Trading as exempted service requires proportionate reversal of common input credit using prescribed exempted-turnover valuation rules.

Trading of bought-out goods is treated as an exempted service solely for Rule 6 of the Cenvat Credit Rules, requiring reversal of common input service credit without subjecting goods sales to service tax. Where common services support both manufacture and trading, the prescribed value of trading under Explanation (c) must be included in exempted turnover for proportionate credit reversal; non-availment of credit on traded goods does not remove this requirement. Excluding that value causes short reversal, and non-disclosure of trading turnover may support the extended period, interest and penalty, subject to conditions for any reduced-penalty benefit.

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Issues: (i) Whether trading of bought-out goods constitutes exempted service for purposes of Rule 6 of Cenvat Credit Rules, 2004? (ii) Whether the appellant was required to include the value determined under Explanation (c) while calculating exempted turnover? (iii) Whether the demand, interest and penalty are sustainable?

Issue (i): Whether trading of bought-out goods constitutes exempted service for purposes of Rule 6 of Cenvat Credit Rules, 2004?

Analysis: The explanation inserted in Rule 2(e) expressly creates a legal fiction treating trading as an exempted service for the limited operation of Rule 6. This treatment concerns reversal of common input service credit and does not impose service tax on the sale of goods. Pre-amendment authority treating trading as outside the scope of service does not govern after the statutory amendment. The Board clarification was consistent with the amended Rules and supported the prescribed treatment of trading.

Conclusion: Trading of bought-out goods is an exempted service for the limited purposes of Rule 6, against the assessee.

Issue (ii): Whether the appellant was required to include the value determined under Explanation (c) while calculating exempted turnover?

Analysis: Rule 6 applies where common input services are used for manufacturing and trading activities. The dispute did not concern credit on the bought-out goods themselves, but credit on common services attributable to trading. The statutory valuation formula for trading activity was mandatory; non-availment of credit on traded goods did not exclude the trading turnover from the computation of proportionate reversal.

Conclusion: The value of trading activity determined under Explanation (c) was required to be included in exempted turnover for computing reversal of common credit, against the assessee.

Issue (iii): Whether the demand, interest and penalty are sustainable?

Analysis: Exclusion of the statutorily determined trading value resulted in short reversal of common input service credit. The omission to disclose the trading turnover in the reversal computation justified invocation of the extended period. Penalty for the incorrect retention of credit was sustainable, while any statutory reduced-penalty benefit remained available upon fulfilment of its conditions.

Conclusion: The differential credit demand with interest, invocation of the extended period, and penalty are sustainable, against the assessee.

Final Conclusion: Common input service credit attributable to trading must be reversed through the statutory turnover-based mechanism.

Ratio Decidendi: Where the Cenvat Credit Rules deem trading to be an exempted service, an assessee using common input services for trading and manufacture must include the prescribed value of trading in exempted turnover and reverse proportionate credit.

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