2019 (9) TMI 1532 - AT - Central Excise

Recovery of allegedly ineligible credit from the recipient of credit - CENVAT Credit - utilization of distributed credit - exempt goods/services - area based exemption - retrospective applicability of the Explanation incorporated in 2011 - gap between the availment of ineligible credit and the utilization of pooled distributed credit for discharge of tax liability - HELD THAT - CENVAT credit is the bridge that reconciles the charging provision and the valuation provision of the taxing statute. In interpreting the various aspects real normal and transaction of value that were subjected to duties before and after 1975 or after 2000 the Hon ble Supreme Court has held that valuation being only a measure of the levy is not controlled by the charging provision and that legislative competence to prescribe the time and extent may accommodate administrative convenience - The decisions in UNION OF INDIA ORS. ETC. ETC. VERSUS BOMBAY TYRE INTERNATIONAL LTD. ETC. ETC. 1983 (10) TMI 51 - SUPREME COURT and COMMISSIONER OF CENTRAL EXCISE INDORE VERSUS M/S GRASIM INDUSTRIES LTD. THROUGH ITS SECRETARY 2018 (5) TMI 915 - SUPREME COURT are seminal enough to warrant for our purpose mere reference without alluding to the significant portions. Propriety notwithstanding and tempting though it may even be to the executive branch of government the cascading effect of such measure on business and the ultimate consumer compelled the incorporation of some neutralizing mechanism - The scheme of CENVAT credit restricts the actual collection to the value of contribution to the product emanating or service offering from the assessed entity which is the unambiguous intent of the charging provision. From the one-on-one correspondence of pro forma credit to the general pooling of CENVAT credit the thread of continuity lies in this bridging intent. Among the various perspectives of CENVAT credit the two which predominate and have coloured the disputes are in the eyes of the tax advisors that it is a mirror of and substitute for the account current and from the standpoint of the tax administrator that it is an exemption scheme. In our opinion such constricted appreciation is akin to describing the Taj Mahal as a spiffy looking tomb; not only is such perspective flawed in capturing the spirit of neutralization but also fails the test of statutory calibration. Even if the accumulated credit is acknowledged as an instrument for discharge of duty liability it lacks the flexibility of the account current as a pool of money. The scheme is notified under the general rule making powers conferred by the taxing statute on the Central Government and not by recourse to the specific power of exemption in the respective statutes - The appellant-assessee is a recipient of credit that is assigned by the distributor who undisputedly has borne the incidence of tax on procured services. It is the distributor who can be charged with awareness of exempted output/output service if any and who is empowered by the statute to take the credit. And it is only such availment by the distributor that can be put to notice for ineligibility as espoused in the decisions that fulfill the criteria of precedent. Even if the input service distributor was unable to establish its claim to avail the credit of tax paid on the different services and thereby to deprive the utilization of such the entity to be subject to recovery proceedings remains unidentified in the Rules. It would be a grave travesty to leave such identification to the adjudicating authority. Indeed the different decisions highlight the inability of the several adjudicating authorities to arrive at a consensus. In this circumstance there may have been no need to fill the gap - In the circumstances of the Rules having failed to isolate the target of recovery which cannot be read into in the absence of any indication of legislative intent it cannot be left to be taxed administrator to substitute for such legislative intent the impugned orders will not sustain. Appeal allowed - decided in favor of assessee.

Summary

Issues Involved:
1. Eligibility of CENVAT credit for services used in manufacturing and trading activities.
2. Jurisdiction and authority for recovery of wrongly availed CENVAT credit.
3. Procedural compliance and the necessity of show cause notices.
4. Retrospective applicability of legislative amendments.
5. Propriety of attributing credit utilization to trading activities.

Issue-wise Detailed Analysis:

1. Eligibility of CENVAT Credit for Services Used in Manufacturing and Trading Activities:
The primary issue revolves around whether the assessee could claim CENVAT credit for services used in both manufacturing and trading activities. The Tribunal noted that services utilized wholly or partly for trading, which are excluded from the definition of 'output service' as per notification no. 3/2001-CE (NT) dated 1st March 2011, are not eligible for CENVAT credit. The Tribunal referenced the Delhi High Court's decision in Lally Automobiles Pvt Ltd, which emphasized that input credits should be segregated and excluded from trading activities. The Tribunal concluded that credits for services used in trading activities are not entitled to availment as credit.

2. Jurisdiction and Authority for Recovery of Wrongly Availed CENVAT Credit:
The Tribunal addressed the jurisdictional competence concerning the recovery of CENVAT credit. It was argued that the recovery should be initiated under rule 14 of CENVAT Credit Rules, 2004, which empowers recovery from the manufacturer or the provider of output service. The Tribunal referred to several decisions, including Castrol India Ltd and Gulf Oil Corporation Ltd, which established that the jurisdictional officer of the recipient of input service credit is not competent to adjudicate ISD invoices over the jurisdictional officer of the Input Service Distributor (ISD). The Tribunal emphasized that the recovery should be directed at the entity that availed the credit, not the distributor.

3. Procedural Compliance and the Necessity of Show Cause Notices:
The Tribunal highlighted the procedural requirements for recovery, stating that any recovery of duties must be preceded by a show cause notice. The Tribunal noted that the proceedings should advance only against the person designated by law to be subject to such recovery. The Tribunal found that the impugned proceedings failed to establish the necessary pre-requisite of placing the distributor on notice, thus questioning the jurisdictional competence to confirm the recovery of allegedly ineligible credit.

4. Retrospective Applicability of Legislative Amendments:
The Tribunal discussed the retrospective applicability of the Explanation incorporated in 2011, which included 'trading' among exempted services. It was noted that the Tribunal had previously discarded the plea of inappropriateness of retrospective applicability, as trading was never considered a tax of the Union. The Tribunal reaffirmed that judicial sanctity and finality have been accorded to the ineligibility of credit for services required for trading activity from the commencement of CENVAT Credit Rules, 2004.

5. Propriety of Attributing Credit Utilization to Trading Activities:
The Tribunal scrutinized the method of attributing credit utilization to trading activities. The Tribunal referenced the decision in Metro Shoes Pvt Ltd, which allowed credit for services used in manufacturing but disallowed it for services directly attributable to trading. The Tribunal emphasized that the proper method for disaggregation of credit attributable to taxable and exempted transactions should be adopted in the absence of specific rules. The Tribunal concluded that the impugned proceedings failed to apply an appropriate method for attributing credit utilization, resulting in the inability to enforce the recovery of short-paid duties.

Conclusion:
The Tribunal concluded that the impugned orders could not be sustained due to the lack of clear legislative intent and procedural deficiencies. Consequently, the appeals of the assessee were allowed, and the appeal of the Revenue was dismissed. The Tribunal emphasized the need for legislative clarity and proper procedural compliance to ensure the legitimacy of tax recoveries.