Trading Activity as Exempted Services – Consequences thereof
The 2011 Budget proposals have among other things in many changes in the CENVAT credit
Rule, 2004 and in one key change an explanation has been added to clause (d) of Rule 2 of
these rules to deem the activity of trading as exempted services.
Seemingly, this change has
come as an off shoot of numerous audit findings and Tribunal decisions in Revenue’s favor
that found input credit, to the extent it had been used in relation to trading activities, is not
allowable.
As for the intention behind introducing this change, it is quite clear. Even then, the
methodology adopted does not appeal to be appropriate as it gives clear sign to effectuate
extensive effects which could not have been imagined even at the time of drafting it. This
new provision is set to play a decisive role in places where the words ‘exempted services’
have been used in CENVAT credit Rules, 2004 where there is a requirement on cases where
the inputs or input services have been used in relation to exempted services either to
maintain separate accounts or to pay 5% on the value of exempted services, it is also to call
for similar requirements when such use is in relation to trading.
Also, given that a value is required to charge an amount equal to 5% thereon, in cases where
the inputs or the input services have been used in relation to trading and there cannot be
any value determined under Section 4 or 4A for this purpose, a supplementary provision has
been introduced in clause C of sub-rule (3D) of Rule 6 of the CENVAT credit Rules, 2004 to
deem that the value in such cases shall be the difference between the sale price and the
purchase price of the goods traded.
It is likely enough that the intention of this new provision is only to deny credit in cases
where the input service had been used in relation to ‘Trading’ by treating it on par with
‘Exempted services but the actual execution has diverted it to go too far and to cause effects
which could have been even thought of a the time of drafting it.
Let us see some of the consequences this new provision is likely to result in most probable
situations: -
1. In a situation where the input service credit has been used for providing exempted
services by a service provider [not being trading] it requires either a reversal of
proportionate credit taken thereon or a payment of 5% on the value of exempted
services.
2. In a situation where the input service credit has been used in relation to trading of
non-CENVAT availed goods by a service provider, it creates both a sale and deemed
exempted service and yet requires only payment of 5% on the value of service i.e. the
difference between the purchase price and sale price.
3. In a situation where the input service has been used in relation to trading of CENVAT
availed goods by a service provider, it creates both a sale and deemed service and
requires payments of an amount equal to credit taken and also an amount equal to
5% on the deemed in value.
4. In a situation where the input service has been used in relation to trading by a
manufacturer of bought out goods on which no CENVAT has been taken, it creates
both a sale and a deemed exempted services and yet requires only payment of 5% on
the difference in value between the purchase price and the sale price.
5. In a situation where the input service has been used in relation to trading by a
manufacturer of his CENVAT availed inputs, it creates both a sale and a deemed
service to require reversal of the actual credit taken by him on the inputs capital
goods and also payment of 5% on the value (difference) of trading.
As perceived from the above, in the face of a certain dual liability, one is discouraged from
trading on of CENVAT availed inputs as such, even when Rule 3(5) of the CENVAT credit
Rules, 2004 allows it as a lawful procedure. Further, the word ‘Trading’ has not been
defined in the Rules and this give room for as many interpretations.
This apart, the new provision is well poised to create another inconsistent situation which
also appears to have not been taken note before introducing it.
In a situation, where the CENVAT credit availed inputs are removed as such to sister units as
a stock transfer, the involvement of a removal is definitely there but the involvement of
trading would still be a big question. Importantly even the sales tax/vat provisions do not
treat such transactions as sale/trading. In the event of considering such transactions as
trading, this new provision is to cause a certain inconsistency and disparity in the liability
between removal of inputs/capital goods as such to sister units and to others.
In overall, the newly introduced provision, has come out of bounds giving room to divergent
interpretations and undesired consequences and it needs to be amended in a manner to be
applied restrictively only in a situation where the input service credit has also been used in
relation to trading activities relating to non-CENVAT availed goods and not when CENVAT
credit availed goods are traded as such.
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