Prospective effect of statutory Explanation: trading not an exempted service pre-amendment, so credit neutralisation not required and remand ordered.

An Explanation that substantively widens a statutory provision is to be given prospective effect; consequently trading was not an exempted service before the amendment and rule 6 CENVAT neutralisation does not apply to distributed credit for the prior period. Disallowances of input-service credits based on alleged lack of correlation/nexus are undermined by later Tribunal decisions on identical services and therefore require fresh adjudication; the impugned demands are set aside and the matters remanded for de novo proceedings to determine any recoverable amount consistent with these legal findings.

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Issues: (i) Whether distributed CENVAT credit availed by head office and distributed to factories without excluding amounts attributable to trading/exempted activities for the period prior to 1-4-2011 was liable to be recovered under rule 6 of the CENVAT Credit Rules, 2004; (ii) Whether demands for denial of credit for lack of correlation/nexus of specific input services with final products should be sustained or require fresh consideration.

Issue (i): Whether trading constituted an "exempted service" prior to 1-4-2011 such that rule 6 of the CENVAT Credit Rules, 2004 obliged neutralisation of distributed credit attributable to trading.

Analysis: The amendment inserting trading into the definition of exempted services by Notification with effect from 1-4-2011 is to be construed with regard to whether it operates retrospectively or prospectively. Relevant authorities and precedents establish that an Explanation which effects a substantive change or widens the scope of the main provision is presumed prospective unless a contrary legislative intent is clear. Decisions cited indicate that trading was not an exempted service prior to 1-4-2011 and that the obligation to neutralise credit under rule 6 does not apply for periods before that amendment.

Conclusion: Trading was not an exempted service prior to 1-4-2011; therefore the obligation under rule 6 of the CENVAT Credit Rules, 2004 to neutralise distributed credit attributable to trading does not apply for the period in dispute. This conclusion is in favour of the assessee.

Issue (ii): Whether disallowance of specific credits for lack of correlation/nexus with final products should be sustained.

Analysis: Certain input services disputed were subsequently adjudicated in favour of the assessee for later periods by orders of the Tribunal without challenge by Revenue. Given those subsequent decisions on identical or substantially similar services and the absence of independent, conclusive adjudication for the period in question, the correctness of earlier disallowances is undermined. The matter requires reconsideration of applicability of the legal tests for correlation and nexus to the specific facts of the period under dispute.

Conclusion: The disallowances for lack of correlation/nexus are not sustained in their present form and require fresh adjudication; this conclusion operates in favour of the assessee to the extent that the demands are set aside for reconsideration.

Final Conclusion: The demands confirmed in the impugned orders do not survive in their present form; appeals are disposed of by setting aside the demands and remanding the matters to the original authority for de novo proceedings limited to ascertaining any enforceable recovery consistent with the findings on the legal issues above.

Ratio Decidendi: An Explanation that effects a substantive widening of a statutory provision is presumed to have prospective effect; accordingly, trading was not an exempted service prior to 1-4-2011 and rule 6 of the CENVAT Credit Rules, 2004 does not apply to require neutralisation of distributed credit for periods before that date.

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