2026 (1) TMI 652 - AT - Service Tax

Procurement and supply of goods and gift vouchers held trading; Rule 6 applied and CENVAT credits denied

Whether activity constitutes trading: The tribunal found the appellant's procurement and supply of goods and gift vouchers falls within ... CENVAT credit - availment and utilisation of CENVAT credit on common input services attributable to trading activity - contravention of Rule 6 of the CENVAT Credit Rules, 2004 - recovery with interest and penalty - invocation of the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994. Whether procurement and supply of goods and gift vouchers by the appellant constitute “trading activity” under the CENVAT Credit Rules, 2004? - HELD THAT:- The appellant is engaged in buying and selling of goods/vouchers, which squarely falls within the ordinary and commercial understanding of trading - the procurement and supply of goods and gift vouchers by the appellant constitutes trading activity - the issue is decided against the appellant. The procurement and supply of goods and gift vouchers constitute trading activity. Whether gift vouchers are actionable claims or goods-in-lieu, and whether their supply can escape Rule 6 of the CENVAT Credit Rules? - HELD THAT:- The gift vouchers represent goods-in-lieu, and not actionable claims - Gift vouchers are not actionable claims - They represent goods-in-lieu, and their trading attracts Rule 6 of CCR 2004 consequences. Whether CENVAT credit attributable to trading activity is admissible prior to 01.04.2011 under the CENVAT Credit Rules, 2004? - HELD THAT:- The phrase “for removal of doubts” used in the Explanation is a clear legislative indicator that the amendment was intended to clarify the existing position and not to create a new levy or restriction - the credit attributable to trading activity was not admissible even prior to 01.04.2011, and the Department was justified in denying such credit - thus, CENVAT credit attributable to trading activity is not admissible even for the period prior to 01.04.2011. Whether, for the period from 01.04.2011 to 31.03.2016, the appellant is entitled to avail CENVAT credit on common input services attributable to trading activity, and whether compliance with Rule 6 of the CENVAT Credit Rules, 2004 is mandatory? - HELD THAT:- From 01.04.2011 onwards, trading is statutorily deemed to be an exempted service, irrespective of the fact that it is not a taxable service under the Finance Act, 1994 - Once an activity is treated as an exempted service, Rule 6(1) comes into operation, which mandates that no CENVAT credit shall be allowed on inputs or input services used for provision of exempted services - The argument of the appellant that Rule 6 is optional is misplaced. The option exists only between the methods prescribed under Rule 6(3), and not between compliance and non-compliance. This position has been consistently upheld by courts. Since the appellant admittedly failed to maintain separate accounts and failed to follow the prescribed reversal/payment mechanism, the denial of credit is legally sustainable. For the period from 01.04.2011 to 31.03.2016, CENVAT credit attributable to trading activity is inadmissible unless Rule 6 is strictly complied with - the issue is decided against the appellant. Whether, after the amendments to the CENVAT Credit Rules post-2016, the appellant is entitled to avail CENVAT credit / whether the demands for the post-2016 period are sustainable? - HELD THAT:- Mere assertion of reversal, without demonstrating strict procedural compliance, cannot entitle the appellant to retain credit. The Tribunal in Dorma India Ltd. [2023 (8) TMI 1691 - CESTAT CHENNAI (LB)] has categorically held that post-amendment provisions do not grant any automatic entitlement to credit, and that Rule 6 compliance remains mandatory - there are no merit in the contention that the Department cannot raise demands for successive periods. Where non-compliance continues, each period gives rise to a fresh cause of action - the appellant is not entitled to avail CENVAT credit attributable to trading activity even for the post-2016 period, in the absence of strict compliance with Rule 6 - the issue is decided against the appellant. Whether invocation of the extended period of limitation, demand of interest and imposition of penalties are sustainable? - HELD THAT:- The proviso to Section 73(1) permits invocation of the extended period where non-payment or short payment of tax arises by reason of fraud, collusion, wilful misstatement, suppression of facts or contravention of statutory provisions with an intent to evade payment of tax. The plea that details were available in books of accounts cannot be accepted. It is settled law that statutory returns are the primary mode of disclosure, and mere availability of information in accounts does not amount to disclosure to the Department - The Hon’ble Supreme Court in Pushpam Pharmaceuticals Co. v. CCE [1995 (3) TMI 100 - SUPREME COURT] has held that suppression includes failure to disclose information which the assessee is legally required to disclose. In the present case, trading details were admittedly not declared in returns. Therefore, the computation of limitation from the date of subsequent disclosure is legally correct - the extended period has been rightly invoked. Levy of Interest - HELD THAT:- Interest under the relevant provisions of the Finance Act, 1994 and CENVAT Credit Rules is automatic and mandatory, once inadmissible credit is availed and utilised - The Hon’ble Supreme Court in SKF India Ltd. v. CCE [2009 (7) TMI 6 - SUPREME COURT] has held that interest is compensatory and follows as a matter of course - the demand of interest is legally sustainable. Levy of penalties - HELD THAT:- The imposition of penalties, including penalties equivalent to the amount of inadmissible credit, is upheld, there being suppression of material facts with intent to evade payment of duty/tax. However, invoking the provisions of Section 80 of FA 1994, in respect of Six appeals relating to periods prior to 14.05.2015 are eligible for complete waiver of penalties under Sections 76, 77 and 78 by invoking Section 80, on the ground of reasonable cause and the seventh appeal, pertaining to the period after 14.05.2015, is not eligible for waiver of penalty, as the statutory power under Section 80 stood deleted. Appeal disposed off. Issues: (i) Whether procurement and supply of goods and gift vouchers by the appellant constitute trading activity under the CENVAT Credit Rules, 2004; (ii) Whether gift vouchers are actionable claims or goods-in-lieu for the purposes of Rule 6 of the CENVAT Credit Rules, 2004; (iii) Whether CENVAT credit attributable to trading activity was admissible prior to 01.04.2011 under the CENVAT Credit Rules, 2004; (iv) Whether for the period 01.04.2011 to 31.03.2016 the appellant was required to reverse/pay amounts under Rule 6(3)/6(3A) in respect of trading; (v) Whether post-2016 amendments affect entitlement to CENVAT credit for trading/gift vouchers; (vi) Whether invocation of extended period of limitation, demand of interest and imposition of penalties are sustainable.Issue (i): Whether procurement and supply of goods and gift vouchers by the appellant constitute trading activity under the CENVAT Credit Rules, 2004Analysis: The Tribunal examined agreements, invoices and accounting records and found undisputed facts: independent procurement of goods/vouchers, separate recovery of cost, VAT/CST paid on supplies and maintenance of inventory. The supply chain and treatment in statutory records indicate buying and selling distinct from the taxable service component. Relevant precedents and Tribunal/High Court decisions treating similar activity as trading were applied.Conclusion: The issue is decided against the appellant. The procurement and supply of goods and gift vouchers constitute trading activity (against the assessee).Issue (ii): Whether gift vouchers are actionable claims or goods-in-lieu for the purposes of Rule 6 of the CENVAT Credit Rules, 2004Analysis: The Tribunal distinguished lottery tickets (actionable claims) from gift vouchers on the basis that vouchers carry assured value, are redeemable for goods and represent consideration already received. Reliance was placed on precedents and Board guidance recognising vouchers as representing value of goods and attracting trading consequences.Conclusion: The issue is decided against the appellant. Gift vouchers are not actionable claims but represent goods-in-lieu and attract Rule 6 consequences (against the assessee).Issue (iii): Whether CENVAT credit attributable to trading activity was admissible prior to 01.04.2011 under the CENVAT Credit Rules, 2004Analysis: The Tribunal applied the foundational principle that CENVAT credit is admissible only where inputs/input services are used for manufacture of dutiable goods or provision of taxable services. Trading is neither manufacture nor taxable service; the Tribunal followed binding decisions (including Lally Automobiles and Dorma India Ltd.) holding that credit attributable to trading was inadmissible even prior to 01.04.2011 and viewed the 2011 Explanation as clarificatory.Conclusion: The issue is decided against the appellant. CENVAT credit attributable to trading activity was not admissible prior to 01.04.2011 (against the assessee).Issue (iv): Whether for the period 01.04.2011 to 31.03.2016 the appellant was required to reverse/pay amounts under Rule 6(3)/6(3A) in respect of tradingAnalysis: With trading statutorily treated as an exempted service from 01.04.2011 (Explanation to Rule 2(e)), Rule 6(1) bars credit for inputs/input services used for exempted services. Rule 6(2) requires separate accounts; absent such accounts, Rule 6(3)/6(3A) prescribes mandatory reversal/payment methods. The Tribunal found that the appellant did not comply with these provisions and relied on corpus decisions and Board circulars affirming mandatory compliance.Conclusion: The issue is decided against the appellant. For 01.04.2011–31.03.2016 CENVAT credit attributable to trading is inadmissible unless Rule 6 requirements are strictly complied with (against the assessee).Issue (v): Whether post-2016 amendments affect entitlement to CENVAT credit for trading/gift vouchersAnalysis: The Tribunal analysed post-2016 changes as procedural/rationalising and not altering the core eligibility condition for credit. It found that trading continued to be treated as exempted; Rule 6 compliance (including 6(3A)) remained obligatory and the appellant failed to demonstrate procedural compliance for the later period.Conclusion: The issue is decided against the appellant. Post-2016 amendments do not entitle the appellant to retain credit in absence of strict Rule 6 compliance (against the assessee).Issue (vi): Whether invocation of extended period of limitation, demand of interest and imposition of penalties are sustainableAnalysis: The Tribunal held that extended limitation under the proviso to Section 73(1) applies where suppression or failure to disclose in statutory returns is established. It found trading turnover and inadmissible credit were not disclosed in ST-3 returns and that disclosure in books is not disclosure in returns. Citing binding precedents, the Tribunal held interest to be mandatory and penalties under Sections 76–78 attracted where suppression exists; it examined case law relied upon by the appellant and distinguished them on facts.Conclusion: The issue is decided against the appellant. Invocation of extended period, demand of interest and imposition of penalties are sustainable (against the assessee).Final Conclusion: The Tribunal upholds the demands for reversal/recovery of inadmissible CENVAT credit, interest and, subject to statutory waiver for pre-14.05.2015 periods, penalties; trading and voucher-supply are treated as trading/exempted service and Rule 6 compliance is mandatory. The appeals are disposed in accordance with these findings.Ratio Decidendi: CENVAT credit is admissible only where inputs or input services are used for manufacture of dutiable goods or provision of taxable services; trading (including supply of gift vouchers treated as goods-in-lieu) is not a taxable service and credit attributable to trading is inadmissible, Rule 6 mandates reversal/payment where separate accounts are not maintained, and non-disclosure in statutory returns permits invocation of the extended period under the proviso to Section 73(1).