Trading activity is outside the service-tax credit scheme, and input credit linked to trading must be segregated and reversed.

Trading activity is not a service and therefore cannot be treated as an exempted service for credit purposes. Where common input services are used both for taxable output services and for trading, the Cenvat Credit Rules, 2004 and Service Tax Credit Rules, 2002 do not permit credit attributable to trading, because that portion falls outside the service-tax credit scheme. The proper method is periodic segregation of the trading-related portion on a reasonable basis using standard accounting principles, with reversal or exclusion of ineligible credit before availing the balance. Credit attributable to trading is inadmissible, and the matter requires quantification after such segregation.

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Issues: (i) Whether trading activity can be treated as a service and hence as an exempted service. (ii) Whether the Cenvat Credit Rules, 2004 and the Service Tax Credit Rules, 2002 apply where common input services are used for trading activity as well as taxable output services. (iii) What procedure should be followed for availing credit where input services are partly attributable to trading activity.

Issue (i): Whether trading activity can be treated as a service and hence as an exempted service.

Analysis: Trading consists of purchase and sale and falls within sales tax law. It does not answer the description of a service. Since it is not a service at all, it also cannot be treated as an exempted service for the purpose of the credit scheme.

Conclusion: Trading activity cannot be treated as a service or as an exempted service.

Issue (ii): Whether the Cenvat Credit Rules, 2004 and the Service Tax Credit Rules, 2002 apply where common input services are used for trading activity as well as taxable output services.

Analysis: The credit rules contemplate situations where taxable services are provided along with exempted services. They do not directly govern a case where part of the business is an activity outside the scope of service itself. In such a case, credit relatable to trading activity cannot be allowed as input service credit for payment of service tax on taxable output services.

Conclusion: The credit rules do not apply to trading as an exempted service, but credit attributable to trading activity is not admissible.

Issue (iii): What procedure should be followed for availing credit where input services are partly attributable to trading activity.

Analysis: Since advance segregation may not always be possible, the proper course is to identify and exclude, at reasonable intervals, the portion of credit attributable to trading on the basis of standard accounting principles, and to avail only the balance for payment of service tax. Subsequent reversal of ineligible credit is treated as non-availment of credit.

Conclusion: The assessee must segregate and reverse the credit attributable to trading activity periodically before availing the balance credit.

Final Conclusion: The demand could not be sustained in the form originally adopted, but the assessee was not entitled to credit attributable to trading activity, and the matter was sent back for quantification after segregation of eligible and ineligible credit.

Ratio Decidendi: Where an assessee uses common input services for taxable services and for trading activity, the portion of credit attributable to trading is not admissible and must be excluded by segregation or reversal; trading activity is outside the ambit of service for credit purposes.

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