M/S Godfrey Phillips India Ltd vs Commissioner Of Central Excise, ... on 14 October, 2016

[Cites 23, Cited by 1]

Custom, Excise & Service Tax Tribunal

M/S Godfrey Phillips India Ltd vs Commissioner Of Central Excise, ... on 14 October, 2016

        

 
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
WEST ZONAL BENCH AT MUMBAI
COURT NO. I

Appeal No. E/87207 to 87210/2014

(Arising out of Order-in-Original No. 68/SK/M-I/13-14 dated 11.03.2014 passed by the Commissioner of Central Excise, Mumbai-I).

For approval and signature:

Honble Shri M.V. Ravindran, Member (Judicial)
Honble Shri Raju, 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?
======================================================

M/s Godfrey Phillips India Ltd. 
Shivkumar Raghunathan
Beenu Agarwal
Deepak Shahani
Appellant

Vs.

Commissioner of Central Excise, Mumbai-I
Respondent

Appearance:
Shri V. Sridharan, Advocate
for Appellant

Shri Hitesh Shah, Commissioner (AR)
for Respondent


CORAM:
SHRI M.V. RAVINDRAN, MEMBER (JUDICIAL) 
SHRI RAJU, MEMBER (TECHNICAL)

Date of Hearing: 16.06.2016 

Date of Decision: 14.10.2016  


ORDER NO.                                    

Per: Raju

The appellants, M/s Godfrey Phillips India Ltd., were clearing their excisable goods through their depots. They were also engaged in trading activities at their depots. The goods manufactured by them are Cigarettes and Cut-Tobacco and the same are charged at specific rate of duty. The appellants also cleared cigarettes to Indian Navy and Coast Guard which is exempted under Notification No. 64/95-CE dated 16.3.1995. The appellants have the procurement division which is engaged in procurement of raw tobacco from auction centers. The raw tobacco is mainly transferred to their own factory for self consumption in the manufacture of cigarettes. Some quantity of raw tobacco is also exported to foreign customers. While factory is located in Mumbai, the Head Office is located in Delhi. The appellants are also engaged in trading of various goods. 90% of their turnover is from cigarettes and cut-tobacco. The traded goods include Pan Masala which is not entitled to CENVAT Credit. All these business are handled by respective business team located in Delhi and other cities and branches and depots of the appellant. The branches, depots and head office are registered as Input Service Distributor (ISD) under Rule 3 of the Service Tax (Registration of Special Category of Persons) Rules, 2005. The appellant being a manufacturer of final products namely, cigarettes and cut tobacco, were entitled to avail credit on inputs, input services and capital goods received in the Andheri factory, used in or in relation to manufacture of final products. In addition to above, the appellants received credit from its branches, depots and head office, distributed by them in terms of Rule 7 of the Cenvat Credit Rules, 2004, under the cover of ISD challans. The appellants availed the credit on the strength of such ISD challans. The appellants have claimed that they are not availing credit in respect of services used exclusively for the purpose of trading. The credit that is distributed by the ISDs relates to the services availed commonly for dutiable final products and traded goods at such branches, offices and depots. An audit was conducted and consequently the appellant reversed an amount of Rs.3,01,987/- along with interest in respect of ineligible services. The appellants also reversed an amount of Rs.2,41,06,906/- along with interest of Rs.69,32,127/- as proportionate credit in respect of certain goods. A show-cause notice was issued to the appellant on various counts and demand was confirmed. Aggrieved by the said order, the appellants are in appeal before this Tribunal.

1.1 Learned Counsel for the appellant argued that they are not pressing for issue other than the following three issues: -

S. No Particulars Confirmed demand for the period 01.04.2007 to 28.02.2008 (Beyond five years) Confirmed demand for the period 01.03.2008 to Dec. 2011 Total amount Confirmed in the Impugned Order Amount admitted by the Appellant.

Amount appealed against A B C D E (C+D) F G (E-F) 1 Amount payable on the value of traded goods for the period 1.4.2011 to 31.1.2.2011 in terms of Rule 6(3)(i) of CENVAT Credit Rules, 2004

-

2,59,80,459 2,59,80,459 10,94,043 2,48,86,416 2 CENVAT wrongly availed on input services (falling under Rule 6(5) CCR, 2004) commonly used for excisable goods and traded goods in contravention of Rule 3 of the CCR, 2004 for the period 2007-08 to 2010-11 10,66,591 64,57,354 75,23,945

-

75,23,945 3 CENVAT wrongly availed on input services (not falling under Rule 6(5) CCR, 2004) commonly used for excisable goods and traded goods in contravention of Rule 3 of the CCR, 2004 for the period 2007-08 to 2010-11.

15,27,862 1,58,85,082 1,74,12,944 28,27,193 1,45,85,751

2.1 Learned Counsel argued that Rule 6 during the period 1.3.2008 to 31.3.2011 read as follows: -

6.?Obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services. - (1) The CENVAT credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods or for provision of exempted services, except in the circumstances mentioned in sub-rule (2).

Provided that the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12AA of the Central Excise Rules, 2002, on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule (2)?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.

(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow either of the following options, as applicable to him, namely:-

(i) the manufacturer of goods shall pay an amount equal to ten per cent of value of the exempted goods and the provider of output service shall pay an amount equal to eight per cent of value of the exempted services; or

(ii) the manufacturer of goods or the provider of output service shall pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in, or in relation to, the manufacture of exempted goods or for provision of exempted services subject to the conditions and procedure specified in sub-rule (3A).

Explanation I.- If the manufacturer of goods or the provider of output service, avails any of the option under this sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year.

Explanation II.- For removal of doubt, it is hereby clarified that the credit shall not be allowed on inputs and input services used exclusively for the manufacture of exempted goods or provision of exempted service.

(3A) For determination and payment of amount payable under clause (ii) of sub-rule (3), the manufacturer of goods or the provider of output service shall follow the following procedure and conditions, namely:-

(a)

(b) the manufacturer of goods or the provider of output service shall, determine and pay, provisionally, for every month,-

(i) the amount equivalent to CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods, denoted as A;

(ii) the amount of CENVAT credit attributable to inputs used for provision of exempted services (provisional)= (B/C) multiplied by D, where B denotes the total value of exempted services provided during the preceding financial year, C denotes the total value of dutiable goods manufactured and removed plus the total value of taxable services provided plus the total value of exempted services provided, during the preceding financial year and D denotes total CENVAT credit taken on inputs during the month minus A;

(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services (provisional) = (E/F) multiplied by G, where E denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the preceding financial year, F denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the preceding financial year, and G denotes total CENVAT credit taken on input services during the month;

(c) the manufacturer of goods or the provider of output service, shall determine finally the amount of CENVAT credit attributable to exempted goods and exempted services for the whole financial year in the following manner, namely:-

(i) the amount of CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods, on the basis of total quantity of inputs used in or in relation to manufacture of said exempted goods, denoted as H;

(ii) the amount of CENVAT credit attributable to inputs used for provision of exempted services = (J/K) multiplied by L, where J denotes the total value of exempted services provided during the financial year, K denotes the total value of dutiable goods manufactured and removed plus the total value of taxable services provided plus the total value of exempted services provided, during the financial year and L denotes total CENVAT credit taken on inputs during the financial year minus H;

(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services = (M/N) multiplied by P, where L denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the financial year, M denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the financial year, and N denotes total CENVAT credit taken on input services during the financial year;

(d) the manufacturer of goods or the provider of output service, shall pay an amount equal to the difference between the aggregate amount determined as per condition (c) and the aggregate amount determined and paid as per condition (b), on or before the 30th June of the succeeding financial year, where the amount determined as per condition (c) is more than the amount paid;

(e) ..

(f) ..

(g) .

(h) ..

(i) Explanation I.- Value for the purpose of sub-rules (3) and (3A) shall have the same meaning assigned to it under section 67 of the Finance Act, 1994 read with rules made thereunder or, as the case may be, the value determined under section 4 or 4A of the Central Excise Act, 1944 read with rules made thereunder.

Explanation II.- Explanation III.- (4)?..

(5)? Notwithstanding anything contained in sub-rules (1), (2) and (3), credit of the whole of service tax paid on taxable service as specified in sub-clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance Act shall be allowed unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services.

(6)?..

2.2 The first issue relates to interpretation of Rule 6(3) of the Cenvat Credit Rules in respect of clearances from 1.4.11 to 31.12.2011. The appellants are seeking to avail the option (i) of sub-rule (3) of Rule 6 for the exempted cigarettes and option (ii) of sub-rule (3) of Rule 6 in respect of traded goods. Sub-rule (3) of Rule 6 provides for a mechanism to be followed by a manufacturer or a service provider producing both dutiable and exempted services and using common inputs and input services where separate record has not been maintained. The main clause of sub-rule (3) during 1.4.2011 to 31.12.2011 read as follows: -

(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow any one of the following options, as applicable to him, namely:-

(i) pay an amount equal to five per cent. of value of the exempted goods and exempted services; or

(ii)?pay an amount as determined under sub-rule (3A); or

(iii)?maintain separate accounts for the receipt, consumption and inventory of inputs as provided for in clause (a) of sub-rule (2), take CENVAT credit only on inputs under sub-clauses (ii) and (iv) of said clause (a) and pay an amount as determined under sub-rule (3A) in respect of input services. The provisions of sub-clauses (i) and (ii) of clause (b) and sub-clauses (i) and (ii) of clause (c) of sub-rule (3A) shall not apply for such payment :

Provided that if any duty of excise is paid on the exempted goods, the same shall be reduced from the amount payable under clause (i) :

Provided further that if any part of the value of a taxable service has been exempted on the condition that no CENVAT credit of inputs and input services, used for providing such taxable service, shall be taken then the amount specified in clause (i) shall be five per cent. of the value so exempted.

2.3 It is seen that the said clause permitted the manufacturer or provider of output services, who opted not to maintain separate records, to choose any one of the options provided under the said sub-rule. The said sub-rule does not permit, the provider of exempted services or manufacturer of exempted goods, to avail of more than one option. In the instant case, during this period the appellants were clearing exempted goods to Indian Navy and Coast Guard after paying an amount equal to 5% of the value of exempted goods as prescribed under option (i) of the sub-rule (3) of Rule 6 of the Cenvat Credit Rules. During the period 1.4.11 to 31.12.2011, the appellants have admitted a liability of an amount equal to Rs.10,94,043/-. This they claim to have calculated as per (ii) sub-rule (3) of Rule 6 of the Cenvat Credit Rules as claimed to be an amount of credit attributable to the value of traded goods. The Revenue is of the view that since the appellants have exercised their option of availing an option provided under clause (i) of sub-rule (3) of Rule 6 of the Cenvat Credit Rules, they cannot exercise an option of reversal of credit in any other option prescribed under sub-rule (3) of Rule 6. Accordingly, a demand of Rs.2,59,80,459/- has been raised on value of traded goods for the period 1.4.2011 to 31.12.2011. It appears that for the period prior to 1.4.2011 no demand has been raised on this count. Revenue had demanded duty of Rs.2,59,80,459/- for the period 1.4.2011 to 31.12.2011 in terms of Rule 6(3)(i) of Cenvat Credit Rules, 2004. During this period the appellant had taken service tax credit of Rs.4,79,59,892/, which was common to dutiable goods and traded goods and taken on the basis of ISD challans during the said period. The appellants had reversed an amount of Rs. 69,78,847/- as credit attributable to traded goods on proportionate basis i.e. credit in ratio of total turnover. The appellants had now claimed that during that period, they were allowed to reverse credit as per the formula prescribed under Rule 6(3A) by considering the value of traded goods as equivalent to the difference between the sale price and the cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase) or ten per cent of the cost of goods sold, whichever is more. On that basis, they have concluded that amount of reversal comes to Rs.10,94,043/-. Clause (c)(iii) of sub-rule (3A) of Rule 6 prescribes the manners in which the manufacture of goods or provider of output services so determined finally the amount of service tax credit attributable to exempted goods / exempted services/ trading activity for the whole financial year. The said clause reads as under: -

c) the manufacturer of goods or the provider of output service, shall determine finally the amount of CENVAT credit attributable to exempted goods and exempted services for the whole financial year in the following manner, namely:-

(i) .

(ii)..

(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services = (M/N) multiplied by P, where M denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the financial year, N denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the financial year, and P denotes total CENVAT credit taken on input services during the financial year; The rule needs to be read with Explanation I of the said sub-rule which clarified as follows: -

Explanation I. - Value for the purpose of sub-rules (3) and (3A),-

(a) shall have the same meaning as assigned to it under section 67 of the Finance Act, read with rules made there under or, as the case may be, the value determined under section 3, 4 or 4A of the Excise Act, read with rules made thereunder.

(b) ..

(c) in case of trading, shall be the difference between the sale price and the cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase) or ten per cent of the cost of goods sold, whichever is more.

From the above, it is seen that after 1.4.2011, it is prescribed that a person required to reverse credit in terms of sub-rule (3A) of Rule 6 of Cenvat Credit Rules would determine the liability in the following manner: -

The manufacturer/service provider will determine

(i) Total value of exempted service provided + total value of exempted goods manufactured and removed during the financial year.

(ii) The total value of taxable and exempted services provided.

(iii) Total value of dutiable and exempted goods removed during the financial year.

(iv) Total credit taken on input services during the financial year.

And, for the purpose of value of traded service, the value will be determined in terms of clause (c) of Explanation-I to the said sub-rule. The appellants have submitted that if calculated in this manner, the liability for reversal comes to Rs.10,94,043/-. The appellants have given the mechanism to arrive at the amount of Rs.10,94,043/- in para E7 at page 73 of the appeal. It seems that the said amount has been calculated as per formula prescribed under sub-rule (3A) of Rule 6 by taking into consideration for each branch the total turnover of each branch, turnover of traded goods at each branch and Amount of credit common to dutiable goods and traded goods. The table is as follows Table A Statement showing proportionate reversal of CENVAT credit pertaining to traded goods availed during the period 01.04.2011 to 31.12.2011 Year Branch Total Turnover (in 000) Turnover of Traded Good (Sales COGS) or 10% of COGS whichever is greater (in 000) Ratio trading goods to total Turnover Amount of credit of common to dutiable goods and traded goods Proportionate credit to be reversed 1 2 3 4 5 6 7 2011-12 HO 248,072.71 5,196.11 2.09 41417774.34 865,631 2011-12 Delhi 49,146.32 631.38 1.28 708704.2668 9,071 2011-12 Chandigarh 58,578.49 495.61 0.85 93806.928 797 2011-12 Mumbai 54,094.59 696.88 1.29 779178.9764 10,051 2011-12 Ahmedabad 39,170.44 449.44 1.15 371895.64 4,277 2011-12 Chennai 991.80 44.79 4.52 668528.93 30,218 2011-12 Hyderabad 7,632.80 217.82 2.85 366814.424 10,454 2011-12 Kolkata 9,411.20 291.75 3.10 842832.0773 26,128 2011-12 Guntur 20,306.90 1,030.30 5.07 2710355.991 137,415 47,959,892 10,94,043 2.3.1 First of all the mechanism of arriving at the value in column 4 of the table is unknown. For arriving at this value detailed accounts need to be maintained to arrive at the cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase). In such case some costs of services availed need to be apportioned to traded goods. No such data has been given.

2.3.2 Secondly the formula prescribed in rule 6(3A)(c ) (iii) requires total service tax credit to be taken by the manufacturer/service provider to be taken for such apportionment. The formula prescribed in rule 6(3A)(c) (iii) is as follows

(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services = (M/N) multiplied by P, where L denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the financial year, M denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the financial year, and N denotes total CENVAT credit taken on input services during the financial year It can be seen that

(i) L denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the financial year,

(ii) M denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the financial year, and

(iii) N denotes total CENVAT credit taken on input services during the financial year For some unknown reasons the appellant have taken N as the Common credit attributable to dutiable and traded goods instead of total credit as required in the formula. The variable N in the formula needs to include the entire credit taken in the factory and not just the common credit availed at the depot and branches.

2.4 Even if their argument that they can avail both the options prescribed in rule 6(3) of Cenvat Credit Rules is accepted they would be required to reverse the credit as per formula prescribed in rule 6(3A)(c) (iii) by taking the value of N as the total credit taken in the period and not merely the common credit. In the instant case the column (6) takes into account only Amount of credit of common to dutiable goods and traded goods. Thus the credit of services taken at factory has been left out of calculation. Thus the claim of the appellant is without any merit.

2.5 However, these issues become irrelevant in the light of sub-rule (3) of Rule 6 of Cenvat Credit Rules, 2004. The rule 6(3) during the period reads as follows 6(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow any one of the following options, as applicable to him, namely:-

(i) pay an amount equal to five per cent. of value of the exempted goods and exempted services; or

(ii)?pay an amount as determined under sub-rule (3A); or

(iii)?maintain separate accounts for the receipt, consumption and inventory of inputs as provided for in clause (a) of sub-rule (2), take CENVAT credit only on inputs under sub-clauses (ii) and (iv) of said clause (a) and pay an amount as determined under sub-rule (3A) in respect of input services. The provisions of sub-clauses (i) and (ii) of clause (b) and sub-clauses (i) and (ii) of clause (c) of sub-rule (3A) shall not apply for such payment :

(emphasis supplied) The rule clearly prescribes that the the manufacturer of goods or the provider of output service can avail any one of the options out of the options provided in the sub rule. The manufacturer has exercised the option (i) in respect of the exempted goods sold to the Navy. It is not open to them to exercise a different option for other goods. In these circumstances we find no merit in the appeal in so far as the first issue is concerned.

3.1 The second issue raised pertains to demand for reversal of proportionate credit from 2007 to 31.3.2011 pertaining to input services covered under Rule 6(5) of Cenvat Credit Rules, 2004. Rule 6(5) of Cenvat Credit Rules, 2004 prior to 1.4.2008 read as follows: -

(5) Notwithstanding anything contained in sub-rules (1), (2) and (3), credit of the whole of service tax paid on taxable service as specified in sub-clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance Act shall be allowed unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services. The said sub-rule was omitted w.e.f 1.4.2011 vide notification No 3/11 CE(NT) dated 1.3.11. The appellants have claimed that in respect of services covered under Rule 6(5) of the Cenvat Credit Rules, 2004 pro-rata disallowance will not apply to common input services mentioned in the said Rules when used for trading. The appellants claim that credit in respect of services used exclusively in activity of trading has already been reversed by them along with interest.

3.2 The appellants argued that Rule 6(5) start with non-obstentive clause and, therefore, it supersedes the clause (1), (2), (3), (4) and (6) of rule 6 of Cenvat Credit Rules, 2004. It was argued that input services availed by them which are included under sub-rule (5) of Rule 6 which are used commonly for manufacture of excisable goods and also for trading activities. They relied on the Circular No. 868/6/2008-CX dated 9.5.2008, wherein CBEC has clarified as follows: -

Question Answer

8.

Whether credit in respect of input services covered by rule 6(5) would be required to be taken into account for determination of amount payable as per formula provide in rule 6(3A).

No, the credit attributable to services mentioned in sub-rule (5), shall not be taken into account for determination of amount under rule 6(3A).

The appellants argued that the credit to be reversed is calculated by the following formula: -

Credit to be reversed = Total credit taken x exempted turnover Total turnover And for the purpose of this, CBE&C has clarified that total credit taken would not include the credit availed under sub-rule (5) of Rule 6 of Cenvat Credit Rules. The learned Counsel also relied the Circular No. 137/203/2007-CX.4 dated 1.10.2007 for the period prior to a.7.2008. The said circular clarified as follows: -

Please refer to letter F.No. IV/16-385/CCO/MCX-I/2005 dated 5th September, 2005 from the Chief Commissioner of Central Excise, Mumbai-I Zone on the above subject. The CC, Mumbai-I had sought clarification that while sub rule (5) of Rule 6 of Cenvat Credit Rules, 2004 allows full credit on the specified services (unless they are used for providing exempted services only) whether the restriction of credit utalisation up to 20% would still apply to credit relating to such services.

The basic purpose of identifying 17 specified services for special dispensation is that these services are used in relation to the entire activities of the service provider and cannot be co-related or apportioned with any individual service (whether taxable or exempted) provided by such service provider. For example service tax paid on construction of an office of a service provider (who provides more than one service) cannot be linked with any particular service provided by him as it may be using it for various purposes and for all services provided by him. Thus, these services are similar in nature to capital goods which is a part of fixed assets/cost that cannot be apportioned for maintaining separate records. It is for this reason that there is no restriction in taking and utilization of credit on these services, so far as they are used for providing some taxable services. If the restriction of 20% is applied to these services also, this basic purpose would be defeated. As regards, taking of credit is concerned, that is anyway available to all input services and there would not have been any reason to select these 17 services for placing them under sub-rule (5). They have been placed in a separate sub-rule [i.e. sub-rule (5)] because in respect of utilization of credit of tax paid on these services, the restriction of 20% does not apply, while the restriction applies in all other cases. In conclusion the credit taken in respect of the services can be utilized for payment of service tax without any limit.

It was argued that the reason for enacting sub-rule (5) of Rule 6 is obvious. The said sub-rule listed all the services which is enduring and long lasting and therefore credit of the same has been allowed irrespective of its use in some exempted service of products.

3.3 Learned Counsel relied on the decision of the Tribunal in the case of Salgaonkar & Bros Pvt. Ltd. 2005 (10) STR 609 (T) and on the decision of the Tribunal in the case of Convergys India Pvt. Ltd. 2009 (16) STR 198 (T).

3.4 Learned AR relied on the decision of the Tribunal in the case of SKF India Ltd. vide Order No. A/947-948/15/EB dated 28.4.2015 and on the decision of the Tribunal in the case of Clariant Chemicals (I) Ltd. Vs. Commissioner of Central Excise, Pune-I vide Order No. A/3360/15/EB dated 15.10.2015. He argued that decision cited by the appellants were in reference to situation where only exempted services or exempted goods were cleared. The decision in the case of SKF India (supra) and Clariant Chemicals (supra) have been given after considering the traded activities as well. In the case of SKF India Ltd., the Tribunal has observed as under: -

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. In case of Clariant Chemcials, the Tribunal has observed as follows: -

18. Learned counsel for the appellant has submitted that they should be given the benefit of the then Rule 6(5) of the Cenvat Credit Rules, which provides entire credit of service tax in respect of specified services, unless such service is used exclusively in or in relation to manufacture of exempted goods or providing exempted service. As noted earlier, even the appellants contention is that they were providing exempted service or not, manufacturing exempted goods, but they were providing trading service. In our view Rule 6(5) is not relevant in the facts of the present case. 3.5 We find that the issue regarding interpretation of sub-rule (5) of Rule 6 of Cenvat Credit Rules, 2004 is no longer res integra. In view of the above, respectfully following the decisions of the Tribunal on the issue, we hold that benefit of Rule 6(5) of Cenvat Credit Rules, 2004 cannot be extended in respect of trading activities. The said credit needs to be reversed in proportion to the trading turnover and the total turnover.

4. The third issue pertains to applicability of the formula prescribed for determination of the credit to be reversed for the period prior from 2007 to 31.3.2011. Learned counsel only contested the method of quantification to be adopted for quantifying the amount to be reversed in respect of trading activities. There was no contest to the requirement of reversal. By notification No. 3/2011-CE (NT) dated 1.3.2011, sub-rule (3A) of Rule 6 was inserted. The said rule prescribed the mechanism for determination of the amount of credit to be reversed when the manufacturer or service provider does not maintain separate records in respect of exempted goods or services and does not opt to pay the amount in terms of clause (i) & (iii) of sub-rule (3) of Rule 6 of the Cenvat Credit Rules.

4.1 The appellants have contended that the formula prescribed for the period after 1.4.2011 should be adopted for the period prior to 1.4.2011 also. Learned Counsel argued that they are not claiming CENVAT Credit on input services exclusively relatable to activity of purchase and sale of various traded goods. They are also not taking CENVAT Credit of the duty paid on the traded goods.

4.2 Learned Counsel argued that there are common services used for manufacture and sale of cigarettes as also for sale and purchase of various traded goods. Learned Counsel accepted that Service Tax attributable to activity of purchase and sale of excisable goods are not available, however, quantum of such credit needs to be determined. He argued that for such determination the provisions of Cenvat Credit Rules introduced w.e.f. 1.4.2011 should be adopted. Learned Counsel argued that under the existing provisions of the Cenvat Credit Rules at the first instance, assessee takes entire credit of Service Tax paid on common input service and subsequently to the extent credit is to be disallowed/reversed. This is for administrative convenience of assessee as well as of the department. He argued that for this purpose, one has to consider total common input service and multiply by a suitable fraction/percentage.

4.3 Learned Counsel argued that for the period prior to 1.4.2011 also the formula prescribed by Notification No. 3/2011-CE (NT) dated 1.3.2011 needs to be followed. It is seen that instead of the total CENVAT credit, the Counsel suggested apportionment of only common input service credit. He argued that sole purpose of the whole exercise is to identify the portion of the Service Tax paid on the common services attributable to trading activity, so that the said portion of credit of Service Tax so paid on common input service can be disallowed. Thus, the whole approach is to apportion the tax paid on the common input service between the manufacturing activity and trading activities. Learned Counsel argued that while apportioning, the Revenue has taken entire sale price of traded goods in the numerator and as a result the entire value of material for trading apart from so called exempted service acts in the numerator. It was argued that only the trading activity should be considered in the numerator.

4.4 Learned Counsel argued that if the multiplier consists of service tax on the common services received, the numerator should consist only of the value of the services (value addition) and should not consist of the value of the material for trading. The common input services contribute only to the value addition of traded goods. He argued that the input services are not used till the stage of purchase of goods and purchase price will not include or comprise of any input service. He argued that any common input service used by the appellant will be after the purchase of goods for sale. He argued that if the Revenue wanted to include the value of traded material, then Revenue should consider apart from the Service Tax paid on the traded goods, excise duty as well. As a illustration of this, the appellant gave the following chart wherein reversal was estimated on this various option adopted by them.

How the Formula will lead to distortion if the value of the entire trading (so called exempted service) will be taken Assumptions 1 Rate of Service Tax 10%

2. Rate of Excise duty 20%

3. No profit involved in the transaction Column name

(x) (y) (z) Trading Turnover Particulars Amount Service Tax Excise duty Materials (A) 1,00,000

20,000 Expenses (B) 50,000 5,000

Total (C) = (A) + (B) 1,50,000 5,000 20,000 Manufacturing Turnover Particulars Amount Service Tax Excise duty Materials (D) 5,00,000

1,00,000 Expenses (E) 3,00,000 30,000

Total (F) = (D) + (E) 8,00,000 30,000 1,00,000 Grand Total (G) = (C) + (F) 9,50,000 35,000 1,20,000 Reversal = Total credit x Exempted Turnover Exempted + Dutiable Turnover Net Credit available Option I Gross value method 24473 1,55,000 (20,000 + 1,00,000+5000+ 30,000) x 1,50,000 1,50,000 + 8,00,000 1,30,527 (1,55,000 24,473) Option II As per the formula post 2011 2058 35,000 (5000 + 30,000) x 50,000 50,000 + 8,00,000 1,32,942 (1,00,000+35,000-2058) Option III As suggested by Department 5526 35,000 (5000 + 30,000) x 1,50,000 1,50,000 + 8,00,000 1,29,474 (5,000+30,000+1,00,000 5526) Option IV Gross value method Credit excluding the credit of inputs used in trading 21315 1,35,000 (1,00,000 + 5000 + 30,000) x 1,50,000 1,50,000 + 8,00,000 1,13,685 (1,35,000 21,315) Option V Net value method 5000 35,000 (5000 + 30,000) x 50,000 50,000 + 3,00,000 1,30,000 (5,000+30,000+1,00,000 5000) Option VI 79412 1,35,000 (1,00,000 + 5000 + 30,000) x 50,000 50,000 + 8,00,000 55,558 (1,35,000 79,412) 4.5 Learned Counsel argued that formula enacted in 2011 is premised on sound logic, hence, it should apply to past period also. He further argued that being a formula related to estimation, the said formula should apply to past as well.

4.6 He relied on the decision of the Hon'ble Supreme Court in the case of Commissioner of Wealth Tax Vs. Sharvan Kumar Swarup 1994 (210) ITR 996 (SC). In the said decision, he argued that a question arose whether Rule 1BB of Wealth Tax Rules, 1957 introduced w.e.f. 1.4.1979 can apply for determination of value of residential house property for assessment year prior to that date also. It was held in the said case that the method prescribed by Rule 1BB was one of the many well recognized modes in vogue, hence, it can be applied for past period also.

4.7 He further argued that formula prescribed under Section 80HHC of Income Tax Act, 1961 for merchant exporter provided for similar estimation on the basis of margin and not on the basis of turnover of the export. Learned Counsel argued that Section 80HHC deals with deductions in total income of assessee in respect of profits derived from exports business. He argued that prior to 1991, Section 80HHC (3) provided for the following formula: -

80HHC concessions=export profits=Total business profits x Export turnover/Total turnover.

Since this formula let certain anomaly, by Finance Act, 1991, Section 80HHC was amended and a new formula was introduced, which reads as under: -

80HHCconcession=export profits= export turnover- costs attributable to such exports (direct and indirect)] 4.8 Learned Counsel cited Circular No. 621 dated 19.12.1991 of Central Board of Direct Taxes, wherein the following has been clarified: -

32.5 Under the existing provisions of sub-section (3) of section 80HHC of the Income-tax Act, profit derived from the export of goods is computed in the following manner :

Export turnover Profits of the business W ------------------

Total turnover xxx xxx 32.8 Under the new formula, the profits from the business of export of any goods or merchandise would be computed in the following manner :

(a) where the export is of goods or merchandise manufactured by the taxpayer, the export profits will be computed in the ratio of export turnover to total turnover as is done under the existing formula;

(b) where the export is of goods not manufactured by the taxpayer but purchased from a third party (i.e., trading goods), export profits will be computed by deducting from the sale proceeds of export, the direct costs and indirect costs attributable to the export. "Direct costs" means costs directly attributable to such goods including their purchase price. "Indirect costs" means costs other than direct costs allocated in the ratio of the export turnover of trading goods to the total turnover;

(c) where the export consists of goods manufactured by the taxpayer as well as of goods purchased from a third party, the export profits will be the aggregate of the following amount :

(i) profits relating to export of goods manufactured by the taxpayer computed by allocating the profits of the business net of profits relating to business of exporting third party goods, in the ratio of the export turnover of the manufactured goods to the total turnover of the manufactured goods;

(ii) profits relating to export of goods purchased from third party by deducting from the sale proceeds of such goods, the direct and indirect costs attributable to such exports;

4.9 Learned Counsel relied on the decision of Hon'ble Supreme Court in the case of CIT Vs. Lakshmi Machine Works 2007 (290) ITR 667 (SC) in the context of deduction under Section 80HHC of the Income Tax Act, 1961. In the said decision, Hon'ble Supreme Court has observed as follows: -

14. The formula under Section 80HHC was very simple as far as it related to the sole business of exports. The formula became complicated in cases of composite business. In the case of direct exporter there were three categories of assessees (i) an assessee who exported goods manufactured by him; (ii) an assessee who did not export goods manufactured by him but exported goods manufactured by others; and (iii) an assessee who exported manufactured goods as well as trading goods. The formula became complicated in the case of the third category.

15. The principal reason for enacting the above formula was to disallow a part of 80HHC concession when the entire deduction claimed could not be regarded as relatable to exports. Therefore, while interpreting the words "total turnover" in the above formula in Section 80HHC one has to give a schematic interpretation to that expression.

16. Leaned senior counsel appearing for the Department (appellant), submitted that one has to give plain and unambiguous meaning to the word "turnover" in the above formula; that there was no need to call for any rule of interpretation or external aid to interpret the said word; that having regard to the plain words of the section, excise duty and sales tax ought to have been included in the "total turnover". Learned counsel submitted that the word "turnover" even in the ordinary sense would include the above two items. Learned counsel urged that the formula should be read strictly.

17. . We do not find any merit in the above contentions advanced on behalf of the Department. Therefore, schematic interpretation for making the formula in Section 80HHC workable cannot be ruled out. Similarly, purposeful interpretation of Section 80HHC which has undergone so many changes cannot be ruled out, particularly, when those legislative changes indicate that the legislature intended to exclude items like commission and interest from deduction on the ground that they did not possess any element of "turnover" even though commission and interest emanated from exports. Goods for export do not incur excise duty liability. As stated above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under Section 80HHC. They were not eligible even without the clarification introduced by the legislature by various amendments because they did not involve any element of turnover.

4.10 He argued that margin alone is consideration of service/supply as held by European Court of Justice. Learned Counsel relied on the decision of European Court of Justice in the case of First National Bank of Chicago Vs. Customs and Excise Commissioners - [1999] 2 W.L.R. 230. The court examined the taxability and valuation of the foreign exchange transactions. The statutory provisions as extracted in the judgment:

Article 2 of the Sixth Directive provides as follows:

`The following shall be subject to value added tax:

1. the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;

2. the importation of goods.' Article 5(1) defines the supply of goods in these terms:

`1. "Supply of goods" shall mean the transfer of the right to dispose of tangible property as owner.' The supply of services is defined in Article 6(1) as follows:

`1. "Supply of services" shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5.' Article 11A(1)(a) is worded as follows:

`The taxable amount shall be:

(a) in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies'.

Article 13B(d)(4) provides as follows:

`Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

...

(d) the following transactions:

...

4. transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of collectors' items; "collectors' items" shall be taken to mean gold, silver or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest.' Article 13C(b), however, makes it possible for Member States to allow their taxpayers a right of option for taxation in respect of the transactions covered by, inter alia, Article 13B(d).

Article 17(3)(c) of the Sixth Directive provides as follows:

`3. Member States shall also grant to every taxable person the right to a deduction or refund of the value added tax referred to in paragraph 2 in so far as the goods and services are used for the purposes of:

...

(c) any of the transactions exempted under Article 13B(a) and (d), paragraphs 1 to 5, when the customer is established outside the Community or when these transactions are directly linked with goods intended to be exported to a country outside the Community.' The Court held that the foreign exchange transactions undertaken by the bank are supplies of services. Further, in that case, while deciding about the consideration for supply for claiming input deduction, it was held that "the consideration therefore comes down to determining what the bank receives for foreign exchange transactions i.e. the remuneration on foreign exchange transactions which it can actually take for itself".

It was held as under:

36 By its second question, the High Court of Justice essentially seeks to ascertain the precise nature of the consideration. The question must therefore be understood as seeking to determine the taxable amount.

37 The Bank submits that the consideration is everything which is received in the course of foreign exchange transactions, that is to say the turnover representing the total value of the currencies supplied in the course of foreign exchange transactions.

38 The Commission and the French Government, on the other hand, take the view that the consideration is the amount of exchange profit realised and the other remuneration obtained by the supplier.

..

40 The Commission explains that it withdrew this proposal for reasons unconnected with that provision.

41 The United Kingdom Government considers that, should the Court take the view that the foreign exchange transactions at issue are a service provided for consideration, any valuation based on the spread between the bid and the offer prices would be incorrect for two reasons. First, the Bank does not charge any customer that spread. Second, such valuation would be tantamount to levying VAT on profit rather than turnover. The United Kingdom Government also submits that it is impossible to identify any consideration in foreign exchange transactions, since the profits or receipts of the Bank arise from its participation in a series of transactions, all at different exchange rates, and not from profit on any individual transaction. Finally, the currencies exchanged do not constitute consideration one for the other.

42 It should be borne in mind that Article 11A(1)(a) of the Sixth Directive provides that the taxable amount is, in respect of supplies of services, that which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser for such supplies.

43 While they are the subject of a supply, the currencies transferred to a trader by his counterparty in the course of a foreign exchange transaction cannot be regarded as constituting remuneration for the service of exchanging currencies for other currencies or consequently as constituting consideration for that service.

44 Determining the consideration therefore comes down to determining what the Bank receives for foreign exchange transactions, that is to say the remuneration on foreign exchange transactions which it can actually take for itself (see, in this regard, Case C-38/93 Glawe v Finanzamt Hamburg-Barmbek-Uhlenhorst [1994] ECR I-1679, paragraph 9).

45 In this regard, the spread representing the difference between the bid price and the offer price is only the notional price which the Bank would obtain if it were to conclude, at the same instant and on similar conditions, two corresponding purchase and sale transactions for the same amounts and the same currencies.

4.11 The learned Counsel has argued that input services are not used till the stage of purchase of goods and purchase price will not include or comprise of any input service. This is factually incorrect. It is obvious that C&F services, Goods transport Operator services, telephone services, cargo handling services, Business Auxiliary services etc are commonly used in the purchase activity. The argument of the learned Counsel is since the common services only contribute to the value addition of the traded goods while computing the proportion of services used in the trading activity, only the value addition of trading needs to be taken. His argument is that, so far as the value of manufactured goods is concerned, the entire value of the manufactured goods needs to be taken to arrive at the correct proportion for apportioning service tax credit. However he argues that as services availed for trading at depot/offices only contribute to value addition in case of traded goods the service tax credit for trading should be apportioned on the basis of value addition in case of traded goods. The argument of the Counsel would be appropriate, if the value of manufactured goods consist only the value addition on account of services consumed. However, that is not a case. The value of manufactured goods not only includes the value of services availed for manufacturing at factory but also consists of the value of raw material used just in the same way as sale value of the traded goods consist of the value of purchase of goods and the value addition thereon. The argument of learned Counsel that the proportion of services used for trading should be determined in the ratio of the value addition in the case of traded goods and the value of manufactured goods is flawed, in so far as for the purpose of traded goods, he has argued to take only the value addition thereon, whereas for the purpose of manufactured goods, he wishes to include the value of raw material as well. A fair way of apportioning will be to apportion it in proportion to the value addition achieved in each case as availment of services contributes to value addition. The value of manufactured gods would consist of the following elements: -

(a) Value of materials,

(b) Value of service used for manufacture,

(c) Manufacturing profit,

(d) Trading cost,

(e) Trading profits.

Similarly, in respect of traded goods, the cost would include: -

(a) Purchase cost consisting of goods,

(b) Manufacturing cost, other costs (it includes all the cost at the hands of appellant) and manufacturing profits

(c) Trading cost and trading profits.

It can be seen that in the instant case, the common services consist of only services availed at depot/office in respect of trading activity and not manufacturing activity. Thus, these services are used exclusively for trading purposes and post manufacture trading activities. Thus, they are need to be divided in the proportion of the value addition happening at the depot/office level after clearance from factory in respect of manufactured goods and the value addition happening at the depot/office level in respect of traded goods. If the argument of the learned Counsel is accepted and the value addition happening at the stage of manufacture and services used therein need to be considered, then the entire Service Tax credit taken at factory also needs to be apportioned. In view of the above, the argument of the learned Counsel does not hold much water.

4.12 The purpose of rule 6(3) is to permit the reversal of cenvat credit based on an estimate as separate records have not been maintained. There was no method prescribed for such estimation before 1.4.2011. Consequently we have to ascertain which method to adopt. After 1.4.2011 a method of such ascertainment has been provided and learned counsel suggests that it can be adopted for the past period too. We need to examine if it gives a fair estimate of the amount of service tax credit attributable to trading activity. The rule 6(3A)(c )(iii) after 1.4.2011 prescribes the method for apportionment of the service tax credit attributable to Exempt and trading services as follows 6(3A)(c) the manufacturer of goods and their clearance up to the place of removal or the provider of output service, shall determine finally the amount of CENVAT credit attributable to exempted goods and exempted services for the whole financial year in the following manner, namely:-

(i) ---

(ii) ---

(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services = (M/N) multiplied by P, where L denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the financial year, M denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the financial year, and N denotes total CENVAT credit taken on input services during the financial year; The said sub-rule needs to be read with Explanation I of the said rule. The Explanation I (c ) prescribes the method of ascertaining trading value for the purpose of the formula prescribed in Rule 6(3A) as follows Explanation I. - Value for the purpose of sub-rules (3) and (3A),-

(c) in case of trading, shall be the difference between the sale price and the cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase) or ten per cent of the cost of goods sold, whichever is more. 4.13 To analyze this rule, we need to examine it with reference to various components of the cost and availability of credit. In respect of the dutiable and exempted final products the various components of the sales value would consist of

(i) Cost of Raw Materials

(ii) Costs of services used at factory (to be apportioned between dutiable and exempted goods)

(iii) Manufacturing profits

(iv) Costs incurred at the depot

(v) Trading profits In respect of trading activity the various components of sales value would consist of

(i) Purchase including cost of purchase and service tax paid on services availed on purchase

(ii) Costs incurred at the depot

(iii) Trading profits The following diagram explains the various components of value addition in the instant case 4.14 As per rule 6(3A)(c )(iii) read with explanation I (c ) the amount of service tax credit to be reversed is to be calculated as follows Amount to be reversed = (N1 + N2) X ( L + (S - P)) M + L + (S - P) Where N1 = Service tax credit availed at factory N2 = Common Service tax availed at depots and various offices (other than factory) M = Sales Dutiable L = Sales exempted S = Sales trading P = Costs of goods sold or Purchase including cost of purchase and service tax paid on services availed on purchase 4.15 The formula is not suitable for the following reasons

a) The formula envisages that the service tax credit attributable to trading activity is proportional to the value addition over the cost of goods sold. However it envisages that the credit to be allowed on dutiable goods should be proportional to the value of goods sold. Services availed during manufacture only lead to value addition. If the Service Tax credit on trading activity is to be apportioned on the basis of value addition in case of trading then the same should be done in the case of dutiable and exempted goods as well by considering only value addition, by excluding the cost of raw material from the sale value for such apportionment.

b) The rule seeks to apportion the service tax in the ratio of value addition on one side and total value (including the value of raw materials, manufacturing value addition, trading value addition) on the other side. If the criterion is that the services availed only lead to value addition in the case of traded goods the same logic applies to manufactured goods also. Thus the formula should take the value addition of the manufactured goods as well while apportioning the service tax credit. To be appropriate it should apportion the credit on the basis of value addition on both sides.

c) Even if we have to follow the formula it cannot be followed in modified form as suggested by learned counsel. The argument of the learned counsel is not to adopt the formula prescribed in the rule 6(3A)(c )(iii) read with explanation I (c ) wherein the amount of service tax credit to be reversed is to be calculated as follows Amount to be reversed = (N1 + N2) X ( L1 + (S - P)) M + L1 + (S - P) But the suggestion of the learned counsel is to adopt the formula without considering the manufacturing service tax N1, that is to say the following formula Amount to be reversed = (N2) X ( L1 + (S - P)) M + L1 + (S - P) This totally defies logic. To apportion the service tax credit availed on only the selling and activity at depots/offices, it seeks to employ the ratio of trading value addition on one side and sum total of all values (including the value of raw materials, manufacturing value addition, trading value addition) on the other side.

d) The formula prescribed for period after 1.4.2011 envisages calculation of cost of goods sold for the traded goods. This will require maintenance of detailed separate accounts and apportionment of common costs. It is also correct that cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase) is not the same as purchase price of the goods. The words difference between the sale price and the purchase price of the goods traded, have been substituted by the words difference between the sale price and the cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase) or ten per cent of the cost of goods sold, whichever is more by the notification 13/11 CE (NT) dated 31.3.11. If detailed accounts are to be maintained for calculating the cost of goods sold in respect of traded goods then what is the need of the formula to estimate the same. The same records will give the real amount of service tax attributable to the trading activity. Thus the formula for estimation, which requires maintenance of detailed records, defeats the purpose of prescribing the formula.

4.16. The learned Counsel has relied on the decision of the Hon'ble Supreme Court in the case of Sharvan Kumar Swarup (supra). Rule 1BB was inserted in the Wealth Tax Rules w.e.f. 1.4.1979. The said rule read as under: -

1BB(1) for the purpose of Sub-section (1) of Section 7, the value of a house which is wholly or mainly used for residential purposes shall be the aggregate of the following amounts, namely:

(a) The amount arrived at by multiplying the net maintainable rent in respect of the part of the house used for residential purposes by the fraction 100/8; and

(b) the amount arrived at by multiplying the net maintainable rent in respect of the remaining part of the house, if any, by the fraction 100/9.

Provided that in relation to a house which is built on leasehold land, this sub rule shall have effect, as if for the fraction 100/8 in Clause (a), or as the case may be, the fraction of 100/9 in Clause (b), the fraction 100/9 and 100/10 respectively had been substituted. The said new rule prescribed the method for arriving at the value of a house under Wealth Tax Act. Hon'ble Supreme Court in the said case observed as under: -

23. We may now turn to the scope and content of Rule 1BB. The said Rule merely provides a choice amongst well-known and well-settled modes of valuation. Even in the absence of Rule 1BB it would not have been objectionable, nor would there be any legal impediment, to adopt the mode of valuation embodied in Rule 1BB namely, the method of capitalisation of income on a number of years' purchase value. The rule was intended to impart uniformity in valuations and to avoid vagaries and disparities resulting from application of different modes of valuation in different cases where the nature of the property is similar.

24. Rule 1BB thus partakes of the character of a rule of evidence. It deems the market value to be the one arrived at on the application of a particular method of valuation which is also one of the recognised and accepted methods. Even if a law raises a presumption and renders the presumption irrebuttable it is yet in the domain of the law of evidence. In Izhar Ahmad Khan's case (supra), it was pointed out by this Court: It would be noticed that as in the case of a rebuttable presumption, so in the case of a irrebuttable presumption, the rule purports to assist the judicial mind in appreciating the existence of fact. In one case the probative value is statutorily strengthened but yet left open to rebuttal, in the other case, it is statutorily strengthened and placed beyond the pale of rebuttal. Considered from this point of view, it seems rather difficult to accept the theory that whereas a rebuttable presumption is within the domain of the law of evidence, irrebuttable presumption is outside the domain of that law and forms part of the Substantive Law.

25. On a consideration of the matter we are persuaded to the view that Rule 1BB is essentially a rule of evidence as to the choice of one of the well accepted methods of evaluation in respect of certain kinds of properties with a view to achieving uniformity in valuation and avoiding disparate valuations resulting from application of different methods of valuation respecting properties of a similar nature and character. The view taken by the High Courts, in our opinion, cannot be said to be erroneous. It can be seen that in the said decision, it was held that the said method is one of the recognized and accepted method and therefore the same was accepted. In the instant case it can be seen that the method suggested by the learned Counsel is not the method prescribed in law even after 1.4.2011. Learned Counsel is seeking to apply the modified method not prescribed by law. The method after 1.4.2011 seeks to apportion the total credit taken by manufacturer/service provider, while the learned Counsel is seeking to adopt the method apportioning only the credit taken in common services. Since the method suggested by the learned Counsel is not a method, which has been prescribed in statute even for the period after 1.4.2011, the said decision of the Hon'ble Supreme Court is not applicable to this case. Furthermore from the above discussion in para 4, it can be seen that even the method prescribed for the period after 1.4.2011 is inherently erroneous.

4.17 Learned Counsel relied on the formula prescribed under Section 80HHC of Income Tax Act, 1961 for the merchant exporter. He further argued that formula prescribed by Parliament in similar context under Section 80HHC of Income Tax Act, 1961 for merchant exporter provided for similar estimation on the basis of margin and not on the basis of turnover of the export. Learned Counsel argued that Section 80HHC deals with deductions in total income of assessee in respect of profits derived from exports business. He argued that prior to 1991, Section 80HHC (3) provided for the following formula: -

80HHC concessions=export profits=Total business profits x Export turnover/Total turnover.

Since this formula let certain anomaly, by Finance Act, 1991, Section 80HHC was amended and a new formula was introduced, which reads as under: -

80HHCconcession=export profits= export turnover- costs attributable to such exports (direct and indirect)] Learned Counsel cited Circular No. 621 dated 19.12.1991 of Central Board of Direct Taxes, wherein the following has been clarified: -

32.5 Under the existing provisions of sub-section (3) of section 80HHC of the Income-tax Act, profit derived from the export of goods is computed in the following manner :

Export turnover Profits of the business W ------------------

Total turnover xxx xxx 32.8 Under the new formula, the profits from the business of export of any goods or merchandise would be computed in the following manner :

(a) where the export is of goods or merchandise manufactured by the taxpayer, the export profits will be computed in the ratio of export turnover to total turnover as is done under the existing formula;

(b) where the export is of goods not manufactured by the taxpayer but purchased from a third party (i.e., trading goods), export profits will be computed by deducting from the sale proceeds of export, the direct costs and indirect costs attributable to the export. "Direct costs" means costs directly attributable to such goods including their purchase price. "Indirect costs" means costs other than direct costs allocated in the ratio of the export turnover of trading goods to the total turnover;

(c) where the export consists of goods manufactured by the taxpayer as well as of goods purchased from a third party, the export profits will be the aggregate of the following amount :

(i) profits relating to export of goods manufactured by the taxpayer computed by allocating the profits of the business net of profits relating to business of exporting third party goods, in the ratio of the export turnover of the manufactured goods to the total turnover of the manufactured goods;

(ii) profits relating to export of goods purchased from third party by deducting from the sale proceeds of such goods, the direct and indirect costs attributable to such exports;

Learned Counsel relied on the decision of Hon'ble Supreme Court in the case of CIT Vs. Lakshmi Machine Works 2007 (290) ITR 667 (SC) in the context of deduction under Section 80HHC of the Income Tax Act, 1961. In the said decision, Hon'ble Supreme Court has observed as follows: -

14. The formula under Section 80HHC was very simple as far as it related to the sole business of exports. The formula became complicated in cases of composite business. In the case of direct exporter there were three categories of assessees (i) an assessee who exported goods manufactured by him; (ii) an assessee who did not export goods manufactured by him but exported goods manufactured by others; and (iii) an assessee who exported manufactured goods as well as trading goods. The formula became complicated in the case of the third category.

15. The principal reason for enacting the above formula was to disallow a part of 80HHC concession when the entire deduction claimed could not be regarded as relatable to exports. Therefore, while interpreting the words "total turnover" in the above formula in Section 80HHC one has to give a schematic interpretation to that expression.

16. Leaned senior counsel appearing for the Department (appellant), submitted that one has to give plain and unambiguous meaning to the word "turnover" in the above formula; that there was no need to call for any rule of interpretation or external aid to interpret the said word; that having regard to the plain words of the section, excise duty and sales tax ought to have been included in the "total turnover". Learned counsel submitted that the word "turnover" even in the ordinary sense would include the above two items. Learned counsel urged that the formula should be read strictly.

It is seen that the said changes in the Income Tax Act, 1961 do not come to the aid of the learned Counsel. The new formula prescribes that the export profits in will be calculated separately and not estimated by a formula. Earlier the formula for 80HHC concessions was export profits= Total business profits x Export turnover Total turnover.

The new formula for 80HHCconcession prescribed export profits= export turnover- costs attributable to such exports (direct and indirect) The calculation of costs attributable to such exports direct and indirect) would require maintenance of detailed records. It is like requirement of maintenance of separate records for dutiable and exempted goods. Since the profit is to be calculated, therefore, for the purpose of export profits, the formula adopts the difference between the export turnover and the cost attributable to such exports (direct and indirect) to ascertain export income. Section 80HHC, therefore, prescribes maintenance of detailed separate records for the export and the domestic sale. It in no way assists the argument of learned counsel. The rule 6 (3) prescribes for an approximation in the circumstances the detailed accounts are not maintained. Such an eventuality arise only if such detailed accounts are not maintained. The new section 80 HHC prefers the exact separate calculation of profit for exports in preference to the estimation method adopted earlier.

4.18 Learned Counsel next relied on decision of European Court of Justice in the case of First National Bank of Chicago - [1999] 2 W.L.R. 230. In the said case, it was held that for the purpose of ascertaining the consideration for supply of services in foreign exchange transaction for claiming input deduction in the currency exchange business, the value of currency will not be considered. The said decision gives the following findings.

1. Transactions between parties for the purchase by one party of an agreed amount in one currency against the sale by it to the other party of an agreed amount in another currency, both such amounts being deliverable on the same value date, and in respect of which transactions the parties have agreed (whether orally, electronically or in writing) the currencies involved, the amounts of such currencies to be purchased and sold, which party will purchase which currency and the value date, constitute supplies of services effected for consideration within the meaning of Article 2(1) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes Common system of value added tax: uniform basis of assessment.

2. Article 11A(1)(a) of the Sixth Directive must be construed as meaning that, in foreign exchange transactions in which no fees or commission are calculated with regard to certain specific transactions, the taxable amount is the net result of the transactions of the supplier of the services over a given period of time. We find that the said decision has no relevance in the instant case. The said decision was only to ascertain the consideration for supply of services in foreign exchange transaction. It has nothing to do with the credit. This method too presumes maintenance of detailed records, which defeats the purpose of the rule 6(3) which comes into play only if detailed records are not maintained.

4.19 Now we examine the method adopted by the revenue. The formula apportions only the common Service Tax credit in respect of services received at depot/offices in proportion to the dutiable manufactured goods and traded good goods dealt at depot/offices. However if the formula is apportioning only the common service tax credit credit it can be done on the basis of sale value as most of the services cost on the basis of the value or volume or weight or turnover. In all these cases the value would be a fair proportion to use for estimation. Thus using sales value for apportioning the common credit is a fair formula. For example in the instant case the various common services in respect of which reversal is sought are

(i) Renting of immovable property, storage and warehouse service. It is hired for storing both dutiable manufactured goods and traded goods. Space for depot or godown has to be apportioned on the basis of volume of goods and in absence of volume of goods and value is a fair method of apportionment. Value addition of traded goods has no relevance for apportionment.

(ii) Management consultancy service, IT service, telephone, chartered accountant, online information and data retrieval service, used for both dutiable manufactured goods and traded goods has to be apportioned on the basis of the number of transactions. In absence of number of transactions and sale value is a fair method of apportionment. Value addition of traded goods has no relevance for apportionment.

(iii) Auctioneer service used for both dutiable manufactured goods and traded goods has to be apportioned on the basis of the value of good. Sale value is a fair method of apportionment. Value addition of traded goods has no relevance for apportionment.

(iv) C&F Agent, transport of goods by road received for both dutiable manufactured goods and traded goods. These services have to be apportioned on the basis of Value/volume/weight of goods and in absence of volume/weight of goods and value is a fair method of apportionment. Value addition of traded goods has no relevance for apportionment.

We do not find that for apportioning the service tax credit of common services used between the dutiable manufactured goods and traded goods the Value addition of traded goods has any relevance. The formula prescribed for the period after 1.4.2011 does not provide reasonable estimate of the credit attributable to the exempted and dutiable activities. Furthermore the formula sought to be adopted by the appellants is not the formula prescribed for the period after 1.4.2011. In these circumstances we hold that the credit availed at various places registered as ISD needs to be apportioned in the ratio of the exempted and other sales, as has been done by the Revenue.

5. We find that in the case of Clarient Chemicals (Supra) the tribunal was dealing with similar situation and upheld the invocation of extended period. The tribunal in the said case observed as follows: -

19. Another contention of the learned counsel is relating to limitation viz: demand is issued invoking the extended period of limitation. It is an admitted position that the appellant was registered as input service distributor and the fact that the appellant was also undertaking trading activity was suppressed from department and this has been admitted by the Director of the Company. Thus, there is a suppression of fact and in our view the extended period of limitation is correctly invoked.

20. We have also gone through the findings of the Commissioner relating to the extended period of limitation and we entirely agree availment of cenvat credit the primary responsibility that the credit has been correctly taken is on the manufacturer or availer of cenvat credit as per Rule 9 (5) and 9 (6). Rule 9 (5) very clearly provides that the burden or poof regarding admissibility of the cenvat credit shall lie upon the manufacturer or provider of output service taking such credit. In view of this position, we have no hesitation in holding that the extended period of limitation has been correctly invoked. We also note the judgement of Hon[ble Madras High Court in the cae of F.L. SmidthPvt. Ltd. (supra). For the same reason, the penalty imposed under Rule 15 of the Cenvat Credit Rules read with Section11AC of the Central Excise Act is in order. We also note, as far as the demand of Rs.1,11,444/- is concerned, appellant has already admitted that the demand of Rs.49,731/- as these have nothing to do with the manufacture of goods. As far as the remaining demand is concerned, which is relating to the security broker service, etc. For the reasons stated earlier, the same is upheld. Penalty imposed in respect of the same is also upheld. It is the primary responsibility of the assessee to take/reverse the credit correctly. The provisions require reversal of credit in these situations. The appellants have not reversed any credit on their own and only when they were investigated that they have reversed as per their own calculation. There was no doubt regarding liability to reverse. In this appeal also they are contesting merely the quantification and not liability to reverse. In these circumstances the extended period has been rightly invoked. The penalty on the appellant company is upheld.

5.1 Shivkumar Ranghunathan, Beenu Agarwal and Deepak Shahani have filed appeals against imposition of penalty against them. It is apparent from the above discussion that the liability to reverse is not disputed. The quantification, though, has been challenged. We find the role of each of them has been discussed clearly in the impugned order. We do not find any reason to interfere with that.

6. In view of above, all the appeals are dismissed.

(Pronounced in Court on 14.10.2016) (M.V. Ravindran) (Raju) Member (Judicial) Member (Technical) Sinha 38 Appeal No. E/87207-87210/14

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Custom, Excise & Service Tax Tribunal

M/S Godfrey Phillips India Ltd vs Commissioner Of Central Excise, ... on 14 October, 2016