Trading as exempted service held prospective from amendment, so neutralisation under Rule 6 not applied and remand ordered.

For the period before 01-04-2011, trading did not constitute an exempted service within the CENVAT Credit Rules, 2004 because the Explanation inserting trading into the definition of exempted services was substantive and operates prospectively from its effective date; consequently the obligation in rule 6 to neutralise or reverse credit attributable to exempted services did not apply for the relevant earlier period. Distributed input service credit held proper on availment does not itself create an immediate recovery; the matter is remitted to the original authority for fresh ascertainment limited to any enforceable recovery.

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Issues: Whether, for the period prior to 1-4-2011, 'trading' constituted an 'exempted service' under the CENVAT Credit Rules, 2004 and consequently whether the obligation under rule 6 of the CENVAT Credit Rules, 2004 to neutralise/ reverse distributed credit applied to input service credits distributed by a head office as an input service distributor.

Analysis: The Tribunal reviewed earlier decisions and the amendment/Explanation introduced by Notification No. 3/2011-C.E.(N.T.) dated 01-03-2011 to rule 2(e) of the CENVAT Credit Rules, 2004 which expressly addressed inclusion of trading within the definition of 'exempted services' w.e.f. 01-04-2011. Applying authoritative precedents on the effect of an Explanation that introduces substantive change, the Tribunal found that the Explanation has prospective effect from its effective date and does not make trading an 'exempted service' prior to 01-04-2011. In consequence, the obligation under rule 6 (relating to neutralisation/reversal of credit attributable to exempted services) did not apply for periods before 01-04-2011. The Tribunal further observed that where distributed credit arose from availment that is now held to be proper, any residual recovery requires fresh ascertainment by the original authority and thus remand limited to that determination is appropriate.

Conclusion: The appeal is allowed by way of remand: trading was not an 'exempted service' prior to 01-04-2011 and rule 6 of the CENVAT Credit Rules, 2004 was not applicable for the relevant period; the impugned demand is set aside and the matter is remitted to the original authority for fresh determination limited to ascertainment of any enforceable recovery.

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