TaxTMI 
TaxTMI 
2018 (11) TMI 179
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....er, Sifycom were filing separate ST-3 returns upto March 2009. Consequent to merger, appellant filed ST-3 returns for the half-year ending September 2009 onwards including the transactions relating to Sifycom also. During the course of audit, it was noticed that appellants were providing erection, commissioning and installation to their customers in the form of establishing enterprise networking. 1.1 During the course of providing this service, they were also selling bought out goods like routers, interface cards, power adapters, cables etc. These goods are either imported on payment of duty or indigenously procured by appellants from wholesale sellers / dealers. No input credit was availed on such goods and these are mentioned as traded goods in the balance sheet. The materials sold are billed separately to the end-customer and thus were engaged in trading activity also. In respect of taxable output service rendered, service bill is raised separately and service tax is paid only on the service charges billed / realized. They were also availing input tax credit on various services like advertising, air travel agents, business auxiliary service, Chartered Accountants etc. which wer....
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....redit Rules, 2004 for the purpose of denying the credit availed on trading activity. The appellant had reversed the credit attributable to trading as per Rule 6(3)(ii) of CCR, 2004. In para 10 of the show cause notice, the department specifically states that trading is not an exempted service and therefore such reversal is not correct. The Hon'ble High Court of Madras in the case of Ruchika Global Interlinks Vs. Commissioner of Central Excise - 2017-VIL-323-MAD-ST has held that prior to 1.4.2011 also trading is to be considered exempted service and that Rule 6 is applicable to demand the proportionate credit availed on trading. In the present case, the department has not invoked Rule 6 for disallowing the credit. Instead, they have invoked Rule 3 of CENVAT Credit Rules, 2004 and alleged that the credit availed on trading is wrong and ineligible. The recovery in the show cause notice is proposed under Rule 14 of CENVAT Credit Rules, 2004. When Rule 3 has been invoked to deny the credit, the department cannot invoke Rule 14 for recovery of proportionate credit as applicable under Rule 6. The show cause notice having not invoked Rule 6 to deny the credit, the recovery of credit attrib....
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....penalty under Rule 15(4) merits to be set aside. In addition, being an interpretational issue, penalty cannot be imposed. 2.4 Without prejudice, the ld. counsel submitted that the appellant, in any case is only liable to reverse the proportionate credit to trading activity as per Rule 6 and the same would be only Rs. 64,08,446/- and the appellant has already reversed Rs. 44,68,272/-. 3. On behalf of Revenue, the ld. AR Shri K. Veerabhadra Reddy supported the findings in the impugned order. He submitted that the appellants were very well aware that trading is not an exempted service. It is neither a service nor a manufacturing activity. Credit availed on trading activity is ineligible under Rule 3 of CENVAT Credit Rules, 2004. The said rule lays down the conditions to avail credit. Since the activity of trading does not find mention in the said rule, the show cause notice has correctly invoked the said rule to deny the credit. The total credit attributable to trading in respect of appellant for October 2005 to March 2010 was quantified as Rs. 13,00,75,361/-, (which includes the credit pertaining to trading activity on Sifycom during the period 2008 - 09 and 2009 - 10) and credit a....
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....trading activity as an exempted service. Corresponding amendments were introduced in Rule 6(3A) as to how to calculate the amount that has to be reversed when trading is an exempted service. In Ruchika Global (supra) the Hon'ble jurisdictional High Court held that trading has to be considered as exempted service even prior to 1.4.2011 and only proportionate credit attributable to trading is to be reversed as per Rule 6 of CENVAT Credit Rules, 2004. Undisputedly, the appellants were availing common input services for both taxable service and trading activities and did not maintain separate accounts. In the reply to the intimation given prior to issuance of show cause notice, they have stated that they reversed an amount of Rs. 44,68,272/- and informed the department that they have reversed the proportionate credit pertaining to common input services used for trading as under Rule 6(3)(ii) treating trading activity as an exempted service. In para 10 of the show cause notice, the department has stated that trading activity cannot be considered as exempt service and therefore Rule 6 of CCR, 2004 is not applicable and the reversal cannot be accepted. In para 8 of the show cause notice, ....
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.... having not invoked Rule 6 of CCR,2004, cannot disallow the proportionate credit availed on trading. For this, the appellant draws support from the decision of the Tribunal in the case of L.G. Electronics (supra). It is correct that show cause notice does not invoke Rule 6 of CCR, 2004. But it is to be noted that the provision for availing credit is envisaged in Rule 3 of CCR, 2004. The show cause notice proposes to deny the credit availed on trading as per Rule 3 of CCR, 2004. Rule 3 does not allow credit to be allowed on trading activity. We have no quarrel that the Hon'ble jurisdictional High Court in the case of Ruchika Global Ltd. (supra) has held that for recovery of proportionate credit availed on trading, the trading activity has to be considered as an exempted service prior to 1.4.2011 also. But the said decision was in a case where Rule 6 was invoked for disallowing the credit availed on common input services used for trading also when separate accounts were not maintained. Here the appellant contends to have maintained separate accounts. But such separate accounts is not as provided by Rule 6 is the finding of Tribunal in the appellant's own case as per Final Order cited....
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....of duties or taxes or cesses suffered on input, input services etc. which alone can be availed as CENVAT credit. From the facts brought out in the show cause notice, it is evident that the impugned input services listed out in para 3.0 and 4.0 have all been availed in spite of the appellant having been involved in trading activity. Thus, there cannot be any credit that could be availed by the appellant ab initio and hence there is no need to examine the applicability of Rule 6 of the CENVAT Credit Rules, 2004 to their case. In any case, trading activity has been made deemed exempted service only with effect from 1.4.2011 and therefore we are not able to appreciate the argument of the ld. counsel that as per the decision of Hon'ble High Court in Ruchika Global (supra) trading is held to be exempted service even prior to 1.4.2011 and therefore credit availed on trading is admissible. In Ruchika Global, Rule 6 of CENVAT Credit Rules, 2004 was invoked to demand the proportionate credit availed on trading. In the present case, only Rule 3 and Rule 6 has not been invoked. When credit is not admissible under Rule 3, the appellant cannot content that Rule 6 ought to have invoked and that t....