Custom, Excise & Service Tax Tribunal
Skf India Ltd vs Commissioner Of Central Excise, Pune-I on 21 April, 2015
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL WEST ZONAL BENCH AT MUMBAI COURT No. I APPEAL Nos. E/758 & 759/12-Mum (Arising out of Order-in-Original No. 1/Central Excise/2012 dated 19.1.2012 passed by Commissioner of Central Excise, Pune-I) For approval and signature: Honble Mr. P.K. Jain, Member (Technical) and Honble Mr. Ramesh Nair, Member (Judicial) ======================================================
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 :
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?
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SKF India Ltd. Appellant
SKF India Ltd. (ISD)
Vs.
Commissioner of Central Excise, Pune-I Respondent
Appearance:
Shri S.S. Gupta, C.A., for appellant
Shri Hitesh Shah, Commissioner (AR), for respondent
CORAM:
Honble Mr. P.K. Jain, Member (Technical)
Honble Mr. Ramesh Nair, Member (Judicial)
Date of Hearing: 18.3.2015
Date of Decision: 21.4.2015
ORDER NO
Per: P.K. Jain
Brief facts of the case are that the appellant is engaged in the manufacture of ball and roller bearings and textile machinery components. Besides manufacture of the said goods, they also undertake trading of similar goods which they normally procure from their associate companies in other parts of the world, as also from SKF Technologies India Pvt. Ltd., Ahmedabad. The appellant has depots/hubs situated in different parts of the country from where they sell the said goods. In India they have two manufacturing units, one located in Pune and the other located in Bangalore. Their main office in India is also located in Pune in the same complex as that of factory.
2. For the above mentioned two activities, i.e. manufacturing and trading, they are using number of taxable input services. They are availing credit of service tax paid on such input services. Since there is no excise duty or service tax on the trading activities, the entire credit is utilized towards payment of excise duty on the goods manufactured by the appellant. Further, since they have two units i.e. one located in Pune and the other in Bangalore, they are utilizing the said credit in the two units. For purpose of distributing the said credit, the main appellant took another registration as an input service distributor in Pune itself and based upon their registration as an input service distributor, they are distributing the credit of input services between the two units.
3. The dispute between the Revenue and the appellant is that since trading is not a taxable activity either under Excise Law or Service Tax Law, and since the input services have been used both in manufacturing and trading, appellants are not eligible for availing the entire credit of input services under Rule 3 read with Rule 2(l) of the Cenvat Credit Rules. The Revenue is of the view that the appellant is not eligible for credit of input services in proportion to the turnover of trading activities and that of manufacturing activities. The appellant was issued a show cause notice proposing to recover the excess amount of credit availed by them, including interest and penalty. The show cause notice also proposed a separate penalty on the appellant in their role as input service distributor (ISD) under Rule 15A of the Cenvat Credit Rules, 2004 as they have distributed inadmissible cenvat credit pertaining to service tax paid on services utilized for trading activities.
4. The case was adjudicated by the original authority vide the impugned order and in the said order, the original authority has confirmed the demand of duty, interest and penalties. A penalty of Rs.5,000/- was also imposed on the appellant in their role as ISD. Aggrieved by the said order, the appellants are before us.
5. The learned counsel for the appellants main contention was that the show cause notice dated 31.3.2011 issued to Pune factory is without jurisdiction. It is the contention of the appellant that the show cause notice should be issued to ISD and not the factory for the denial of credit. It is submitted that the issue has been decided by the Tribunal in the case of Godfrey Philips India Ltd. reported in 2009 (14) STR 375 (Tri.-Ahmd.). It is submitted that the said judgment of the Tribunal has been followed by the Tribunal in the following cases:-
(i) United Phosphorus Ltd. reported in 2013 (30) STR 509 (Tri.-Ahm);
(ii) Ericsson India Pvt. Ltd. reported in 2011 (24) STR 346 (Tri.-Bang);
(iii) Castrol India Ltd. reported in 2013 (30) STR 214 (Tri.-Ahm), and
(iv) SKF India Ltd. final order No.20723-20724/2014 dated 7.5.2014 (Tri.-Bang).
It is contended that the present show cause notice is required to be set aside on the ground that the show cause notice having issued by the authority which has no jurisdiction.
5.1 The next contention of the learned counsel is that the credit cannot be denied unless the assessment of distribution of credit made at the ISD is set aside. It is submitted that as per Rule 9(10), the ISD is required to submit half-yearly returns and, therefore, for purpose of denial of credit, the said self-assessment has to be first set aside. Without setting aside the self-assessment, the credit cannot be denied to the main appellant. The Honble Supreme Courts decision in the case of Flock India Pvt. Ltd. reported in 2000 (120) ELT 285 (SC) is quoted to support the contention. It is further submitted that the Bangalore Bench of this Tribunal in their own case, has set aside the demand vide final order No. 20723-20724/2014 dated 7.5.2014. It is also contended that if for some reason, the present Bench is of the different opinion, then the matter may be referred to a Larger Bench and in support of this contention, the judgment of the Honble Allahabad High Court in the case of Xerox India Ltd. reported in 2011 (270) ELT 654 (All.) is quoted. It is also submitted that CBEC has issued letter No. 137/68/2013-ST dated 10.3.2014 and this letter of the CBEC is not binding on CESTAT as it is contrary to the ratio laid down by CESTAT. It is submitted that in case of conflict between the Board circular and CESTAT order, CESTAT order has to prevail and in support of the same, certain case laws are submitted. It is further submitted that the ratio of the judgment of this Tribunal in the case of Mercedes Benz reported in 2014-TIOL-476 is not applicable in the present case. According to the learned counsel, in the said judgment this Tribunal has held that in computing the ratio of exempted turnover, the gross value of trading i.e. without deduction of cost of goods sold shall be considered as value of exempted turnover. It is submitted that in the said judgment, this Tribunal has not laid down a general proposition that the value of exempted turnover shall be adopted based on the gross value of trading but was so to the peculiar facts and circumstances of that case. It is further submitted that there are large number of services which have been used by them and it cannot be said that the services were used in the same proportion and in view of this position, the ratio of the judgment in the case of Mercedes Benz is not applicable.
5.2 The learned counsel also submitted that credit relating to category of services specified in Rule 6(5) of the Cenvat Credit Rules, 2004 should be allowed.
5.3 It was also submitted by the learned counsel that the demand needs to be recomputed based on the provisions of Rule 6(3D) made effective from 1.4.2011. It is submitted that there were no provisions earlier for reversal of credit used for trading activity. However, Notification 3/2011 dated 1.3.2011 has amended the provisions of Rule 6 to provide for computation of ratio for reversal of cenvat credit used for trading activity. As per the said provisions, only the margin i.e. difference between the sale price and the cost of the goods sold or 10% of the cost of the goods sold, whichever is higher, has to be taken as the value towards exempted services. The learned counsel relied upon the judgment of the Tribunal in the case of Bharat Laundry reported in 1989 (42) ELT 676 (Tri.-Del.). It is also submitted that the formula prescribed under Rule 6(3D) has been accepted by the department in the case of Godrej & Boyce Mfg. Co. Ltd. and no appeal has been filed against the said order of the Commissioner. It is submitted that there must be uniformity in application of law for all the assessees and in support of the same, certain case laws are quoted.
5.4 It was further submitted by the learned counsel that the demand needs to be recomputed as there are certain services which are directly used for manufacturing activity.
5.5 The next contention of the learned counsel is that the demand is time barred as the same pertains to the period 2006-07 to January 2011 and the show cause notice was received by them in April 2011. Hence the demand prior to March 2010 is hit by limitation, as the issue relates to interpretation of statutory provisions and there was a bona fide belief that in the absence of any reversal provisions, no cenvat credit is to be reversed for trading activity upto March 2011.
6. The learned Commissioner (AR), on the other hand, submitted that the appellant is one and the same and they have taken registration for manufacturing activity. Since they wanted to distribute the credit of input services, they have taken registration as an input service distributor in addition to as manufacturer. It is to be noted that both the registrations are in the name of SKF India Ltd., Chinchwad, Pune. Function relating to input service distributor is being carried out from the office which is also located in the same premises as that of the factory. He further submitted that show cause notice has been issued to the appellant, both as a manufacturer as also an input service distributor. For both the activities viz. manufacturing and input service distribution, the jurisdiction is that of Commissioner of Central Excise, Pune-I. Under the circumstances, the various contentions raised with relation to jurisdiction not challenging the assessment etc. are of no consequence and are being made as they have no case on merit and wants to deflect the attention.
6.1 The learned Commissioner (AR) further submitted that the whole issue in the show cause notice as also the order-in-original is relating to Rule 3 read with Rule 2(l) of the Cenvat Credit Rules, 2004 and the appellant intentionally is trying to confuse the issue by bringing in Rule 6(5). He submitted that the purpose of giving input stage credit is to avoid the cascading effect of taxation. The trading activity is not chargeable to excise or service tax and, therefore, there is no question of cascading effect of taxation. Credit of tax paid on input service used in the trading activity cannot be availed under the Cenvat Credit Rules. Thus, there were only two options available to the appellant, one was not to avail the credit of such input services or to bifurcate the credit of input services. All that the Revenue is proposing is to bifurcate the credit of input services and demanding reversal of the credit which they have taken in relation to the trading activities. He drew attention that under Rule 3, a manufacturer or producer of final products (or provider of taxable service) are allowed to take credit of specified duty paid on input or capital goods or any input service received by the manufacturer of final products. Final product is defined in Rule 2(h) as excisable goods manufactured or produced from input, or using input service. In the present case, in addition to the manufacturing activity, the appellant was engaged in the trading activity which is neither a service nor taxable either under Excise or Service Tax Law. He further drew attention to Section 2(l) which defines the input service and the relevant clause (ii) provides that such input services means any service used by a manufacturer, whether directly or indirectly or in relation to the manufacture of final products and clearance of final products, upto the place of removal, and includes services used in relation to modernization, renovation or repairs of a factory, premises of provider of output service or any office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal. Further, the term final product is defined under clause (h) of the said Rule. In view of the said definitions, the appellant is not permitted to take credit of input services used in the trading activities. Since the input services are of such a nature that these are used both in the trading as also the manufacturing activities, the only solution is to divide the credit in proportion to the turnover of trading activity and manufacturing activity. The learned AR further submitted that the issue has been discussed in detail by this Tribunal in the case of Mercedes Benz India Pvt. Ltd. vs. CCE, Pune-I reported in 2014-TIOL-476-CESTAT-MUM. In the said judgment, this Tribunal has taken a view that trading is not a service. The learned AR also submitted that even the appellant at the time of original adjudication has taken the same plea that trading is not a service and, therefore, the ratio of the judgment in the case of Mercedes Benz (supra) will be squarely applicable.
6.2 The learned Commissioner (AR) further submitted that the formula prescribed under Rule 6(3) comes into force from 1.4.2011 and cannot be applied for the retrospective period. In the Budget 2011 by a deeming fiction, law was amended to consider the trading activity as exempted service and this deeming fiction can be applied only for future and not for the past. Even the concerned Notification stated that it comes into force w.e.f. 1.4.2011. He further submitted that for the same reasons, the formula prescribed under Rule 6(3D) will be applicable for the future and not the past as it is related to the deeming fiction.
6.3 The learned Commissioner (AR) also submitted that the contention of the appellant that credit relating to category of services provided in Rule 6(5) of the Cenvat Credit Rules can be allowed as long as those services are relating to the business, cannot be accepted. In the present case, it is not only the business of manufacture but business of trading and, therefore, the credit of services specified in Rule 6(5) also requires to be disallowed as far as the said services are used in the business of trading. Credit only in respect of business of manufacture can be allowed.
6.4 It is further submitted that the demand is not time barred as the appellant has never disclosed that they are taking the entire credit including the credit of input services used in the trading activities. The learned AR submitted the case laws in support of various contentions Honble Madras High Courts judgment in the case of F.L. Smidth Pvt. Ltd. vs. CCE, Tiruchirapalli reported in 2015 (317) ELT 225 (Mad.), particularly paras 10 & 11 of the said judgment. The learned AR also submitted that in the facts and circumstances of the case, extended period of limitation would be applicable, in view of the judgments in the case of
(i) Kalpik Interiors vs. CST, Delhi reported in 2014 (36) STR 1283;
(ii) Ratnamani Metals & Tubes Ltd. vs. CCE, Ahmedabad reported in 2012 (285) ELT 274 (Tri.-Ahmd.) (para 9);
(iii) Sree Rayalaseema Hi-Strength Hypo Ltd. vs. CC&CE, Tirupati reported in 2012 (278) ELT 167 (AP) (para 9);
(iv) CCE, Goa vs. Pooja Ferro Alloys Ltd. reported in 2011 (273) ELT 24 (Bom.) (paras 11 & 12);
(v) Balmer Lawrie & Co. Ltd. vs. CCE, Belapur reported in 2014 (301) ELT 573 (Tri.-Mumbai) (para 5.3);
(vi) AG Industries Pvt. Ltd. vs. CCE, New Delhi reported in 2001 (129) ELT 218 (Tri.-Del.) (para 2).
7. We have considered the submission of both the sides. The main contentions raised by the learned counsel is relating to jurisdiction. The relevant provision for registration is provided under Section 69 of the Finance Act, 1994. The said provision is reproduced below:-
69. (1) Every person liable to pay the service tax under this Chapter or the rules made thereunder shall, within such time and in such manner and in such form as may be prescribed, make an application for registration to the Superintendent of Central Excise.
(2) The Central Government may, by notification in the Official Gazette, specify such other person or class of persons, who shall make an application for registration within such time and in such manner and in such form as may be prescribed. A bare reading of the said section would indicate that registration is required to be taken by (i) every person liable to pay service tax, and (ii) other person or class of persons as notified by the Central Government. Thus, the service tax registration is required to be taken by a person or class of persons. Normally, a service provider may have office at one place but may be providing services at different places. The registration is not required to be taken for each and every place where service is being provided but by the person where he has his office. Under the above Section 69(2), the Government has notified other person or class of persons required to take registration. One of such person is input service distributor. What exactly is the concept of input service distributor? It was realized that many a times a manufacturer may be having one or more units and certain distribution outlets located in different parts of the country from where the goods so manufactured are sold and in the process, a number of services are utilized. Many a times the invoices in respect of such services are raised to their main office. All offices may not even by paying excise duty or service due to nature of activity there. Further, many of the services are of the nature which cannot be said to be for a specific factory or a specific distribution outlet such as warehouse, depots etc. For example, advertisements may be relating to more than one manufacturing units located in different places. Auditing services may be used in Corporate/Accounts office which may be located in different city. In fact, from 1994 onwards, thee was a large number of disputes wherein certain inputs were received in the factory but the invoices etc. were in the name of the head offices and there used to be dispute between the Revenue and the manufacturing unit about the availment of credit. In fact, in case of input services, this problem becomes more acute as in many cases the input services cannot be identified with a particular location. In order to overcome all such difficulties, the concept of input service distributor was introduced. It is to be noted that the concept of input service distributor is that in one place manufacturer or a service provider receives various invoices issued under Rule 4A of the Service Tax Rules, 1994 and thereafter credit available on these invoices is redistributed to their own different factories (or registered places as provider of output service) and such entities in turn avail the credit. Unlike registered dealers of excisable goods, input service distributor does not trade in the services but distributes the credit in its own entities alone.
8. In the case in hand, the appellants are located in Chinchwad, Pune and are registered as manufacturer of goods under the Central Excise Act. If this was the only factory, there was no need to get registered as input service distribution. Since they have another unit in Bangalore, they have taken registration of the Pune unit as an input service distributor also. The purpose of such a registration is that the concerned authority is aware that the registered person is receiving invoices relating to input services used in their both the factories/locations. They normally would be paying excise duty in both the factories and accordingly the credit of input services is distributed among both the factories. It is to be noted that all the functions i.e. receipt of the invoices, distribution of the credit of such invoices, availment and utilization of such credit are done by the same legal entity. The only reason for distribution is that excise duty is paid factory-wise. So credit of duty on input services is also required to be distributed in both the factories.
9. The main objection of the appellant that the show cause notice should have been issued to the ISD and not to the factory and proceedings is, therefore, without jurisdiction, in our view, is not sustainable in the present facts and circumstances of the case as both ISD and the factory are located in one and the same place and the two registrations, one for excise and the other as an ISD, will not make a difference. Both registrations are for the same legal entity. Both the activities are to be dealt by the same Commissioner. The credit in dispute, if eligible, will also be utilized in the factory located within the jurisdiction of the same Commissioner. The case law relating to Godfrey Philips India Ltd. (supra) is distinguishable as in that case the ISD and the factory were not located within the same place. Similar is the position in respect of the other four case laws quoted by the learned counsel for the appellant. These cases are therefore distinguishable. We do not see any reason to refer the matter to the Larger Bench in the facts and circumstances of the present case.
10. The next contention of the learned counsel was that credit cannot be denied unless the assessment of distribution of credit made at the ISD is set aside. It is to be noted that input service distributor is not an assessee under the Service Tax Law. He is only a distributor. ISD neither provides any service nor pays any service tax as provider of output service and, therefore, there is no question of assessment or self-assessment. No doubt ISD is required to file a half-yearly return. That return only gives the details of credit received and distributed. The relevant part is reproduced below:-
Credit details for Input service distributor (A) Details of Cenvat credit received and distributed Details of Credit Apt/ Oct May/ Nov June/ Dec July/ Jan Aug/ Feb Sept/Mar (1} (3} (4) (6) (7} Opening Balance Credit of service tax received Credit of service tax distributed Credit of service tax not eligible to be distributed* Closing Balance (B) Details of Education cess received and distributed Details of Credit Apt/ Oct May/ Nov June/ Dec July/ Jan Aug/ Feb Sept/Mar (1) (2) (3) (4) (5) (6) Opening Balance Credit of education cess received Credit of education cess distributed Credit of education cess not eligible to be distributed* Closing Balance *as per rule 7(b) of CENVAT Credit Rules, 2004 (C) The taxable services on which input service credit has been distributed during the half year period Self Assessment memorandum
(a) I/We declare that the above particulars are in accordance with the records and books maintained by me/us and are correctly stated.
(b) I/We have assessed and paid the service tax and/or availed and distributed CENVAT credit correctly as per the provisions of the Finance Act, 1994 and the rules made thereunder.
(c) I/We have paid duty within the specified time limit and in case of delay, I/We have deposited the interest leviable thereon.
This return cannot be called as a self-assessment by the ISD. In fact, it is to be noted that this return is common to the service tax payee as also the ISD and so called as declaration are common for the provider of output service and for the ISD. Concept of self-assessment is relevant for service provider also. Since there is no assessment, the contention of the learned counsel is required to be rejected outright. The judgment of Honble Supreme Court in Flock India Pvt. Ltd. (supra) is altogether in different context and is relating to classification list, where the assessees were required to get the classification list approved from the Revenue. Assessee did not challenge the classification list approved by Revenue. The Honble Supreme Court held that without challenging the same, refund cannot be filed. In the present case, neither there is any self-assessment nor any assessment is required to be made under any provision of the Service Tax Law. In any case, self-assessment cannot be considered as appealable order passed by an authority. In any case, we find the availment of credit and thereafter the distribution has been challenged in the present show cause notice to the appellant and he cannot be permitted to say that this has not been done to them as an ISD but has been done as factory or vice versa. Factory and ISD, both are one and the same legal entities and are in one place under the jurisdiction of same Commissioner. Two registrations, one as manufacturer and the other for activity as ISD, will not make any difference whatsoever.
11. The learned counsel has submitted that the Bangalore Bench of the Tribunal in their own case has set aside the demand. We have gone through the said order. In the said order, the Tribunal has only remanded the matter. In respect of the Bangalore unit, at least the ISD and the unit were located in different places under jurisdiction of two different Commmissioners. In the present case, ISD as well as unit are located in the same complex and, therefore, the ratio of the said case is not applicable. Hence the contention of the appellant is rejected.
12. The learned counsel has also submitted that the matter may be referred to the Larger Bench. As discussed earlier, in the present case, both ISD as also the Pune factory are located in the same premises and, therefore, the case laws quoted are distinguishable and hence, in our view, there is no need to refer the matter to a Larger Bench and the contention is rejected.
13. The learned counsel has also submitted that the letter issued by the CBEC dated 10.3.2014 clarifying that the provisions of Rule 14 of the Cenvat Credit Rules, 2004 shall only be invoked for denial of credit, is not binding on the CESTAT. There can be no doubt that circular issued by the CBEC is not binding on the CESTAT. In fact, this is applicable to appellants contention regarding order dated 27.11.2013 passed by another Commissioner in the case of M/s. Godrej & Boyce Mfg. Co. Ltd.
14. The learned counsel has also submitted that the decision in the case of Mercedes Benz (supra) is not applicable in the present case. In our view, the said decision of the Tribunal in the case of Mercedes Benz is 100% fully applicable to the facts of the present case. In the said case, Mercedes Benz were manufacturing cars in India as also trading by importing certain models from abroad. This is exactly what is being done by the appellant. They are manufacturing certain types of ball bearings and they are also involved in trading of certain ball bearings by importing from their associates or procuring from their subsidiary companies in India. We therefore do not find any strength whatsoever in the said contention of the appellant that the ratio of the judgment in the case of Mercedes Benz is not applicable. We also do not find any strength in the contention of the appellant that the judgment of the Mercedes Benz case was in the peculiar set of circumstances. Learned counsel for the appellant has quoted para 17 of the said judgment. In para 13 of the said judgment, this Tribunal has held as under:-
13.?The main contention of the ld. Sr. Advocate is that their business consists of two streams viz. manufacturing and trading. The services which are common for manufacturing and trading are therefore used in connection with their business and the definition of input services as per Rule 2(l) specifically includes activities relating to business and therefore, they are entitled to take the credit of the same. We are not impressed with the said argument of the ld. Sr. Advocate. The term input service is defined under Rule 2(l) as -
input service means any service, -
(i) used by a provider of taxable service for providing an output service; or
(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products up to the place of removal, and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation up to the place of removal; (Emphasis supplied).
We observe the definition of input service has two parts. The first part provides for use by a provider of a taxable service for providing output service. The second part provides for use by a manufacturer in or in relation to the manufacture of final products. Further, the said definition relating to manufacture not only relates to the services which are used in the manufacturing operations but also includes services used in relation to setting up, modernization, renovation or repairs of a factory, advertisement or sales promotion, market research, storage up to the place of removal, etc. The definition further includes activities relating to business such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security. Thus we observe that second part of the definition includes services which are required for setting up of the factory or marketing of the goods. For example, advertisement or sales promotion or market research or storage up to the place of removal, etc., are activities which may not be directly used in the manufacture of the goods but are required for sale of manufactured goods. Further, there are certain services which are not directly related to the manufacture or ultimate sale of the goods but would be used by the manufacturer in his day-to-day business activity such as accounting, auditing, financing, recruitment, quality control, etc. Here again such services are linked to his manufacturing activity. The definition of input service makes it very clear that the input service credit is available to a manufacturer and has to be related to the final products being manufactured by that manufacturer. Thus, if advertisement is relating to the goods manufactured by the manufacturer, then the manufacturer would be entitled for the credit of the same as an input service. Similarly, if the manufacturers activity relating to accounting, financing, recruitment and quality control, etc., are relating to the goods manufactured by him, then the manufacturer would be entitled to the credit of tax paid on input service. In our view the term business used in the said definition is relating to the business of manufacture of the final products by the manufacturer and not relating to the trading activity. A somewhat similar issue i.e. whether Activities relating to business requires integral connection between activity/service and business of manufactured final products came up before this Tribunal in the case of Telco Construction Equipment Co. Ltd. v. C.C.E. & Cus., Balgaum reported in 2013 (32) S.T.R. 482 (Tri.-Bang.). This Tribunal by majority view observed as -
30.2?The proposed order by the Honble Member (Technical) allowing the credit in respect of five services and the proposal to remand for fresh consideration of the eligibility of nine services has been made in the light of decision in Coca Cola case holding that -
all services which constitute activities related to business need not have a nexus with manufacture in a manner different from what was found in the Coca Cola India Pvt. Ltd. case by the Honble High Court to become input Service.
On the other hand, Honble Member (Judicial) took note of the decision in the case of Ultratech Cement Ltd. relevant portion of which reads as follows :
29.?The expression activities in relation to business in the definition of input service postulates activities which are integrally connected with the business of the assessee. If the activity is not integrally connected with the business of the manufacture of final product, the service would not qualify to be a input service under Rule 2(l) of the 2004 Rules. In view of the above judgment, he was of the opinion that a manufacturer claiming the benefit of Cenvat credit on any service under Rule 2(l) on the premise that the service is covered by the above expression should establish an integral connection between the activity/service and the business of manufacturing the final product.
31.1?I find that the decision in the case of Coca Cola analyses the definition of input services in 5 limbs and holds that each limb of the definition of input service can be considered as providing an independent benefit or concession or exemption. One of the limbs considered related to services used in relation to activities relating to business ..... However, the scope of the term activities relating to business was not spelt out in the said decision.
31.2?However, the latter decision of the Honble High Court of Bombay, Nagpur Bench in the case of Ultratech Cement Ltd. has dealt with the scope of the said phrase and held as under :
29.?The expression activities in relation to business in the definition of input service postulates activities which are integrally connected with the business of the assessee. If the activity is not integrally connected with the business of the manufacture of final product, the service would not qualify to be a input service under Rule 2(l) of the 2004 Rules. It is also relevant to note that the decision in the case of Ultratech Cement Ltd. has been rendered after considering the decision in the case of Coca Cola (Paragraphs 37 & 38).
31.3?It is further noticed that the Honble High Court of Bombay in the case of Manikgarh Cement has also interpreted the expression relating to business and held as under :
However to qualify as an input service, the activity must have nexus with the business of the assessee. The expression relating to business in Rule 2(l) of Cenvat Credit Rules, 2004 refers to activities which are integrally related to the business activity of the assessee and not welfare activities undertaken by the assessee. 31.4?On the other hand, a close perusal of the decisions relied upon by the learned advocate for the appellant, reveals that the said decisions did not interpret the expression relating to business.
31.5?In view of the above, the appellant should be required to establish integral connection between the service and the business of manufacture of final product for the benefit of Cenvat credit on the service as held by the learned Member (Judicial) relying on the Honble High Courts judgment in the case of Ultratech Cement Ltd.
In the case of the appellant assessee, there are distinct streams, the first one is manufacturing of cars in India and the second one is importing the cars and selling the cars in the Indian market, viz. trading activity. In view of above position, we are of the view that the credit of input services which are used both in the manufacturing and trading cannot be entirely allowed. It will also be interesting to see various common services of which credit has been taken and are matter of dispute in the present case. The main common services on which the credit has been taken are advertisement, event management service, business auxiliary services, business support services. These services are related to sales promotion and are included in the definition before the words activities relating to business such as.. In respect of these services, there can be no doubt that these have to be linked with manufactured product (and not to the traded goods). We also note that all services used in business are not included in the definition of input service. This part of the definition reads activities relating to business such as accounting, auditing, financing, recruitment and .... Thus the services used in activities such as accounting, auditing, financing, recruitment, etc., are only to be allowed. The services under dispute are mainly advertisement, event management, business auxiliary, business support services. None of these services are relating to activities illustrated or enumerated in the definition. On this ground also we do not find any merit in the contention of the appellant assessee that they would be entitled to the credit of common services. We, therefore, hold that the common services are not covered by the definition of activities relating to business. The appellant has given the breakup of credit taken on various services. In fact, after going through the said list, in our view, the decision in the case of Mercedes Benz is squarely applicable in the present case even for determining the quantum of credit to be reversed i.e. on turnover basis. Almost 50% of credit is for business support service which will be equally applicable for trading and manufacturing. Similar is the position in respect of I.T. services as also all other services listed.
15. The next contention of the appellant was that the credit relating to categories of services specified in Rule 6(5) of the Cenvat Credit Rules, 2004 shall be allowed. We have gone through the said Rule 6(5). Said sub-rule starts with non-obstanta clause with reference to sub-rule (1), (2) & (3) of Rule 6. Eligibility of credit is defined in Rule 3 read with definition in Rule 2(l). It is only after that various questions in Rule 6, come into play. Rule 6(5) cannot be read in isolation but has to be read in the overall scheme of the things. The overall scheme of cenvat credit is with reference to the manufacturing activity or providing of output service. The Cenvat Credit Rules are not with reference to the trading activities. In the present case, the dispute is between the manufacturing activity and that relating to trading activity. We, therefore, outrightly reject the contention of the appellant.
16. The next contention of the learned counsel is that the demand needs to be recomputed based on the provisions of Rule 6(3D) made effective from 1.4.2011. This issue has already been dealt in detail in the case of Mercedes Benz (supra). Paras 16 to 18 of the said judgment are reproduced below:-
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 turner 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.
18.?In addition to the earlier mentioned case laws, the ld. Sr. Advocate also mentioned the judgment of the Honble Supreme Court in the case of Ashok Leyland Ltd., Madras v. Commissioner of Income Tax, Madras reported in (1997) 1 SCC 729. We have gone through the said judgment of the Honble Supreme Court. The issue in that case was relating to deduction attributable to a priority industry within the meaning of Sec. 80B(7). It is in that context that the Honble Supreme Court took a view that importing certain spare parts and selling the same in the market would be covered within the scope of priority industry as it was necessary for the appellant to provide such spare parts in the market. We do not find the facts in the present case are comparable. Trading of imported cars is not necessary for selling the domestically manufactured cars. We have also discussed the scope of the term business used in the definition of input services with reference to the business of manufactured and imported goods. We, therefore, do not find the ratio of the said judgment applicable in the present circumstances. In view of the said decision of the Tribunal, the contention of the appellant needs to be rejected.
17. Yet another contention of the appellant is that the demand needs to be recomputed as there are certain services which are directly used for manufacturing activity. We find that during investigation, the appellant has not made any such claim and not provided any such detail. Even while filing the appeal, no such claim has been made. It is only at the time of argument, a peculiar claim of this type has been made without giving any details. Under the circumstances, we reject the contention.
18. The appellant has submitted that major part of the demand is time barred. The main contention is that the period of limitation cannot be applied as the issue relates to the interpretation of the statutory provisions and they were under bona fide belief that in the absence of any reversal provision, no cenvat credit has to be reversed for trading activity upto March 2011. We are unable to appreciate the said contention. It is common knowledge that the credit of input or input services is allowed only in order to eliminate the cascading effect of taxes. Thus, for taking credit, the trading activity should be taxable under Service Tax or Excise Law. The credit of input or input services is not allowed in respect of non-taxable activities. Here is a case where the services were used for trading activity. The appellant should have not taken the credit in the first instance itself, which was totally wrong on their part. They did not indicate in the returns that the credit relating to the trading activities was also being availed by them. Therefore, this is a clear case of suppression, and conduct of the appellant in this regard does not take him further and the extended period of limitation has been rightly invoked.
19. We have also gone through the judgments quoted by the learned Commissioner (AR). The Honble Madras High Court in the case of F.L. Smidth Pvt. Ltd. (supra) has observed as under:-
10. On an understanding of the above provision, namely, Rule 2(1) of the Cenvat Credit Rules, there is no manner of doubt that input service means goods which is used by the manufacturer directly or indirectly in relation to the manufacturing of final product and clearance of final product from the place of removal. In the present case, the Department has allowed Cenvat credit in respect of the value of goods amounting to Rs. 5.41 crores and denied for balance. We find no error in such determination, which is in consonance with Rule 2(1) of the Cenvat Credit Rules.
11. On the plea of limitation, it has been considered by the Adjudicating Authority, Commissioner (Appeals) and the Tribunal and there is a clear finding that the appellant had not disclosed the availment of input service credit on commission in respect of trading activities and it came to the knowledge of the Department only on verification of the documents, such as, contract agreements, commission agreements, etc. and therefore the plea of limitation was rightly rejected by the Authorities below. This Tribunal in the case of Kalpik Interiors (supra) has observed as under:-
14.?As regards the allegation of suppression of facts, it is seen that the appellants deliberately indulged in deducting 67% from the gross value shown in the invoices and paid service tax only on 33% under Notification No. 15/2004-S.T. and Notification No. 1/2006-S.T., admitted to have availed of the said notifications and even mentioned these notifications in their ST-3 Returns even when the said notifications specifically, unambiguously and expressly debarred completion and finishing services from such benefit and also they (i.e. appellants) nowhere disclosed that the service for which the said exemption notifications were claimed was completion and finishing service. All this clearly establishes suppression of facts on their part with intention to evade service tax. The judgments cited by them in this regard do not come to their rescue as none of them deals with a situation where benefit of an exemption notification was claimed so brazenly and blatantly to evade service tax when there was no scope for any ambiguity or confusion regarding the inadmissibility thereof. In coming to a finding regarding suppression of facts overall facts and circumstances of the case have to be considered in each case as was also held in the case of Mett Macdonald Ltd. v. CCE, Jaipur - 2006 (2) S.T.R. 524 (Tri.-Del.) = 2011 (134) E.L.T. 799 (Tribunal). In the present case, the fact that the appellants did not inform the department that they were claiming the said exemption notifications in respect of completion and finishing services coupled with the fact that they so brazenly and blatantly indulged in claiming the benefit under the said notifications in spite of the fact that the said notifications were so expressly, conspicuously and unambiguously not applicable for the said services establishes suppression of facts on their part unquestionably at least on the basis of preponderance of probability. We must hasten to add though that this doesnt debar them from staking a claim for the benefit of Notification No. 12/2003-S.T. provided, as discussed and elaborated earlier the conditions stipulated thereunder are fully satisfied in the manner prescribed. In the case of Ratnamani Metals & Tubes Ltd. (supra), this Tribunal has observed as under:-
8. The ld. counsel? submitted that the issue is covered by the decision of the Honble High Court of Bombay in the case of Nicholas Piramal (India) Ltd. (supra) will not carry his case any further, inasmuch that provisions of Rule 6(1) cannot be read in isolation and if the goods are used only for exempted product, then the credit is not available but if it can be proved and said inputs were used for manufacturing of dutiable products, then the benefit of Rule 6(3) can be extended to assessee. As we have already pointed out that in this case the appellants have not produced any evidence to show that the appellants had used these H.R. Coils for the manufacture of dutiable products also. We have no hesitation whatsoever in holding that taking credit in respect of services used in trading activity cannot be considered as bona fide at all. Just because the Government has put a trust in the trade and permitted them to take credit without any reference to tax authorities, it does not imply that the appellant can avail any credit whether permissible or not under the law and then later on, take the plea that the same is not recoverable on the grounds that the issue involves interpretation and hence the extended period of limitation cannot be applied. For similar reasons, penalties have been correctly imposed and we uphold the same.
20. In the result, we do not find any merit in the appeal filed by the main appellant and accordingly the same is dismissed.
21. We find that a penalty of Rs.5,000/- has been imposed on the appellant as an ISD under Rule 15A of the Cenvat Credit Rules. The said Rule 15A reads as under:-
Whoever contravenes the provisions of these rules for which no penalty has been provided in the rules, he shall be liable to a penalty which may extend to five thousand rupees. In the present case, undoubtedly, the returns filed by the appellant as ISD were not in accordance with law. The declaration made in the ST-3 returns was not correct. Hence the penalty imposed is upheld.
22. The case was heard and order was reserved on 18.3.2015 and the learned counsel for the appellant had submitted written submissions during the course of hearing. Later on, on 24.3.2015 they submitted another letter. We have gone through the said letter. We find that the letter contains more than what was submitted during the course of hearing as also in the grounds of appeal filed before this Tribunal. As per Rule 10 of the CESTAT (Procedure) Rules, 1982, the appellant shall, except by the leave of the Tribunal, urge or be heard in support of any grounds not set forth in the memorandum of appeal. The procedure being followed by the learned counsel for the appellant is totally incorrect and we, therefore, refuse to discuss the submissions made in the said letter (even though we have gone through the said letter and find that the submissions made are devoid of even any consideration).
23. Both the sides have in addition, quoted number of case laws. We have gone through these. We do not consider it necessary to discuss each of these case laws.
24. In the result, both the appeals are dismissed as devoid of any merits.
(Pronounced in Court on 21.4.2015) (Ramesh Nair) Member (Judicial) (P.K. Jain) Member (Technical) tvu 1 32