2025 (7) TMI 1259 - AT - Central Excise

Reversal of Cenvat credit availed on common input services under Rule 6 (3) of CENVAT Credit Rules - trading - non-maintenance of separate accounts/ records - scope of Exempted Service prior to and after 01.04.2011 - invocation of extended period of limitation - penalty - HELD THAT - Trading falls under the ambit of exempted service only from 01.04.2011 which has been further clarified by the Notification No.03/2011-CE (NT) dated 01.03.2011. It is also found that the case law relied upon by the appellants squarely supports this view. Therefore the appellants are not required to reverse any credit for the period prior 01.04.2011. It is further found that the show cause notice has been issued invoking the extended period. The appellants are a central excise assessee and has been regularly paying duty and paying taxes; understandably regular audit is also being undertaken. As submitted by the learned Counsel for the appellants it is found that there is no specific allegation with evidence to indicate that the appellants have indulged in fraud collusion mis-declaration etc. with intent to evade payment of duty. Therefore there are merit in the submissions of the appellants that the Revenue has not made out any case for invocation of extended period. It has been held by the Tribunal in a number of cases that in such circumstances extended period cannot be invoked; moreover extended period cannot be invoked when the detection was due to an audit conducted. The demand does not survive on merits and limitation - the appellants have deposited the CENVAT credit payable w.e.f. 01.04.2011 - Appeal allowed.

Summary

ISSUES:

Whether trading activities constitute an exempted service under the CENVAT Credit Rules prior to 01.04.2011.Whether reversal of CENVAT credit is required for input services used for exempted services without maintaining separate accounts/records.Whether the extended period of limitation can be invoked in the absence of evidence of fraud, collusion, or mis-declaration.Whether penalty under Rule 15(2) of the CENVAT Credit Rules can be imposed when the demand is based on audit findings without establishing extended period applicability.

RULINGS / HOLDINGS:

Trading falls under the ambit of "exempted service" only from 01.04.2011 as per Rule 2(e) of the CENVAT Credit Rules and Notification No.03/2011-CE (NT) dated 01.03.2011; therefore, reversal of credit prior to this date is not required.Since the appellants did not maintain separate accounts/records for exempted and taxable services, reversal of CENVAT credit on common input services is required only from 01.04.2011 onward.The extended period of limitation cannot be invoked as there is no evidence of fraud, collusion, mis-declaration, or intent to evade duty; detection arising from regular audit does not justify extended period invocation.Penalty under Rule 15(2) of the CENVAT Credit Rules cannot be imposed when the demand fails on merits and limitation grounds.

RATIONALE:

The Court applied the definition of "Exempted service" under Rule 2(e) of the CENVAT Credit Rules, distinguishing the position before and after 01.04.2011, supported by Notification No.03/2011-CE (NT) dated 01.03.2011 and consistent case law including My Car (Bhopal) Pvt. Ltd. and Franke Faber India Ltd.The Court relied on the principle that reversal of credit is mandated when input services are used for exempted services without segregation of accounts, as per Rule 6(3) of the CENVAT Credit Rules.The Court referred to established precedent that extended period of limitation under the Finance Act cannot be invoked absent proof of fraud, collusion, or mis-declaration, particularly when detection results from routine audit; this was reinforced by the Tribunal's Principal Bench decision in G.D Goenka Private Limited emphasizing the central excise officer's duty to scrutinize returns within the normal limitation period.The Court held that penalty imposition requires a valid demand and proper limitation compliance, which were not established here, thus negating the penalty under Rule 15(2).