2026 (3) TMI 1588 - AT - Central Excise

Post-clearance sale of manufactured vehicles was not trading, and Rule 6 credit reversal failed without proof of exempted service nexus.

Post-clearance sale of vehicles manufactured on job work basis through Regional Sales Offices was not trading, because the goods were first manufactured ... Post-clearance sale of vehicles through Regional Sales Offices - Trading as exempted service under Rule 2(e) - assumption of engaged in trading activity - Applicability of Rule 6 - reversal of credit or payment of amount - manufacture of Light Commercial Vehicles known as “DOST” on job work basis - cleared on payment of Central Excise duty in terms of Rule 10A of the Central Excise Valuation - demand in the first notice hit by limitation - Extended period of limitation. Whether the appellant was engaged in trading activity amounting to “exempted service” under Rule 2(e) of the CENVAT Credit Rules, 2004 - HELD THAT:- The Tribunal held that, in common commercial understanding, trading denotes purchase and sale of goods without undertaking manufacture. Here, the vehicles were admittedly manufactured by the appellant at its factory on job work basis and cleared on payment of Central Excise duty under Rule 10A. Mere subsequent sale through Regional Sales Offices formed part of the normal sale chain after clearance and did not alter the character of the activity already completed in the factory. In the absence of any evidence that the appellant independently purchased finished vehicles as a trader for resale, the allegation of trading could not be sustained. [Paras 8] The Department failed to establish that the appellant was engaged in trading of vehicles so as to fall within exempted service. Applicability of Rule 6 credit reversal - Common input services - Nexus with exempted activity - HELD THAT:- The Tribunal held that invocation of Rule 6 required proof of two foundational elements: engagement in both dutiable and exempted activities, and use of common inputs or input services for both. The show cause notices proceeded only on the assumption that sale through Regional Sales Offices was trading, without identifying any specific input service used in relation to the alleged exempted activity or establishing a nexus between the credit availed and such activity. The Tribunal also noted that duty had been discharged on the vehicles cleared from the factory on the assessable value determined under Rule 10A. Applying the principles in M/s. Markwell Paper Plast Pvt. Ltd. Versus CC&CE, Noida [2012 (7) TMI 290 - CESTAT, NEW DELHI], Commissioner of Central Excise, Tirunelveli vs DCW Ltd [2008 (10) TMI 380 - MADRAS HIGH COURT], and Union of India vs Hindustan Zinc Ltd [2014 (5) TMI 253 - SUPREME COURT], it held that credit reversal provisions could not be invoked on an artificial bifurcation of the same manufacturing activity. [Paras 9] The demand raised under Rule 6(3) lacked legal basis and was unsustainable. Extended period of limitation - Suppression of facts - Penalty - HELD THAT: - The Tribunal found that the first notice was founded on materials drawn from the appellant's own financial statements and annual reports, showing that the relevant facts were already available to the Department during audit. There was no evidence of suppression, fraud or wilful misstatement, and the dispute arose only from the Department's legal characterization of the activity. Relying on Gammon India Ltd. vs Commissioner of Central Excise and Pahwa Chemicals Pvt. Ltd. vs Commissioner of Central Excise [1999 (5) TMI 436 - CEGAT, MUMBAI], the Tribunal held that extended limitation could not be invoked where facts stood disclosed in statutory records. Since the demand failed on merits in any event, the second notice, though within normal limitation, also could not survive; and the penalties were liable to be set aside. [Paras 10] The demand in the first notice was barred from invocation of the extended period, and all penalties were set aside; the second notice also failed on merits. Final Conclusion: The Tribunal held that the appellant's activity remained one of manufacture and clearance on payment of duty, and could not be recharacterised as trading to invoke Rule 6 of the CENVAT Credit Rules, 2004. The demands failed on merits; the extended period invoked in the first notice was also held inapplicable, and the penalties were set aside. Issues: (i) Whether the appellant's post-clearance sale of vehicles through Regional Sales Offices constituted trading amounting to exempted service under Rule 2(e) of the CENVAT Credit Rules, 2004; (ii) whether Rule 6(3) of the CENVAT Credit Rules, 2004 applied so as to require reversal of credit or payment of amount; (iii) whether the demand in the first notice was hit by limitation and whether the penalties were sustainable.Issue (i): Whether the appellant's post-clearance sale of vehicles through Regional Sales Offices constituted trading amounting to exempted service under Rule 2(e) of the CENVAT Credit Rules, 2004.Analysis: The arrangement showed that the appellant manufactured and assembled the vehicles on job work basis at its factory and cleared them on payment of excise duty under the valuation framework applicable to such manufacture. Mere subsequent sale or distribution of the same vehicles through Regional Sales Offices did not change the character of the activity from manufacture to trading. Trading, in the commercial sense, requires purchase and resale without manufacturing, and no material established that the appellant independently purchased finished vehicles for resale as a trader.Conclusion: The allegation of trading amounting to exempted service was not established and is rejected.Issue (ii): Whether Rule 6(3) of the CENVAT Credit Rules, 2004 applied so as to require reversal of credit or payment of amount.Analysis: Rule 6 applies only where an assessee is engaged in dutiable and exempted activities and common inputs or input services are used for both. The record did not show any independent exempted service or identify any specific input service used for the alleged trading activity. The demand was founded only on the premise that post-clearance sales amounted to trading, which was insufficient. The principle against artificial bifurcation of a single manufacturing activity to invoke credit reversal also supported the appellant's case.Conclusion: Rule 6(3) was not applicable and the demand raised under it was unsustainable.Issue (iii): Whether the demand in the first notice was hit by limitation and whether the penalties were sustainable.Analysis: The transactions were reflected in statutory records, financial statements and annual reports, and the demand arose from audit scrutiny of those records. No evidence of suppression of facts or wilful misstatement was shown. In the absence of such ingredients, extended limitation could not be invoked. Since the demand itself failed on merits, the penalties based on that demand also could not survive.Conclusion: The extended period was not justified and the penalties were not sustainable.Final Conclusion: The impugned orders could not be sustained because the appellant was not shown to be engaged in taxable trading activity, the credit-reversal provision was inapplicable, and the time-bar invocation for the first notice failed; the appeals succeeded with consequential relief.Ratio Decidendi: Post-clearance sale of goods manufactured on job work basis does not, by itself, constitute trading or exempted service for the purpose of Rule 6, unless an independent exempted activity and nexus with common input services are established.