Retrospective treatment of trading as exempt service led to credit reversal, but full prior reversal and limitation defeated the demand.

Trading was treated as an exempted service retrospectively under Rule 6 of the Cenvat Credit Rules, 2004, following the amendment to Rule 2(e), so common input service credit linked to trading became subject to reversal requirements for the relevant period. Where the assessee had already reversed the entire common input service credit for financial year 2011-12 with interest, no further demand survived for that year because the reversal was treated as equivalent to non-availment. For the remaining period, the demand was time-barred because the Department already knew the trading activity and credit position from audit and statutory returns, and extended limitation was not available.

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Issues: (i) whether trading activity could be treated as an exempted service retrospectively so as to attract reversal of common input service credit under Rule 6 of the Cenvat Credit Rules, 2004 for the relevant period; (ii) whether reversal of the entire common input service credit for the financial year 2011-12 rendered the demand for that year unsustainable; and (iii) whether the demand for the remaining period was barred by limitation.

Issue (i): whether trading activity could be treated as an exempted service retrospectively so as to attract reversal of common input service credit under Rule 6 of the Cenvat Credit Rules, 2004 for the relevant period.

Analysis: The definition of exempted services under Rule 2(e) was amended by Notification No. 03/2011-CE (NT) dated 01.03.2011 to clarify that trading is included within exempted services. The relevant dispute concerned the period prior to and around the amendment, and the Tribunal accepted that the clarification operated retrospectively in the light of the larger bench view relied upon in the record. Once trading was treated as an exempted service, the common input service credit attributable to such activity became liable to the requirements of Rule 6.

Conclusion: The trading activity was rightly treated as an exempted service for the purpose of Rule 6, retrospectively.

Issue (ii): whether reversal of the entire common input service credit for the financial year 2011-12 rendered the demand for that year unsustainable.

Analysis: The record showed that the entire credit availed on the common input services for that financial year had already been reversed along with interest. In such circumstances, the reversal was treated as equivalent to non-availment of the credit on those common services, and no further amount could be demanded under Rule 6(3)(i) for that year.

Conclusion: The demand for the financial year 2011-12 was unsustainable.

Issue (iii): whether the demand for the remaining period was barred by limitation.

Analysis: The Tribunal found that the Department had prior knowledge of the trading activity and the credit position through audit and statutory returns, yet the notice was issued beyond the normal period. In the absence of a sustainable basis to invoke extended limitation, the demand for the larger period could not be sustained.

Conclusion: The demand was barred by limitation.

Final Conclusion: The confirmation of duty, interest, and penalty was set aside in full, and the assessee obtained full relief.

Ratio Decidendi: Where trading is treated as an exempted service by retrospective clarification, common input service credit attributable to such activity is governed by Rule 6 of the Cenvat Credit Rules, 2004, but complete reversal of such credit neutralises further demand for that period, and limitation cannot be extended when the Department already knew the material facts through audit and statutory disclosures.

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