earlier years, noting the absence of supporting material establishing bona fide belief for the period for which extended limitation was invoked. It was, however, noted that once the audit objection was raised and reversal was made for a later year, the Department could not continue to allege suppression for subsequent periods in the same manner.

Conclusions: The majority held that the extended period is invocable for recovery of credit attributable to trading for the period prior to the detection/reversal, and the allegation of suppression was accepted for that earlier period. Accordingly, limitation did not bar the demand as confirmed.

Issue (ii): Sustainability of demand for reversal/recovery of credit and interest

Legal framework: The Court/Tribunal proceeded on the admitted position that trading is neither manufacture nor a taxable output activity during the relevant period, and therefore credit on common input services to the extent attributable to trading is not admissible.

Interpretation and reasoning: Since inadmissibility of credit on trading activity was not in dispute, and extended limitation was held applicable on facts, the majority treated the confirmed recovery as maintainable. The majority also noted that a later reversal by the assessee pursuant to audit did not negate recoverability of inadmissible credit for earlier periods, nor did it establish a legally acceptable ground to defeat recovery by limitation.

Conclusions: The majority sustained the demand as confirmed along with interest, holding that the extended period could be applied and the recovery could not be defeated on limitation.

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