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 result, input service tax credit attributable to trading must be identified and excluded by the appellant. The matter was remanded to the Original Adjudicating Authority for the appellant to furnish separate details of service tax on inputs attributable to trading and other services; the authority shall verify and quantify any amount to be reversed or paid.

---

---

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.

---