2025 (3) TMI 65 - AT - Service Tax

Input service tax credit denied for trading activities as trading constitutes exempted services under Cenvat Credit Rules

M/s. SHV LPG India Pvt. Ltd. (formerly known as Caltex Gas India Pvt Ltd.,) Versus Commissioner of GST & Central Excise, Chennai South Commissionerate

CESTAT Chennai held that input service tax credit cannot be availed on services used for trading activities as trading constitutes exempted services. The ... Disallowance of wrongly availed and utilized input service credit - input service or not - Packaging Service - Department was of the view that such input services were availed by the appellant not only for rendering the services to BPCL but also for the sale of their own LPG on which no excise duty or service tax was paid - HELD THAT:- The issue whether the input service tax credit taken on taxable services availed while providing taxable output services as well as engaging in the activity of trading is no more res-integra as it has now been consistently held by High Courts of different jurisdictions that credit cannot be taken of entire service tax paid on taxable services availed while providing taxable output services or manufacturing taxable goods as well as simultaneously engaging in the activity of trading. It is seen that the Honourable High Court of Madras in its decision in M/s. Ruchika Global Interlinks v The CESTAT, Chennai, [2017 (6) TMI 635 - MADRAS HIGH COURT] has held that 'learly, both before and after amendment, “exempted services” meant those taxable services, which were exempt from whole of Service Tax and, included those services on which Service Tax was not leviable, under Section 66 of the Finance Act. The inclusion in Explanation to Rule 2(e) “trading” was, without doubt, only clarificatory. As accepted by Mr. Jayachandran, the appellant had not been paying Service Tax on trading activity during the relevant period.' Again, in CCE Thane II v. Milton Polyplas (I) Pvt Ltd, [2019 (4) TMI 240 - BOMBAY HIGH COURT], the Honourable High Court of Bombay was deciding whether the notice issued invoking the erstwhile Rule 57 I of the MODVAT rules demanding fraudulently availed credit during the period 1995 to 1999 would abate as contended by the Respondent-assessee therein, since the MODVAT rules were omitted and/or substituted by CENVAT Rules w.e.f 1st April 2000. The effect of Section 38A, namely that it will not affect the previous operation of the rules and the right, privilege, obligation or liability acquired, accrued or incurred or incurred under the said repealed rules is subject to the caveat “unless a different intention appears”, stipulated therein. However, while the Cenvat Credit Amendment Rules, 2011, notified by Notification No.3/2011-CE (NT) dated 01-03-2011, which came into effect from 01.04.2011, effected sweeping changes, we could not glean or discern a different intention to curb any right, privilege, obligation or liability acquired, accrued or incurred under any rule, notification or order so amended, repealed, superseded or rescinded, so as to deny the benefit under Rule 6(5) of the CCR that is being claimed by the appellant. If the appellants were availing any of the aforementioned specified taxable services and had taken credit of service tax paid on the same and have not used such specified taxable services exclusively in or in relation to providing exempted services, then irrespective of the stipulations in sub-rules (1), (2) and (3) of Rule 6 of the Cenvat Credit Rules, 2004, credit of the whole of service tax paid on such specified taxable services shall be allowed and such taking of credit is correct and legal. The jurisdictional High Court in the case of M/s. Ruchika Global Interlinks has held that the explanation to Rule 2(e) stipulating that “exempted services” includes trading is clarificatory. Thus, for the relevant period, trading is to be treated as “exempted services”. Conclusion - i) Input service tax credit on services used in trading activities cannot be availed as trading is treated as an exempted service. ii) The benefit of Rule 6(5) of the Cenvat Credit Rules, 2004, applies to the relevant period, allowing credit on specified services unless used exclusively for exempted services. iii) Penalties imposed on the appellants are unsustainable due to the interpretational ambiguities and the appellants' bona fide belief in their entitlement to credits. The matter needs to be remanded to the jurisdictional adjudicating authority in order to determine the extent to which the cenvat credit has been taken on the services which the appellants have claimed would be taxable services as specified in the sub-clauses of clause (105) of Section 65 of the Finance Act as listed in Rule 6(5), and credit of whole of service tax of which shall be allowed unless such service is used exclusively in or in relation to manufacture of exempted goods or providing exempted services - Appeal disposed off by way of remand. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment revolve around the disallowance of wrongly availed and utilized input service credit by the appellants, the consequent demand for recovery of such credit along with interest, and the imposition of penalties. Specifically, the issues include: Whether the input service tax credit taken on taxable services availed while providing taxable output services and engaging in trading activities was rightly availed. The applicability of Rule 6(5) of the Cenvat Credit Rules, 2004, which allows credit on certain specified services, and whether the appellants could claim this benefit. The imposition of penalties on the appellants for availing such credits and whether the penalties are sustainable given the interpretational ambiguities surrounding the law during the disputed period.ISSUE-WISE DETAILED ANALYSIS1. Input Service Tax Credit and Trading ActivitiesThe relevant legal framework involves the Cenvat Credit Rules, 2004, particularly Rule 2(l) defining 'input service' and Rule 6 addressing the obligation of manufacturers and service providers. The Department contended that the appellants wrongly availed credit on services used in trading activities, which were not taxable during the relevant period. The Court referenced prior decisions, including those from the High Courts of Madras and Delhi, which consistently held that trading activities are to be treated as exempted services, thus not eligible for input service credit.The Court noted that the explanation to Rule 2(e) of the Cenvat Credit Rules, 2004, which clarified that 'exempted services' include trading, was only clarificatory. Consequently, the appellants' claim that trading was not explicitly covered as exempted during the relevant period was rejected.2. Applicability of Rule 6(5) of the Cenvat Credit Rules, 2004The appellants argued for the applicability of Rule 6(5), which allowed full credit on certain specified services unless used exclusively for exempted goods/services. The Court examined the omission of Rule 6(5) effective from April 1, 2011, and its implications. Citing the Supreme Court's interpretation of statutory omissions as repeals, the Court held that the omission did not affect rights or liabilities accrued under the rule before its repeal. Therefore, the appellants could claim the benefit of Rule 6(5) for the relevant period.3. Imposition of PenaltiesThe penalties were imposed based on the appellants' continued availing of credits despite prior adjudications. However, the Court acknowledged the interpretational ambiguities and the evolving legal landscape, which could lead to a bona fide belief regarding the entitlement to credits. Citing the Madras High Court's decision in Shriram Value Services Pvt Ltd, the Court found that penalties were unwarranted and set them aside.SIGNIFICANT HOLDINGSThe Court held that: Input service tax credit on services used in trading activities cannot be availed as trading is treated as an exempted service. The benefit of Rule 6(5) of the Cenvat Credit Rules, 2004, applies to the relevant period, allowing credit on specified services unless used exclusively for exempted services. Penalties imposed on the appellants are unsustainable due to the interpretational ambiguities and the appellants' bona fide belief in their entitlement to credits.The Court remanded the case for a de novo adjudication to determine the extent of credit eligible under Rule 6(5) and directed that penalties be set aside. The adjudicating authority is instructed to conduct proceedings expeditiously, adhering to principles of natural justice, and allow the appellants to present evidence supporting their claims.