Reimbursable expenditure and common CENVAT credit rules: valuation limits, proportionate reversal, and extended limitation for suppression.

Reimbursable expenditure could not be added to the taxable value for reverse-charge service tax on legal, professional and GTA services for the relevant period, because the valuation basis relied on was not yet applicable; the demand on that component was therefore unsustainable. Where common input services were used for both taxable franchise service and exempted trading activity, full CENVAT credit was not admissible in the absence of proper separate accounts, and proportionate reversal was required. Deliberate failure to segregate credit attributable to exempted activity was treated as suppression of material facts, supporting invocation of the extended limitation period and consequential penalties.

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Issues: (i) Whether service tax was payable under reverse charge mechanism on legal and professional services and GTA services after including reimbursable expenditure in the taxable value; (ii) Whether CENVAT credit on common input services used for taxable franchise service and exempted trading activity was admissible; (iii) Whether the extended period of limitation and penalties were sustainable.

Issue (i): Whether service tax was payable under reverse charge mechanism on legal and professional services and GTA services after including reimbursable expenditure in the taxable value.

Analysis: The demand was founded on inclusion of reimbursable expenditure in the taxable value. The valuation rule invoked for such inclusion was held to be impermissible for the relevant period, as reimbursable expenditure could be included only after the statutory amendment relied upon by the Tribunal. The dispute period was prior to that amendment, and the tax already paid under reverse charge mechanism on the impugned services could not be enhanced by adding reimbursable amounts to the value.

Conclusion: The service tax demand on reimbursable expenditure was unsustainable and this issue was decided in favour of the assessee.

Issue (ii): Whether CENVAT credit on common input services used for taxable franchise service and exempted trading activity was admissible.

Analysis: The appellant was engaged in both taxable and exempted activities, including trading, which was treated as an exempted service for CENVAT purposes. No satisfactory evidence showed maintenance of proper separate accounts or compliance with the prescribed options under the credit rules. Since the common input services were used for both taxable and exempted activities, the credit attributable to the exempted activity was not allowable and proportionate reversal was required.

Conclusion: The denial of full credit and direction for proportionate reversal were upheld, and this issue was decided in favour of the department.

Issue (iii): Whether the extended period of limitation and penalties were sustainable.

Analysis: The appellant was aware of its trading activity and of the obligation not to avail credit attributable to exempted activity, yet failed to maintain proper segregation and disclosed the relevant amounts only partially. This was treated as suppression of material facts with intent to evade tax liability, justifying invocation of the extended limitation period and consequential penalties.

Conclusion: The extended period of limitation and the penalties were sustained, and this issue was decided in favour of the revenue.

Final Conclusion: The demand of service tax on reimbursable expenditure was set aside, while the order requiring proportionate reversal of CENVAT credit and the penalties was sustained, resulting in partial allowance of the appeals.

Ratio Decidendi: Reimbursable expenditure cannot be added to the taxable value for the relevant period absent a valid statutory basis, but common credit used for both taxable and exempted activities requires proportionate reversal, and deliberate non-segregation may justify extended limitation and penalties.

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