TRADING ACTIVITIES CANNOT BE CONSIDERED AS A SERVICE OR EXEMPTED SERVICE

[Mr. M. GOVINDARAJAN]

In mega exemption notification ‘trading of goods’ has been notified as an exempted service. The case laws discussed below clearly indicate that trading of goods cannot be considered as a service or exempted service.

In ‘Orion Appliances Limited V. Commissioner of Service Tax, Ahamedabad’ – 2010 (5) TMI 85 - CESTAT, AHMEDABAD the appellants took CENVAT credit on advertising, security, courier, telephone and banking services.   The impugned input services used in providing repair and maintenance service and also in trading activity. The contention of the department is that credit of input services which were entirely used in trading activity was not available to the appellants for payment of service tax.   The appellant had adjusted the service tax amount full from CENVAT credit and had availed the excess credit which was not admissible to the appellants.   The lower authorities have taken a view that in view of the provisions of Rule 3 and Rule 6 of CENVAT credit Rules, the appellant should have maintained separate accounts in respect of input services used for trading activity and other services which are liable to service tax.   Accordingly the excess CENVAT credit availed by the appellant was demanded.

The Tribunal framed the following issues to be decided in this case:

• Whether the trading activity can be called as a service?
• Whether Rule 6 of CENVAT Credit Rules, 2004 would be applicable when input services used in receipt of trading activity as well as taxable services?
• If CENVAT Credit Rules are not applicable the procedure to be followed by the assessee for availing input service tax credit.

For the first issue the Tribunal held that since trading activity is nothing but purchase and sales and is covered sale tax law, it may not be appropriate to call it as a service.   Therefore trading activity cannot be called a service and therefore it cannot be considered as an exempted service also.   For the second issue the Tribunal held that trading activity is not being a service it is not covered by Service Tax Credit Rules, 2002 and CENVAT Credit Rules, 2004.   Credit is not admissible on input service attributable to trading activity. For the third issue the Tribunal held that the quantum of input service attributable to trading activity is to be segregated as per accounting principles once in a quarter or six months and each credit to be deducted and balance only to be availed.   The Tribunal remanded the matter to the adjudicating authority to undertake segregation and verification and arrive at amount to be reversed.

In ‘Gulf Oil Corporation Limited V. Commissioner of Central Excise, Vapi’ – 2012 (8) TMI 45 - CESTAT, AHMEDABAD the appellant filed the appeal against the order of Commissioner of Central Excise (Appeals) in which the Commissioner (Appeals) held that the input for manufacturing unit as well as for registered dealer for sale were brought in the same truck and the appellants paid the service tax on the freight charge by reverse charge method. They had already taken credit for transportation of input service used in their factory.   They were not eligible for service tax paid on the portion of the freight which relates to transportation of the goods meant for trading purpose by registered dealer because the registered dealer is neither engaged in manufacture of dutiable goods nor is providing taxable service.

The appellant contended before the Tribunal that they were granted single registration for service tax and all the activities carried out by them have to be considered as a manufacture.   The definition of input service is inclusive definition and hence input service can be used by a manufacturer for any purpose. There was no provision in Rule 6 for pro rata calculation of service tax between the manufactured goods and taxable service. In their case there are exempted goods or service and hence the credit available cannot be apportioned on pro rata basis.

The Tribunal agreed with the findings of the Commissioner (Appeals) as the input service definition as contained in Rule 2(l) of the CENVAT Credit Rules is for use by a provider of a taxable service or for use by a manufacturer or in relation ot manufacture of final product. In this case the registered dealer is neither a manufacturer nor a provider of taxable service. Therefore he will not come under the definition and cannot avail the credit of service tax paid on transportation of goods. The Tribunal relied on the judgment in ‘Orion Appliances Limited V. Commissioner of Service Tax, Ahamedabad’ – 2010 (5) TMI 85 - CESTAT, AHMEDABAD. The Tribunal held that the service tax credit in respect of input service attributable to trading activities is not available to the appellant.

In ‘M/s TFL Quinn India Private Limited V. Commissioner of Central Excise, Hyderabad’ – 2014 (1) TMI 1111 – CESTAT Bangalore – the show cause notice was issued denying CENVAT credit on certain input services used by the assessee in trading activities. It is alleged that trading activities were exempted services and hence no CENVAT credit could not have been taken on input services used in the trading activities. The show cause notice was issued in terms of Rule 6(1) and not anything under Rule 6(3A).   The Tribunal found that nobody has a case that any taxable service was involved in trading activities. The Tribunal held that trading activities christened as exempted services for the purposes of Rule 6(3) as late as in 2011. This legislative act has, indeed, created a legal fiction, far removed from reality. As trading activities have never been recognized by the statute as taxable services, prima facie, the appellant was not entitled to take CENVAT credit on input services which were used in trading activities during the material period. In this view of the matter, denial of CENVAT credit of Rs. 4,76,651/- cannot be faulted.

In view of the above the CBEC is to consider and delete the trading of goods from the mega exemption notification as it does not amount to service and hence the provisions of service tax act, rules would not be covered.