Synise Technologies Ltd vs Commissioner Of Central Excise

IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL,WEST ZONAL BENCH AT MUMBAI

COURT No. I

APPEAL No.ST/85482/14 & ST/86082/14

(Arising out of Order-in-Appeal No.PUN-EXCUS-003-APP-316-13-14 dated 26/11/2013 passed by Commissioner of Central Excise (Appeals), Pune)

For approval and signature:

Honble Mr. P.S. Pruthi, Member (Technical)

1. Whether Press Reporters may be allowed to see :No the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?

2. Whether it should be released under Rule 27 of the :Yes CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?

3. Whether Their Lordships wish to see the fair copy :Seen of the Order?

4. Whether Order is to be circulated to the Departmental :Yes authorities? ========================================

Synise Technologies Ltd., Appellant Vs. Commissioner of Central Excise, Respondent Pune

Commissioner of Central Excise, Appellant Pune

Vs.

Synise Technologies Ltd., Respondent Appearance: Shri.P.S.Joshi, Advocate for appellant Shri.Sanjeev Nair, Examiner (AR), for respondent

CORAM: Honble Mr. P.S. Pruthi, Member (Technical)

Date of Hearing : 22/04/2015 Date of Decision : /04/2015

ORDER NO

Per: P.S. Pruthi

1. The first appeal is filed by the appellant, M/s.Synise Technologies Ltd. against Order-in-Appeal No.PUN-EXCUS-003-APP-316-13-14 dated 26/11/2013 passed by Commissioner of Central Excise (Appeals), Pune, confirming demand of Cenvat credit of Rs.6,97,822/- along with interest and imposing a penalty of Rs.3,48,911/- under Section 78 of the Finance Act, read with Rule15 of the Cenvat Credit Rules. The second appeal is filed by the Revenue on the ground that the Commissioner (Appeal) has erred in modifying the demand confirmed from Rs.21,05,690/- for the period 2006-07 to 2010-11 by the adjudicating authority and reducing the same to Rs.6,97,822/- and in reducing the penalty to 50% of the amount of Cenvat credit demanded.

2. The appellant is engaged in the provision of Business Auxiliary Services (BAS) and IT Software Services as well as trading of scrap. They availed Cenvat credit of service tax paid on common services received for providing output services as well as in trading activities. As the trading activity is not taxable under Central Excise law or Service Tax law, the benefit of wrongly availed Cenvat Credit on input services used in trading activity amounting to Rs.21,05,690/- during the period April 2006 to March 2011 was denied by the adjudicating authority, with option to pay 25% of duty as penalty if deposited within 30 days of the receipt of adjudication order as provided in terms of Section 78 of the Finance Act read with Rule 15 (3) of the Cenvat Credit Rules. In appeal proceedings, the Commissioner (Appeals) decided that, since with effect from 01/04/2011 the definition of exempted services was amended and method of computation of value of input services used for trading activity was prescribed in Rule 6 (3D), the same formula can be adopted for the period of dispute to arrive at the quantum of Cenvat Credit used in the trading activities. He accordingly reduced the amount of Cenvat credit demanded to Rs.6,97,822/- along with interest under Section 75 and imposed penalty under Section 78 amounting to Rs.3,48,911/-.

3. Heard both the sides and considered the submissions.

4. The contention of the learned Counsel for the appellant is that there is no provision in law for disallowing Cenvat Credit on input services commonly used for providing output services and in trading activities. Further, an explanation clarifying that exempted services includes trading was inserted under Rule 2 (e) of the Cenvat Credit Rules with effect from 01/07/2012. Hence, prior to this date as the definition of exempted service did not include trading, the denial of Cenvat Credit as done is not correct. He contested the demand confirmed by the adjudicating authority in which the total trading turn over was considered to deny the Cenvat credit on the input services going into the trading activities. According to him this is patently wrong because the value of trading activity should be computed on the basis of selling price minus cost price which formula was adopted from 01/04/2011 in Rule 6 of the Cenvat Credit Rules. According to him, the adoption of this formula retrospectively to cover the period of dispute is also wrong as held by this Tribunals decision in the case of Mercedes Benz India Pvt. Ltd., Vs. CCE, Pune-1  2014 (36) STR 704 (Tri-Mumbai).

4.1 The learned Counsel relied on the decision of this Tribunal in the case of Ghatge Patil Auto Farm Machinization Vs. CCE, Kolhapur  2014-TIOL-761-CESTAT-MUM and in the case of CCE, Tirupathi Vs. Shariff Motors  2010 (18) STR 64 (Tri-Bang) which held that credit cannot be denied even if part of the input service credit is used in paying service tax on reverse charge basis on GTA services rendered for transportation of vehicles to the authorised service station. According to him provisions of such GTA services is related to trading activity only.

4.2 The learned Counsel argues on the ground of time bar stating that prior to 2011 all input service used in connection with the business were entitled to Cenvat Credit. Their activity of trading is a business activity. It was only in 2011 that the definition of exempted service specifically included trading activity. Hence, as the department itself was not clear on the treatment of trading activity vis-`-vis Cenvat Credit, invoking the extended time period is not justified. He relied on the Supreme Court judgement in the case of Sai Sathya Sai Inst., High Medi. Sciences Vs. UOI  2003 (158) ELT 675 (SC) to state that it was for Government to impose conditions while considering fulfillment of exemption or otherwise. And in the present case, there was no restriction in using credit for trading. He relied on the Tribunal judgement in the case of Landis + GYR Ltd., Vs. CCE, Kolkata-V  2013 (2900 ELT 447 (Tri-Kolkata) which held that if circumstances or facts are not clearly spelt out, extended time period cannot be invoked.

5. The learned DR reiterates the findings of the Commissioner. He emphasizes that trading is not a service at all. The question of permitting input service credit for providing output activity of trading does not arise at all. Therefore, the apportionment of credit which goes into the trading activity was correctly done by the Commissioner following the Tribunal decision in the case of Mercedes Benz India Pvt. Ltd., (supra). He submits that the judgement in the case of Shariff Motors (supra) relied upon by the learned Counsel is not relevant because the circumstances in those cases are that the activities involved are both in the nature of services, namely, the authorised service station service and GTA service. Therefore, the facts are distinguishable. The learned DR also submits that the Commissioner (Appeals) has gone beyond the show-cause notice in computing the formula in accordance with the Rule 6 and he did not put the department to notice in this matter.

6. It is clear from the definition that the input service must be used in the business of providing output service. The appellant have strongly relied on the fact that input service credit was not disallowed for use in trading during the period in dispute. We find that trading is altogether outside the purview of Service Tax law. Service tax Cenvat credit is permissible on input services in accordance with Rule 3 of Cenvat Credit Rules. Under Rule 2 (l) input services are defined as services used for providing output service. Even the inclusive part of definition of input service under Rule 2 (l) only includes services used in the business of providing output service. Trading not being an output service, credit cannot be allowed on the input services used for trading. Reliance is placed on the case of Mercedes Benz India Pvt. Ltd., (supra) which held as follows:

3.?The learned counsel for the appellants submitted that trading activity is not at all a service. According to Rule 6(2) of Cenvat Credit Rules, the appellant is required to maintain separate account only in respect of exempted service and dutiable service. Since trading activity cannot be considered a service at all, the question of maintenance of separate accounts does not arise. Further, he also submits that services such as advertisement, security, courier, telephone, banking and professional charges are used commonly for trading activity as well as maintenance and repair, commissioning and installation services. It is not correct to say that these services are not required or have not been utilized for trading activity also. He submits that entire credit has been disallowed without taking this aspect into account even though it had been submitted by the appellant that these services had been used for both the activities. On the other hand learned DR would submit that the lower authorities after verifying the records have come to the conclusion that these services have not been utilized for trading activity. Further, he also submits that duty demand has been made as per Rule 3 of Service Tax Credit Rules, 2002. It is his contention that since trading activity is not at all a service, the provisions of Rule 6 of Cenvat Credit Rules and provisions of Service Tax Credit Rules cannot be applied.

4.?The issues to be decided in this case are :

(i) Whether trading activity can be called a service.

(ii) Whether Rule 6 of Cenvat Credit Rules, 2002 and Service Tax Credit Rules, 2002 would be applicable when input services are used in respect of trading activity as well as taxable services.

(iii) if Cenvat Credit Rules and Service Tax Credit Rules are not applicable, the procedure to be followed by the assessee for availing input service tax credit.

5.?As regards the issue as to whether trading activity can be called a service, it is quite clear that since trading activity is nothing but purchase and sales and is covered under sales tax law, it may not be appropriate to call it a service. Therefore it has to be held that trading activity cannot be called a service and therefore it cannot be considered as an exempted service also.

6.?The next question that arises is whether Cenvat Credit Rules and Service Tax Credit Rules would be applicable. Rule 6(2) of Cenvat Credit Rules is reproduced below :

Where a manufacturer or provider of output service avails of Cenvat credit in respect of any inputs or input services, [***], and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take Cenvat credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable.

7.?Sub-rule (3) of Rule 6 provides that where output service provider does not maintain separate account, he has to follow the procedure or avail the options available under that Rule. But this rule is applicable only when the output service provider is providing services which are chargeable to service tax and as well as exempted services. Similar is the situation when we examine Rule 3 of Service Tax Credit Rules, 2002. Both these rules clearly speak of exempted services. Rule 3 of Service Tax Credit Rules also covers non-taxable services. Since trading activity is not at all a service, it is not correct to apply these provisions.

8.?Then the question arises as to whether the appellant would be eligible for the full amount of service tax credit taken by them on input services can be used for payment of service on output service provided the input services have been used for providing the output services. No doubt there is no one to one correlation required. This is the reason why provisions have been made in Cenvat Credit Rules and Service Tax Credit Rules to cover such situations where an assessee is providing both exempted and taxable services. In cases where an assessee is undertaking activities which cannot be called a service or which cannot be called manufacture, that activity goes out of the purview of both Central Excise Act as well as Finance Act, 1994. Therefore, we have a situation where an assessee would not be eligible to take input Service tax credit on an output which is neither a service nor excisable goods and at the same time there is no provision to cover situations where an assessee is providing a taxable service and is undertaking another activity which is neither a service nor manufacture. In such a situation the only correct legal position appears to be that it is for the appellant to choose and segregate the quantum of input service attributable to trading activity and exclude the same from the records maintained for availment of credit. Naturally this cannot be done in advance since it may not be possible to forecast what would be the quantum of trading activity and other activity which is liable to service tax. The only obvious solution which would be legally correct appears to be to ensure that once in a quarter or once in a six months, the quantum of input service tax credit attributed to trading activities according to standard accounting principles is deducted and the balance only availed for the purpose of payment of service tax of output service. This proposition is not against the law in view of the fact that there are several decisions of various High Courts and also of the Tribunal wherein a view has been taken that subsequent reversal of credit amounts to non-availment of credit.

15.?We find considerable force in the arguments of ld. Senior Advocate for the appellant that changes made by Explanation are substantive in nature. Explanations have been made in Rules by a Notification without giving it retrospective effect and though notification was issued on 1-3-2011 but came into force only 1-4-20011 and thus it cannot have retrospective effect. In our view, Revenues act as to consider trading as exempted service for the period Aug., 2010 to March, 2011 in E/1019/12-Mum and demanding 6% of the trading turnover is not correct.

16.?In view of the above, we have come to the conclusion that trading was not a service and therefore, cannot be considered as an exempted service during the period prior to 1-4-2011 and the amended provision with effect from 1-4-2011 will not have retrospective effect. The next issue to be decided is how to apportion the credit of input service taken by the appellant, where such input services have been used both in the manufactured goods and trading activities of the imported goods. It is in this context that the ld. Sr. Advocate for appellant has argued that the same should be computed with reference to clause (c) of Explanation I appended after Rule 6(3D) of Cenvat Credit Rules, 2004. The said provision as noted earlier was inserted with effect from 1-4-2011. The argument of the ld. Sr. Advocate is that the said explanation only provides the procedure for computation and since this change is procedural in nature it will have a retrospective effect. Ld. Sr. Advocate also argued that in case of traded goods, the value addition by the appellant is only the difference between the sale price and the purchase price of the goods which is not so in the case of manufactured goods.

On a query by the Bench that since ld. Sr. Advocate is arguing that only the value addition should be taken in respect of the traded goods, then why the same criteria should not be applied in the case of manufactured goods i.e. take the differential amount between the selling price and cost of various raw materials. Ld. Sr. Advocate stated that in case of manufactured goods so many things go into production process like labour, electricity and many other services and it will not be appropriate to take the value addition. In support of his contention that in case of traded goods only value addition should be taken, ld. Sr. Advocate took us through the judgment of the Court (5th Chamber) dated 14-7-1998 in case C-172/96 which was passed on a reference under Article 177 of the EC Treaty by the High Court of Justice of England and Wales, Queens Bench Division. We have gone through the said judgment carefully. In the said case, the issue was how to determine the turnover for purpose of value added tax in case of transactions in different currencies by the First National Bank of Chicago. The Bank used to purchase various currencies at a certain rate in other currencies.

Similarly, the Bank used to sell various currencies in other currencies. The difference between the two is generally understood as spread and would be the income of the Bank. The question was what should be considered as the turnover for purpose of VAT. It is in that context, the said court has held that the spread, the difference between the selling price and purchase price should be taken for the purpose of VAT. In the present case, the dispute is not relating to computation of turnover for purpose of charging a tax as there is no tax liability in case of traded goods. The question is how to apportion the credit of tax on the input service between the manufactured goods and the traded goods, whether we should take the turn over of the manufactured goods and traded goods for apportioning the credit of the service tax on input services or some other criteria should be followed. We, therefore, do not find any applicability whatsoever of the said judgment in the facts and circumstances of the present case. Another judgment quoted by the ld. Sr. Advocate is the judgment of the Honble Supreme Court in the case of Commissioner of Wealth Tax, Meerut v. Sharvan Kumar Swarup & Sons reported in (1994) 6 SCC 623. In this case, wealth-tax was applicable on various assets.

A new rule was inserted with effect from 1-4-1979 to determine the market value of properties. The question was whether the new inserted rule can be used for determining the value of properties for earlier period and hence determine the wealth-tax. It is in this context that the Honble Supreme Court has taken a view that the same would be applicable to all the proceedings pending at the time of its enactment. In the present case, as mentioned earlier, it is not the computation of tax but apportionment of the credit of service tax on input services availed for manufactured goods and traded goods. As we have already held that trading was not a service and therefore cannot be considered as an exempted service before 1-4-2011, therefore, the substantive provision itself did not exist before the said date. Under the circumstances, we are of the view that the said judgment is not applicable in the facts and circumstances of the present case.

17.?Having come to the conclusion that clause (c) of Explanation 1 has no application for determining the apportionment of the credit of service tax on input services, the question is how to determine the same. We find that the major amount pertains to the services in relation to the advertisement, even management, business auxiliary service and business support service. When the appellant is spending certain amounts for sales promotion such as advertisement of the cars and consequent to the said expenditure he has certain turnover of the cars out of which some of the cars manufactured indigenously while other cars are imported and hence traded. In our view, the credit of tax paid on such sales promotion activities should be apportioned with reference to the turnover of the manufactured cars and turnover of the traded cars. For example, if the turnover in particular period is say Rs. 1,000 crore out of which turnover of Rs. 700 crore is pertaining to the indigenous cars and turnover of Rs. 300 crores pertains to the imported and traded cars then if the input credit of Rs. 10 crores is available then Rs. 7 crore should be considered for the manufactured cars in India and credit of Rs. 3 crore should be considered pertaining to imported and traded cars.

If we go by the argument of the ld. Sr. Advocate then the value for traded cars will have to be taken as Rs. 30 crores and total turnover will be considered as Rs. 730 crores and credit of Rs. 10 crores will have to have apportioned in the ratio of 700 : 30 or 70:3. Obviously, this would be leading to incorrect results. It would amount to 96% expenditure (relating to sales promotion) is for the domestically manufactured goods and approximately 4% expenditure on the imported and traded cars. Similar is the position in respect of event management service. Here again, the event management, service is used both for indigenously manufactured cars and also imported and traded cars. Same reasoning would be equally applicable for business auxiliary and business support service. In view of the above analysis, in our view, it would be appropriate to apportion the credit of service tax on input service in the ratio as is the turnover of manufactured cars and imported and traded cars. In fact, we have gone through clause (c) of Explanation I added with effect from 1-4-2011 and are of the view that perhaps the said new method has been adopted to encourage the trading of the goods rather than the manufacturing of the goods (otherwise criterion should have been same viz. based upon turnover or value addition).

We, therefore hold that for the period under dispute the credit of service tax paid on the common input services should be apportioned in the same ratio as the turnover of the manufactured and traded cars.

7. The learned Counsel has placed reliance on the case of Shariff Motors (supra) which held that:

3.?The Respondents are authorized dealers of Hero Honda Motor Cycles. They are also providing servicing or repair for the said motor cycles. The issue is whether the Respondents are eligible for availing credit of service tax paid on transportation of motor cycles from the factory to the show room as input service and utilized it as output service for payment of service tax on the services provided as an authorized service station. The Original authority denied the credit on the ground that input service is applicable only if the input and output services are of the same category. Therefore the credit was denied. The Respondents approached the Commissioner (Appeals). The Commissioner (Appeals) held that the respondents are entitled for the credit. The Revenue is aggrieved over the impugned order of the Commissioner (Appeals). The Grounds of Appeal are as follows :-

(a) The Commissioner (Appeals) has not correctly interpreted the definition of input service. As per Cenvat Credit Rules, 2004 definition of input service means -

(i) Used by a provider of taxable service for providing an output service, or

(ii) .......

As per the above definition for any service to be qualified as input service, it should be used for providing an output service. In the instant case the service provider is availing credit of service tax paid on the amount incurred for inward transportation of vehicles to be sold from the show room. The input service is related only to the sale of the vehicles. It is not at all related nor required for doing servicing on the vehicles to be received much later to their sale and hence cannot be treated as input service for providing output service under authorized service station category.

(b) Further the vehicles sold by them would not come to their service station in as such condition for servicing purpose. They receive only used/old condition vehicles at service station for servicing purpose. It cannot also be ruled out that they may be servicing the old/used vehicles at service station sold by other dealers. There is no relation of input service (inward transportation of new vehicles) of the show room to output service of service station, i.e. servicing of motor vehicles.

(c) In other words the services like receiving the new vehicles by road through transporter to the show room ends with the sale of the same. Further there is no activity at the show room for the new vehicles received, other than the sale of the same. Hence the input service of inward transportation of new vehicles is closed with the sale of new vehicles.

(d) The service at station is totally a different activity i.e. servicing the old/used vehicles only and there is no relation to the input services received at the show room to output services from the service station.

(e) The inward transportation of new vehicles is not meant for service station. Hence the input service of GTA cannot be treated as input service to service station in terms of Cenvat Credit Rules, 2004.

4.?The learned Departmental Representative reiterated the Grounds of the Appeal.

5.?The learned Consultant for the Respondents stated that the view taken by the Revenue is not correct. He stated that the Respondents received Hero Honda Motor Cycles and then they discharged the service tax liability on the tax paid as GTA as the goods had to be received from the factory to their show room. Therefore the service tax paid has been taken as credit. The Respondents themselves are also service providers as authorized service dealers. As authorized service dealers, they are required to undertake servicing of the vehicles. The Revenues contention is that the servicing is done only on old vehicles at service station and that they may be servicing the old used vehicles at service station sold by other dealers. There is no relation of input service (inward transportation of new vehicles) of the show room to output service of the service station servicing of motor vehicles. This is the main contention of the Revenue.

6.?We have gone through the records of the case very carefully. The Respondents are paying service tax on GTA services on the service tax paid on transportation of the vehicles to their show room. They are also providers of output service. This output service is servicing of various vehicles. The Revenue has taken a very narrow view that the Respondents might be servicing even vehicles sold by other authorized dealers. In our view, unless the vehicles are received and sold, there would not be any servicing of the same. Moreover the definition of the input service is broad enough to cover the input service availed by the Respondents and also the output service rendered by them. We do not find any merit in the appeal of the Revenue. The Respondents are rightly entitled for the credit. Hence we reject the Revenues appeal and uphold the impugned order.

I find that the above case is placed on a somewhat different footing. The activities involved are both services namely, GTA service and authorised station service. That is, use of input service credit for paying tax on GTA service. In the present case the issue is of denial of input service credit of services used for trading. I also find that Mercedes Benz is a later judgement and therefore, I am inclined to follow it.

8. The Mercedes Benz judgement also held that the formula introduced in Rule 6 in 2011 cannot be applied retrospectively. Following this judgement, I hold that the amount of credit to be disallowed was correctly computed by the adjudicating authority. The reliance by the learned Counsel on the case of Sai Sathya Sai Inst. (supra) is inappropriate. The department is not imposing a condition which is not in the Rules. Department is merely saying that input credit is available under Service Tax law for providing output services as defined in the Cenvat Credit Rules whereas the trading activity is outside the purview of service tax law.

9. On issue of time bar, the learned Counsel has relied on Landis + GYR Ltd. (supra) which held that:

? I find that the show cause notice does not spell out the circumstances or facts which were suppressed and how the appellant had availed the said admissible CENVAT credit with mala fide intention. I also find that the Adjudicating authority as well as the Appellate authority did not discuss the facts which were suppressed or mis-declared or mis-stated by the appellant, except observing that had the Audit not pointed out the said wrong credit, the amount would not have been recovered from the appellant. I find this reasoning standing alone cannot be accepted as a ground for confirming suppression, mis-statement or mis-declaration of facts by the appellant, in availing the inadmissible CENVAT credit on the input services used in the trading of the goods and not in or in relation to the manufacture of the goods.

But in the present case, the appellant have not declared in their returns that the input service credit was used in relation to trading. This amounts to suppression of facts. Therefore, the extended period of limitation is correctly invoked as the appellants are following self assessment procedure and taking credit on their own. Therefore, the present case is distinguishable from the case of Landis + GYR Ltd. Reliance is placed on the case of Mercedes Benz (supra).

10. I agree with appeal of Revenue that reducing penalty to 50% of amount confirmed under proviso to Section 78 (1) is bad in law because the proviso became effective from 08/04/2011. I am inclined to agree with the learned AR that the department was not put to notice on application of Rule 6 (3) by the Commissioner (Appeals) when the show-cause notice did not state this. I find that principles of natural justice have been violated. However, I have already decided the issue on merits in favour of Revenue. I uphold the penalty equivalent to amount of Cenvat credit demanded as held by the adjudicating authority.

11. The appeal filed by the appellant is dismissed. Revenues appeal is allowed.

(Pronounced in Court on.)

(P.S. Pruthi) Member (Technical)

pj

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