2010 (5) TMI 85 - AT - Service Tax

Trading activity not a service; rules 3 and 6(3) on input service credit do not apply; exclude trading-attributable credit

CESTAT held that trading activity (purchase and sale) is not a service, so rules 3 and 6(3) governing input service credit for services do not apply. As a ... Trading not a service - Cenvat Credit Rules - applicability to exempted and dutiable services - Service Tax Credit Rules - applicability to non taxable services - segregation and reversal of credit attributable to non service activity - remand for quantification and verification of credit reversalTrading not a service - Trading activity cannot be treated as a service and therefore cannot be an exempted service for the purposes of the Cenvat/Service Tax credit rules. - HELD THAT: - The Tribunal found that trading activity is essentially purchase and sale governed by sales tax law and is not a service under service tax law. Consequently, trading cannot be classified as an exempted service within the meaning of provisions which distinguish between taxable and exempted output services. The conclusion that trading is not a service was reached and applied to the facts of the case. [Paras 5]Trading activity is not a service and cannot be considered an exempted service.Cenvat Credit Rules - applicability to exempted and dutiable services - Service Tax Credit Rules - applicability to non taxable services - Provisions of Rule 6 of the Cenvat Credit Rules and Rule 3 of the Service Tax Credit Rules operate in the context of assessees providing both taxable and exempted (or non taxable) services and do not apply to activities that are not services, such as trading. - HELD THAT: - The Tribunal examined Rule 6(2) of the Cenvat Credit Rules and Rule 3 of the Service Tax Credit Rules and held these rules are framed to deal with providers who render both taxable and exempted output services (or taxable and non taxable services). Because trading is not a service, the statutory scheme in those rules is not directly applicable to segregate input service credit attributable to trading. The rules therefore cannot be invoked to justify treating trading as an exempted output service for the purpose of credit restriction. [Paras 6, 7]Cenvat Credit Rules and Service Tax Credit Rules are not applicable to trading activity since trading is not a service.Segregation and reversal of credit attributable to non service activity - remand for quantification and verification of credit reversal - Assessee must segregate and exclude input service credit attributable to trading activity from credit availed for taxable output services; the matter as to the quantum to be reversed is remanded to the Original Adjudicating Authority for verification and quantification. - HELD THAT: - The Tribunal recognised a lacuna where an assessee carries out a taxable service and a separate non service activity (trading) that falls outside the excise/service tax regime. It held that the legally correct course is for the assessee to segregate, on reasonable accounting principles, the portion of input service credit attributable to trading and exclude that portion from credits used for payment of service tax. Practical implementation requires periodic (quarterly or half yearly) deduction of credit attributable to trading. Given the factual dispute over usage of particular input services and the quantum attributable to trading, the Tribunal remanded the matter to the Original Adjudicating Authority to allow the assessee to present segregated details, to verify them and, if necessary after giving opportunity to the assessee, quantify the amount to be reversed or paid. [Paras 8, 9]Assessee must segregate and exclude credit attributable to trading; matter remanded to Original Adjudicating Authority for verification and quantification with opportunity to the assessee.Final Conclusion: Trading is not a service and Cenvat/Service Tax credit rules applicable to exempted or non taxable services do not apply; the assessee must segregate and exclude input service credit attributable to trading, and the quantification of any reversal or payment is remanded to the Original Adjudicating Authority for verification and determination after affording the assessee an opportunity. Issues:1. Whether trading activity can be called a service.2. Whether Rule 6 of Cenvat Credit Rules, 2002 and Service Tax Credit Rules, 2002 would be applicable when input services are used in respect of trading activity as well as taxable services.3. If Cenvat Credit Rules and Service Tax Credit Rules are not applicable, the procedure to be followed by the assessee for availing input service tax credit.Analysis:Issue 1:The Tribunal considered whether trading activity could be classified as a service. It was determined that trading activity, being primarily sales and purchases, falls under sales tax laws and is not considered a service. Therefore, trading activity cannot be labeled as a service or an exempted service.Issue 2:Regarding the applicability of Rule 6 of Cenvat Credit Rules and Service Tax Credit Rules, the Tribunal analyzed the provisions of Rule 6(2) of Cenvat Credit Rules, emphasizing the requirement for maintaining separate accounts for input services used in dutiable and exempted goods or services. It was noted that since trading activity is not a service, the provisions of these rules do not apply to such activities.Issue 3:The Tribunal addressed the procedure for availing input service tax credit when trading activity is involved. It was highlighted that if an assessee is engaged in activities that are not services or manufacturing, they must segregate the input services attributable to trading activity and exclude them from credit availment records. The Tribunal suggested periodic adjustments based on standard accounting principles to ensure correct credit utilization for taxable services.In conclusion, the Tribunal remanded the matter to the Original Adjudicating Authority for the appellants to present details of service tax paid on input services related to trading activity separately. The Authority was directed to quantify any amount to be reversed or paid by the appellants after verification, with the opportunity for revision granted to the appellants if necessary. The decision aimed to ensure compliance with legal requirements and proper utilization of service tax credits in scenarios involving trading activities.