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BRIEF FACTS OF THE CASE:

1.1 This order is arising out of show cause notice bearing F. No. STC/4-142/O&A/2010-11 dated 20/07/2011 issued to M/s. Hindprakash International Pvt. Ltd. (a registered C. Ex. Dealer having ECC no. AABCH 2318A XD001) situated at 201, Hindprakash House, Plot no. 10/6, GIDC, Phase-I, Vatva, Ahmedabad (hereinafter referred to as “assessee”). The show cause notice called upon the assessee to show cause to the Commissioner, Service Tax, Ahmedabad as to why;

(i) Trading activity carried out by the assessee should not be considered as an exempted service and an amount of Rs. 17,63,224/- (as per Annexure A-1) as discussed in the foregoing paras for the period from 2006-07 to 2007-08, equivalent to the CENVAT credit utilized in excess than the permissible limit of 20% of the amount of service tax payable as per Sub-Rule (3) (c) of Rule 6 of the Cenvat Credit Rules, 2004 should not be recovered from them in Cash, under Rule 14 of the Cenvat Credit Rules, 2004 read with proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years as discussed hereinabove.

(ii) An amount of Rs. 1,35,69,665/- (as per Annexure A-2) as discussed in the foregoing paras for the period 2008-09, 2009-10 and 2010-11 equivalent to 8% (or 6%) of the value of the exempted services under option (i) of Rule 6 (3), as applicable to them should not be demanded from them under Rule 14 of the Cenvat Credit Rules, 2004 read with proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years as discussed hereinabove.

(iii) Services received by them in respect of Foreign Bank Charges should not be considered as taxable service under the category of “Banking and other Financial Services” as specified in clause (zm) of section 65 (105) of the Finance Act, 1994 as amended and an amount of Rs. 12,02,681/- paid as Foreign Bank Charges should not be considered as taxable value and Service Tax amounting Rs. 1,39,461/- (Rs. 135,756/- as Service Tax and Rs. 3,705/- as Education Cess) (as per Annexure-B) as discussed in the foregoing paras during the period from 2006-07 to 2010-11 should not be demanded from them under proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years as discussed hereinabove.

(iv) Services received by them in respect of Commission paid to a foreigner should not be considered as taxable service under the category of “Business Auxiliary Services” as specified in clause (zzb) of section 65 (105) of the Finance Act, 1994 as amended and an amount of Rs. 4,41,494/- paid as Commission to a foreigner should not be considered as taxable value and Service Tax amounting Rs. 54,216/- (Rs. 52,979/- as Service Tax and Rs. 1,237/- as Education Cess) (as per Annexure-C) paid on the said Commission amount for the period for 2006-07 & 2008-09 through Cenvat credit account E. no. 00104 dated 28/05/2011 should not be recovered in Cash from them under Section 73 (1) of the Finance Act,1994, invoking the larger period of five years as discussed hereinabove. Why the amount of interest of Rs. 26,218/- already paid vide the challan dated 06/10/2011 mentioned above should not be adjusted towards the demand of Interest. Also, why Service Tax amounting to Rs. 38,363/- (Rs. 37,246/- Service Tax and Rs. 1,117/- Education Cess) paid on the Commission amount of Rs. 3,72,456/- for the year 2009-10 through Cenvat credit account should not be recovered in Cash from them under proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years as discussed hereinabove.

(v) Services rendered by them in respect of High Seas Sales should not be considered as 2

taxable service under the category of “Business Auxiliary Services” as specified in clause (zzb) of section 65 (105) of the Finance Act, 1994 as amended and an amount of Rs. 66,23,253/- should not be considered as taxable value and Service Tax amounting Rs. 8,10,686/- (Rs. 7,94,790/- as Service Tax and Rs. 15,896/- as Education Cess) (as per Annexure D-1) for the year 2006-07 should not be demanded from them under Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years as discussed hereinabove. Also why an amount of Rs. 2,99,35,004/- should not be considered as taxable value and Service Tax amounting Rs. 36,19,143/- (Rs. 35,13,731/- as Service Tax and Rs. 1,05,411/- as Education Cess) (as per Annexure D-2) for the period from 2007-08 to 2010-11 should not be demanded from them under proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years as discussed hereinabove.

(vi) Services rendered by them in respect of rent income should not be considered as taxable service under the category of “Renting of Immovable Property Service” as defined under Section 65 (105) (zzzz) of the Finance Act 1994, as amended, on the amount of taxable value of Rs. 15,00,000/- received as payment/ recovered by them from their customers should not be considered as taxable value and Service Tax amounting to Rs. 1,54,500/- (Rs. 1,50,000/- as Service Tax and Rs. 4,500/- as Education cess) for the year 2009-10 should not be demanded from them under proviso to Section 73(1) of the Finance Act, 1994, invoking the larger period of five years as discussed hereinabove. The amount of Service tax already paid under protest vide Cenvat credit a/c. E. No. 00103 dated 28/05/2011 mentioned above should not be adjusted towards the demand of Service Tax. Why the amount of interest of Rs. 33,334/- already paid vide challan dated 06/10/2011 mentioned above should not be adjusted towards the demand of Interest.

(vii) Interest at the prescribed rate on the amount of service tax liability as shown in (i) to (vi) above for the period from 2006-07 to 2010-11 should not be paid by them for the delay in making the payment, under section 75 of the Finance Act, 1994 as amended and the payment of the same amount already made by the assessee, should not be adjusted towards the demand of interest.

(viii) Penalty should not be imposed upon them under Section 76 of the Finance Act, 1994 as amended for the failure to make the payment of service tax payable by them within stipulated time.

(ix) Penalty should not be imposed upon them under Rule 15(3)/15(4) (for the respective period) of the Cenvat Credit Rules, 2004 read with Section 78 of the Finance Act, 1994 for contraventions discussed herein above.

(x) Penalty should not be imposed upon them under Section 78 of the Finance Act, 1994 as amended for suppressing the value of taxable services provided by them before the department with intent to evade payment as shown above.

1.2 As indicated in the show cause notice, audit of records of M/s. Hindprakash International Pvt. Ltd. (a registered C. Ex. Dealer having ECC no. AABCH 2318A XD001) situated at 201, Hindprakash House, Plot no. 10/6, GIDC, Phase-I, Vatva, Ahmedabad (hereinafter referred to as “assessee”) was conducted by the officers of Central Excise, Ahmedabad-I Commissionerate. The audit covered the period from April-2005 to March-2010. The said assessee is also engaged in trading of goods e.g. Dyes Intermediates, Dyes & Chemicals, etc. They are also having service tax registration no. AABCH 2318A ST001 for the taxable services provided under the category of ‘Business Auxiliary Services’ and ‘Renting of Immovable Property Services’. They have a manufacturing unit at different address i.e. Plot no. 115, GIDC, Phase-II, Vatva, Ahmedabad and 3 had Central Excise registration no. AABCH2318AXM001. The Central Excise registration was subsequently surrendered in the office of the Assistant Commissioner of Central Excise, Division-III, Ahmedabad, on 17/11/2008.

1.3 The Commissioner of Central Excise, Ahmedabad-I vide letter F. no. VI/1(b)/275/IA/2010-11/AP-I (CAAP-B) dated 13/04/2011 forwarded the following objections raised by the audit pertaining to the service tax matters to this Commissionerate for further necessary action:

1. Revenue Para-1: Wrong availment of Cenvat Credit of service tax in regard to the input services consumed in relation to trading activity; 2. Revenue Para-2: Nonpayment of service tax on the foreign bank charges paid to the foreigner; 3. Nonpayment of service tax on the Commission paid to the foreigner; 4. Short payment of Service tax under the category of Business Auxiliary Service by the assessee, on the differential value of High Seas Sales & Purchase value of import goods (CIF), by not showing the price of service component separately; 5. Nonpayment of Service tax on the Commercial Lease Rent Income.

1.4 In this connection, the required details/ documents in respect of said discrepancies were called for from the said assessee vide letters F. no. STC/04-13/Prev./Gr.VII/2011-12 dated 19/04/2011, 02/05/2011, 23/05/2011, 30/06/2011 & 04/10/2011. The said assessee filed reply/ clarifications and details/information vide their letters dated 14/05/2011, 20/07/2011, 14/09/2011 and 10/10/2011.

1.5 Also, comments on the reply submitted by the assessee vide their letters dated 22/03/2011 & 23/04/2011 addressed to the Superintendent of Central Excise (Audit), Ahmedabad-I were called for from the C. Ex. (Audit), Ahmedabad-I vide this office letters F. no. STC/04- 13/Prev./Gr.VII/2011-12 dated 07/06/2011 and 26/07/2011. The Additional Commissioner (Audit) offered comments / views on the same vide letter F. no. VI/1(b)-275/IA/2010-11 AP-I (CAAP-B) dated 05/08/2011 and forwarded copy of Final Audit Report (FAR) No. 06/2011-12 issued by the Assistant Commissioner (Audit), C. Ex., H.Q., Ahmedabad-I from F. no. VI/1(b)/275/IA/2010-11/AP-I (CAAP-B) dated 03/08/2011 in respect of the audit of records of M/s. Hindprakash International Pvt. Ltd. as a registered dealer having registration No. AABCH 2318AXD001. Comments / views were also called for from the C. Ex. (Audit), Ahmedabad-I vide this office letter F. no. STC/04-13/Prev./Gr.VII/2011-12 dated 07/10/2011, which were given by them vide letter F. no. VI/1(b)-275/IA/2010-11 AP-I (CAAP-B) dated 10/10/2011.

1.6 As per Revenue para-1 of the said Final Audit Report, during the course of Audit, it was found that the assessee is engaged mainly in the trading of goods with the turnover in Crores [Rs.46.85 (including High Seas Sales (HSS) of Rs. 35.75 crore), Rs.99.30 (including HSS of Rs. 37.91 crore), Rs.127.16 (including HSS of Rs. 36.76 crore), Rs.130.86 (including HSS of Rs. 32.88 crore), Rs.141.24 (including HSS of Rs. 33.21 crore) & Rs.73.80 (including HSS of Rs. 15.07 crore), in the year 2005-06, 2006-07, 2007-08, 2008-09, 2009-10 and for the period April’10 to Sept.’10 respectively]. The basic concept of Cenvat credit is to integrate Central level taxes into a single Value Added Regime. The concept of value addition is in built in the scheme, there has to be tax on value addition at each stage. The essential objective of Cenvat credit Rules is to grant relief in case of cascading effect of taxation (and thus tax the net value addition). The entitlement for cenvat is only for the manufacturers and provider of taxable service where the nexus between the input and taxable output is a must. Traders do not find a place in the Cenvat credit scheme, as it is out of the tax regime. Cenvat credit is dependent on the stage of receipt of 4 goods and services; a link/nexus with a taxable output needs to be established at the stage of receipt of goods or services. The definition reveals that in the case of no levy of tax (non taxable service) there is no cascading impact resulting in denial of cenvat credit, as it is out of the tax regime. Further, it is to state that traders are not a part of cenvat chain in terms of cascading effect (value addition), but a mechanism is there in the Central Excise Rules, 2002 containing provision which permit a trader to register himself either as a first stage dealer or second stage dealer, to pass on the Cenvat credit taken on goods.

1.7 Further, the trading activity of the said assessee is neither covered under the definition of ‘final product’ as per clause (h) of Rule 2 of Cenvat Credit Rules, 2004 (CCR, 2004) nor it is an ‘output service’ defined under clause (105) of section 65 of the Financial Act, 1994 as per the clause (p) of the Rule 2 of CCR, 2004 read with Finance Act, 1994, so there is no levy of excise duty or service tax on the trading activity. There is a contravention to the above said CCR, 2004 as trading activity is not covered under the provisions of Finance Act, 1994. Any activity covered under the Finance Act, 1994 can either be a taxable service or exempted service, but trading activity is neither of these but a non taxable activity which takes it is out of the tax regime.

1.8 The Cenvat credit taken on input services which are used in relation to trading activity, which is non-taxable service as per the clause (p) of the Rule 2 of CCR, 2004 having no leviability of service tax, is in contravention to the said CCR, 2004. Further, clause (ii) of sub- rule (l) of Rule 2 of CCR, 2004 is applicable to the manufacturer and clause (i) of the sub-rule (l) of Rule 2 of CCR, 2004, applicable to service provider defines the “input service means any service used by the provider of taxable service for providing an output service”. This clearly means that the taxable service received and consumed by a service provider must be in relation to rendering of output service. Since there is no cascading impact in trading activity, the input service received & consumed in relation to the trading activity and not in relation to rendering of output service provided by the service provider, cenvat credit is not admissible. As per the ledger a/c & Profit & Loss a/c for the year 2005-06 & 2006-07 Business Auxiliary Service charges of Rs. 42.54 lakhs & Rs. 105.73 lakhs respectively are shown and taxable amount on which service tax is paid is Rs.0.22 lakhs & Rs.0.20 lakhs in the year 2005-06 & 2006-07 respectively. In the subsequent years, the service rendered was Business Service Income (Service in regard to Marketing of Product) of Rs. 32.05 lakhs & Commission income (Service in regard to Market & Supply of Papers) of Rs. 75.90 lakhs, totaling to Rs. 107.95 lakhs in the year 2007-08. Commission income (Service in regard to Market & Supply of Papers) is Rs. 51.43 lakhs in the year 2008-09. Further, Rent income is Rs. 1.57 lakhs in the year 2006-07, Rs.1.15 lakhs in the year 2007-08, Rs.3.75 lakhs in the year 2008-09, Rs.15.00 lakhs in the year 2009-10 and Rs.7.50 lakhs during the period April’10 to Sept.’10. From the above figures, it can be seen that the percentage of total taxable activity to the total turnover of sales is approximately 0.05% to 1.10% during the above said period.

1.9 Further, the assessee had wrongly availed the cenvat credit of service tax as per “Table B” (as shown below) with regard to the input service consumed in relation to trading activity i.e. BAS service Rs.2,21,134/-, CHA service Rs.58,34,675/-, Commission service Rs.65,640/-, Courier service Rs.78,047/-, Financial Bank Charges Rs. 25,99,488/-, Laboratory & Testing service Rs.24,864/-, Professional charges Rs. 2,78,022/-, Telephone service Rs.1,96,913/-, Travelling service Rs. 6,344/-, Warehousing service Rs. 4,35,121/- and Xerox service Rs.18,600/-, total amounting to Rs.13,98,155/-, Rs. 18,17,438/-, Rs. 21,82,973/-, Rs.19,33,172/- & Rs. 24,27,109/- in the year 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11 respectively.

“ Table-B” 5

Particul Apr.'0 Oct.'06 Apr.'0 Oct.'07 - Apr.'08 - Oct.'0 Apr'.'09 Oct.'09 Apr.'10 - Oct.'10 - Total ars 6 - - 7 - Mar.'08 Sep.'08 8 - - Sep.'09 - Sep.'10 Mar.'11 Sep.'0 Mar.'0 Sep.'07 Mar.'0 Mar.'1 6 7 9 0

BAS 3,153 1,478 166,86 2,277 43,074 4,285 221,134 Services - - - 7 -

CHA 489,77 507,35 488,00 669,753 829,177 342,16 754,598 466,36 660,807 626,696 5,834,675 Services 3 0 0 0 1

Commiss 65,640 65,640 ion ------Services

Courier 1,502 3,679 8,267 14,102 5,468 24,061 5,521 4,590 8,785 2,072 78,047 Charges

Financial 163,74 101,52 188,93 266,227 230,548 253,85 303,597 216,58 377,500 496,976 2,599,488 Charges 5 4 2 2 6

Laborato ry - 6,881 2,177 3,271 1,944 4,370 73 343 400 5,405 24,864 Service

Professio nal - - 26,698 44,031 25,585 100,63 25,620 35,657 9,373 10,425 278,022 Charges 3

Telephon e 15,005 17,486 18,430 16,067 20,071 28,473 21,554 20,272 20,249 19,306 196,913 Services

Travellin g - 61 90 1,236 865 - - 321 2,609 1,162 6,344 Services

Warehou sing 8,563 9,546 23,892 40,967 121,482 23,435 45,344 27,562 55,669 78,661 435,121 Services

Xerox Services 1,753 2,494 - 3,820 2,185 1,797 1,216 1,680 1,251 2,404 18,600

Total 1 1 1 680,34 717,81 756,48 ,060,952 ,237,325 945,64 1,157,52 775,64 1,179,71 ,247,392 9,758,847 1 4 6 8 3 9 7

1.10 The output service provided by the assessee is Business Auxiliary Service (procurement of goods which are input for the High Seas client), Service charges (for payment made on behalf of client), Commission income (for finding prospective client for the supplier) & Rent income (which is on the immovable property rented for commercial purpose), wherein hardly any input service as detailed in the above table is been consumed. Therefore, there is contravention to the sub-rule (l) & (p) of Rule 2 of CCR’2004 read with section 65 of the Finance Act’1994 and as per Section 66 of the said Act, (means no levy of service tax), and also contravention as per the sub- rule (6) of Rule 9 of Cenvat Credit Rules’2004, as the assessee is the provider of output service had not maintained proper records/accounts for the receipt and consumption of input services in which the relevant information regarding the value, tax paid, cenvat credit taken and utilized, the person from whom the input service has been procured is recorded and the burden of proof regarding the admissibility of service tax credit shall lie upon the person taking such credit. There should be separate accounts for receipt & consumption of input service defined under the sub-rule (l) of Rule 2 of CCR’2004, means consumption in relation to rendering of output taxable service and non taxable service. i.e the activity on which service tax is not levied as per section 66 of Finance Act’1994 and is not covered under the sub-rule (p) of the Rule 2 of CCR’2004 read with section (65) of the said Act. The service provider shall take credit only on that portion of input service, which is intended for use in relation to rendering of output services, in other words there must be a link/nexus between the input service & taxable output service, by maintaining proper records/accounts. Further, in the present case it can be seen that there is no cascading effect of cenvat credit of service tax taken, as the gross taxable value is Rs. 306.85 6

lakhs and the service tax credit taken is Rs. 97.59 lakhs. Further gross amount of expense is Rs. 775.00 lakhs, which is more than 2.5 times the service income, which itself is unjustified. The assessee had also collected the service tax for the service rendered from the service recipient, but had paid from the service tax credit taken in relation to trading activity, as shown in the “Table A” below. This clearly indicate that the assessee had collected the service tax on the service rendered, but paid through the wrongly availed cenvat credit of service tax, which is in relation to the trading activity (non taxable service). Therefore, the assessee is benefited by collecting the service tax from service recipients and availing the Cenvat credit of service tax in relation to trading activity.

Table “A”

Service Tax Service Tax Service tax Total Service Gross value of YEAR Credit Credit paid in cash Tax Paid Taxable Service Availed Utilized

April’06-Sept.’06 6,80,341 6,20,274 2,97,500 9,17,774 77,12,891

Oct.’06- March’07 7,17,814 3,19,450 52,322 3,71,772 30,37,353

April’07-Sept.’07 7,56,486 8,271 0 8,271 66,912

Oct.’07- March’08 10,60,952 13,43,493 0 13,43,493 1,22,13,172

April’08-Sept.’08 12,37,325 6,35,607 0 51,42,440 6,35,607

Oct.’08- March’09 9,45,648 46,442 0 46,442 3,75,740

April’09-Sept.’09 11,57,523 0 0 0 0

Oct.’09- March’10 7,75,649 38,663 0 38,663 3,72,456

April’10-Sept.’10 11,79,717 77,250 0 77,250 7,50,000

Oct'10-March'10 12,47,392 104,442 0 104,442 10,14,000

TOTAL Rs : 97,58,847 31,93,892 3,49,822 35,43,714 3,06,84,964

1.11 The same is required to be recovered as per Rule 14 of CCR’2004, along with due interest, as the input services on which credit is taken is been consumed in relation to trading activity, which is exempted service as per Section 66 of the Financial Act, 1994 and not defined under the sub-rule (l) & (p) of the Rule 2 of CCR’2004 read with Section (65) of the Financial Act’1994.

1.12 The assessee had wrongly availed the cenvat credit of service tax as per “Table-B” on the CHA service received amounting to Rs.58,34,675/- on the trading activity which are not in relation to rendering of output service provided by the assessee i.e. Business Auxiliary Service (procurement of goods which are input for the High Seas client) & Service charges (for payment made on behalf) for two years only), Commission income (for finding prospective client for the supplier) & Rent income (which is on the immovable property rented for commercial purpose). Further, it is to state that the Business Auxiliary Service (the procurement of goods which are 7 input for the High Seas client), on which service tax is only paid for two years. In that case also it is the client who had borne the CHA charges for receiving the goods as per the transfer of owner agreement in the year 2005-06 & 2006-07. Thus, the service tax credit on the CHA service is purely of the trading turnover excluding the High seas sales value. Thus, there is also contravention to the Explanation II of clause (ii) of sub-rule (3) of Rule 6 of CCR’2004 and also as per the clause (g) & (p) of the Rule 2 of CCR’2004 read with Section 65 & 66 of the Financial Act’1994, and to the clause (i) of the sub-rule (l) of Rule 2 of Cenvat Credit Rules’2004 and as per the sub-rule (vi) of Rule 9 of Cenvat Credit Rules’2004, as discussed in the above paras.

1.13 The assessee had wrongly availed the cenvat credit of service tax as per “Table-B” on Finance & Banking service amounting to Rs.25,99,488/- on the trading activity, as there is hardly any relation of the said service to rendering of output services provided by the assessee i.e. Business Auxiliary Service (procurement of goods which are input for the client), Commission income (which is on the percent basis for finding prospective client for the supplier) & Rent income (which is on the immovable property rented for commercial purpose). But, as per the sub- rule (vi) of Rule 9 of Cenvat Credit Rules’2004, as the assessee the provider of output service had not maintained proper records for the receipt and consumption of input services in which the relevant information regarding the value, tax paid, cenvat credit taken and utilized, the person from whom the input service has been procured is recorded and the burden of proof regarding the admissibility of service tax credit shall lie upon the person taking such credit. There should be separate accounts for receipt & consumption of input service defined under the clause (i) of sub-rule (l) of Rule 2 of CCR’2004, that means consumption in relation to rendering of output taxable service and non taxable service (means the activity on which service tax is not levy as per section 66 of the Financial Act’1994), means not covered under the provision of law and not defined as output service as per sub-rule (p) of the Rule 2 of CCR’2004 read with Section 65 of the Financial Act’1994. The service provider shall take credit only on that portion of input service, which is intended for use in relation to rendering of output services, which are taxable service chargeable to service tax, by maintaining proper records and not on the activity which is exempted service as per Section 66 of the Financial Act’1994. Thus, there is the contravention as per the clause (g) & (p) of the Rule 2 of CCR’2004 read with Section 65 & 66 of the Financial Act’1994, and to the clause (i) of the sub-rule (l) of Rule 2 of Cenvat Credit Rules’2004 and as per the sub-rule (vi) of Rule 9 of Cenvat Credit Rules’2004, as discussed in above paras.

1.14 The assessee had wrongly availed the cenvat credit of service tax as per “Table-B” above on BAS service Rs.2,21,134/-, Commission service Rs.65,640/-, Courier service Rs.78,047/-, Laboratory & Testing service Rs.24,864/-, Professional charges Rs.2,78,022/-, Telephone service Rs.1,96,913/-, Travelling service Rs.6,344/-, Warehousing service Rs.4,35,121/- and Xerox service Rs.18,600/-, received and consumed for the trading activity, amounting to Rs.13,06,085/- as there is hardly any relation of these services to output services provided by the assessee i.e. Business Auxiliary Service (procurement of goods which are input for the client), Commission income (which is on the percent basis for finding prospective client for the supplier) & Rent income (which is on the immovable property rented for commercial purpose). But, as per the sub- rule (vi) of Rule 9 of Cenvat Credit Rule’2004, as the assessee the provider of output service had not maintained proper records for the receipt and consumption of input services in which the relevant information regarding the value, tax paid, cenvat credit taken and utilized, the person from whom the input service has been procured is recorded and the burden of proof regarding the admissibility of service tax credit shall lie upon the person taking such credit. There should be separate accounts for receipt & consumption of input service defined under the clause (i) of sub-rule (l) of Rule 2 of CCR’2004 that means consumption in relation to rendering of output taxable service and exempted service. The service provider shall take credit only on that portion of input service, which is intended for use in relation to rendering of output services, 8

which are taxable service chargeable to service tax, by maintaining proper records and not on the activity which is exempted service. Thus, availment of cenvat credit of service tax on the BAS, Commission, Courier, Laboratory & Testing, Professional charges, Telephone, Travelling, Warehousing, Xerox service received and consumed for the trading activity, which is exempted service and no separate proper records is maintained for the taxable service & exempted service. So, there is contravention as per the clause (g) & (p) of the Rule 2 of CCR’2004 read with Section 65 & 66 of the Financial Act’1994, and to the clause (i) of the sub-rule (l) of Rule 2 of Cenvat Credit Rules’2004 and as per the sub-rule (vi) of Rule 9 of Cenvat Credit Rule’2004, which is been explained in the paras discussed above. The same is required to be recovered as per Rule 14 of CCR’2004, along with due interest, as the input services on which credit is taken is been consumed in relation to trading activity, which is exempted service as per Section 66 of the Financial Act, 1994 and not defined under the sub-rule (l) & (p) of the Rule 2 of CCR’2004 read with section (65) of the Finance Act’1994.

1.15 Further, it is to state that the assessee had recovered the expenditure from the customer i.e. CHA charges, Transportation expenses, Bank charges, Interest etc as shown in the Balance sheets of respective years in Schedule: 20 below Sr. No. 17 (B) Notes forming the part of Accounts : Sr. No.(3) and the assessee had also submitted the statement showing the reimbursement of the expenses incurred on behalf of client service wise and period wise and the same is reproduced below as per “Table –C” and on some such expenses cenvat credit of service tax has also been wrongly availed, as the expenses are of trading activity and even not borne by the said assessee.

“ Table –C”

GL Description Year Total Expenses Reimbursement Net Expenses

Clearing & Forwarding- Import 2006-07 92,15,884 47,53,332 44,62,552

Clearing & Forwarding- Export 2006-07 14,02,471 - 14,02,471

Bank Charges 2006-07 25,32,566 4,68,932 20,63,634

Clearing & Forwarding- Import 2007-08 1,00,56,561 25,44,649 75,11,912

Clearing & Forwarding- Export 2007-08 15,45,501 5,25,981 10,19,520

Bank Charges 2007-08 32,26,562 4,69,616 27,56,946

Clearing & Forwarding- Import 2008-09 1,05,39,830 17,00,152 88,39,678

Clearing & Forwarding- Export 2008-09 12,73,066 3,61,183 9,11,883

Bank Charges 2008-09 35,20,646 2,34,669 32,85,977

Clearing & Forwarding- Import 2009-10 1,26,08,966 13,42,135 1,12,66,831

Clearing & Forwarding- Export 2009-10 11,22,830 4,26,417 6,96,413

Bank Charges 2009-10 30,29,018 70,977 29,58,041

1.16 The same is required to recovered as per Rule 14 of CCR’2004, along with due interest, as the input services on which credit is taken is consumed in relation to trading activity, which is exempted service and not covered under Section 66 of the Financial Act, 1994 and not defined under the sub-rule (l) & (p) of the Rule 2 of CCR’2004 read with Section 65 of the Finance Act’1994.

1.17 The Additional Commissioner (Audit), Central Excise, Ahmedabad-I vide letter F. no. VI/1(b)-275/IA/2010-11 AP-I (CAAP-B) dated 10/10/2011, commented that in view of the 9 wrong availment of the cenvat credit of service tax on the CHA service amounting to Rs.48,37,552/-, as it is exclusively used in relation to the trading activity for the period F.Y. 2007-08, 2008-09, 2009-10 & 2010-11 as per the “Annexure-I” (copy enclosed) & as per the above “Table-B” & shown in the said FAR and letter F. No. VI/1(b)-275/IA/2010-11 AP-I (CAAP-B) dated 10/10/2011 of the Additional Commissioner (Audit), Central Excise, Ahmedabad-I, as it is not in relation to the output service provided by the assessee, because the role of the CHA is not apparent as per the nature of service provided & activity under taken during the aforesaid period i.e. Business Service Income (BAS for Marketing the Product) & Commission income (BAS- Market & Supply of Papers) in the year 2007-08, Commission income (BAS-Market & Supply of Papers) in the year 2008-09 and Rent income from immovable property for the period F.Y 2007-08, 2008-09, 2009-10 and 2010-11. Thus, it appears that the cenvat credit availed by the assessee is of trading activity, which is non-taxable service covered under exempted service as per the rule 2(e) of CCR’2004, read with Section 65 & 66 of Finance Act’1994. Hence the credit of input services CHA charges is used exclusively in trading for the period F.Y 2007-08, 2008-09, 2009-10 & 2010-11 as per “Annexure–I” cannot be availed even before 01.04.2008, as mentioned in the Circular No. 943/04/2011-CX (Sr. No. 6), which also leads to the contravention of sub-rule (l) & (p) of Rule 2 of CCR’2004, sub rule (1) of Rule 6 of CCR’2004, read with the Section 65 & 66 of Finance Act’1994. Further, there is contravention to Rule 6 (2) as the assessee is not maintaining separate records, so it is required to be recovered as per Rule 6 (3)(i) of CCR’2004, as the option benefit of clause (ii) of sub-rule (3 & 3A) of Rule 6 of CCR’2004 is not available, as the assessee had not opted for the same & not even followed the procedure & condition specified in the Rule 6 (3A) of CCR’2004.

1.18 However, the benefit of the said circular is available for the F.Y year 2006-07, in regard to the cenvat credit of the CHA service as per the “Annexure–II” (copy enclosed), taking into consideration as common input services, which is availed subject to restriction of utilization of credit up to 20% of the total service tax liability as per above Table “A” & shown in the said FAR and letter F. no. VI/1(b)-275/IA/2010-11 AP-I (CAAP-B) dated 10/10/2011 of the Additional Commissioner (Audit), Central Excise, Ahmedabad-I. As the output service is in regard to Business Auxiliary Service CHA-(procurement of goods which are input for the High Seas client) & Service charges (for payment made on behalf), where the role of the CHA is apparent/evident as per the nature of service provided in the F.Y 2006-07.

1.19 So, the above said wrongly availed cenvat credit should be recovered under Rule 14 of CCR’2004 along with penalty under Rule 15 of CCR’2004 , as there is contravention to the sub- rule (l) & (p) of Rule 2 of CCR’2004 read with Section 65 & 66 of the Financial Act’1994 and contravention to the Rule 6 (1) & (2) of CCR’2004 & Rule 6 (3) (i) of CCR’2004 & also as per the sub- rule (6) of Rule 9 of Cenvat Credit Rule’2004, as the assessee is the provider of output service had to maintained separate & proper records/accounts for the receipt and consumption of input services in which the relevant information regarding the value, tax paid, cenvat credit taken and utilized, the person from whom the input service has been procured is recorded and further the burden of proof regarding the admissibility of service tax credit shall lie upon the person taking such credit.

1.20 Further, the wrongly availed cenvat credit of service tax on Finance & Banking service amounting to Rs.23,34,218/- as it is exclusively used in relation to the trading activity for the period F.Y. 2007-08, 2008-09, 2009-10 & 2010-11 as per the “Annexure-I” & as per above “Table-B” & shown in the said FAR and letter F. no. VI/1(b)-275/IA/2010-11 AP-I (CAAP-B) dated 10/10/2011 of the Additional Commissioner (Audit), Central Excise, Ahmedabad-I, as it is not in relation to the output service provided & activity under taken by the assessee, because the 10

Financial & Banking charges are all related to Bill of lading, L/C charges (Commitment, Postage & bank charges), Bill discounting (L/c bill payment & collection of bill) etc, so all bank charges are in relation to purchase & sales of goods i.e. trading activity. According to the nature of service provided during the aforesaid period i.e. Business Service Income (BAS for Marketing the Product) & Commission income (BAS- Market & Supply of Papers) in the year 2007-08, Commission income (BAS-Market & Supply of Papers) in the year 2008-09 and Rent income from immovable property for the period F.Y. 2007-08, 2008-09, 2009-10 and 2010-11. Further, it is to state that the bank transaction comes in picture only when amount so received by the assessee, for the service provided is to be deposited into the bank account, the said bank transaction is free of charges. Thus, it is clear that the credit availed by the assessee is of trading activity, which is non-taxable service covered under exempted service as per the Rule 2(e) of CCR’2004, read with the Section 65 & 66 of Financial Act’1994. Hence the credit of input services of Banking charges is used exclusively in trading for the period F.Y 2007-08, 2008-09, 2009-10 and 2010-11 as per “Annexure-I” cannot be availed even before 01.04.2008, as mentioned in the Circular No. 943/04/2011-CX (Sr. No. 6), which also leads to the contravention of sub-rule (l) & (p) of Rule 2 of CCR’2004, sub rule (1) of Rule 6 of CCR’2004, read with the section 65 & 66 of Financial Act’1994. Further, there is contravention to the Rule 6 (2) as the assessee is not maintaining separate records, so it should be recovered as per Rule 6 (3) (i) of CCR’2004, as the option benefit of clause (ii) of sub-rule (3 & 3A) of Rule 6 of CCR’2004 is not available, as the assessee had not opted for the same & not even followed the procedure & condition specified in the Rule 6 (3A) of CCR’2004. Further, it is state that the benefit of Rule 6 (5) is not available as the service is exclusively used in trading activity (non taxable service).

1.21 However, the benefit of the Rule 6 (5) of CCR, 2004 is available for the F.Y year 2006- 07, in regard to the cenvat credit of the financial & banking charges, taking into consideration as common input services, which is shown as per above Table “B” of the said report amounting to Rs.2,65,269/-, as the output service is of Business Auxiliary Service CHA-(procurement of goods which are input for the High Seas client) & Service charges (for payment made on behalf), where it is evident that the transaction with bank, would consist of common bank charges as per the nature of service provided during the F.Y 2006-07.

1.22 So, the above said wrongly availed cenvat credit should be recovered as per the Rule 14 of CCR’2004 along with penalty under Rule 15 of CCR’2004, as there is contravention to the sub-rule (l) & (p) of Rule 2 of CCR’2004 read with section 65 & 66 of the Financial Act’1994 and contravention to the Rule 6 (1) & (2) of CCR’2004 & Rule 6 (3) (i) of CCR’2004 & also as per the sub-rule (6) of Rule 9 of Cenvat Credit Rule’2004, as the assessee is the provider of output service had to maintained separate & proper records/accounts for the receipt and consumption of input services in which the relevant information regarding the value, tax paid, cenvat credit taken and utilized, the person from whom the input service has been procured is recorded and further the burden of proof regarding the admissibility of service tax credit shall lie upon the person taking such credit.

1.23 Further, the wrong availment of the Cenvat credit of service tax on the BAS service Rs.2,17,981/- (Oct.’07 to March’11), Commission service Rs.65,640/-(Oct.’06 to March’07), Laboratory & Testing service Rs.24,864/-(Oct.’06 to March’11) and Warehousing service Rs.4,17,012/- (April’07 to March’11), wherein the total amount of all service is Rs.7,25,497/-, as it is exclusively used in relation to the trading activity, as per the “Annexure-I” & as per the “Table-B” & shown in the said FAR, as it is not in relation to the out service provided & activity under taken by the assessee, because the role of the said services is not evident/apparent as per the nature of service rendered during the aforesaid period i.e. Business Auxiliary Service CHA- 11

(procurement of goods which are input for the High Seas client) & Service charges (for payment made on behalf) in the F.Y 2006-07, Business Service Income (BAS for Marketing the Product) & Commission income (BAS- Market & Supply of Papers) in the year 2007-08, Commission income (BAS-Market & Supply of Papers) in the year 2008-09 and Rent income from immovable property in the year 2007-08, 2008-09, 2009-10 and 2010-11. Thus, it is clear that the credit availed by the assessee is of trading activity, which is non-taxable service covered under exempted service as per the Rule 2(e) of CCR’2004, which was also mentioned in Noti. No. 05/2003-ST dated 14.05.2003 & also covered under the sub-rule (4) & (5) of Rule 3 of Service Tax Credit Rules’2002, vide Circular No. 77/07/2004-ST dated 10.03.2004, read with the Section 65 & 66 of Financial Act’1994. Hence credit of the above said input services used exclusively in trading for the period F.Y. 2006-07, 2007-08, 2008-09, 2009-10 & 2010-11, as per “Annexure–I” cannot be availed even before 01.04.2008, as mentioned in the Circular No. 943/04/2011-CX (Sr. No. 6), which also leads to the contravention of sub-rule (l) & (p) of Rule 2 of CCR’2004, sub rule (1) of Rule 6 of CCR’2004, read with the Section 65 & 66 of Financial Act’1994. Further, there is contravention to the Rule 6(2) as the assessee is not maintaining separate records, so it should be recovered as per Rule 6 (3) (i) of CCR’2004, as the option benefit of clause (ii) of sub-rule (3 & 3A) of Rule 6 of CCR’2004 is not available, as the assessee had not opted for the same & not even followed the procedure & condition specified in the Rule 6 (3A) of CCR’2004.

1.24 However, the benefit of the said circular is available for the F.Y 2006-07 & 2007-08 in regard to the services i.e. Courier service Rs.27,550/-, Professional charges Rs.70,729/-, Telephone service Rs.66,988/-, Travelling service Rs.1,387/-, Xerox service Rs.8,067/- and in regard to the Warehousing service Rs.18,109/- & BAS service Rs.3,153/-( F.Y 2006-07), taking into consideration as common input services, which is availed subject to restriction of utilization of credit up to 20% of the total service tax liability as per the Table “A” and as per the “Annexure-II” (copy enclosed), as the output services are in regard to Business Auxiliary Service CHA-(procurement of goods which are input for the High Seas client) & Service charges (for payment made on behalf) in F.Y 2006-07 and Business Service Income (BAS for Marketing the Product) & Commission income (BAS- Market & Supply of Papers) in the year 2007-08, where the said services consumed is obvious/evident as per the nature of service provided.

1.25 Further, the wrong availment of the cenvat credit of service tax is to be recovered for the F.Y 2008-09, 2009-10 & 2010-11 in regard to the input services i.e Courier service Rs.50,497/-, Professional charges Rs.2,07,293/-, Telephone service Rs.1,29,925/-, Travelling service Rs.4,957/-, Xerox service Rs.10,533/- taking into consideration as common input services as per “Annexure-III” (copy enclosed), as per the Circular No.943/04/2011-CX (Sr.No.7), sub-rule (l) & (p) of Rule 2 of CCR’2004, read with the Section 65 & 66 of Financial Act’1994. Further, there is contravention to the Rule 6(2) as the assessee is not maintaining separate records, so it should be recovered as per Rule 6(3) (i) of CCR’2004, as the option benefit of clause (ii) of sub- rule (3 & 3A) of Rule 6 of CCR’2004 is not available, as the assessee had not opted for the same & not even followed the procedure & condition specified in the Rule 6 (3A) of CCR’2004.

1.26 Therefore, the above said wrongly availed cenvat credit is required to be recovered as per the Rule 14 of CCR’2004 along with Rule 15 of CCR’2004, as there is contravention to the sub- rule (l) & (p) of Rule 2 of CCR’2004 read with Section 65 & 66 of the Financial Act’1994 and contravention to the Rule 6(1) & (2) of CCR’2004 & Rule 6(3) (i) of CCR’2004 & also as per the sub-rule (6) of Rule 9 of Cenvat Credit Rules’2004, as the assessee is the provider of output service had to maintained separate & proper records/accounts for the receipt and consumption of input services in which the relevant information regarding the value, tax paid, cenvat credit taken 12 and utilized, the person from whom the input service has been procured is recorded and further the burden of proof regarding the admissibility of service tax credit shall lie upon the person taking such credit.

2.1 The assessee vides their above letters dated 22/03/2011, 23/04/2011, 14/05/2011 and 14/09/2011 replied that they did not agree with this point. The Director of M/s. Hindprakash International Pvt. Ltd. vide their letter dated 12/09/2011 authorised Shri Paresh D. Raval, to give statement and stated that the same will be binding to the company for future course of action. A statement of Shri Paresh D. Raval, Authorised signatory of M/s. Hindprakash International Pvt. Ltd. was recorded on 10/10/2011 under Section 14 of Central Excise, 1994 read with Section 83 of the Finance Act, 1994 wherein he reiterated earlier submissions made by them vide their letters dated 22/03/2011, 23/04/2011, 14/05/2011, 14/09/2011 & 08/10/2011 and inter-alia stated that:-

(i) Their main activity is trading of the goods; that they procure the goods by way of purchase either from locally or from abroad; that they also provide various services namely, commission agency, renting of immovable properties and business auxiliary services; that they discharge service tax on these services; that in respect of goods imported, they are paying service tax on various services utilized during the course of import of the goods under Cenvat Credit Rules, 2004; that they are entitled to avail service tax paid on various services as credit, as these services are utilized in the course of their business; that they make use of various taxable Input services directly or indirectly while providing the output services and that the service tax utilized by them is in accordance with the Cenvat Credit Rules, 2004.

(ii) Prior to 01/04/2008, Rule 6(3) of the Cenvat Credit Rules, 2004, provided that a service provider who provides both taxable and exempted services has to maintain separate account of input services used in taxable and exempted services so that he does not avail credit on input services used for providing non-taxable output services. If he chooses not to maintain separate accounts, he shall utilize credit only to extent of an amount not exceeding twenty percent of the amount of service tax payable on taxable output service.

(iii) W.e.f. 01/04/2008, under the amended Rule 6(3), the following options are available to the taxpayers not maintaining separate Cenvat credit accounts for dutiable and exempted outputs;

(i) Pay an amount equal to 10% (5% w.e.f. 7/7/2009) of the value of the exempted goods or 8% (6% w.e.f. 7/7/2009) of the value of the exempted services. “Exempted service includes non-taxable service also” OR

(ii) Pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in or in relation to manufacture of exempted goods or for provision of exempted services. Rule 6 (3A) prescribes the conditions and procedure to determine the amount of CENVAT credit attributable to exempted outputs.

(iv) The C. B. E. C., New Delhi vide its Instruction letter-ST issued from F. no. 137/72/2008- CX.4 dated 21/11/2008, while examining the issue of utilization of accumulated CENVAT credit, point for consideration was that, prior to 01-04-2008 [before the amendment in Rule 6(3)] the option available to the taxpayer, under Rule 6(3), was that, he was allowed to utilize credit only to the extent of an amount not exceeding 20% of the amount of service tax payable on taxable output service. However, there was no restriction in taking CENVAT credit and also there was no provision about the periodic lapse of 13

balance credit. In this issue, the Board has clarified that as no lapsing provision was incorporated and that the existing Rule 6(3) of the CENVAT Credit Rules does not explicitly bar the utilization of the accumulated credit, the department should not deny the utilization of such accumulated CENVAT credit by the taxpayer after 01-04-2008. Further, it must be kept in mind that taking of credit and its utilization is a substantive right of a taxpayer under value added taxation scheme. Therefore, in the absence of a clear legal prohibition, this right cannot be denied.

(v) In respect of treatment of credit of input and input services used in trading before 1.4.2008, C.B.E.C. vide para 7 of the Circular No. 943/04/2011-CX dated 29/04/2011 has clarified that trading is an exempted service. Hence credit of any inputs or input services used exclusively in trading cannot be availed. Credit of common inputs and input services could be availed subject to restriction of utilization of credit up to 20% of the total duty liability as provided for in extant Rules. In respect of calculating value of trading, it was clarified vide para 8 of the Circular that the method normally followed by the concern for its accounting purpose as per generally accepted accounting principles should be used.

(vi) As per Circular No. 868/6/2008-CX dated 09/05/2008 issued by C.B.E.C., it was clarified that exempted service includes non-taxable service also, in respect of Rule 6(3) of the CENVAT Credit Rules, 2004 pertaining to an assessee opting not to maintain separate Cenvat credit accounts for dutiable and exempted outputs.

(vii) Vide Notification no. 3/2011-CE (NT) dated 01/03/2011, the CENVAT Credit Rules, 2004 has been amended. These rules are called the CENVAT Credit (Amendment) Rules, 2011 and came into force on the 1st day of April, 2011. The definitions of “exempted services” provided in Rule 2(e) of the CENVAT Credit Rules, 2004 has been amended vide the said notification and it has been clarified that “exempted services” includes “trading”. Also, Rule 6 of the CENVAT Credit Rules, 2004 has been amended vide the said notification and it has been clarified vide Explanation I (c) of the said rule that “in case of trading, “Value” for the purpose of sub-rules (3) and (3A) shall be the difference between the sale price and the purchase price of the goods traded”.

(viii) From the above, the point raised by the Audit that trading is not exempted service but non taxable service and hence cenvat credit of input services availed by the service provider is completely ineligible and requires to be recovered is not acceptable. For the period prior to 01.04.2008, the service provider can be allowed to utilize credit only to the extent of an amount not exceeding 20% of the amount of service tax payable on taxable output service. This means that the remaining 80% of tax is to be paid from PLA/ cash. However, there is no restriction in taking CENVAT credit. For the period after 01/04/2008, under the amended Rule 6(3), the service provider is required to pay an amount equivalent to the CENVAT credit attributable to input services used in non- taxable/ exempted services.

(ix) Also, as per para 7 & 8 of the judgment given by the CESTAT, Ahmedabad in the case of M/s. Orion Appliances Ltd. Vs. CST, Ahmedabad (2010-TIOL-752-CESTAT-AHM), “Sub Rule 3 of Rule 6 provides that where output service provider does not maintain separate account, he has to follow the procedure or avail the options available under that Rule. But this rule is applicable only when the output service provider is providing services 14

which are chargeable to service tax and as well as exempted services. Similar is the situation when we examine Rule 3 of Service Tax Credit Rules, 2002. Both these rules clearly speak of exempted services. Rule 3 of Service Tax Credit Rules also covers non taxable services. Since trading activity is not at all a service, it is not correct to apply these provisions.”

“ Then the question arises as to whether the appellant would be eligible for the full amount of service tax credit taken by them on input services can be used for payment of service on output service provided the input services have been used for providing the output services. No doubt there is no one to one correlation required. This is the reason why provisions have been made in Cenvat Credit Rules and Service Tax Credit Rules to cover such situations where an assessee is providing both exempted and taxable services. In cases where an assessee is undertaking activities which cannot be called a service or which cannot be called manufacture, that activity goes out of the purview of both Central Excise Act as well as Finance Act, 1994. Therefore, we have a situation where an assessee would not be eligible to take input service tax credit on an output which is neither a service nor excisable goods and at the same time there is no provision to cover situations where an assessee is providing a taxable service and is undertaking another activity which is neither a service nor manufacture.”

(x) As per para 5 of the judgment given by the CESTAT, South Zonal Bench, Bangalore, in the case of M/s. Ericsson India Pvt. Ltd. Vs. CC, CE & ST reported in (2011) 9 Taxmann.com 273 (Bang. CESTAT), “We note that in Stay Order No. 1685/2009 in the case of Bhel-Ge Turbine Service Pvt. Ltd. v. CCE, Hyderabad [2010-TIOL-343- CESTAT-BANG.] We held that exempted services mentioned in Rule 2(e) of CCR covered only services which were notified and prima facie could not be interpreted to include the services on which no tax was levied under Section 66 of the Act. The basis on which the demand is raised is that the Corporate office and the main unit of the appellant (which is also registered as ISD) provided output services which are attributable to taxable services as well as exempted services, namely, trading activity and failed to maintain separate accounts for receipt, consumption and inventory of input services meant for use in providing taxable output services and in the provision of exempted services thereby violating provisions of Rule 6(3) of CCR and inviting restriction to utilize the credit available up-to a maximum of 20% of the tax on output services produced. We find that prima-facie the ‘trading activity involved does not constitute exempted services for the assessee to come within the mischief of rule 6(3)(c) of CCR. Therefore, prima facie, the demand of service tax to the tune of Rs.3,55,05,053/- is not sustainable.”

(xi) The eligibility to Cenvat credit is governed by Rule 3 of the CCR. As per Rule 3 (1) of the CCR, the provider of output services is allowed to take credit on the service tax paid on any input service received by them.

‘Input service' is defined in Rule 2(1) of the CCR to mean any service,-

(i) used by a provider of taxable service for providing an output service; or

(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products, up-to the place of removal, 15 and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage up-to the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation up-to the place of removal;

In view of the above definition of the input service, the said definition is very broad and include not only those services which are used for providing output services but also covers such services which are treated as activities relating to business. Hence any services which are used for business would qualify as ‘input service' whether the said service is used for providing output service or not.

In this respect, the Larger Bench of the Tribunal in the case of ABB Ltd Versus CCE & ST., Bangalore (2009-TIOL-830-CESTAT-BANG-LB) has held that the expression “business” is a term of vide import as held by the Apex Court in Mazgaon Dock Ltd. Vs. Commissioner of Income-tax and Excess Profits Tax (2002-TIOL-613-SC-IT). Further the definition of ‘Input Services' uses the expression “activities relating to business”. The word ‘relating' further widens the scope of the expression “activities relating to business”. There is no qualification to the word “activities” - there is no restriction that the “activities relating to business” should be relating to only the “main” activities or “essential” activities and, therefore, all other activity relating to business falls within the definition of “input service” ….. the expression “such as” is purely illustrative. The expression means “for example” or “of a kind that” - (Concise Oxford Dictionary). It has been defined in the Chambers Dictionary as “for example”. The usage of the words “such as” after the expression “activities relating to business” in the inclusive part of the definition, therefore, further supports our view that the definition of the term “input service” would not be restricted to services specified thereafter…… the word “include” is generally used to enlarge the meaning of the preceding words and it is by way of extension, and not restriction. Similar view has been taken by the Larger Bench of the Tribunal in Commissioner of Central Excise v. GTC Industries Ltd. (2008-TIOL-1634- CESTAT-MUM-LB), relying on the Apex Court's decision in Reserve Bank of India v. Peerless General Finance & Investment Co. Ltd. (2002-TIOL-670-SC-MISC).

As regards the contention of the value of the input service forming a part of the value of output/output service, the Hon'ble Larger Bench of the Tribunal in the case of ABB (supra) held that the valuation and cenvat credit are independent of each other and have no relevance to each other. Interpretation of “input service” cannot fluctuate with change in definition of “value” under Section 4 or Section 4A of Central Excise Act, 1944 or tariff value under Section 3 ibid.

Hence it is clear from a conjunctive reading of Rule 3(1) and Rule 2(l) of CCR that the cenvat credit on all the input service is allowed whether the same is used for providing taxable output service or exempted output service or non-service. The only restriction on taking credit is specified in Rule 6 of CCR to the extent of credit attributable to exempt service (which includes non-taxable service). Hence it is clear that there is no restriction either expressed or implied in the CCR to take credit attributable to non-service (i.e., trading activity). 16

(xii) Hon'ble Tribunal in the Orion Appliances case (supra) has held that trading activity is not an exempted service and hence Rule 6 of the Cenvat Credit Rules, 2004 (CCR) does not apply. There is no provision in the CCR to cover such situations. Accordingly the only obvious solution which is legally correct is to ensure that once in a quarter or once in a six months, the quantum of input service tax credit attributed to trading activities according to standard accounting principles is reversed.

Hence the Hon'ble Tribunal has admitted that Rule 6 of the CCR does not apply and there is no provision in CCR to cover such situation. However, the Hon'ble Tribunal has not examined the purport of law and has not considered the legal position that a benefit which has been given to the service provider in CCR cannot be taken away without the authority of law. As explained above, there is no express or implied restriction on the service provider to take attributable cenvat credit on input services used in trading activity. Hence it is not legally correct to state that the quantum of input service tax credit attributed to trading activities according to standard accounting principles is to be reversed.

In this connection it may be pertinent to mention that it is a settled position of law that if there is any ambiguity in law or if two views are possible the view which is favorable to the assessee should be taken.

3.1 Thus, it appears that M/s. Hindprakash International Pvt. Ltd. have provided both taxable and exempted services but have not maintained separate account of input services used in taxable and exempted services as per Rule 6(2) of the erstwhile Cenvat Credit Rules, 2004 during the period from 2006-07 to 2010-11. For the year 2006-07 & 2007-08, they should utilize credit only to extent of an amount not exceeding twenty percent of the amount of service tax payable on taxable output service, as per Rule 6(3) of the erstwhile Cenvat Credit Rules, 2004. However, they have utilized credit of an amount exceeding twenty percent of the amount of service tax payable during the year 2006-07 and 2007-08, to the tune of Rs. 6,81,813/- and Rs. 10,81,411/- (as per Annexure-A-1) which is required to be paid in cash. The amount of Rs. 6,81,813/- and Rs. 10,81,411/- totaling to Rs. 17,63,224/- is liable to be recovered from them in Cash along with Interest under Rule 14 of the Cenvat Credit Rules, 2004 read with Section 75 of the Finance Act, 1994.

3.2 Also for the period from 2008-09 to 2010-11, as per Rule 6(3) of the amended Cenvat Credit Rules, 2004, they should pay an amount equal to 8% (6% w.e.f. 7/7/2009) of the value of the exempted services OR they should pay an amount equivalent to the CENVAT credit attributable to input services used for provision of exempted services. However, they have neither paid prescribed amount on the value of the exempted goods nor paid an amount equivalent to the CENVAT credit attributable to input services used for exempted services. Further, there is contravention to the Rule 6(2) as the assessee is not maintaining separate records, so it is required to be recovered as per Rule 6 (3) (i) of CCR’2004, as the option benefit of clause (ii) of sub-rule (3 & 3A) of Rule 6 of CCR’2004 is not available, as the assessee had not opted for the same & not even followed the procedure & condition specified in the Rule 6 (3A) of CCR’2004. Thus, they are failed to pay an amount of Rs. 42,64,787/-, Rs. 54,52,379/- and Rs. 38,52,499/- (as per Annexure-A-2) which is equivalent to 8% (or 6%) of value of the exempted services as per Rule 6 (3) (i) of the Cenvat Credit Rules, 2004 for the year 2008-09, 2009-10 & 2010-11 respectively. Hence, the amount of Rs. 42,64,787/-, Rs. 54,52,379/- and Rs. 17

38,52,499/- totaling to Rs. 1,35,69,665/- is liable to be recovered from them along with Interest under Rule 14 of the Cenvat Credit Rules, 2004 read with Section 75 of the Finance Act, 1994.

3.3 They have also failed to follow sub-Rule (6) of Rule 9 of the Cenvat Credit Rules, 2004 which prescribes that the manufacturer of final products or the provider of output service shall maintain proper records for the receipt and consumption of the input services in which the relevant information regarding the value, tax paid, CENVAT credit taken and utilized, the person from whom the input service has been procured is recorded and the burden of proof regarding the admissibility of the CENVAT credit shall lie upon the manufacturer or provider of output service taking such credit.

3.4 As per the Revenue para-2 of the said Final Audit Report, the assessee had paid Foreign Bank charges of Rs. 3,06,236/-, Rs. 2,86,953/-, Rs. 1,81,275/-, Rs. 3,03,617/- and Rs. 1,24,600/-, for the year 2006-07, 2007-08, 2008-09, 2009-10 & 2010-11 respectively, as per the foreign bank charges ledger a/c. However, they had not paid the service tax on the Foreign Bank charges as per section 66A of the Finance Act, 1994, on the reverse charge mechanism as deemed service provider, only for the purpose of charging service tax. So, the service provided from outside India and received in India, therefore, not treated as taxable service provided by the recipient for the purpose of Cenvat Credit Rule, 2004. Thus, there is nonpayment of service tax on the value amount to Rs. 3,06,236/-, Rs. 2,86,953/-, Rs. 1,81,275/-, Rs. 3,03,617/- & Rs. 1,24,600/-, on which service tax amounting to Rs. 37,483/-, Rs. 35,467/-, Rs. 22,405/-, Rs. 31,272/- and Rs. 12,834/- (as per Annexure-B) totaling to Rs. 1,39,461/- (Rs. 135,756/- S.T. + Rs. 3,705/- E.C.) along with due interest for the year 2006-07, 2007-08, 2008-09, 2009-10 & 2010-11 respectively.

3.5 The assessee vides their letters dated 22/03/2011, 23/04/2011, 14/05/2011 and 14/09/2011 replied that they did not agree with this point. Shri Paresh D. Raval, Authorised signatory of M/s. Hindprakash International Pvt. Ltd. in his statement dated 10/10/2011 recorded under Section 14 of Central Excise, 1994 read with Section 83 of the Finance Act, 1994 reiterated earlier submissions made by them vide their letters dated 22/03/2011, 23/04/2011, 14/05/2011 and 14/09/2011 and inter-alia stated that as per the terms and conditions of the purchase order, they forward a set of original documents including bill of exchange to their bank SBI/ Syndicate Bank for collection; that they on certain occasions get the documents discounted; that their bank usually sends the documents to the foreign bank for collection; that on collection of the amount, the foreign bank remit the amount after deduction of processing / collecting charges to their above bank in India which in turn pay to them by way of credit to their account; that they are paid the amount actually received from the foreign bank; that their banks sometimes deduct the difference between the amount credit to their account immediately on forwarding to them the documents for collection and the actual amount received from the foreign bank at a later date; that they are never in negotiation with the foreign bank for collection of the amount due to them from their importer; that it is their banks directly negotiate with the foreign bank; that as per section 66A of the Finance Act, 1994 the service receiver is liable to pay the service tax on reverse mode basis; that it is the SBI/ Syndicate bank that is the service receiver which is liable to pay the service tax; that the SBI gets reimbursements of the same from them; that they are not liable to pay the service tax as viewed by the Audit. They also stated that the charge of Audit that the services rendered by the foreign bank to the Indian exporter with the exporter’s bank (SBI & Syndicate Bank) merely acting as an agent, since the foreign bank charges are reimbursed by the assessee (recipient of service) is not proper and acceptable in as much as the said Indian Banks have availed the services on principal to principal basis and not as an agent of the exporter. 18

3.6 Foreign Bank charges appears to be covered under “Banking and other Financial Services” defined under clause (12) of Section 65 of the Finance Act, 1994 and considered as taxable service under clause (zm) of Section 65 (105) of the Finance Act, 1994 which is well covered under Rule 3 (iii) of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. The relevant extracts of the said Section 65 (12) and said Rule 3 (iii) are reproduced below:

Section 65 (12) “banking and other financial services” means

(a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate or [commercial concern], namely

(i) financial leasing services including equipment leasing and hire-purchase;

[‘Explanation — For the purposes of this item, “financial leasing” means a lease transaction where —

(i) contract for lease is entered into between two parties for leasing of a specific asset;

(ii) such contract is for use and occupation of the asset by the lessee;

(iii) the lease payment is calculated so as to cover the full cost of the asset together with the interest charges; and

(iv) the lessee is entitled to own, or has the option to own, the asset at the end of the lease period after making the lease payment;]

[(ii) Omitted]

(iii) merchant banking services;

[(iv) Securities and foreign exchange (forex) broking, and purchase or sale of foreign currency, including money changing;]

(v) asset management including portfolio management, all forms of fund management, pension fund management, [custodial, depository and trust services,]

(vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy;

(vii) provision and transfer of information and data processing; and

[(viii) banker to an issue services; and

(ix) other financial services, namely, lending, issue of pay order, demand draft, cheque, letter of credit and bill of exchange, transfer of money including telegraphic transfer, mail transfer and electronic transfer, providing bank guarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults, operation of bank accounts;]

[(b) foreign exchange broking and purchase or sale of foreign currency, including money changing provided by a foreign exchange broker or an authorised dealer in foreign exchange or an authorised money changer, other than those covered under sub- clause (a);] 19

[‘Explanation — For the purposes of this clause, it is hereby declared that “purchase or sale of foreign currency, including money changing” includes purchase or sale of foreign currency, whether or not the consideration for such purchase or sale, as the case may be, is specified separately;]

Taxation of Services (Provided from Outside India and Received in India) Rules, 2006

Rule 3: Taxable services provided from outside India and received in India

Subject to Section 66A of the Act, the taxable services provided from outside India and received in India shall, in relation to taxable services,

(iii) specified in clause (105) of section 65 of the Act, but excluding, —

a) sub-clauses (zzzo) and (zzzv); (b) those specified in clause (i) of this rule except when the provision of taxable services specified in clauses (d), (zzzc), and (zzzr) does not relate to immovable property; and (c) those specified in clause (ii) of this rule, be such services as are received by a recipient located in India for use in relation to business or commerce. Provided that where the taxable service referred to in sub-clause (zzzzj) of clause (105) of section 65 of the Act is received by a recipient located in India, then such taxable service shall be treated as taxable service provided from outside India and received in India subject to the condition that the tangible goods supplied for use are located in India during the period of use of such tangible goods by such recipient.

The text of the Section 66A of the Finance Act, 1994 is also reproduced below:

Section 66A: Charge of service tax on services received from outside India

(1) Where any service specified in clause (105) of section 65 is,—

(a) provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and

(b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India, such service shall, for the purposes of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of this Chapter shall apply:

Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply:

Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.

(2) Where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section.

Explanation 1 — A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country. 20

Explanation 2 — Usual place of residence, in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted.]

3.7 From the above, it appears that as Foreign Bank charges falls under the category of “Banking and other Financial Services” and a service specified in clause (zm) of section 65 (105) of Chapter V of the Finance Act, 1994 provided by the person in a country other than India and received by the said assessee in India, such service is considered as taxable service under Section 66A of the Finance Act, 1994 and is treated as if the recipient had himself provided the service in India, and accordingly all the provisions of the said chapter are applicable. The said service is taxable as per Rule 3 (iii) of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 as the said service is specified in section 65 (105) of Chapter V of the Finance Act, 1994 and received by a recipient located in India for use in relation to business or commerce. Also, as the said taxable service is provided by the person in a country other than India and received by the said assessee in India, they fall under the definition of a “person liable for paying the service tax” as per Rule 2 (1) (d) (iv) of the Service Tax Rules, 1994.

3.8 The relevant extract of Rule 2 (1) (d) (iv) is reproduced below:

Rule 2 (1) (d) of the Service Tax Rules, 1994

“person liable for paying the service tax” means, --

(iv) in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under section 66A of the Act, the recipient of such service;

3.9 As per Rule 5 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, the taxable services provided from outside India and received in India shall not be treated as output services for the purpose of availing credit of excise paid on any input or service tax paid on any input services under CENVAT Credit Rules, 2004.

3.10 As per Rule 3 (4) of the CENVAT Credit Rules, 2004, the CENVAT credit may be utilized for payment of (a) any duty of excise on any final product; or (b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or (c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or (d) an amount under sub rule (2) of rule 16 of Central Excise Rules, 2002; or (e) service tax on any output service:

3.11 As the Foreign Bank charges falling under the category of “Banking and other Financial Services” is not treated as output service for the purpose of availing credit of excise paid on any input or service tax paid on any input services under CENVAT Credit Rules, 2004, payment of Service tax of Rs. 1,39,461/- for the period from 2006-07 to 2010-11 through Cenvat credit a/c. is not admissible and it has to be paid in Cash only.

3.12 In view of the above facts, it appears that the said assessee has failed to pay service tax amounting to Rs. 37,483/-, Rs. 35,467/-, Rs. 22,405/-, Rs. 31,272/- and Rs. 12,834/- totaling to Rs. 1,39,461/- (Rs. 135,756/- S.T. + Rs. 3,705/- E.C.) (as per Annexure B) along with due interest on Foreign Bank charges of Rs. 3,06,236/-, Rs. 2,86,953/-, Rs. 1,81,275/-, Rs. 3,03,617/- 21 and Rs. 1,24,600/- paid during the year 2006-07, 2007-08, 2008-09, 2009-10 & 2010-11 respectively. It is further observed that the said assessee has obtained Service Tax Registration but has not paid the said Service Tax under “Banking and other Financial Services” and also not reflected the same in their ST-3 Returns properly. Thus, they have contravened the provisions of Section 67 of the Finance Act, 1994 as they have failed to determine value of taxable service for charging service tax in the prescribed manner; Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994 as they failed to make the payment of Service tax at the rates specified in Section 66 of the Finance Act, 1994 in prescribed manner and within prescribed period and Section 70 of the Finance Act, 1994 read with Rule 7 of the Service Tax Rules, 1994 as they failed to assess the service tax due on the said service provided and furnish return in prescribed manner.

3.13 As per the Revenue para-3 of the said Final Audit Report, the assessee had paid Commission of Rs. 2,93,684/- and Rs. 1,47,810/-, to a foreigner for the year 2006-07 & 2008-09 respectively as per the ledger a/c. However, they had not paid the service tax on the Commission paid to a foreigner as per the Section 66A of the Financial Act,1944, on the reverse charge mechanism as deemed service provider, only for the purpose of charging service tax. So, the service provided from outside India and received in India, therefore, not treated as taxable service provided by the recipient for the purpose of Cenvat Credit Rules, 2004. Thus, the nonpayment of service tax on the value amount to Rs. 2,93,684/- and Rs. 1,47,810/-, on which service tax amounting to Rs. 35,947/- & Rs. 18,269/- (as per Annexure-C) totaling to Rs. 54,216/- (Rs. 52,979/- S.T. + Rs. 1,237/- E.C.) along with due interest, for the year 2006-07 & 2008-09 respectively. Further, it was observed that they have paid the service tax amounting to Rs. 38,363/- (Rs. 37,246/- S.T. + Rs. 1,117/- E.C.) through Cenvat credit of service tax on the Commission value Rs. 3,72,456/- in the year 2009-10, which should be paid through cash as deemed service provider.

3.14 Commission paid to foreigner appears to be covered under “Business Auxiliary Services” defined under clause (19) of Section 65 of the Finance Act, 1994 and considered as taxable service under clause (zzb) of Section 65 (105) of the Finance Act, 1994 which is well covered under Rule 3 (iii) of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. The relevant extract of the said Section 65 (19) is reproduced below:

Section 65 (19) “business auxiliary service” means any service in relation to, —

(i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or

(ii) promotion or marketing of service provided by the client; or

(iii) any customer care service provided on behalf of the client; or

(iv) procurement of goods or services, which are inputs for the client; or

[Explanation.— For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, “inputs” means all goods or services intended for use by the client;]

[(v) production or processing of goods for, or on behalf of the client; or]

(vi) provision of service on behalf of the client; or 22

(vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi) such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision, and includes services as a commission agent, [but does not include any activity that amounts to “manufacture” of excisable goods.]

[Explanation. — For the removal of doubts, it is hereby declared that for the purposes of this clause, —

(a) “commission agent” means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person —

(i) deals with goods or services or documents of title to such goods or services; or

(ii) collects payment of sale price of such goods or services; or

(iii) guarantees for collection or payment for such goods or services; or

(iv) undertakes any activities relating to such sale or purchase of such goods or services;

[(b)

(c) “excisable goods” has the meaning assigned to it in clause (d) of section 2 of the Central Excise Act, 1944 (1 of 1944); “manufacture” has the meaning assigned to it in clause (f) of section 2 of the Central Excise Act, 1944 (1 of 1944)]

3.15 From the above, it appears that as Commission paid to foreigner falling under the category of “Business Auxiliary Services” being a service specified in clause (zzb) of section 65(105) of Chapter V of the Finance Act, 1994 and provided by the person in a country other than India and received by the said assessee in India, such service is considered as taxable service under Section 66A of the Finance Act, 1994 and is treated as if the recipient had himself provided the service in India, and accordingly all the provisions of the said chapter are applicable. The said service is taxable as per Rule 3 (iii) of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 as the said service is specified in Section 65 (105) of Chapter V of the Finance Act, 1994 and received by a recipient located in India for use in relation to business or commerce. Also, the said assessee falls under the definition of a “person liable for paying the service tax” as per Rule 2(1) (d) (iv) of the Service Tax Rules, 1994.

3.16 The assessee vide letter dated 23.04.2011 accepted the audit observation and informed that they will pay the amount in a short time along with interest. The assessee vide letter dated 03/10/2011 and 08/10/2011 both addressed to the Assistant Commissioner (Audit), Central Excise, Ahmedabad-I informed that they have paid service tax of Rs. 54,216/- vide Cenvat a/c. E. no. 00104 dated 28/05/2011 and Interest of Rs. 26,218/- vide challan dated 06/10/2011 respectively.

3.17 As per Rule 5 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, the taxable services provided from outside India and received in India shall 23 not be treated as output services for the purpose of availing credit of excise paid on any input or service tax paid on any input services under CENVAT Credit Rules, 2004.

3.18 As per Rule 3 (4) of the CENVAT Credit Rules, 2004, the CENVAT credit may be utilized for payment of (a) any duty of excise on any final product; or (b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or (c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or (d) an amount under sub rule (2) of rule 16 of Central Excise Rules, 2002; or (e) service tax on any output service:

3.19 As the Commission paid to foreigner falling under the category of “Business Auxiliary Services” is not treated as output service for the purpose of availing credit of excise paid on any input or service tax paid on any input services under CENVAT Credit Rules, 2004, Service tax of Rs. 54,216/- for the year 2006-07 & 2008-09 and Service tax of Rs. 38,363/- for the year 2009-10 paid through Cenvat credit a/c. is not admissible and it has to be paid in Cash only.

3.20 In view of the above facts, it appears that the said assessee has failed to pay service tax amounting to Rs. 35,947/- and Rs. 18,269/- totaling to Rs. 54,216/- (as per Annexure-C) in Cash along with due interest on the Commission amount of Rs. 2,93,684/- and Rs. 1,47,810/- paid to foreigner for the year 2006-07 and 2008-09 respectively. They have also failed to pay the service tax amounting to Rs. 38,363/- in Cash as deemed service provider on the Commission value of Rs. 3,72,456/- paid to foreigner in the year 2009-10, which they paid through Cenvat credit of service tax. It is further observed that the said assessee has obtained Service Tax Registration but has not paid the said Service Tax under “Business Auxiliary Services” and also not reflected the same in their ST-3 Returns properly. Thus, they have contravened the provisions of Section 67 of the Finance Act, 1994 as they have failed to determine value of taxable service for charging service tax in the prescribed manner; Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994 as they failed to make the payment of Service tax at the rates specified in Section 66 of the Finance Act, 1994 in prescribed manner and within prescribed period and Section 70 of the Finance Act, 1994 read with Rule 7 of the Service Tax Rules, 1994 as they failed to assess the service tax due on the said service provided and furnish return in prescribed manner; Rule 5 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 read with Rule 3 of the CENVAT Credit Rules, 2004 as they failed to pay service tax in Cash on the Commission amount paid to foreigner for the year 2006-07, 2008-09 and 2009-10.

3.21 As per the Revenue para-4 of the said Final Audit Report, the assessee had provided the service of procurement of goods, which are input for the client having an element of being incidental or auxiliary to the said service and is a Business Auxiliary Service as defined under clause (iv) & (vii) of section 65 (19) of Finance Act, 1994 which is taxable under section 65 (105) (zzb) of Finance Act, 1994. Clause (vii) of section 65 (19) of Finance Act, 1994 uses the words “service incidental or auxiliary” which means a support service to the business auxiliary service stated in clause (iv). The said assessee while providing the services of procurement of goods, which are input to the client provides incidental service or auxiliary service viz. processing of purchase order, information & tracking of delivery schedule, customer management, formulation of customer service (i.e. to put together, plan, create, device & originate). This is covered under (BAS) as per (Para 2.1.3) Circular No. 59/8/2003 dated 20.06.2003. The levy of service tax depends on the dominant intention of the transacting parties. So, as per the dominant nature of activity provided by the assessee, i.e. the supply of goods 24 where some service is required to be done as incidental to the sale, where the skill is involved over and above what goes into the delivery of goods. The assessee executes an agreement (Transfer Of Ownership or High Seas Sales Contract) for transfer of document title of the goods, substantiates the facilitating service, involving skill & expertise under individual capacity of the assessee i.e. i) procuring the raw materials by importing which are input to the client & rendering incidental services to the business auxiliary service of procurement of goods, a) where the bill of entry in the name of the original importer the assessee, where the goods are in bonded by the assessee, then ex-bond from the warehouse as per the Section 59 (3) of Custom Act,1962 to the buyer or b) where the bill of entry is in the name of the high seas purchaser the assessee, means the transfer of document title of the goods by importer to the buyer, which takes place by handing over the bill of lading or by endorsement to the buyer, ii) support service i.e. processing of purchase order, tracking of delivery schedule, formulation of customer service (i.e. put together, plan, create, device & originate), inventory management & supervision of the goods and handing over the bill of lading to the buyers by transferring the title of goods, which is also defined as incidental service to the purchase & sale activity and so taxable under Business Auxiliary Service. The activity under taken by the assessee can be called as trading, if it is as per normal course of import purchase and high seas sales of goods before it crosses the custom frontier of India or in terms of local trading purchase & sales of goods sales tax is paid on the sales value of goods sold. But, here the import purchase made by the assessee has to be categorized as ‘procurement of goods’, which are input to the client as it has an element of incidental service to the business auxiliary service and the sale gets effected through the transfer of document title of the goods (i.e. in future goods). This is nothing but facilitating the client for acquiring/procuring the goods used as input. Thus, it cannot be classified as normal trading purchase & sales activity and it is clear that the service tax cannot be levied for the value of goods sold, as per the exemption Notification no. 12/2003-ST. Since, the said assessee has not separately shown the value of service element in this transaction, the service tax is leviable on the gross transaction value of sale because it also consists of the element of incidental support service to the sale which is taxable under the category of ‘business auxiliary service’.

3.22 Whereas, it is also observed that during the year 2006-07 the activity under taken by the assessee, was that of importing the goods, which are input to the clients. It appears that the said assessee had executed an agreement prior to import which is evident as the date of the stamp paper on which agreement was executed is prior to the date of invoice issued by the foreign supplier and is also prior to the date at which the goods had arrived in territorial jurisdiction of India. Thereafter, the goods are either shifted to custom bonded warehouse, by filling the warehousing bill of entry in respect to the total quantity of consignment received by the assessee or by endorsing/ handing over the bill of lading to the buyers. The high seas buyer then files the ex-bond bill of entry for the quantity purchased by him as per the agreement and transfer of document and title of the goods is affected. Then as per the quantity mentioned in the agreement, the title of the goods changes by handing over the set of documents to the buyer, by endorsing the respective bill of entry in favour of the buyer, as mentioned in Sr. no. 10 of the agreement.

3.23 Further, it was observed that as per condition Sr. No. 4 of the agreement for transfer of ownership, the sales price was shown as CIF+2% and the billing pattern of the assessee for the total amount realized was in two ways, (i) by raising the retail sales invoice (Non-taxable) for transfer of bonded goods or direct transfer by high seas sales by endorsing/handing over the bill of lading to the buyers and the price charged for the goods, is equal to (CIF+2%), (ii) by raising the debit note for the Business Auxiliary Service charge, along with the service tax on the debit note value, which is being deposited to the service tax department. Further as per the condition at Sr. No. 5, 6 and 7 of the said agreement it is mentioned that all the expenses will be borne by the buyer i.e. Customs/ Excise duty, Clearing charges, Octroi & other levies, any sales tax, clearing, handling and transportation charges and the buyer will make their own arrangement for obtaining 25 the delivery of goods from the customs/ port. So, as per the dominant nature of activity provided by the assessee, i.e. the supply of goods where some service is required to be done as incidental to the sale, where the skill is involved over and above what goes into the delivery of goods. The activity under taken by the assessee is nothing but facilitating service, involving skill & expertise under individual capacity of the assessee as discussed in the above paras, which is also defined as incidental or auxiliary support service to the purchase & sale activity and thereby taxable under Business Auxiliary Service. Thus, it cannot be termed as normal trading purchase & sales activity and it is clear that the service tax cannot be levied for the value of goods sold, as per the exemption Notification No. 12/2003-ST. Since, as already discussed above, the said assessee has not separately shown the value of service element in this transaction, the service tax is leviable on the gross transaction value of sale because it also consists of the element of incidental support service to the sale which is taxable under the category of ‘business auxiliary service’.

3.24 Thus, the assessee cannot escape from the service tax liability, which is well explained in the respective paras above, on the basis of an agreement for Transfer of Ownership. Further, by preparing debit note only for the amount charged over and above the value shown i.e. the CIF+ 2% known as loading or facilitation charges and by preparing the non-taxable retail sales invoice, by not showing the price of service component separately under the guise of high seas sales price of goods, which does not mean there is no transaction value in regard to service tax, as procurement of goods, which are input to the client, with incidental or support service to the auxiliary service is taxable service. Further, as per the concept on the gross transaction value in service tax even though the said facilitation service value is been recovered through retail sales invoice i.e. non taxable invoices, also attract service tax. The assessee is recovering 2% more on the cost of goods apart from the debit note amount, which also includes the value component of service rendered, as incidental or support service to the business auxiliary service as the procurement of goods is under the individual capacity & skill with notional profit on the total activity undertaken by the assessee, as discussed in the paras above.

3.25 It is clear that the service tax cannot be levied on the normal sale consideration of goods as integrated concept of tax on goods and is fundamental to the levy thereof (taxation of sale of goods being a state subject). But here there is no sales tax on the transaction value, even though the sale is in bond & ex-bond, which is not high seas sales as discussed in the para above, but which is merely transfer of documents title of the goods, wherein the assessee is taking dual benefit by not paying the sales tax, showing the ex-bond sales as high sea sales and also the stamp paper purchase date is very much prior to the invoice date of foreign supplier, on which the high seas sales agreement is executed, and on the other side not paying service tax by showing the transaction value as high sea sale price of goods, which does not mean there is no transaction value in regard to service tax, as procurement of goods, which is input to the client, with the incidental support service to the auxiliary service, which is taxable service. Thus, it cannot be classified as normal trading purchase & sales activity and it is clear that the service tax cannot be levied for the value of goods sold, as per the exemption Notification no. 12/2003-ST. The service tax leviable on the gross transaction value of sale because it consist of the element of incidental service which goes along with the sale i.e. auxiliary service, and as there is an concept of gross transaction value (including the value of service & notional profit as the concept of gross value) in service tax as per the sub-clause (a) of Rule (3) & sub-rule (1) of rule (5) of Service Tax (Determination of Value) Rules’2006, read with Section 67 of the Financial Act’1994.

3.26 As the assessee is procuring the goods on behalf of client, which are input to the client and rendering incidental or support service to the auxiliary service, they are providing the service 26 of “Commission agent” as per the Explanation under Section 65(19) in the category of Business Auxiliary Service. “commission agent means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person deals with goods or services or documents of title to such goods or services, or collects payment of sale price of such goods or services or guarantees for collection or payment for such goods or services or undertake any activities relating to such sale or purchase of such goods or services”. Therefore, it appears that the services provided by the said assessee are covered under the category of ‘Business Auxiliary Service’. The service tax is chargeable on the gross amount charged by the service provider for such service provided by him as per the sub-clause (a) of Rule (3) & sub-rule (1) of rule (5) of Service Tax (Determination of Value) Rules, 2006, read with Section 67 of the Finance Act, 1994.

3.27 As per the above discussion, the consideration and amount realized by the assessee over and above the cost of goods is chargeable to service tax, irrespective of the service tax amount is being charged or otherwise. The assessee had not paid the service tax on the transaction amount of 2% recovered on the CIF value of goods, as shown in the agreement Sr. No. 4 by raising non taxable retail sales invoice. As the assessee had not charged the service tax on the transaction amount of 2% recovered on the CIF value of goods as reflected in non taxable retail sales invoice, then the price charged shall be considered to be inclusive of the service tax component as per the section 12B of the Central Excise Act, 1944 made applicable to the Finance Act, 1994. Therefore, service tax of Rs. 8,10,686/- (as per Annexure D-1) is payable under the category of Business Auxiliary Service leviable on the amount of 2% (per cent) considering it is inclusive of service tax component, for the year 2006-07.

3.28 During the subsequent period i.e. from the year 2007-08 to 2010-11, in addition to the above discussion, activity under taken by the assessee, was importing the goods, which are input to the client, by executing a contract/agreement (Transfer of Ownership) or (High Seas Sales Contract) at a date prior to the date of invoices which is evident as the date of the stamp paper on which agreement was executed is much earlier to the invoice date of the foreign supplier and much earlier than the arrival of goods in territorial jurisdiction of India. Thereafter, the goods are shifted to custom bonded warehouse, by filling the warehousing bill of entry in respect of the total quantity of consignment received by the assessee or the buyer will file the bonded bill of entry for the quantity purchased by him as per the contract/ agreement or the assessee endorses/hands over the bill of lading to the buyers. Then as per the quantity mentioned in the contract the title of the goods changes by handing over the set of documents to the buyer or after the documents have been released from the bank, by endorsing the respective bill of entry in favour of the buyer, as per the terms mentioned for the transfer of title or delivery of goods in the above said High Seas Sale contract, which cannot be said as contract but agreement as discussed in the above para in Indian Contract Act, 1872.

3.29 Further, it was observed that as per the condition of the contract/ agreement for transfer of ownership, the sales price or consideration charged for the goods as mentioned in the contract/agreement and the billing pattern of the assessee for the total amount realized is by raising the retail sales invoice (Non-taxable) for transfer of goods through direct transfer by high seas sales. Further as per the condition of the above said contract/agreement, it is mentioned that (i) payment of cost of documents- full payment of cost of documents comprising of CIF value, L/c opening/ amendment charges, bank interest, commission & other charges for retirement of documents to be made by the actual user to them and payment against 60 days from delivery, (ii) Delivery-all the right and title of above goods will be transferred by them to the actual buyer 27 after the documents have been retired from the bank. If the consignment consists of a large quantity, they shall be at the liberty to endorse deliver order for the quantity sold to you in your favour, (iii) Import duties & clearance charges-in view of the disposal of goods on HSS the actual user buyer shall arranges clearance of the goods from customs at his own risk and responsibility and all duties will be borne by the buyer. So, as per the dominant nature of activity provided by the assessee, i.e. the supply of goods where some service is required to be done as incidental to the sale, where the skill is involved over and above what goes into the delivery of goods. The activity under taken by the assessee substantiate the facilitating service, involving skill & expertise under individual capacity of the assessee as discussed in the above paras, which is also defined as incidental or auxiliary support service to the purchase & sale activity and so taxable under Business Auxiliary Service. Thus, it cannot be classified as normal trading purchase & sales activity and it is clear that the service tax cannot be levied on the value of goods sold, as per the exemption Notification No. 12/2003-ST. Therefore, service tax is leviable on the gross transaction value of sale because it consists of the element of incidental service which goes along with the sale.

3.30 Thus, the assessee cannot escape from the service tax liability, which is well explained in the respective paras above, on the basis of the “High Seas Sales Contract”, which is not the contract but agreement as per Indian Contract Act, 1872, and is merely sale through the transfer of documents and title of the goods that is “Transfer of Ownership”. Further, the act of preparing the non-taxable retail sales invoice, by not showing the price of service component separately under the guise of high seas sales price of goods, does not in any way mean that there is no transaction value taxable under service tax with regard to procurement of goods, which are input to the client under Business Auxiliary service. The assessee is recovering amount in excess of his total purchase price of goods including other expenses borne by him. This clearly indicates that the said amount includes value component of service rendered, for procurement of goods for the clients.

3.31 Thus, in view of the above, service tax is leviable on the gross transaction value of sale because it consists of the element of incidental service under Business Auxiliary Service as per the sub-clause (a) of Rule (3) & sub-rule (1) of Rule (5) of Service Tax (Determination of Value) Rules’2006, read with Section 67 of the Financial Act, 1994.

3.32 As already discussed above, the assessee is a “Commission agent” as defined under the Explanation given under Section 65(19) of the Act. Service tax is chargeable on the gross amount charged by the service provider for such service provided by him as per the sub-clause (a) of Rule (3) & sub-rule (1) of Rule (5) of Service Tax (Determination of Value) Rules’2006, read with Section 67 of the Financial Act’1994.

3.33 As discussed above,, the consideration and amount realized by the assessee over and above the cost of goods is chargeable to service tax, irrespective of whether the service tax amount is been charged or otherwise. Even though the assessee had not charged the service tax on the differential amount recovered (High seas sales value less: purchase cost of imported goods) as reflected in non taxable retail sales invoice, then the price charged shall be presumed to be inclusive of the service tax component as per the section 12B of the Central Excise Act, 1944 made applicable to the service tax law. Therefore, service tax of Rs. 36,19,143/- (as per Annexure-D-2) is payable under the category of Business Auxiliary Service on the differential amount presuming inclusive of service tax component for the year 2007-08 to 2010-11. 28

3.34 The assessee vides their letters dated 22/03/2011, 23/04/2011, 14/05/2011 and 14/09/2011 submitted the documents and explained the issues. Shri Paresh D. Raval, Authorised signatory of M/s. Hindprakash International Pvt. Ltd. in his statement dated 10/10/2011 recorded under Section 14 of Central Excise, 1994 read with Section 83 of the Finance Act, 1994 reiterated earlier submissions made by them vide their letters dated 22/03/2011, 23/04/2011, 14/05/2011 and 14/09/2011 and inter-alia stated that they have entered into an agreement for sale of goods with various buyers on High Seas Basis; before that, they negotiated with the sellers overseas for purchase of goods; that when the goods are en-route to India on High Seas, they endorse the documents in favour of the buyers in India; that they also execute a written agreement on a Non-Judicial Stamp Paper; that the goods are sold on Principal to Principal basis; that they did not procure them on behalf of the clients; that all buyers never hired their services; that there should be hiring of services by a person called the client in order to attract the levy of the service tax; that in absence of it, service tax cannot be levied; that in the entire transaction, there is no service involved. So, service tax is not leviable. Therefore, they are not liable to pay service tax on High Seas Sales under the head Business Auxiliary Service as viewed by the audit.

3.35 Further, Shri Paresh D. Raval stated that the charge by the Audit that “the activity under taken by the assessee, was importing the goods, which are input to the client, by undergoing the pre-agreement i.e. date of the stamp paper on which agreement executed is pre-dated to the invoice date of the foreign supplier & far before the arrival of goods in territorial jurisdiction of India” is also not correct in as much as the date of agreement which is relevant is always after the purchase date or date of invoice issued by the foreign Supplier; that the date of stamp paper on which agreement executed is the date on which purchase of stamp paper from the stamp vendor and is always before the date of agreement and is not relevant for considering it “future goods” and hence, the charge of Audit that “the import purchase made by the assessee is called procurement of goods, which are input to the client with the element of incidental service to the auxiliary service as the sale gets effected through the transfer of document title of the goods (i.e. in future goods), that means facilitating the client for acquiring the goods used as input” is not sustainable and acceptable.

3.36 He further stated that High Seas Sales/Transfer of Ownership contracts are required to be executed on non-judicial stamp paper as per the value fixed under the Stamp Duty Collection Act by the State Authority and the said non-judicial stamp papers are always purchased by them; that all their High Seas Sales/ Transfer of Ownership Sales are on Case to Case/Consignment to Consignment basis; that they do not enter into any yearly/ periodical contract/ agreement/ commitment of any kind with their buyers/customers, other then the High Seas Sales contract which is required for the clearance of goods under the Customs Act, 1962; that the letters from some of their buyers in this regard have been submitted by them vide their letter dated 08/10/2011 to the Service Tax department. In respect of billing pattern/retail sales invoices/debit notes issued for High Seas Sales, he stated that upto November, 2006 they were raising invoices in respect of High Seas Sales contract by adding flat amount of 2% on CIF value of the goods; that the balance amount, if any, was recovered by way of Debit Note and on the amount as shown in the debit note, the service tax under the head “BAS” was duly discharged by them; that from December, 2006 onwards the invoice was raised on the entire amount and the practice of issuance of debit note was discontinued; that the entire value was considered as a sale value and the invoices were raised accordingly.

3.37 Shri Paresh D. Raval also stated that in respect of treatment of credit of input and input services used in trading before 1.4.2008, C.B.E.C. vide para 7 of the Circular No. 943/04/2011-CX 29 dated 29/04/2011 has clarified that trading is an exempted service. Also, the definition of “exempted services” provided in Rule 2 (e) of the CENVAT Credit Rules, 2004 has been amended vide Notification no. 3/2011-CE (NT) dated 01/03/2011 and it has been clarified that “exempted services” includes “trading”; that as per para 5 of the judgment given by the CESTAT, Ahmedabad in the case of M/s. Orion Appliances Ltd. Vs. CST, Ahmedabad (2010- TIOL-752-CESTAT-AHM), trading activity is nothing but purchase and sales and is covered under sales tax law and it may not be appropriate to call it a service; that therefore it was held that trading activity cannot be called a service and therefore it cannot be considered as an exempted service also.

3.38 Further, Shri Paresh D. Raval stated that as alleged by the Audit, “even if the activity under taken by the assessee substantiate the facilitating service, involving skill & expertise under individual capacity of the assessee, which is also defined as incidental or auxiliary support service to the purchase & sale activity and so taxable under Business Auxiliary Service”, is not sustainable, as trading activity is an exempted service as per the clarification given by C.B.E.C. vide para 7 of the Circular No. 943/04/2011-CX dated 29/04/2011 for the period even before 01/04/2008; that they do not agree with the objection raised by the audit vide revenue para-4 of the said Final Audit Report (FAR).

3.39 In view of above discussion, service tax of Rs. 8,10,686/- (as per Annexure D-1) is payable under the category of Business Auxiliary Service leviable on the amount of 2% (per cent) presuming inclusive of service tax component, for the year 2006-07 and service tax of Rs. 36,19,143/- (as per Annexure-D-2) is payable under the category of Business Auxiliary Service on the differential amount presuming inclusive of service tax component for the year 2007-08 to 2010-11.

3.40 As per the Revenue para-5 of the said Final Audit Report, the assessee had received Rs. 15,00,000/- as Lease Rent Income during the year 2009-10 as per the ledger a/c. However, they had not paid the service tax on the said Lease Rent Income of Rs. 15,00,000/-, on which service tax amounting to Rs. 1,54,500/- (Rs. 15,00,000/- S.T. + Rs. 4,500/- E.C.), along with due interest. The accounting adjustment entry cannot be treated as payment towards service tax, as the same is not reflected in the ST-3 return of the aforesaid period.

3.41 Lease Rent Income received by the assessee appears to be covered under “Renting of Immovable Property Services” defined under clause (90a) of Section 65 of the Finance Act, 1994 and considered as taxable service under clause (zzzz) of Section 65 (105) of the Finance Act, 1994. The relevant extracts of the said Section 65 (19) and Section 65 (105) (zzzz) are reproduced below:

Section 65 (90a) “renting of immovable property” includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce but does not include —

(i) renting of immovable property by a religious body or to a religious body; or

(ii) renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre;

Explanation [1].— For the purposes of this clause, “for use in the course or furtherance of business or commerce” includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple-use buildings;] 30

Explanation 2.— For the removal of doubts, it is hereby declared that for the purposes of this clause “renting of immovable property” includes allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of the said immovable property;

Section 65 (105) (zzzz)

[to any person, by any other person, by renting of immovable property or any other service in relation to such renting for use in the course of or, for furtherance of business or commerce.]

Explanation 1.— For the purposes of this sub-clause, “immovable property” includes—

(i) building and part of a building, and the land appurtenant thereto;

(ii) land incidental to the use of such building or part of a building;

(iii) the common or shared areas and facilities relating thereto; and

(iv) in case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate, and

[(v) Vacant land, given on lease or license for construction of building or temporary structure at a later stage to be used for furtherance of business or commerce but does not include-

(a) vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes;

(b) vacant land, whether or not having facilities clearly incidental to the use of such vacant land;

(c) land used for educational, sports, circus, entertainment and parking purposes; and

(d) building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.

Explanation 2.—For the purposes of this sub-clause, an immovable property partly for use in the course or furtherance of business or commerce and partly for residential or any other purposes shall be deemed to be immovable property for use in the course or furtherance of business or commerce;

3.42 In view of the above facts, it appears that Lease Rent Income received by the assessee falls under the category of “Renting of Immovable Property Services” defined under clause (90a) of Section 65 (105) of Chapter V of the Finance Act, 1994 and such service is considered as taxable service under clause (zzzz) of section 65 (105) of the Act. The said assessee has failed to pay service tax amounting to Rs. 1,54,500/- (Rs. 15,00,000/- S.T. + Rs. 4,500/- E.C.) along with due interest on the Lease Rent Income of Rs. 15,00,000/- received during the year 2009-10 which is recoverable from them under proviso to Section 73(1) of the Act. It is further observed that the said assessee has obtained Service Tax Registration but has not paid the said Service Tax under “Renting of Immovable Property Services” and also not reflected the same in their ST-3 Returns properly. Thus, they have contravened the provisions of Section 67 of the Finance Act, 1994 as they have failed to determine value of taxable service for charging service tax in the prescribed manner; Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax 31

Rules, 1994 as they failed to make the payment of Service tax at the rates specified in Section 66 of the Finance Act, 1994 in prescribed manner and within prescribed period and Section 70 of the Finance Act, 1994 read with Rule 7 of the Service Tax Rules, 1994 as they failed to assess the service tax due on the said service provided and furnish return in prescribed manner.

3.43 The assessee vide letter dated 23.04.2011 accepted the audit observation and informed that they will pay the amount in a short time along with interest. The assessee vide letter dated 03/10/2011 and 08/10/2011 both addressed to the Assistant Commissioner (Audit), Central Excise, Ahmedabad-I informed that as the issue of service tax on Renting of Immovable Property was under litigation and not preferred out, and in order to avoid litigation, they have paid service tax of Rs. 1,54,500/- vide Cenvat a/c. E. no. 00103 dated 28/05/2011 under protest and also paid Interest of Rs. 33,334/- vide challan dated 06/10/2011 respectively.

3.44 Thus it appears that the said assessee has contravened the provisions of

(i) Sub-Rule (3) (i) of Rule 6 of the Cenvat Credit Rules, 2004 in as-much-as they have failed to pay an amount of Rs. 17,63,224/- as discussed in the foregoing paras for the period from 2006-07 and 2007-08 equivalent to the CENVAT credit used in excess which is required to be paid in Cash within stipulated time limit. They also failed to pay an amount of Rs. 1,35,69,665/- as discussed in the foregoing paras for the period 2008-09, 2009-10 and 2010-11 equivalent to 8% (or 6%) of the value of the exempted services under option (i) of the said sub-rule, as applicable to them within the stipulated time limit;

(ii) Sub-Rule (6) of Rule 9 of the Cenvat Credit Rules, 2004 in as-much-as they failed to maintain proper records for the receipt and consumption of the input services in which the relevant information regarding the value, tax paid, CENVAT credit taken and utilized, as discussed in the foregoing paras for the period from 2006-07 to 2010-11.

(iii) Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994 in as-much-as they have failed to pay the service tax amounting to Rs. 1,39,461/- (Rs. 1,35,757/- as Service Tax and Rs. 3,705/- as Education cess) in Cash on Foreign Bank charges on the reverse charge mechanism as deemed service provider and as discussed in the foregoing paras for the period from 2006-07 to 2010-11 to the credit of the Government account within the stipulated time limit;

(iii) Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994 in as-much-as they have failed to pay the service tax amounting to Rs. 54,216/- (Rs. 52,979/- as Service Tax and Rs. 1,237/- as Education cess) in Cash instead of Cenvat credit account, on Commission paid to the foreigner on the reverse charge mechanism as deemed service provider and as discussed in the foregoing paras for the period from 2006-07 and 2008-09 to the credit of the Government account within the stipulated time limit. They also failed to pay the service tax amounting to Rs. 38,363/- (Rs. 37,246/- as Service Tax and Rs. 1,117/- as Education cess) in Cash instead of Cenvat credit account, on Commission paid to the foreigner on the value of Rs. 3,72,456/- in the year 2009-10 within the stipulated time limit.

(iv) Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994 in as-much-as they have failed to pay the service tax amounting to Rs. 8,10,686/- (Rs. 7,94,790/- as Service Tax and Rs. 15,896/- as Education cess) on Business Auxiliary Service involved in High Seas Sales transactions as discussed in the foregoing paras for the year 2006-07 to the credit of the Government account within the stipulated time limit; they also failed to pay the service tax amounting to Rs. 36,19,143/- (Rs. 35,13,731/- as Service Tax and Rs. 1,05,411/- as Education cess) on Business Auxiliary Service involved in High Seas Sales transactions as discussed in the foregoing paras for the year 32

2007-08 to 2010-11 to the credit of the Government account within the stipulated time limit;

(v) Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994 in as-much-as they have failed to pay the service tax amounting to Rs. 1,54,500/- (Rs. 15.00.000/- as Service Tax and Rs. 4,500/- as Education cess) on Lease Rent Income as discussed in the foregoing paras for the year 2009-10 to the credit of the Government account within the stipulated time limit;

(vi) Section 70 of the Finance Act, 1994 as amended read with Rule 7 of the Service Tax Rules, 1994 in as much as they have failed to self–assess the Service Tax on the taxable value and to file ST-3 returns properly for above said services during the period from 2006-07 to 2010-11.

3.45 The said assessee has neither disclosed the details/data as discussed in the foregoing paras in their ST-3 returns nor has submitted any such documents along with the ST-3 returns or at any other point of time. The ST-3 returns are arithmetical in nature and the details utilization of cenvat credit etc on exempted services cannot be ascertained from the returns. Furthermore, the liability to pay service tax under reverse mechanism as well as the liability to pay service tax under Business Auxiliary service with regard to procurement of inputs for the client only came to the notice of the department on scrutiny of Financial Books of Accounts and agreements and contracts. Therefore, had not the short payment of service tax and wrong uitilisation/availment of cenvat credit been detected during the course of audit, the same would have gone undetected. Therefore, there is definite element of suppression of facts on the part of the said assessee. All the above acts of contravention on the part of the said assessee appear to have been committed by way of suppression of facts with an intent to evade payment of service tax as discussed in the foregoing paras and, therefore, the said service tax not paid is required to be demanded and recovered along with interest from them under the proviso to Section 73 (1) of the Finance Act, 1994 by invoking extended period of five years. All these acts of contravention of the provisions of Section 67, Section 68 and Section 70 of the Finance Act, 1994 read with Rule 6 and Rule 7 of the Service Tax Rules, 1994; Rule 6 and Rule 9 of the Cenvat Credit Rules, 2004 appears to be punishable under the provisions of Section 76 and Section 78 of the Finance Act, 1994 as amended time to time along with Rule 15 of the Cenvat Credit Rules, 2004.

3.46 Moreover, in addition to the contravention, omission and commissions on the part of the said assessee as stated in the foregoing paras, it appears that, they have willfully suppressed the facts, nature and value of service provided and received by them with an intent to evade the payment of Service Tax for the services provided and received by them, rendering themselves liable for penalty under Section 78 of the Finance Act, 1994 along with Rule 15(3)/15(4) (for the respective period) of the Cenvat Credit Rules, 2004.

3.47 They are also liable to pay interest at the appropriate rates for the period from due date of payment of Service Tax till the date of actual payment as per the provisions of section 75 of the Finance Act, 1994.

3.48 In view of the aforesaid issues a SCN bearing F. No. STC/4-142/O&A/2010-11 dated 20/07/2011 was issued to M/s. Hindprakash International Pvt. Ltd., and the same is taken up for decision by this order.

4. DEFENSE REPLY / SUBMISSIONS AND PERSONAL HEARING: 33

4.1 The personal hearing was fixed on 20/03/2013 which was attended by Shree N. K. Tiwari, consultant of the assessee and Shree Paresh Raval, manager belonging to the assessee. During the course of the hearing the assessee represented by above persons discussed various points raised in the SCN which are based on FAR issued to them. They stated that in respect of paras 3 & 5, they have paid service tax with interest and in respect of paras 1, 2, and 4 there is no service tax liability. They agreed to give detailed reply to SCN during next week and requested case to be dropped.

4.2 The assessee vide his letter dated 29/03/2013 submitted the defense reply to the show cause notice. In the defense reply the assessee made the following contentions:

4.3 They acknowledge the receipt of the SCN, wherein, they have been called upon to show cause as to why Trading activity should not be considered as an exempted service and an amount of Rs. 17,63,224/, equivalent to the Cenvat credit utilized in excess of 20% of the amount of service tax payable during 2006-07 and 2007-28, as per Rule 6 (3) (c ) of the Cenvat Credit Rules, 2004 (herein after referred to as the CCR, 2004), should not be recovered from them in cash under Rule 14 of the CCR, 2004 read with proviso to Section 73 (1) of the Finance Act, 1994 (herein after referred to as the said Act); that an amount of Rs. 1,35,69,665/ for the period for 2008 to 2011 being /, equivalent to 8% or 6% of the value of exempted service as per Rule 6 (3) (1 ) CCR, 2004), should not be recovered from them under Rule 14 of the CCR, 2004 read with proviso to Section 73 (1) of the said Act; that services received by them in respect of Foreign Bank Charges should not be considered as a taxable service and service tax amount of Rs.1,39,461/ should not be recovered from them under proviso to Section 73 (1) of the said Act; that services received by them in respect of Commission paid to the Foreigner should not be considered as a taxable service and service tax amount of Rs. 54,216/ should not be recovered from them under proviso to Section 73 (1) of the said Act; why the amount of Rs. 38,363/ paid as service tax on commission from Cenvat account should not be recovered from them in cash under proviso to Section 73 (1) of the said Act; services rendered in respect of High Sea Sale should not be considered as taxable service and service tax amounting to Rs. 8,10,686 for the period 2006-07 and Rs. 36,19,143/ for the period from 2007-2008 to 2010-2011, should not be recovered from them under proviso to Section 73 (1) of the said Act; services rendered in respect of Rent Income should not be considered as taxable service and service tax amounting to Rs. 1,54,500/ and Education Cess of Rs. 4,500/ should not be recovered from them under proviso to Section 73 (1) of the said Act; the said amount having been paid, why the same should not be appropriated; interest as applicable should not be recovered from them under Section 75 of the said Act; and penalty should not be imposed on them under Sections 76, 77, Rule 15 (3)/15(4) of the CCR, 2004 and 78 of the said Act. The assessee contented that the notice has been issued on the allegations that they have not discharged the service tax liability under different services as alleged by deliberate withholding of essential information. The entire show cause notice is based on an audit objection raised during the curse of audit of their record as Registered Dealer.

4.4 The assessee denied all the allegations, averments and contentions leveled against them vide the show cause notice as if they all are individually and specifically dealt with and traversed, save and except, to what have been specifically admitted by them. They in particular denied that there is short payment of service tax by them and that the Cenvat credit has been availed by them incorrectly.

4.5 The assessee submitted that the entire show cause notice is based on FAR 06/2011-12, issued by the Assistant Commissioner (Audit), Central Excise, Ahmedabad-I, as is evident from 34 the show cause notice itself. They submitted that they are registered dealer and have taken registration for passing on the Cenvat credit of the duty paid on the raw materials purchased and supplied by them to various buyers. Further, with regards to payment of service tax, they are registered with Service tax Commissionerate, as the Central Excise, Commissionerate I, does not have jurisdiction on them for the matters pertaining to payment of service tax by them. Thus, the very audit objection raised by the audit officers of central excise Commissionerate I, is extra jurisdictional. That being so, the action taken on the said audit report is void ab-initio and any action for recovery based on such extra jurisdictional objection would be without authority of law.

4.6 Without prejudice to the aforesaid contentions, it is submitted that the entire case of the department has been based on an objection raised during audit of their registered dealer account. The Hon'ble Tribunal in the case of Indian Plastics Ltd. Vs. CCE reported at 1988 (35) ELT 434 (T) and in the case of Swastik Tin Works Vs. Collector of Central Excise, Kanpur reported at 1986 (25) ELT 198 (Tribunal), held that the show cause notice issued merely on the basis of audit objection is invalid. In the present case, although the documents were called for and statement recorded, but, the facts as stated by them were not appreciated. The issue raised was with regard to the providing of service and taxability of service and the same was based on audit objections by the officers, who did not have any jurisdiction to audit the records pertaining to service tax. Applying the ratio of the above decision in the present proceedings, the subject notice having been issued solely on the basis of audit objection without any investigation or verification is legally not tenable and the same deserves to be withdrawn in the interest of justice.

4.7 The subject notice was received by them on 21.10.2011 seeking to recover service tax alleged to have short paid under proviso to section 73 (1) of the said Act, for the period 2005-06 to 2010-11. Thus, the recovery is proposed to be made for a period beyond one year. The said recovery can be made after invoking the extended period of limitation of five years provided under proviso to section 73 (1 ) of the said Act. The extended period of limitation of five years can be invoked only in case of fraud or collusion or wilful mis-statement or suppression of facts, or contravention of any of the provisions of said Act or Rules with intent to evade the payment of service tax. On going through the subject notice, it is revealed that the allegation of withholding of information with an intention to evade payment of service tax has been made, without disclosing as to which information, which they were required to furnish and the same was withheld by them. It is submitted that in order to demand duty under section 73 (1) of the said Act by invoking extended period of five years something positive other than mere failure or inaction on the part of the manufacturer or service provider or conscious or deliberate withholding of any information which the manufacturer or the service provider, otherwise knew, is required to be established. Further, when the department had full knowledge about the facts and the manufacturer's actions or inactions are based on their belief that they were required or not required to carry out such action or inaction, the period beyond one year cannot be made applicable. In support of the above contention, they place reliance on the decision of the Hon'ble Supreme Court in the case of Chemphar Drugs reported at 1989 (40) ELT 276 (SC). It is submitted that the entire activity was known to the department. Not only that all the details as required in the returns, which were regularly filed by them, were reflected. Thus, there was no suppression or withholding of any fact or any inaction on their part, as such, the extended period of limitation cannot be invoked for recovery from them. They are enclosing herewith copies of ST-3 Returns in support of above contentions.

4.8 In the case of Padmini Products reported at 1989 (43) ELT 195 (SC), the Hon'ble Supreme Court held that for invoking the extended period of five years, the ingredients postulate a positive act rather than mere failure to pay duty. In the present case the allegations of suppression of facts made against the noticee is not tenable as the entire activity was well within 35 the knowledge of department. The Hon'ble Court further observed that even if there was any scope for confusion, divergent opinion and belief the extended period cannot be invoked for recovery. As such, the extended period of five years cannot be invoked against the noticee for recovery and the proceedings initiated vide the subject notice are required to be withdrawn in the interest of justice.

4.9 The Hon'ble High Court of Gujarat in the case of Apex Electricals P. Ltd. Vs. Union of India reported at 1992 (61) ELT 413 (Guj.), has held that if any information is not required to be disclosed and if the same is not disclosed, than the allegation of suppression for invoking the extended period cannot be made. In the subject notice, the allegation is mere suppression of facts without disclosing as to which facts were not disclosed by the noticee as also whether they were under statutory obligation to disclose the said facts and still they did not disclose it. In view of above, the allegation of suppression invoked in the subject notice is not tenable.

4.10 In yet another case of Vasant Sahkari Sakhar Karkhana Ltd. Vs. Collector of Central Excise reported at 1989 (43) ELT 98 (Tribunal), has held that the nature of product has to be kept in mind while considering the facts for invoking the extended period of limitation. In the present case, the entire nature of activity is well known to all the Officers of department. Further, the noticee have already filed submitted the information as required by the department about two years back. It is further submitted that department in such a situation can hardly be allowed to even allege that they were not aware of the activity being carried out by noticee. As such, the extended period of limitation for recovery is not available to the department.

4.11 The word suppression came up for judicial scrutiny in the case of Pushpam Pharmaceuticals Vs. Collector reported at 1995 (78) ELT 401 (SC). The Hon'ble Court observed that the expression suppression has to be construed strictly in view of strong contiguous words like fraud, collusion. The expression does not mean any omission. The act must be deliberate i.e. the correct information was not disclosed deliberately to escape from payment of tax. The Hon'ble Court further observed that where facts are known to both the parties, the omission by one to do what he might have done and not that he must have done does not render it suppression. In the present case, there is absolutely nothing brought on record as to what the noticee was required to do and the same has not been done by them.

4.12 In the case of Om Sai Professional Detective & Sec. Ser. P. Ltd. Versus C.C.E., GUNTUR, reported in 2008 (12) S.T.R. 79 (Tri. - Bang.), the Hon’ble Tribunal has held as under:

“It was their submission that they had assessed the service tax and voluntarily paid the same from January 2005 onwards. They stated that they were under a bona fide belief that the method of assessment followed by them was correct. They submitted that the balance sheets and income-tax returns had reflected the correct incomes which are not in dispute. They further submitted that there was no intention to evade payment of tax as there is no ingredient of fraud, collusion or wilful misstatement or suppression of facts or contravention of rules with intent to evade tax on their part. Therefore the larger period is not invokable. They relied on the Apex Court judgments rendered in the cases of Tamilnadu Housing Board v. CCE [1994 (74) E.L.T. 9 (S.C.)]; Cosmic Dye Chemicals v. CCE [1995 (75) E.L.T. 721 (S.C.)]; Dadha Pharmaceuticals v. CE [2003 (152) E.L.T. 251 (S.C.)] and M.K. Kotecha v. CCE [2005 (179) E.L.T. 261 (S.C.)]. The Tribunal’s ruling rendered in the case of CCE v. Jalani Enterprises [2001 (134) E.L.T. 813 (T)] is also relied on. It is also submitted that the Commissioner (Appeals) in similar proceedings initiated by the Department against them, had accepted the assessee’s plea of the time-bar in Order-in-Appeal No. 09/2007 (G) ST dated 3-12-2007. The Commissioner (Appeals) has noted in Para 12 of the said order –

“ Mental intention cannot be in two ways one for the Service tax and another for income-tax. Evade to income tax is preferable than, to evade to Service tax, as the burden of incidence in Service tax is shift-able. 36

In view of the above circumstances, I am convinced that the appellant must have been under bona fide belief that the method of valuation of taxable services arrived at by them is correct.”

4.13 They also referred to a recent Stay Order passed in the case of Rama Paper Mills Vs Commissioner of Central Excise, Meerut, reported at 2011 (22) STR 19 (Tri.-Del.), wherein it was held by the Hon’ble Tribunal that demand for extended period based on figures in the ledger and balance sheet points to absence of willful suppression and the extended period is not invokable. In the present case, the demand is entirely based on the figures taken from the ledger of the assessee.

4.14 In view of above decisions and the facts of the case, the assessee contended that the extended period for recovery of Service Tax is not available to the department and the proceedings initiated vide the subject notice are required to be withdrawn in the interest of justice.

4.15 The assessee also submitted that the entire amount received by them has to be considered as cum service tax value. In support of above contention, the assessee placed reliance on the decision in the case of P. Jani & CO. Versus Commissioner of Service Tax, Ahmedabad, reported at 2010 (20) S.T.R. 701 (Tri. - Ahmd.) and in the case of Commissioner of C. EX. & CUS., Patna Versus Advantage Media Concultant, reported at 2008 (10) S.T.R. 449 (Tri. - Kolkata), which has been maintained by the Hon’ble Supreme Court as reported in 2009 (14) S.T.R. J49 (S.C.)].

4.16 In their defense reply the assessee further contended that after having dealt with the primary submissions, now they would like to discuss the allegation made in the subject notice, issue wise.

WRONG AVAILMENT OF CENVAT CREDIT OF SERVICE TAX WITH REGARD TO INPUT SERVICES CONSUMED IN TRADING ACTIVITY.

4.17 In their defense reply the assessee contended that during the course of audit, they did not agree with the point that their main activity is trading of the goods by way of purchase either from locally or from abroad. They also provide various services namely, commission agency, renting of immovable properties and business auxiliary services and they discharge service tax on these services. In respect of goods imported, they are paying service tax on various services utilized during the course of import of the goods under Finance Act, 1994. They are entitled to avail service tax paid on various services as input service credit, as these services are utilized in the course of their business. They make use of various taxable Input services directly or indirectly while providing the output services; and that the service tax utilized by them is in accordance with the Cenvat Credit Rules, 2004.

4.18 The C. B. E. C., New Delhi vide its Instruction letter-ST issued from F. No. 137/72/2008- CX.4 dated 21/11/2008, while examining the issue of utilization of accumulated CENVAT credit, point for consideration was that prior to 01-04-2008 [before the amendment in Rule 6(3)] the option available to the taxpayer, under Rule 6(3), was that, he was allowed to utilize credit only to the extent of an amount not exceeding 20% of the amount of service tax payable on taxable output service. However, there was no restriction in taking CENVAT credit and also 37 there was no provision about the periodic lapse of balance credit. In this issue, the Board has clarified that as no lapsing provision was provided; and that the existing Rule 6(3) of the CENVAT Credit Rules does not explicitly bar the utilization of the accumulated credit, the department should not deny the utilization of such accumulated CENVAT credit by the taxpayer after 01-04-2008. Further, it is submitted that taking of credit and its utilization is a substantive right of a taxpayer under value added taxation scheme. Therefore, in the absence of a clear legal prohibition, this right cannot be denied.

4.19 The Central Government issued Notification No. 3/2011-CE (NT), dated 01/03/2011, vide which the CENVAT Credit Rules, 2004, has been amended. These rules are called the CENVAT Credit (Amendment) Rules, 2011 and it came into force from the 1st day of April, 2011. The definition of “exempted services” provided in Rule 2 (e) of the CENVAT Credit Rules, 2004 has been amended and an explanation was inserted by virtue of which it has been provided that “exempted services” includes “trading”. Also, Rule 6 of the CENVAT Credit Rules, 2004 has been amended vide the said notification and it has been clarified vide Explanation I (c) of the said rule that “in case of trading, “Value” for the purpose of sub-rules (3) and (3A) shall be the difference between the sale price and the purchase price of the goods traded”.

4.20 Based on the above Notification and Instruction of the Board, it is crystal clear that the trading was considered as an exempted service only from 01.04.2011. For the period prior to 01.04.2011, trading was considered as a non taxable service. It is only after 01.04.2011, trading was notified as “exempted service” and hence only after that date, Rule 6(3) of the CENVAT Credit Rules can be made applicable for any recovery Hence only after that date of issuance of the said Notification, which has been made effective from 01.04/2011, Rule 6(3) of the CENVAT Credit Rules, 2004, can be made applicable. Hence the question of reversal of Cenvat credit prior to 01/03/2011 does not arise and the said demand may be quashed immediately.

4.21 They crave to refer and to rely on the decision of the Hon’ble Tribunal in the case of M/s. Ericsson India Pvt. Ltd. Vs. CC, CE & ST reported in (2011) 9 Taxmann.com 273 (Bang. CESTAT), wherein, the Hon’ble tribunal observed as follows:

“ We note that in Stay Order No. 1685/2009 in the case of Bhel-Ge Turbine Service Pvt. Ltd. v. CCE, Hyderabad [2010-TIOL-343-CESTAT-BANG.] We held that exempted services mentioned in Rule 2 (e) of CCR covered only services which were notified and prima facie could not be interpreted to include the services on which no tax was levied under Section 66 of the Act. The basis on which the demand is raised is that the Corporate office and the main unit of the appellant (which is also registered as ISD) provided output services which are attributable to taxable services as well as exempted services, namely, trading activity and failed to maintain separate accounts for receipt, consumption and inventory of input services meant for use in providing taxable output services and in the provision of exempted services thereby violating provisions of Rule 6(3) of CCR and inviting restriction to utilize the credit available up to a maximum of 20% of the tax on output services produced. We find that prima-facie the ‘trading activity involved does not constitute exempted services for the assessee to come within the mischief of rule 6(3)(c) of CCR. Therefore, prima facie, the demand of service tax to the tune of Rs.3,55,05,053/- is not sustainable.”

4.22 Applying the ratio of the above decision in the present case, trading cannot be considered as an exempted service prior to 01.04.2011.

4.23 The eligibility to Cenvat credit is governed by Rule 3 of the CCR. As per Rule 3(1) of the CCR, the provider of output services is allowed to take credit on the service tax paid on any input service received by them. The term “input service” has been defined as under: 38

‘Input service' is defined in Rule 2(1) of the CCR to mean any service,-

(i) used by a provider of taxable service for providing an output service; or

(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products, upto the place of removal, and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage up-to the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation up-to the place of removal;’

4.24 In view of the above definition of the input service, it may be stated that the said definition is very exhaustive and include not only those services which are used for providing output services but also covers such services which are treated as activities relating to business. Hence any services which are used for business would qualify as ‘input service' whether the said service is used for providing output service or not.

4.25 In this respect, it may be pertinent to mention that the Larger Bench of the Tribunal in the case of ABB Ltd Vs CCE &ST., Bangalore (2009-TIOL-830-CESTAT-BANG-LB) has held that the expression “business” is a term of vide import as held by the Apex Court in Mazgaon Dock Ltd. v. Commissioner of Income-tax and Excess Profits Tax (2002-TIOL-613-SC-IT). Further the definition of ‘Input Services' uses the expression “activities relating to business”. The word ‘relating' further widens the scope of the expression “activities relating to business”. There is no qualification to the word “activities” - there is no restriction that the “activities relating to business” should be relating to only the “main” activities or “essential” activities and, therefore, all other activity relating to business falls within the definition of “input service”.

4.26 The use of expression “such as” is purely illustrative. The expression means “for example” or “of a kind that” - (Concise Oxford Dictionary). It has been defined in the Chambers Dictionary as “for example”. The usage of the words “such as” after the expression “activities relating to business” in the inclusive part of the definition, therefore, further supports their view that the definition of the term “input service” would not be restricted to services specified thereafter…… the word “include” is generally used to enlarge the meaning of the preceding words and it is by way of extension, and not restriction. Similar view has been taken by the Larger Bench of the Tribunal in Commissioner of Central Excise v. GTC Industries Ltd. (2008- TIOL-1634-CESTAT-MUM-LB), relying on the Apex Court's decision in Reserve Bank of India v. Peerless General Finance & Investment Co. Ltd. (2002-TIOL-670-SC-MISC).

4.27 As regards the contention of the value of the input service forming a part of the value of output/ output service, the Hon'ble Larger Bench of the Tribunal in the case of ABB (supra) held that the valuation and cenvat credit are independent of each other and have no relevance to each other. Interpretation of “input service” cannot fluctuate with change in definition of “value” under Section 4 or Section 4A of Central Excise Act, 1944 or tariff value under Section 3 ibid.

4.28 Hence it is clear from a conjunctive reading of Rule 3(1) and Rule 2(l) of CCR that the cenvat credit on all the input service is allowed whether the same is used for providing taxable output service or exempted output service or non-service. The only restriction on taking credit is specified in Rule 6 of CCR to the extent of credit attributable to exempt service/non-taxable 39 service). Hence it is clear that there is no restriction either express or implied in the CCR to take credit attributable to non-service (i.e., trading activity).

4.29 Similar views have been taken by the Hon’ble Tribunal in the Orion Appliances case (supra) wherein it has been held that trading activity is not an exempted service and hence Rule 6 of the Cenvat Credit Rules, 2004 (CCR) does not apply. There is no provision in the CCR to cover such situations. Accordingly the only obvious solution which is legally correct is to ensure that once in a quarter or once in a six months, the quantum of input service tax credit attributed to trading activities according to standard accounting principles is reversed.

4.30 Hence the Hon'ble Tribunal has admitted that Rule 6 of the CCR does not apply and there is no provision in CCR to cover such situation. However, the Hon'ble Tribunal has not examined the purport of law and has not considered the legal position that a benefit which has been given to the service provider in CCR cannot be taken away without the authority of law. As explained above, there is no express or implied restriction on the service provider to take attributable cenvat credit on input services used in trading activity. Hence it is not legally correct to state that the quantum of input service tax credit attributed to trading activities according to standard accounting principles is required to be reversed.

4.31 In this connection it may be pertinent to mention that it is a settled position of law that if there is any ambiguity in law or if two views are possible the view which is favorable to the assessee should be taken.

4.32 In their defense reply the assessee contended that as discussed at above paragraphs question of Cenvat credit prior to 01.03.2011 does not arises and the said demand may be quashed immediately, However if the department is taking view which is against the calculation made by them, than they may be allowed to consider rule 6(5) benefit, and that they are enclosing statement showing the cenvat credit taken and attributable to the trading activity and the service provided after 01.04.2008, and submitting along with written submission, a statement showing the above details.

RENTING OF IMMOVABLE PROPERTY

4.33 In the subject notice reference to Revenue Para 5 has been made wherein, it has been pointed out that they have not paid service tax amounting to Rs.1,54,000 on renting of immovable property. In this regard it is submitted that service tax on renting of immovable property was enacted from 1-6-2007. However, the said service was challenged in various High Courts and all the High Court’s unanimously held that service tax on the renting of immovable property is not payable. However, by a retrospective amendment with scope of renting of immovable property was enlarged and the service tax on renting of immovable property was required to be paid. Here, it is submitted that the vires of renting of immovable property service was challenged and its constitutional validity has been upheld by the Hon’ble High Court of Punjab and Haryana. In the matter before the Hon’ble Supreme Court on this issue, the Hon’ble Supreme Court has remarked that the service tax is payable on renting of immovable property and there would be no stay on recovery of service tax payable on the renting of immovable property after October, 2011 and the issue of taxability has still not been decided. But, the vires on the constitutional validity have been upheld, it was decided by them that the amount of 40 service tax payable on renting of immovable property be paid and accordingly the said amount was paid by them with interest.

4.34 As regards the imposition of penalty, it is submitted that with the scope of Finance Act, 1994 was enlarged and it was provided that if the amount is paid within 6 months from the date of passing of the Finance Bill 2011, no penalty shall be imposed. As the amount of service tax along with interest on renting of immovable property has been paid by them prior to the date fixed for payment, they are entitled for waiver of penalty and therefore penalty may not be imposed on them.

COMMISSION (BUSINESS AUXILIARY SERVICE)

4.35 On the above issue the assessee in their defense reply contended that in the subject notice at Revenue Para 3 it was sought for by the department to recover the service tax on the commission paid by them to their foreign agent. The assessee contended that the amount of service tax along with interest on the commission has already been paid by them. However, in the subject show cause notice there is a mention for payment of the said amount through cash as they are a deemed service provider. It was submitted by the assessee that the service tax on the commission is required to be paid by them under the reverse charged mechanism as per Section 66A of the Finance Act, 1994. The said section 66A provides that wherein service specified in clause (105 ) of Section 65 is provided by a person whose establishment from which the service shall be provided as his permanent address or shall use of his residence or a country other than in India or received by a person who is in place of business in India, such service shall for the purpose of section be the taxable service and such taxable service shall be treated as if the recipient has been himself provided the service in India and accordingly the provisions of section shall apply. On going through the provisions of section 66A, it seems that the conditions under the clauses (a) & (b) of sub section 1 of Section 66A are to be complied with, for being covered under the ambit of the said section. Here, it may pointed out that between sub-clause 1(a) & 1(b) the word “and” has been used, meaning thereby that both sub section (a) & sub section (b) are to be read in conjunction, for being complied and being covered under section 66A. On reading of sub section (a) & (b), it seems that it only states with regard to such taxable services, the service recipient himself has to consider as the provider of service tax. The sub section does not in anywhere stipulate that the amount of service tax on the commission is required to be paid in cash. Therefore, the allegation made in the show cause notice is without the authority of law.

4.36 The assessee further contended at this juncture tried to draw my attention to the provisions of CENVAT Credit Rules, 2004. The assessee contended that Sub Rule (4) of Rule 3 of CENVAT Credit Rules provides that Cenvat Credit may be utilized for payment of any amount of service tax on any output service. The said sub rule does not provide for any restriction on payment of any service tax and accordingly the charge made in the show cause notice that the amount is required to be paid in cash is without any basis.

4.37 In the aforesaid connection the assessee further contended that various Tribunals have held that the payment of tax from Cenvat Credit amount is to be considered as payment of tax in cash therefore the allegation made by the notice fails in this ground also and the amount of service tax payable by them may be considered as due compliance in the payment service on the commission paid by them to their foreign agent. In this regard, they craved for leave to rely on the decision of Hon’ble Tribunal in the case of Indian Acrylic Ltd. Vs. Commissioner of Chandigarh reported at 2012 (285) ELT 354. 41

4.38 In the aforesaid connection the assessee further contended that it is well settled law that there is no room for intendment in the fiscal statute. If the intention of the legislation was to allow payment of service tax on the commission in cash only, the same would have been incorporated in the statute itself. The above contention is justified by them by referring to the service provided by the Goods Transport Agency, (GTA) where there is a specific mention that the amount of service tax on GTA has to be paid in cash. The allegation for payment in cash of the service tax on the commission paid to the agent on the ground also.

BANKING AND FINANCIAL SERVICES

4.39 In the aforesaid connection the assessee drew my attention to the statement dated 10/10/2011 of their representative, wherein, it was stated by him that they are exporters of various goods i.e. Dyes and Intermediates. As per terms, agreement and conditions of the purchase order, they forward a set of original documents including bill of exchange to their bankers i.e. SBI or Syndicate Bank. It was also stated by him that on certain occasions, they get the documents discounted. It was stated by him that their bankers sends the documents to the foreign bank for collection. The foreign bank remits the amount to their bankers, who after collecting their charges credit the said amount to their account. It was also stated by him that they never negotiate with the foreign bank for collection of any amount from their overseas buyers. It is their bank which negotiates and deals with the foreign bank and therefore in this case the service provider and service recipient if any are the foreign bank and their bankers in India. Accordingly, if at all any service tax is required to be paid under sec. 66A of the Finance Act 1994 on the reverse charge mechanism; the said liability cannot be fastened on them as it is only the service recipient who is required to pay the amount of tax.

4.40 In the aforesaid connection the assessee further contended that it has been alleged that their bankers i.e. SBI and Syndicate Bank were merely acting as an agent. It was submitted by their representative that the transaction between the foreign bank and their bank is on principal to principal basis and the concept of agent does not arise. In the aforesaid connection the assessee further submitted that if at all the bankers SBI and Syndicate Bank were to be considered as their agent, then in that case it was obligatory to put on record that their bankers were acting on clear directives regarding the collection of the proceeds from a particular bank or branch in a particular manner. In the present case, they do not have any say as to how and from which branch of the foreign bank their bankers are collecting the proceeds. It is the will and wisdom of their Indian banker to choose the foreign bank from which the proceeds is to be collected and therefore, it is not correct to say that the said bank STI and Syndicate Bank are their agent.

4.41 In the aforesaid connection the assessee further contended that with the expansion and liberalization of economy, almost all the foreign banks have either a representative office of their own or have a joint venture in India and therefore the provisions of section 66A is not applicable on the ground that the foreign bank does not have a place or business in India. The assessee contended that in the SCN no evidence to the effect that the foreign bank, which had provided the service to their bankers did not have any office in India. In any case the transaction is between the two bankers, they are not required to pay any service tax as alleged in the show cause notice.

SALE OF GOODS ON HIGH SEA SALE BASIS 42

4.42 In the aforesaid connection the assessee contended that the SCN proposes to recover service tax on the service charges alleged to have been provided by them on the differential value of high seas sale and purchase of imported goods by not showing the price of service component separately but the allegation are not backed by any evidence. It was contended by the assessee that it is obligatory on the part of the department to have brought on record evidence either documentary or oral from the clients for whom the said goods were alleged to have been procured. On the contrary, they have submitted documents from various buyers, who have clearly stated that they had purchased the goods from them on high seas sale basis and the consignment is purchased on case to case basis. The assessee submitted few set of documents from their buyers and contended that the SCN proceeds on an incorrect appreciation of fact.

4.43 In the aforesaid connection the assessee further contended that the term procure means to receive or to obtain whereas in case of purchase, price or the consideration paid is the main criteria. In case of procurement, the consideration may or may not have been paid, but in order to cover a transaction under the ambit of purchase the consideration has to be paid and only when the consideration is paid the transaction is considered as purchased. The assessee contended that in the SCN no evidence has been brought on record to prove that the high sea sale was without any consideration and therefore the allegation of procurement for client who uses as an input fails.

4.44 In the aforesaid connection the assessee further contended that the high seas sale is as well recognized type of sale in the course of international trade. Even the Foreign Trade Policy, issued by the Government of India, recognizes high seas sale as one of the modes of sale. In any high seas sale, the two main ingredients are high seas and sale. The term high seas means before entering into the territorial jurisdiction of India and the sale is for consideration. In the present case the sale effected for a consideration by transferring the documents like bill of lading endorsing in the name of the buyer. The high sea sale contract is made on a non-judicial stamp paper, the value of which has been fixed by the State Government under the collection of Stamp Act. In the high seas sale contract, the consideration had been shown as CIF + 2% and that is the purchase price for the high seas buyer. The high seas seller, after endorsement of documents in case of high seas sale, ceases to have any liability on the goods and all the statutory formalities including payment of taxes is to be carried out by the high seas buyer. The sale by the original importer to high seas buyer is always on principal to principal basis. Therefore, in all cases the transaction between the original importer and the high seas buyer is for the sale of goods on a price which is minimum CIF 2%. The 2% element has been fixed as the minimum amount of the CIF to be added. The aforesaid addition of 2% of the CIF value has been adopted as thumb rule for the assessment of arriving at assessable value for the purpose of customs duty and the same is accepted by the Customs department on which the duty is charged accordingly.

4.45 In the aforesaid connection the assessee further contended there is another method, whereby, the goods are imported in the name of the original importer and are warehoused under section 58 of the Customs Act, 1962. Thereafter, the importer enters into an agreement with the prospective buyer wherein, he transfer the ownership of the goods under an agreement. In the said agreement the sale price of the goods are shown. For a proper appreciation, the assessee submitted one set of high seas contract and one set of transfer of ownership agreement. The assessee contended that in the case of transfer of ownership agreement, the goods are in the warehouse under the control of Customs Authorities / the custodian appointed by the Customs authorities. On execution of transfer of ownership agreement, the buyer steps into the shoes of the original importer, covering all the statutory formalities for clearance and the payment of duty of customs and other charges are undertaken by him. The assessee contended that the above two 43 modes are generally acceptable in the normal course for transfer of imported goods by way of sale. The assessee further contended that in case of sale of goods there is no service element, no service charges is required to be paid and hence the allegation of short payment of duty is without any substance and the allegation is required to be withdrawn.

4.46 On the issue of notification no 12/2003-ST, the assessee in their defense reply contended that it is not understood as to what relevance the said notification has in the present case. The assessee contended that the notification provides that in case of a service provider transfers the property of the goods as well as provides services, then in that case the service tax is leviable on the service component and not on the value and therefore the said notification has no relevance in the present case.

4.47 On the issue of the date of stamp paper on which the agreements were executed being found to be prior to the date of invoices of the original overseas supplier in some cases the assessee in their defense reply contended that it is not understood as to how the date of stamp papers in any way relevant to the fact of any service being provided by them and non-payment of service tax thereon. The stamp paper is a non-judicial paper provided by the State Government, the value of which is decided by the State Government for all the agreements and contracts to be executed and the date of stamp paper has no relevance for execution of the contract agreement.

4.48 In their defense reply the assessee submitted that in the said show cause notice, it has been alleged that they were raising the sales invoice equal to CIF 2% and where also raising debit note for certain value on which the service tax was paid by them. In this connection the assessee contended that prior to November, 2006 they were raising invoice on CIF 2% and certain amount was recovered through debit note and on which service tax was paid and it was duly reflected in their ST-3 returns. However, it was advised to them that such method of raising debit note and invoice does not appear to be correct and therefore November 2006 onwards, they started raising a consolidated retail invoice in the entire amount for the purpose on which the Customs duty was paid. The assessee submitted that in this regard, they have already intimated to the department regarding the change in pattern of invoice.

4.49 In their defense reply the assessee also further submitted that in the case of import of goods, the taxable event is the time when the goods enter the territorial waters of India and is continued till the goods gets mixed with the land mass in India. In case of High seas sale, the contract for sale of goods is made before the goods enter the territorial water of India and in case of goods stored in the warehouse by agreement of transfer of ownership. In both cases the goods are sold when the import is not complete. In support of above contention of completion of import, they refer and rely on the decision in the case of Garden Silk Mills Ltd. Vs Union of India reported at 1999 (113) ELT 358 (SC).

4.50 In their defense reply the assessee also submitted that it is well settled that if the department intends to charge service tax on service or services, onus is on the department to prove the classification of that service and its taxability. In the present case, the subject notice does notice at all reveal, as to which services were provided by them during the course of high seas sale which attracted service tax. The department have failed to classify and specify, the service on which the service tax was required to be paid, the entire action of the department in demanding service tax is based on mere presumptions and assumptions not supported by facts and therefore no action on such unsupported facts cannot be taken against them. In support of 44 above contention, they crave to refer and to rely on the decision in the case of Jetlite ( India) Ltd. Vs Commissioner reported at 2011 (21) STR 119 ( Tri. Del.).

4.51 In their defense reply the assessee further submitted that the difference between a contract and agreement is no sequence with the nature of the transaction, which is not in dispute. The assessee submitted that the nature of transaction is that documents were transferred by them to the prospective buyers on principal to principal basis before the goods enter into Indian Territorial Water of India and thereafter all the statutory obligations were compiled, based on the said endorsed documents by the buyer and therefore the allegation that the high seas sales contract is not a contract but an agreement, is no sequence and cannot be made the basis of determining for any service tax liability upon them.

4.52 In their defense reply the assessee submitted that it is well settled that the penalty should not be imposed in ordinary course. For imposition of penalty, it has to be established that the assessee had acted deliberately in defiance of law. In the present case, there is nothing on record which suggests that they had acted deliberately in defiance of law. The Hon’ble Supreme Court in the case of Hindustan Steel Ltd. Vs State of Orissa reported at 1978 (2) E.L.T. (J 159) (S.C.) has held as under:

“An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute”

Applying the ratio of the above decision in the present case, no penalty is imposable on them.

4.53 In the aforesaid connection the assessee further submitted that before imposing penalty the requisite mens rea has to be established, as held by the Hon'ble Supreme Court in the case of Akbar Badruddin Jiwani Vs Collector of Customs reported at 1990 (47) ELT 161 (SC). The words typically imposing a mensrea requirement include willfully, maliciously, fraudulently, recklessly, negligently, corruptly, feloniously and wantonly. In the present proceeding, the element of mensrea being absent, the imposition of penalty is not warranted.

4.54 In their defense reply the assessee also submitted that they were under a bonafide belief that since there is an element of service in their trading activity, they are required to pay service tax on such services and in doing so, the Cenvat credit as input service is admissible to them. This position was explained by their representative while giving the statement. They crave to refer the provisions of Section 80 of the Finance Act, 1994, which is reproduced below:

“80. Penalty not to be imposed in certain cases.- Notwithstanding anything contained in the provisions of Section 76, Section 77, Section 78 or Section 79, no penalty shall be imposable on the assessee for any failure referred to in the said provisions if the assessee proves that there was reasonable cause for the said failure.” 45

4.55 The assessee submitted that in so far as Section 80 of the Act is concerned, it starts with an obstante clause and therefore it overrides provisions of Sections 76, 77, 78 and 79 of the Act and provides that no penalty shall be imposable even if any one of the said provisions are attracted if the assessee proves that there was reasonable cause for failure stipulated by any of the said provisions. They were under a bonafide belief that since there is an element of service in their trading activity, they are required to pay service tax on such services and in doing so, the Cenvat credit as input service is admissible to them. Thus, it is a fit case where the provisions of Section 80 of the said Act are invokable and no penalty is required to be imposed on the notice under Section 76, 77 and 78 of the Finance Act, 1994. In support of above contention, the noticee rely on the decision in the case of Shri Raj Auto Centre Versus Commissioner of C. EX., Ahmedabad -III, , reported at 2010 (18) S.T.R. 457 (Tri. - Ahmd.).

4.56 The assessee submitted that the provisions of Section 76 and 78 of the said Act are mutually exclusive. In any case, after 10.5.2008, penalties under section 76 and 78 of the said Act cannot be imposed simultaneously. The Hon’ble High Court of Punjab & Haryana in the case of Commissioner of Central Excise Vs First Flight Courier, reported at 2011 (22) STR 622 (P&H) has held that even prior to 10.05.2008, penalties both under section 76 and 78 of the said Act are not justified. Similar views has been taken by the Hon’ble Tribunal in the case of Jivant Enterprise Vs Commissioner of Service Tax, reported at 2012 (28) STR 582 (Tri.-Ahmd.).

4.57 In the end the assessee in their defense reply submitted that in the foresaid premises, the department having failed to bring on record, unimpeachable evidence to show that the service was provided by them and on which no service was paid by them, the entire show cause notice deserves to be withdrawn. The subject notice fails on the ground of limitation also.

5. DISCUSSION AND FINDINGS:

5.1 I have carefully gone through the subject show cause notice, the assessee’s written defense reply and the arguments made by them before me at the time of personal hearing.

5.2 Before, I proceed to decide the case on merit, I first deal with the issue of Jurisdictional raised by the assessee in his defence reply. I find that audit of the said assesesee who is registered as a ‘First Stage Dealer’, was carried out by the officers of C.Ex Commissionerate, Ahmedabad-I and during the course of the said audit it was noticed that the said assessee had wrongly availed Cenvat credit on ‘input services’ which were linked directly to trading activities of the said assessee. The said Cenvat credit on ‘input services’ was reflected in the Service Tax Receivable Account as well as ST-3 Returns of the assessee. Accordingly, the observations were conveyed to the Service Tax Commissionerate, Ahmedabad where investigation was carried out by the Preventive wing and show cause notice was issued. Therefore, the contention with regard to the dispute of jurisdiction is not tenable. Accordingly, I am competent to decide the case.

5.3 On going through the SCN and the assessee’s written defense reply and the arguments made by them before me at the time of personal hearing and the relied upon case records, I observe that:

i) The present show cause notice has arisen on the basis of the audit of the said assesesee who is registered as a ‘First Stage Dealer’, by the officers of C.Ex Commissionerate, Ahmedabad-I. 46

ii) the assessee is basically an importer of various chemicals which are cleared by him from customs by filing the Bills of Entries for home consumption. He also purchases various chemicals locally. The said assessee is also registered as a First stage dealer with the Central Excise department for issuance of cenvatable invoices to its customers and therefore, the quantity of chemicals so imported and purchased locally is entered in the RG-23D Register. The Cenvat credit of CVD in case of import and C.Ex. duty on local purchase is taken in the RG23D Register. When the said chemicals are sold to the buyers, the Cenvat credit to the extent of quantity sold is debited in RG-23D Register and passed on to the buyers under invoices as prescribed. Simultaneously, the said assessee had availed Cenvat credit of service tax paid on various ‘input services’ used by them for procuring the materials locally as well as from overseas market. The details of such credit is as under:

Particulars Apr.'06- Oct.'06- Apr.'07- Oct.'07 - Apr.'08 - Oct.'08- Apr'.'09 - Oct.'09- Apr.'10 - Oct.'10 - Total (Amt in Rs.) Sep.'06 Mar.'07 Sep.'07 Mar.'08 Sep.'08 Mar.'09 Sep.'09 Mar.'10 Sep.'10 Mar.'11 BAS Services 3,153 1,478 166,867 2,277 43,074 4,285 221,134 CHA Services 489,773 507,350 488,000 669,753 829,177 342,160 754,598 466,361 660,807 626,696 5,834,675 Commission 65,640 65,640 Services Courier 1,502 3,679 8,267 14,102 5,468 24,061 5,521 4,590 8,785 2,072 78,047 Charges Financial 163,745 101,524 188,932 266,227 230,548 253,852 303,597 216,586 377,500 496,976 2,599,488 Charges

Laboratory 6,881 2,177 3,271 1,944 4,370 73 343 400 5,405 24,864 Service Professional 26,698 44,031 25,585 100,633 25,620 35,657 9,373 10,425 278,022 Charges Telephone 15,005 17,486 18,430 16,067 20,071 28,473 21,554 20,272 20,249 19,306 196,913 Services Travelling 61 90 1,236 865 321 2,609 1,162 6,344 Services Warehousing 8,563 9,546 23,892 40,967 121,482 23,435 45,344 27,562 55,669 78,661 435,121 Services Xerox Services 1,753 2,494 3,820 2,185 1,797 1,216 1,680 1,251 2,404 18,600

Total 680,341 717,814 756,486 1,060,952 1,237,325 945,648 1,157,523 775,649 1,179,717 1,247,392 9,758,847

iii) The assessee is also engaged in importing chemicals and its sale on ‘High Sea Sales’ basis before the goods reach the Indian territory. For such sales, the assessee enters into an agreement with the buyers. In such cases, the liability of clearance and payment of custom duty etc. lies with the buyers. The customs authority at the port of import while assessing the B/E filed by the buyer load 2% or 4% of CIF value for the purpose of valuation of goods. The assessee raised bills towards sale of such goods and in addition to the said bills, they also raised debit notes and collect certain charges. It was understanding of the said assessee that the charges collected under debit notes are liable to service tax under the category of ‘Business Auxiliary Services’ on the belief that their activity is that of procurement of goods on behalf of the clients. Accordingly, they had obtained Service Tax registration and were discharging service tax liability. While, discharging the service tax liability, the said assessee had utilized some quantum of Cenvat credit of ‘input services’ as mentioned in ii) above.

iv) The assessee is also engaged as a mediator/facilitator between supplier of paper and its buyer and had earned commission on the said transaction on which they had discharged service tax under the category of ‘Business Auxiliary Service’. While, discharging the service tax liability, the said assessee had utilized some quantum of Cenvat credit of ‘input services’ as mentioned in ii) above.

v) The said assessee had rented some property and received rent on which they have paid service tax under the category of ‘Renting of immovable property Service’. 47

5.4 Thus, the aforesaid factual position suggests that the said assessee is a trader of chemicals in the capacity of a ‘registered dealer’ as well as a ‘service provider’.

5.5 Based on the audit objections, the impugned show cause notice was issued alleging as to why:

(i) Trading activity carried out by the assessee should not be considered as an exempted service and an amount of Rs. 17,63,224/- (as per Annexure A-1) as discussed in the foregoing paras for the period from 2006-07 to 2007-08, equivalent to the CENVAT credit utilized in excess than the permissible limit of 20% of the amount of service tax payable as per Sub-Rule (3) (c) of Rule 6 of the Cenvat Credit Rules, 2004 should not be recovered from them in Cash, under Rule 14 of the Cenvat Credit Rules, 2004 read with proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years as discussed hereinabove.

(ii) An amount of Rs. 1,35,69,665/- (as per Annexure A-2) as discussed in the foregoing paras for the period 2008-09, 2009-10 and 2010-11 equivalent to 8% (or 6%) of the value of the exempted services under option (i) of Rule 6 (3), as applicable to them should not be demanded from them under Rule 14 of the Cenvat Credit Rules, 2004 read with proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years as discussed hereinabove.

(iii) Services received by them in respect of Foreign Bank Charges should not be considered as taxable service under the category of “Banking and other Financial Services” as specified in clause (zm) of section 65 (105) of the Finance Act, 1994 as amended and an amount of Rs. 12,02,681/- paid as Foreign Bank Charges should not be considered as taxable value and Service Tax amounting Rs. 1,39,461/- (Rs. 135,756/- as Service Tax and Rs. 3,705/- as Education Cess) (as per Annexure-B) as discussed in the foregoing paras during the period from 2006-07 to 2010-11 should not be demanded from them under proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years as discussed hereinabove.

(iv) Services received by them in respect of Commission paid to a foreigner should not be considered as taxable service under the category of “Business Auxiliary Services” as specified in clause (zzb) of section 65 (105) of the Finance Act, 1994 as amended and an amount of Rs. 4,41,494/- paid as Commission to a foreigner should not be considered as taxable value and Service Tax amounting Rs. 54,216/- (Rs. 52,979/- as Service Tax and Rs. 1,237/- as Education Cess) (as per Annexure-C) paid on the said Commission amount for the period for 2006-07 & 2008-09 through Cenvat credit account E. no. 00104 dated 28/05/2011 should not be recovered in Cash from them under Section 73 (1) of the Finance Act,1994, invoking the larger period of five years as discussed hereinabove. Why the amount of interest of Rs. 26,218/- already paid vide the challan dated 06/10/2011 mentioned above should not be adjusted towards the demand of Interest. Also, why Service Tax amounting to Rs. 38,363/- (Rs. 37,246/- Service Tax and Rs. 1,117/- Education Cess) paid on the Commission amount of Rs. 3,72,456/- for the year 2009-10 through Cenvat credit account should not be recovered in Cash from them under proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years as discussed hereinabove.

(v) Services rendered by them in respect of High Seas Sales should not be considered as taxable service under the category of “Business Auxiliary Services” as specified in clause (zzb) of section 65 (105) of the Finance Act, 1994 as amended and an amount of Rs. 66,23,253/- should not be considered as taxable value and Service Tax amounting Rs. 8,10,686/- (Rs. 7,94,790/- as Service Tax and Rs. 15,896/- as Education Cess) (as per Annexure D-1) for the year 2006-07 should not be demanded from them under Section 48

73 (1) of the Finance Act, 1994, invoking the larger period of five years as discussed hereinabove. Also why an amount of Rs. 2,99,35,004/- should not be considered as taxable value and Service Tax amounting Rs. 36,19,143/- (Rs. 35,13,731/- as Service Tax and Rs. 1,05,411/- as Education Cess) (as per Annexure D-2) for the period from 2007-08 to 2010-11 should not be demanded from them under proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years as discussed hereinabove.

(vi) Services rendered by them in respect of rent income should not be considered as taxable service under the category of “Renting of Immovable Property Service” as defined under Section 65 (105) (zzzz) of the Finance Act 1994, as amended, on the amount of taxable value of Rs. 15,00,000/- received as payment/ recovered by them from their customers should not be considered as taxable value and Service Tax amounting to Rs. 1,54,500/- (Rs. 1,50,000/- as Service Tax and Rs. 4,500/- as Education cess) for the year 2009-10 should not be demanded from them under proviso to Section 73(1) of the Finance Act, 1994, invoking the larger period of five years as discussed hereinabove. The amount of Service tax already paid under protest vide Cenvat credit a/c. E. No. 00103 dated 28/05/2011 mentioned above should not be adjusted towards the demand of Service Tax. Why the amount of interest of Rs. 33,334/- already paid vide challan dated 06/10/2011 mentioned above should not be adjusted towards the demand of Interest.

(vii) Interest at the prescribed rate on the amount of service tax liability as shown in (i) to (vi) above for the period from 2006-07 to 2010-11 should not be paid by them for the delay in making the payment, under section 75 of the Finance Act, 1994 as amended and the payment of the same amount already made by the assessee, should not be adjusted towards the demand of interest.

(viii) Penalty should not be imposed upon them under Section 76 of the Finance Act, 1994 as amended for the failure to make the payment of service tax payable by them within stipulated time.

(ix) Penalty should not be imposed upon them under Rule 15(3)/15(4) (for the respective period) of the Cenvat Credit Rules, 2004 read with Section 78 of the Finance Act, 1994 for contraventions discussed herein above.

(x) Penalty should not be imposed upon them under Section 78 of the Finance Act, 1994 as amended for suppressing the value of taxable services provided by them before the department with intent to evade payment as shown above.

6. In the aforesaid back drop I now, take up the above issues sequentially.

6.1 As regards, the demand of Rs. 17,63,224/- (as per Annexure A-1), I have to first decide whether, ‘trading of goods’ can be considered as ‘exempted service’ and if so, from which date. Discussion in this regard is as under:

“exempted service under erstwhile Rule 2(e) of Cenvat Credit Rules, 2004, was as under:

"exempted services" means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act;

6.2 Vide Notification No.3/2011-CX (NT) w.e.f. 1.4.2011, following explanation was introduced under the said Rule 2(e) of Cenvat Credit Rules, 2004:

“For the removal of doubts, it is hereby clarified that “exempted services” includes “trading” 49

6.3 As regards the applicability of aforesaid explanation, CBEC Circular No. 943/04/2011- CX dated 29/04/2011 is issued from F. No. 354/73/2011-TRU under which among other things the following clarifications were issued in tabular format.

S. No. Issue Clarification

6 Can the credit of input or input Trading is an exempted service. Hence the credit of any inputs or services used exclusively in trading, input services used exclusively in trading cannot be availed. be availed?

7 What shall be the treatment of credit Trading is an exempted service. Hence credit of any inputs or of input and input services used in input services used exclusively in trading cannot be availed. trading before 1.4.2008? Credit of common inputs and input services could be availed subject to restriction of utilization of credit up to 20% of the total duty liability as provided for in extant Rules.

6.4 In light of aforesaid clarification, which was issued subsequent to introduction of explanation below the definition of exempted service, I hold that the effect of the said explanation shall have retrospective effect.

6.5 Further, I observe that when trading activities are specifically incorporated within the domain of exempted service, the provision of Rule 6 of the credit rules also become applicable to a service provider who in addition to providing the taxable service is also engaged in trading activities [exempted service]. Since, in the present case the explanation that is inserted is declaratory in nature its effect is applicable retrospectively. On this issue I place my reliance upon the decision of the Hon’ble Delhi High Court in the case of Pawan Kumar v. DRI, 2007 (218) E.L.T. 331 (Del.) and Binani Industries Ltd. [JT 2007 (5) SC 311]. The relevant portion in the case of Pawan Kumar (supra) is reproduced below:-

“(10) The presumption against retrospective operation is not applicable to declaratory statutes. CRAIES has explained the position regarding declaratory statutes in the following manner [Statute Law, 7th Edn., p 58]:- “ For modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. Usually, if not invariably, such an Act contains a preamble, and also the word ‘declared’ as well as the work ‘enacted’, (approved by the Supreme Court in Central Bank of India v. Their Workmen, AIR 1960 S.C. 12) (11) An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law, retrospective operation is generally intended. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit.”

6.6 Therefore, I reject the assessee’s claim that the explanation inserted in the definition of exempted service is not having retrospective effect. Thus as discussed above the assessee who is engaged in trading activities in addition to providing of taxable service is obligated to reverse the proportionate credit availed in respect of its trading activities.

6.7 During the period April,2006-07 to March,2008 the details of Opening balance of Cenvat credit, Cenvat credit availed, Cenvat credit utilized payment made through cash, total 50

service tax paid, gross value of taxable service and closing balance in Cenvat account was as under:

Service tax Service tax Service tax Total service Gross value of C.B. of Year O.B. credit availed Credit utilized paid in cash tax paid Taxable service Cenvat April’06- Sept.’06 0 680341 620274 297500 917774 7712891 60067

Oct.’06- March’07 60067 717814 319450 52322 371772 3037353 458431

April’07- Sept.’07 458431 756486 8271 0 8271 66912 1206646

Oct.’07- March’08 1206646 1060952 1343493 0 1343493 12213172 924105

3215593 2291488 349822 2641310 23030328

6.8 In view of the provisions of erstwhile Rule 6(3)(c) as they existed at the material time, the assessee who opts not to maintain separate account for taxable service and exempted service as provided in Rule 6(2) of the Canvat Credit Rules, 2004, can utilize Cenvat credit to the extent of 20% of the tax liability and balance has to be paid through Cash. However, from the above table it is evident that the assessee have utilized Cenvat credit in excess of 20% of the service tax liablities. The details of total excess utilization for the period 2006-07 to 2007-08 is worked out as under.

Amount of cenvat credit permissible Amount of service for utilization Amount of tax required to be (20% of amount Amount of Total Cenvat service tax paid in cash. (80% Amount of Amount of of service tax credit Year credit payable on the of the amount of credit actually service tax paid payable on output utilized in availed taxable output service tax payable utilized in cash service) as per excess. service on taxable output erstwhile rule 6 service) (3)(c) of CCR, 2004. 2006-07 1398156 1289556 257911 1031645 939724 349822 681813 2007-08 1817441 1351764 270353 1081411 1351764 0 1081411 1763224

6.9 Therefore, from the aforesaid working it clearly transpires that the assessee have utilized Cenvat credit in excess of what was permissible to be used. The excess utilization of Cenvat credit comes to Rs. 17,63,224/- which they should have paid by cash. Therefore, the said excess utilization of Cenvat credit was in violation of erstwhile Rule 6(3)(c) of Cenvat Credit Rules, 2004.

6.10 In this regard, I rely on the case of Commissioner of Service Tax, Chennai Vs State Bank of India as reported in 2011 (22) S.T.R. 638 (Tri. - Chennai) wherein it was held by the Hon’ble CESTAT that:-

Provisions of Rule restricting utilization of credit to the extent of 20% of tax payable is very clear cut provision and concerned branch of SBI was required to follow the same more so when they are claiming to be Service tax collectors.

6.11 Therefore, the show cause notice survives on merit and the demand is liable to be 51 confirmed. However, as the equivalent amount of Cenvat credit is required to be restored in the Cenvat account subject to the condition that they pay the said amount of Rs.17,63,224/- in cash.

The aforesaid Rule 6(3)(c) was omitted with effect from 01.04.2008 and in place new provisions were introduced in the Cenvat Credit Rules, 2004 for the assessees who were providing taxable service and exempted output service but opt not to maintain separate records as prescribed under Rule 6(2) of the Cenvat Credit Rules,2004.

7. Accordingly, I now discuss the issue with regard to the demand for payment of an amount Rs. 1,35,69,665/- (as per Annexure A-2) for the period 2008-09, 2009-10 and 2010-11 equivalent to 8% (or 6%) of the value of the exempted services under option (i) of Rule 6 (3), as applicable to them which is proposed to be recovered from the said assessee under Rule 14 of the Cenvat Credit Rules, 2004 read with proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years. Before I conclude anything in this regard I would like to discuss as under.

7.1 I observe from Revenue Para-1 of the Audit Report raised by the officers of Central Excise Commissionerate- I, Ahmedabad that traders do not find a place in the Cenvat credit scheme, as it is out of the tax regime. The said assessee had availed Cenvat Credit of Rs.97,58,847/- on various input services which were directly linked to trading activities but were having no nexus with output service provided by the assessee. Therefore, the said credit did not appear admissible to the assessee and hence, the service tax paid by the assessee out of the said inadmissible cenvat credit is not proper.

7.2 It is assessee’s claim that they are entitled to avail credit in view of Rule 2(l) of Cenvat Credit Rules, 2004 and have cited various decisions in their favour with regard to eligibility of cenvat credit under Rule 2(l) “for activities in relation to business.” It was also the contention of the assessee that they are Registered dealer under Rule 9 of the Central Excise Rules, 2002 for the purpose of distributing cenvat credit of CV duty/C. Ex. duty; that trading of various chemicals imported as well as procuring the same indigenously in the capacity of Registered dealer is their business activity and in view of erstwhile Rule 2(l) of Cenvat credit Rules, 2004 as it existed upto 31.3.2011, they are entitled to avail cenvat credit. In support of the same they have cited various decisions also.

7.3 For the sake of having clarity in the matter I reproduce herewith definition of Input service defined under Rule 2(l) of CCR,2004 as under.

‘Input service' is defined in Rule 2(1) of the CCR to mean any service,-

(i) used by a provider of taxable service for providing an output service; or

(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products, upto the place of removal, and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage up-to the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation up-to the place of removal;’ 52

[emphasis provided]

7.4 I observe that eventhough Cenvat credit on services received for activities relating to business is admissible to the said assessee being a ‘Registered dealer’ as per Rule 2(l) of Cenvat Credit Rules, 2004, the recourse available to him was to pass on the said Cenvat credit availed by him on services related to trading activities in view of Rule 3(1) of the Cenvat Credit Rules, 2004 or the same could remain accumulated with him in his account. The same cannot be utilized for payment of service tax for his output services. My above findings are supported by Explanation II given below Rule 6(3) of Cenvat Credit Rules, 2004 which states 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”. Since, trading is an exempted service retrospectively as discussed in my above findings, such credit utilized by the assessee for payment of service tax on his output service of ‘Business Auxiliary Service’ etc is not in line with the law. As the assessee have used the said credit for payment of service tax on output service the charge in the show cause notice is that the said cenvat credit was common credit for taxable service as well as exempted service i.e. trading.

7.5 A close look at Rule 6 clearly reveals that sub-rule (1) of Rule 6 of the Cenvat Credit Rules states that Cenvat credit is not admissible on input service used in providing exempted service. Legitimate interest of the Revenue is that in case of exempted service, credit on inputs service should not be available. Sub-rule (2), requires separate accounts to be maintained if common inputs/input services are used for providing both exempted and taxable services. Sub- rule (3) covers the situation where the assessee does not want to maintain separate accounts and gives him options with regard to the manner in which he can discharge his tax liability and one of the options is to pay a percentage of the value of the exempted service. Sub-rule (3) provides a facility to reduce the burden on the tax payer of maintaining separate accounts, if he wishes to do so and instead pay a percentage of the value of the exempted goods. Accordingly, the provisions of Rules 6(2) and 6(3) are to be interpreted in a manner that they do not create a liability against an assessee in excess of the objective of Rule 6(1). The intention of the legislature is to ensure that the credit in respect of inputs service used in the exempted service should not be taken and accordingly the credit incorrectly taken is deniable and recoverable.

7.6 Now, considering aforesaid thoughts in mind with regard to the aforesaid Cenvat credit of Rs. 97,58,847/- availed by the said assessee on various input services during the period 2006- 07 to 2010-11, I observe that the same is required to be split in to two periods i.e. from April’2006 to March’2008 and from April’2008 to March’2011 because both the periods require different treatment in view of the changes in the Cenvat Credit Rules, 2004. For the first period i.e. April’2006 to March’2008 the Cenvat credit availed by the said assessee is Rs.32,15,593/- and for the second period i.e. April’2008 to March’2011, Cenvat credit availed by the assessee is Rs. 65,43,254/-. I have already decided the issue for the first period in para supra. I proceed to decide the issue for the second period as under:

7.7 It is forth coming from the show cause notice that for this period the department have issued show cause notice for demanding an amount of Rs. 1,35,69,665/- at the rate of 8%/6/%/5% of the value of exempted service under Rule 6(3)(i) of the Cenvat Credit Rules, 2004 on the ground that the assessee has not kept separate account as prescribed under Rule 6(2) 53 of the Cenvat Credit Rules, 2004 for the quantity of input service utilized for exempted service as well as for the taxable service.

7.8 I have critically examined the audit report as well as show cause notice. It is the observation of the audit that during the period 2008-09 to 2010-11 most of the Cenvat credit availed by the assessee was exclusively pertaining to exempted service i.e. trading activities. If it is so, how the same Cenvat credit can be allowed in view of explanation –II given below Rule 6(3) of the Cenvat credit Rules, 2004. Further Rule 6(1) of the Cenvat Credit Rules,2004 states that “ 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)”. Where as explanation-II under Rule 6(3) states that “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. “Further Rule 6(5) of the Cenvat Credit Rules,2004 states that “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.”

7.9 Thus, Rule 6(1) is applicable to those input services which are common for providing exempted service as well as taxable services.

7.10 Therefore, before Rule 6(1),(2),(3) is made applicable, it is necessary to segregate the Cenvat credit availed by the assessee according to the provisions made in this regard i.e. quantum of Cenvat credit availed on those input services which qualify under Rule 6(5) and Explanation –II below Rule 6(3). The Cenvat credit so arrived has to be excluded for the purpose of Rule 6(1).

7.11 From the details given in the show cause notice I have noticed that out of total Cenvat credit of Rs. 65,43,254/-, the Cenvat credit of Rs. 18,91,595/- is availed on Banking and other financial services, testing and scientific analysis i.e. Laboratory services which qualify under Rule 6(5) of the Cenvat Credit Rules, 2004 as detailed hereunder:

Cenvat credit under Rule 6(5) for the period 2008-09 to 2010-11 Financial Charges [zm] 1879060 Laboratory Service [zzh] 12535 Total 1891595

7.12 Further input services which are common for providing exempted service as well as taxable services and don’t qualify under Rule 6(5) of the Cenvat Credit Rules, 2004 are identified and discussed in the show cause notice are as under: 54

Particulars Apr.'08 - Oct.'08- Apr'.'09 - Oct.'09- Apr.'10 - Oct.'10 - Total (Amt in Rs.) Sep.'08 Mar.'09 Sep.'09 Mar.'10 Sep.'10 Mar.'11 Courier Charges 5,468 24,061 5,521 4,590 8,785 2,072 78,047 Professional 25,585 100,633 25,620 35,657 9,373 10,425 278,022 Charges Telephone Services 20,071 28,473 21,554 20,272 20,249 19,306 196,913

Travelling Services 865 321 2,609 1,162 6,344

Xerox Services 2,185 1,797 1,216 1,680 1,251 2,404 18,600

Total 54,174 1,54,964 53,911 62,520 42,267 35,369 4,03,205

7.13 Thus, out of total Cenvat credit of Rs. 65,43,254/-, credit of Rs. 18,91,595/- was admissible to the assessee as per Rule 6(5). Therefore, credit of Rs. 18,91,595/- has to be deducted. Accordingly, for the purpose of Explanation-II of Rule 6(3), Cenvat credit is Rs. 42,48,454/- (Rs. 65,43,254/- - Rs. 18,91,595/- - Rs. 4,03,205/-) and common Cenvat credit for the purpose of Rule 6(1) is Rs.4,03,205/-.

7.14 Therefore, Cenvat credit of Rs. 42,48,454/- is not available to the assessee in view of explanation-II below Rule 6(3). Cenvat credit of Rs. 18,91,595/- was admissible to the assessee in view of Rule 6(5) of Cenvat Credit Rules, 2004.

7.15 Now, coming to the demand of Rs. 1,35,69,665/- raised under Rule 6(3)(i) of Cenvat Credit Rules, 2004, I observe that the said demand is raised as the assessee has failed to maintain separate account for consumption of common service [viz. on which Cenvat credit availed was Rs.4,03,205/-] in exempted and taxable service as required under Rule 6(2) of Cenvat Credit Rules 2004.

7.16 Further Rule 6(3) states that “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 five per cent. of value of the exempted goods and the provider of output service shall pay an amount equal to six percent. 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).

7.17 Thus, if an assessee chose not to maintain separate accounts for such common service they shall follow either of the option provided under Rule 6(3)(i) of 6(3)(ii). Here I observe that the department have straightway chose to raise demand under Rule 6(3)(i) and no opportunity has been provided to the assessee to give an option for Rule 6(3)(ii) which is not correct in view of the following discussions. 55

7.18 Rule 6(3) provides that the assessee is entitled to avail any of the option which is suitable/ applicable to him and not at the discretion of the department as is done in the case on hand. In other words, it is the prerogative of the assessee to choose any one of the aforesaid two options. However, in the present case it is observed that demand of Rs.1,35,69,665/- against lapse of non maintenance of separate account for Cenvat of Rs.4,03,205/- has been raised as per option in Rule 6(3)(i) of CCR,2004 to the party without giving an opportunity to the assessee to exercise an option.

7.19 In this regard it is the contention of the assessee that prior to 01.04.2011 the only restriction on taking credit is specified in Rule 6 of CCR to the extent of credit attributable to exempt service/non-taxable service). Hence it is clear that there is no restriction either express or implied in the CCR to take credit attributable to non-service (i.e. trading activity) that similar views have been taken by the Hon’ble Tribunal in the Orion Appliances case (supra) wherein it has been held that trading activity is not an exempted service and hence Rule 6 of the Cenvat Credit Rules, 2004 (CCR) does not apply. There is no provision in the CCR to cover such situations. Accordingly, the only obvious solution which is legally correct is to ensure that once in a quarter or once in a six months, the quantum of input service tax credit attributed to trading activities according to standard accounting principles is reversed.

7.20 After considering carefully the aforesaid contention and the CBEC’s Circular No. 943/04/2011-CX dated 29.4.2011 clarifying about applicability of Rule 6 to trading activities for the period prior to 01.04.2011, I find that the assessee was under reasonable belief that Rule 6 was not applicable in their case and therefore, they could not have exercised option under Rule 6(3)(i) or Rule 6(3)(ii) of CCR,2004. However, when the issue was raised during audit by the department, assessee should have been asked to exercise his option in this regard, which has not been done. I find that there is no justification in demanding Rs.1,35,69,665/- under clause 6(3)(i) of CCR,2004 against common Cenvat credit of Rs.4,03,205/- without providing him an opportunity to exercise his preferred option, particularly when rules provide for the same, and trading being included in exempted service with effect from 01.04.2011, the clarification being issued by the department on 29.04.2011 and when department intended to apply the aforesaid explanation retrospectively. No prudent men having common intelligence would invite liability of Rs. 1,35,69,665/- for taking benefit of Rs. 4,03,205/- [common input service] and therefore, if an opportunity to avail option would have been given to the assessee, he would have definitely preferred option under Rule 6(3)(ii) for proportionate reversal as per formula prescribed by the department under Rule 6(3A). Further I also noticed that there was accumulated balance of Rs. 9,24,105/- as on March,2008. Further demand of Rs. 17,63,224/- (as per Annexure A-1) for the period 2006-07 to 2007-08 is already raised and confirmed as discussed in para supra. The balance of Rs.9,24,105/- was legally available to them for utilization in view of the CBEC’s circular issued from F.No.137/72/2008-CX.4 dated 21.11.2008. The text of the said circular is as under. 56

Cenvat — Utilisation of accumulated Cenvat credit F. No. 137/72/2008-CX.4, dated 21-11-2008 Government of India Ministry of Finance (Department of Revenue) Central Board of Excise & Customs, New Delhi

Subject : Utilization of accumulated Cenvat credit restricted in terms of Erstwhile Rule 6(3)(c) of Cenvat Credit Rules, 2004 - Regarding.

Kindly refer to your letter C.No. 715/Hqrs/Audit/08 dated 20-11-2008 on the subject mentioned above wherein the issue of utilization of accumulated Cenvat credit has been raised.

The matter has been examined and the following points emerged during its consideration, -

Prior to 1-4-2008 [before the amendment in Rule 6(3)] the option available to the taxpayer, under rule 6(3), was that, he was allowed to utilize credit only to the extent of an amount not exceeding 20% of the amount of service tax payable on taxable output service. However, there was no restriction in taking Cenvat credit and also there was no provision about the periodic lapse of balance credit. This resulted in accumulation of credit in many cases. W.e.f. 1-4-2008, under the amended rule 6(3), the following options are available to the taxpayers not maintaining separate accounts;

(i) Option No. 1 - In respect of exempted goods, he may pay an amount equal to 10% of the value of exempted goods; and in respect of exempted/non-taxable services, he may pay an amount equal to 8% of the value of such exempted/non-taxable service; OR (ii) Option No. 2 - He may pay an amount equivalent to Cenvat credit attributable to inputs and input services attributable to exempted goods and non-taxable/exempted services.

As stated earlier, many taxpayers had accumulated Cenvat credit balance as on 1-4-2008. The matter to be considered was whether this credit balance should be allowed to be utilized for payment of service tax after 1- 4-2008.

As no lapsing provision was incorporated and that the existing Rule 6(3) of the Cenvat Credit Rules does not explicitly bar the utilization of the accumulated credit, the department should not deny the utilization of such accumulated Cenvat credit by the taxpayer after 1-4-2008. Further, it must be kept in mind that taking of credit and its utilization is a substantive right of a taxpayer under value added taxation scheme. Therefore, in the absence of a clear legal prohibition, this right cannot be denied.

Pending issues may be decided accordingly.

7.21 Further I observe that during the period 2008-09 to 2010-11 the assessee have used Cenvat credit of only Rs.9,02,404/- for providing taxable service as is evident from the following details.

Service Tax Service Tax Service tax Total Service Gross value of C.B. of Year O.B. Credit Availed Credit Utilized paid in cash Tax Paid Taxable Service Cenvat

April’08- Sept.’08 924105 1237325 635607 0 635607 5142440 1525823

Oct.’08- March’09 1525832 945648 46442 0 46442 375740 2425038

April’09- Sept.’09 242508 1157523 0 0 0 0 1400031

Oct.’09- March’10 1400031 775649 38663 0 38663 372456 2137017

April’10- Sept.’10 2137017 1179717 77250 0 77250 750000 3239484

Oct'10- March'10 3239484 1247392 104442 0 104442 1014000 4382434

6543254 902404 0 902404 7654636 57

7.22 Therefore, during the period 2008-09 to 2010-11, Cenvat credit of Rs. 9,02,404/- utilized by the assessee is less than the amount of cenvat credit of Rs. 9,24,105/- available with him as on 31.3.2008. In other words, the said assessee had utilized only the Cenvat credit which was available as accumulated credit as on March,2008 and leads to a logical conclusion that even though during the period 2008-09 to 2010-11 the assessee had availed fresh credit of Rs. 65,43,254/- but the same had remained unutilized.

7.23 With regard to the procedures prescribed under Rule 6(3A)(a to c), I observe that the procedure has been put in place for deciding final Cenvat credit attributable to exempted service and has no other purpose. As discussed herein above, I find that since the value of exempted services for the period under question was known at the time of audit, there was no question for either provisional reversal on monthly basis as stipulated in Rule 6(3A)(a to b) or final assessment in the month of June of next financial year as per rule 6(3A)(c) of CCR,2004. Therefore, non intimation of the option under Rule 6(3)(ii) of CCR,2004 to the Superintendent having jurisdiction over the assessee, in the beginning of each Financial year is only a procedural lapse and not a substantive lapse when the department while conducting audit for the prior period was in a position to determine the proportionate credit under the formula prescribed under Rule 6(3)(ii) of CCR,2004. It is also observed that in the instant case the assessee have not complied the provisions of Rule 6(3A), however, the said rule 6(3A) is not a substantive provision but a procedural provision - Amendment having retrospective effect.

7.24 With regard to option under Rule 6(3)(i) or 6(3)(ii) and procedures prescribed under Rule 6(3A). I would like to rely on following decisions.

In the decision delivered by Hon’ble CESTAT, Principal Bench, New Delhi in their Final Order No. 459/2010-EX(PB) dated 12.07.2010 in the case of M/s J.B. Mangharam Foods Pvt. Ltd vs Commissioner of C.Ex., Indore reported at 2010(258) ELT 575 (Tri-Del). The full text of the said decision is as under.

[Order per : Justice R.M.S. Khandeparkar, President (Oral)]. - Heard the learned advocate for the appellants and the learned DR for the respondent.

2.This appeal arises from the order dated 8-1-2010 passed by the Commissioner, Gwalior. By the impugned order, the Commissioner has confirmed the demand of Rs. 7,37,92,949/- against the appellants along with penalty of equal amount.

3.The demand has been confirmed essentially on the ground that the appellants failed to maintain separate accounts in respect of the inputs and the credit earned thereon utilized in the manufacture of dutiable and non-dutiable final products.

4.The appellants are engaged in the manufacture of biscuits classifiable under Chapter Heading 1905 31 00 of the Schedule to the Central Excise Tariff Act, 1985. The appellants are availing cenvat credit facility and they are clearing final products on payment of duty as well as nil rate of duty in terms of Exemption Notification No. 3/2006-C.E., dated 1-3-2006 as amended by Notification No. 22/2007-C.E., dated 3-5-2007 in respect of the goods having MRP upto Rs. 100/- per kg. Show cause notices came to be issued to the appellants on the ground that they had failed to maintain separate accounts in relation to the inputs and the credit earned thereon as regards the utilization thereof in dutiable and non-dutiable final products as was otherwise required to be maintained in terms of Rule 6(2) of the Cenvat Credit Rules, 2004. The notices were 58

contested by the appellants including the ground that in case of non-maintenance of such records, they are entitled for the benefit as contemplated under sub-rule 3(ii) read with sub-rule (3A) of Rule 6 of the said Cenvat Credit Rules, 2004 and they cannot be saddled with the liability of an amount equal to 10% of the value of the exempted goods w.e.f. 1-4-2008.

5.The learned advocate for the appellants submitted that, in spite of above referred specific defences having been raised, the authority below ignored the same and saddled the appellants with the liability of an amount equal to 10% of the value of the exempted goods contrary to the provisions of law.

6.We have heard at length the learned advocate for the appellants and the learned DR for the respondent and perused the records.

7.The impugned order nowhere discloses consideration of the point which is sought to be canvassed on behalf of the appellants. Perusal of the reply filed by the appellants to the show cause notice read with the written submissions made on the date of hearing before the Commissioner clearly discloses that the above point was specifically raised on behalf of the appellants. In the circumstances, it was necessary for the Commissioner to consider the said point and to decide as to whether the appellants are entitled for the benefit in terms of sub-rule 3(ii) read with sub-rule (3A) of Rule 6 of the Cenvat Credit Rules, 2004 or not. The finding of the Commissioner that the only remedy is under Rule 6(3)(i) of the said Rules and thereby to pay the amount equal to 10% of the value of the exempted goods is not correct. Sub-rule (3) of Rule 6 clearly gives option to the manufacturer in this regard and once the said option is given, it will be for the manufacturer to make the choice. Once specific plea in this regard was raised, it was necessary for the Commissioner to deal with the same and arrive at correct finding on assessment of the material on record and on application of the provisions of law. Having failed to do so, the impugned order cannot be sustained and is liable to be set aside and the matter remanded to the Commissioner to decide the same afresh after hearing the parties. In the result, on the limited point, as stated above, the impugned order is set aside and the matter is remanded to the Commissioner, Indore, to decide the same afresh after hearing the parties in accordance with the provisions of law. The appeal stands disposed of accordingly.

In the decision delivered by the settlement commission, Customs and Central Excise New Delhi, Principal Bench in their final order No. F/837/CE/2009-SC(PB) dated 04.05.2009 in the case of application filed by M/s Alchem International Ltd, reported as 2009(247)ELT (Sett.Comm) wherein it was observed and held as under.

Settlement of case - Cenvat/Modvat - Common inputs used in dutiable and exempted goods without maintaining separate accounts - Records maintained enable segregation of inputs used in manufacture of exempted and dutiable goods - Sub-rule (3) of Rule 6 of Cenvat Credit Rules, 2004 not authorizes collection of new levy as percentage of value of exempted goods where records enable computation of Cenvat credit taken in respect of exempted goods - Provisions not intended as penal measure if assessee opts for non-maintenance of separate accounts - Tribunal decision in 2008 (228) E.L.T. 452 (Tribunal) holding requirement to pay amount as per rule ceases once credit reversed, applicable - Full and true disclosure made - Immunity from prosecution granted and duty, interest and penalty quantified and settled - Sections 32F and 32K of Central Excise Act, 1944. - The Bench would like to give due importance to the purpose and intent of the law and would not like to be shackled by the procedural technicalities that in a particular case may result in undue hardship not intended by law and create obstructions in the way of trade and industry. If a law can be reasonably be seen and interpreted in a manner that it facilitates the trade and industry without detriment to the legitimate interest of the Revenue and if it were apt in the given situation, the Bench would like to do so. [paras 2.1, 18, 19, 20]

Settlement of case - Objectives of settlement - Determination of liability of applicant in an equitable, just and fair manner, without giving undue importance to technicalities - If a law can reasonably be seen and interpreted in a manner that it facilitates trade and industry without detriment to legitimate interest of Revenue, the Settlement Commission to do so - Sections 32F and 32K of Central Excise Act, 1944. [para 18]

Similar view was taken by Hon’ble CESTAT, (Tri- Bang) in the identical case appeal filed by M/s Foods, Fats & Fertilisers Ltd, vs Commissioner, of C.Ex.,Guntur in their final order No. 435/2009 dated 27.04.2009 in appeal No. E/763/2008 reported as 2011(22)STR 484(Tri-Bang) wherein it was observed and held as under:- 59

Cenvat/Modvat - Inputs - Common inputs used in exempted and dutiable goods - Separate inventory for each use not kept due to technical infeasibility - However, for use in dutiable goods, credit of duty taken on pro-rata basis adopting a scientific method of calculating hydrogen gas consumed in exempted goods - Work register giving details of consumption, invoices and entries in Cenvat register of pro-rata credit - HELD : It cannot be said that separate account of receipt, consumption and inventory of hydrogen gas was not kept - Demand of 8%/10% of value of exempted products set aside especially as entire credit was not availed and there was no legal requirement of separate storage of inputs used commonly in exempted and dutiable goods - Rule 57CC of erstwhile Central Excise Rules, 1944 - Rule 6 of Cenvat Credit Rules, 2004. [para 8]

The text of para 8 of the said decision is as under.

8. We have gone through the records of the case very carefully. Two show cause notices had been issued demanding 8%/10% on the value of the exempted goods in terms of Rule 6(3)(b) of the Cenvat Credit Rules on the ground that the appellants used common inputs for dutiable and exempted products and did not maintain separate accounts of receipt, consumption and inventory of the inputs. Another point is with regard to the availment of input service tax credit on the entire tax paid by them, even though they had manufactured both dutiable and exempted products. For this violation, a penalty of Rs. 10,000/- has been imposed. Equal penalties have been imposed in respect of the demand of 8%/10% of the amount confirmed. Interest also has been demanded. The assessee had used the following inputs :- (i) Crude palm oil (ii) Hydrogen Gas (iii) Nickel Catalyst The main allegation is that they did not maintain separate accounts for receipt, consumption and inventory of the inputs as prescribed in the Cenvat Credit Rules, 2002/2004. It is seen that the appellants had not taken entire credit on the duty paid on the inputs used in dutiable and exempted products. It is on record that they had availed credit on pro-rata basis. In other words, the credit has been taken only in respect of inputs used in dutiable products. It is a fact that the appellants have stated that they could not have separate inventory for the input used in dutiable and exempted products. That does not mean that they have not maintained separate accounts for the receipt and consumption of inputs used in dutiable and exempted products. A distinction was made between maintain separate inventory and accounts of inventory referring to Rule 57CC(9) and Rule 6. Our attention was invited to the sample copies of the work register for consumption details of the inputs along with entries in Cenvat register availing pro-rata credit. The details of the availment of credit on pro-rata basis in respect of hydrogen gas was submitted in reply to the show cause notice dated 28-1-2008. Similarly in respect of Crude palm oil and Nickel Catalyst. the pro-rata availment details of credit has been given, All these shows that the appellants had not availed the entire credit for both dutiable and exempted products. Therefore allegation of the Department is not sustainable. There is indeed a separate account of the receipt and consumption of the inputs used in dutiable and exempted products. The methodology of pro-rata allocation of Hydrogen Gas utilized in the manufacture of vanaspathi (exempted final products) and stearic acid (dutiable final products) were also explained and the detailed steps and formulas were also brought on records. We have also gone through the methodology for arriving at the pro-rata allocation of hydrogen gas. This is given in Page 53 to 55 of the Paper Book. The appellants had adopted a scientific method of calculating the hydrogen gas consumed in exempted products. From the total hydrogen gas consumed, the quantity of hydrogen gas consumed for the manufacture of stearic acid is subtracted and balance of the quantity of hydrogen gas consumed in the dutiable products. The methodology adopted is scientific. In view of the above, it is not correct to say that the appellants, had not maintained separate accounts of receipt, consumption and inventory. In fact, this Bench in the case of Sri Ramachandra Paper Boards v. Commissioner of Central Excise, Visakhapatnam [2007 (218) E.L.T. 386 (Tri. - Bang.)] has held that there is no stipulation in the rules that the inputs used in both exempted and dutiable products should be stored separately. In these circumstances the demand of 8%/10% of the value of the exempted products is not at all justified. Further on going through the records, we find that the appellants had kept the Department informed of the practice adopted by them. Therefore there is no justification for invocation of longer period and imposition of mandatory penalty.

Cenvat credit - Reversal of - Input services, Common input services used in dutiable and exempted goods - Reversal made permissible by introduction of Rule 6(3A) of Cenvat Credit Rules, 2004 - HELD : Rule 6(3A) ibid not a substantive provision but a procedural provision - Amendment having retrospective effect. [para 10]

Interpretation of statutes - Literal interpretation - It is to be avoided in favour of purposeful/meaningful interpretation, if it leads to absurdity. [para 10]

Interpretation of statutes - Amendment to procedural law - They have retrospective effect. [para 10].

The text of para 10 of the said decision is as under. 60

10. The learned Advocate took the point stressed on the untenability of minority view in Nicolas Piramal (I) Ltd. case (supra). He relied on the several decisions of the Hon’ble Apex Court and also authoritative legal treatises. Inadvertently, the appellant had taken input service tax credit in the entire amount instead of pro- rata basis. When the lapse was pointed out the entire credit was reversed. In other word an act which is done has been undone. This is called a ‘Principle of Restoration’. The original position is restored, when an act done is undone. In the context of the present case, the reversal of entire input service tax credit taken amounts to not taking credit at all. In a Sales Tax case, the assessee collected the sales tax from the purchasers and later refunded to them. The Hon’ble Madras High Court considered that this would amounts not collecting the tax at all. Even in the Chandrapur Magnets case, the Hon’ble Apex Court has held that reversal of Cenvat credit would amounts not taking the credit. We further agree with the appellants that in certain circumstances, one should avoid literal interpretation in favour of the purposeful or meaningful interpretation when the literal interpretation leads to absurdity. For example, in the present case the input service credit is Rs. 3.15 lakhs and the demand raised in the show cause notice at 10% of the sale value of exempted goods would come to Rs. 16 crores. We agree with the appellants that no reasonable or prudent man would prefer to enjoy Rs. 3.15 lakhs at the cost of Rs. 16 crores. We also take note of the fact that the Rule 6 of the Cenvat Credit Rules had been amended by introducing Rule 6(3A) with effect from 1-4-2006 permitting reversal of credit attributable to be worked out in a manner prescribed. The learned Advocate expatiated much on substantive and procedural law. We are in agreement with him. The point urged was that a law which merely alters the procedure may with perfect propriety be made applicable to past as well as future transactions. We agree that the Rule 6(3A) is not a substantive provision but procedural provision. Hence we are of the view that it would be having a retrospective effect. In these circumstances, the levy of penalty is not at all justified.

The Hon’ble CESTAT in para 11 of the said decision passed following order.

11. Summing up, the availment of pro-rata credit is perfectly in order and therefore Rule 6(3)(b) cannot be applied. Reversal of input service credit amounts to not taking credit at all. Therefore we set aside the impugned order and allow the appeal with consequential relief.

7.25 In the case on hand I observe that the assessee has violated the conditions of Rule 6(3) read with Rule 6(3A) in entirety. The said assessee not only failed to decide Cenvat credit attributable to exempted service as prescribed in Rule 6(3A) but also failed to reverse the same as prescribed in the said rules. Therefore, I find that no benefit as stipulated for allowing cenvat credit on the quantity of service used in taxable service be allowed to them as prescribed under Rule 6(1),6(2) read with Rule 6(3) of CCR, 2004, the said common credit of Rs. 4,03,205/- is not allowable to them.

7.26 In light of aforesaid discussion with regard to demand of an amount of Rs. 1,35,69,665/- I find that the assessee is not entitled to Cenvat credit of

(i) Rs. 42,48,454/- (Rs. 65,43,254/- - Rs. 18,91,595/- - Rs. 4,03,205/-) pertained exclusively to trading activities in view of explanation II given under Rule 6(3)

(ii) Rs. 4,03,205/- being common credit for exempted as well as taxable service for which the assessee have not complied with the provisions of Rule 6(1), 6(2) and 6(3).

7.27 Thus out of demand of Rs. 1,35,69,665/- I disallow the Cenvat credit of Rs. 46,51,659/- and drop the balance amount of Rs. 89,18,006/-.

8. Now I decide the demand of service tax of Rs. 1,39,461/- proposed to be recovered on the services received by them in respect of Foreign Bank Charges under the category of “Banking and other Financial Services” as specified in clause (zm) of section 65 (105) of the Finance Act, 61

1994 on the taxable value of Rs. 12,02,681/- paid as Foreign Bank Charges.

8.1 In this regard I observe that the assessee in their defense reply contended that the amount of service tax along with interest on the commission has already been paid by them. However, on the issue of payment of the said amount through cash it was submitted by the assessee that the service tax on the commission is required to be paid by them under the reverse charge mechanism as per Section 66A of the Finance Act, 1994. The assessee while contending applicability Section 66A submitted that the conditions under the clauses (a) & (b) of sub section 1 of Section 66A are to be complied with, for being covered under the ambit of the said section and that between sub-clause 1(a) & 1(b) the word “and” has been used, meaning thereby that both sub section (a) & sub section (b) are to be read in conjunction. It was the assessee’s contention that sub section (a) & (b) only states that with regard to such taxable services, the service recipient himself has to be considered as the provider of service tax. The sub section does not anywhere stipulate that the amount of service tax on the commission is required to be paid in cash. Therefore, the allegation made in the show cause notice is without the authority of law.

8.2 The assessee further contended at this juncture and tried to draw my attention to the provisions of CENVAT Credit Rules, 2004. The assessee contended that Sub Rule (4) of Rule 3 of CENVAT Credit Rules provides that Cenvat Credit may be utilized for payment of any amount of service tax on any output service. The said sub rule does not provide for any restriction on payment of any service tax and accordingly the charge made in the show cause notice that the amount is required to be paid in cash is without any basis. In the aforesaid connection the assessee further contended that various Tribunals have held that the payment of tax from Cenvat Credit amount is to be considered as payment of tax in cash therefore the allegation made by the notice fails in this ground also and the amount of service tax payable by them may be considered as due compliance in the payment service on the commission paid by them to their foreign agent. In this regard, they relied on the decision of Hon’ble Tribunal in the case of Indian Acrylic Ltd. Vs. Commissioner of Chandigarh reported at 2012 (285) ELT 354.

8.2.1 In this regard, I would like to peruse Rule 3(4) of Cenvat Credit Rules, 2004 which states about the utilization of Cenvat credit, which is as under :-

Rule 3(4) The CENVAT credit may be utilized for payment of– a) any duty of excise on any final product; or b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or d) an amount under sub rule (2) of rule 16 of Central Excise Rules, 2002; or 62

e) service tax on any output service:

Thus, in view of Rule 3 (4) (e), the Cenvat credit can be utilized for payment of service tax on any output service. In other words, for the purpose of payment of service tax under Rule 2(1)(d) (iv) of Service Tax Rules, 1994, wherein the service recipient has to pay the service tax, the service involved is not considered an ‘output service’ for the service recipient. Therefore, I find that service tax cannot be paid through Cenvat Credit in such cases.

8.3 I reject the assessee’s contention because the assessee is required to pay the tax as deemed service provider. This service is not the output service of the assessee. Hence the assessee has to pay the service tax on the aforesaid service in cash and not through the cenvat account. As per Rule 5 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, the taxable services provided from outside India and received in India shall not be treated as output services for the purpose of availing credit of excise paid on any input or service tax paid on any input services under CENVAT Credit Rules, 2004. Accordingly, I order the assessee to pay service tax of Rs.1,39,461/- in cash and restore the payment of Rs.1,39,461/- made through Cenvat credit.

9. Now I proceed to decide demand of Rs. 54,216/- and Rs. 38,363/-for service tax not paid by the assessee on Commission of Rs. 4,41,494/- paid to a foreigner under the category of “Business Auxiliary Services” as specified in clause (zzb) of section 65 (105) of the Finance Act, 1994 during the period 2006-07 & 2008-09 .

9.1 In this regard, I observe that on being pointed out by the audit, the assessee have paid the service tax as under. As the payments have been made from Cenvat credit account, It has been proposed in the show cause notice to recover in cash the Service tax of Rs. 54,216/- and 38,363/- paid by the assessee from Cenvat credit account.

Period Taxable Amount in Rs. Mode of payment Entry No./Challan amount No. / date 2006-07 4,41,494/- 54,216/- Cenvat credit 00104/28.05.2011 & 2008-09 2009-10 3,72,456/- 38,363/- Cenvat Credit 26,218/- Cash as Interest 06.10.2011

9.2 As already discussed in para 8.2.1, Rule 3(4) of Cenvat Credit Rules, 2004 provides for the utilization of Cenvat credit, according to which the Cenvat credit can be utilized for payment of service tax on any ‘output service’. In case of reverse charge mechanism as the service recipient is paying the service tax, service received by him cannot be termed an ‘output service’. Therefore, I find that service tax cannot be paid through utilization of Cenvat Credit in such 63 cases. I therefore find that the said amount of Rs.54,216/- and Rs.38,363/- is required to be paid in cash. However, as the amount of Rs.54,216/- and Rs.38,363/- have been debited from Cenvat account, the same is allowed to be restored. Further, as proposed in the show cause notice, I appropriate Interest of Rs.26,218/- against the interest liability arising out of this.

10. Now I proceed to decide demand of Service tax of Rs. 8,10,686/- for the period 2006-07 and Rs.36,19,143/- for the period 2007-08 to 2010-11 under the category of Business Auxiliary service.

10.1 In the aforesaid connection the assessee contended that the SCN proposes to recover service tax on the service charges alleged to have been provided by them on the differential value of high seas sale and purchase of imported goods by not showing the price of service component separately but the allegations are not backed by any evidence. It was contended by the assessee that it is obligatory on the part of the department to have brought on record evidence either documentary or oral from the clients for whom the said goods were alleged to have been procured. On the contrary, they have submitted documents from various buyers, who have clearly stated that they had purchased the goods from them on high seas sale basis and the consignment is purchased on case to case basis. In the aforesaid connection the assessee further contended that the term ‘procure’ means to receive or to obtain whereas in case of purchase, price or the consideration paid is the main criteria. In case of procurement, the consideration may or may not have been paid, but in order to cover a transaction under the ambit of purchase the consideration has to be paid and only when the consideration is paid the transaction is considered as purchased. The assessee contended that in the SCN no evidence has been brought on record to prove that the high sea sale was without any consideration and therefore the allegation of procurement for client who uses as an input fails.

10.2 In the aforesaid connection the assessee further contended that the high seas sale is as well recognized type of sale in the course of international trade. Even the Foreign Trade Policy, issued by the Government of India, recognizes high seas sale as one of the modes of sale. In any high seas sale, the two main ingredients are high seas and sale. The term high seas means before entering into the territorial jurisdiction of India and the sale is for consideration. In the present case the sale effected for a consideration by transferring the documents like bill of lading endorsing in the name of the buyer. In the high seas sale contract, the consideration had been shown as CIF + 2% and that is the purchase price for the high seas buyer. The high seas seller, after endorsement of documents in case of high seas sale, ceases to have any liability on the goods and all the statutory formalities including payment of taxes is to be carried out by the high seas buyer. The sale by the original importer to high seas buyer is always on principal to principal basis. Therefore, in all cases the transaction between the original importer and the high seas buyer is for the sale of goods on a price which is minimum CIF 2%. The 2% element has been fixed as the minimum amount of the CIF to be added. The aforesaid addition of 2% of the CIF value has been adopted as thumb rule for the assessment of arriving at assessable value for 64 the purpose of customs duty and the same is accepted by the Customs department on which the duty is charged accordingly.

10.3 In the aforesaid connection the assessee further contended there is another method, whereby, the goods are imported in the name of the original importer and are warehoused under section 58 of the Customs Act, 1962. Thereafter, the importer enters into an agreement with the prospective buyer wherein, he transfer the ownership of the goods under an agreement. In the said agreement the sale price of the goods are shown. The assessee contended that in the case of transfer of ownership agreement, the goods are in the warehouse under the control of Customs Authorities / the custodian appointed by the Customs authorities. On execution of transfer of ownership agreement, the buyer steps into the shoes of the original importer, covering all the statutory formalities for clearance and the payment of duty of customs and other charges are undertaken by him. The assessee contended that the above two modes are generally acceptable in the normal course for transfer of imported goods by way of sale. The assessee further contended that in case of sale of goods there is no service element, no service charges is required to be paid and hence the allegation of short payment of duty is without any substance and the allegation is required to be withdrawn.

10.4 In their defense reply the assessee submitted that in the said show cause notice, it has been alleged that they were raising the sales invoice equal to CIF 2% and where also raising debit note for certain value on which the service tax was paid by them. In this connection the assessee contended that prior to November, 2006 they were raising invoice on CIF 2% and certain amount was recovered through debit note and on which service tax was paid and it was duly reflected in their ST-3 returns. However, it was advised to them that such method of raising debit note and invoice does not appear to be correct and therefore November 2006 onwards, they started raising a consolidated retail invoice in the entire amount for the purpose on which the Customs duty was paid. In their defense reply the assessee also further submitted that in the case of import of goods, the taxable event is the time when the goods enter the territorial waters of India and is continued till the goods gets mixed with the land mass in India. In case of High seas sale, the contract for sale of goods is made before the goods enter the territorial water of India and in case of goods stored in the warehouse by agreement of transfer of ownership. In both cases the goods are sold when the import is not complete. In their defense reply the assessee also submitted that it is well settled that if the department intends to charge service tax on service or services, onus is on the department to prove the classification of that service and its taxability. In the present case, the subject notice does notice at all reveal, as to which services were provided by them during the course of high seas sale which attracted service tax. The department has failed to classify and specify the service on which the service tax was required to be paid, the entire action of the department in demanding service tax is based on mere presumptions and assumptions not supported by facts and therefore any action on such unsupported facts cannot be taken against them. In support of above contention, they crave to refer and to rely on the decision in the case of Jetlite ( India) Ltd. Vs Commissioner reported at 2011 (21) STR 119 ( Tri. Del.). 65

10.5 In their defense reply the assessee further submitted that the difference between a contract and agreement is no sequence with the nature of the transaction, which is not in dispute. The assessee submitted that the nature of transaction is that documents were transferred by them to the prospective buyers on principal to principal basis before the goods enter into Indian Territorial Water of India and thereafter all the statutory obligations were compiled, based on the said endorsed documents by the buyer and therefore the allegation that the high seas sales contract is not a contract but an agreement, is no sequence and cannot be made the basis of determining for any service tax liability upon them.

10.6 It is the case of the department that the assessee has earned income called high sea sales commission on the goods imported / procured by them and sold to other on the high sea sales basis. The high sea sales commission is included in customs value for the purpose of paying all / aggregate of customs by the high sea sales buyer (who now becomes the importer) when he files the bill of entry for its clearance by the customs. This does not mean the assessee, who is based in India, is not liable to pay the service tax on commission earned by them under the category of Business Auxiliary Service. The assessee was aware of it and was paying service tax on the earlier occasion but has stopped paying the service on the wrong interpretation of law. In respect of the high sales the assessee is providing the service as “commission agent” to its clients and the commission earned is liable to service tax under the category of Business Auxiliary Service”.

10.7 In this regard I observe that up to November, 2006 it is a fact that the assessee was charging certain amount under debit notes for goods sold on ‘High seas sales ’; that it was the assessee’s contention that when the BAS service was introduced, in the year 2003/2004, they were under the impression that they were liable to pay service tax on the such amount collected and they were discharging service tax on such transactions up to November, 2006 and subsequently they realized that since, amount charged from the customers under debit notes was not in relation to rendering any service, they were not liable to pay service tax on the said amount and therefore they stopped paying service tax on such amounts.

10.8 In this regard I find that High sale transactions are on principal to principal basis. The imported cargo loaded from the port of importation along with bill of lading subsequently the said consignment is sold on high sea sales before the vessels touch to the Indian territory till that time the services hired by the assessee are for self only. When goods sold to the buyers on high sea sale basis, subsequent services were hired by the buyer of the goods. Therefore I find that there is no service elements are involved in the entire process by the assessee to the buyer. Further, Custom clearance and duty payment etc. is the responsibility of the buyer of the goods. The invoices raised for such sale was consideration for such sales. As regard the additional 66 consideration recovered under debit notes by them from their buyers on high sea sale, I find that it is not brought on record that the said amounts were recovered by them towards rendering of any service, however such charges charged if any are related to the cost of import by the assessee and is not towards rendering of any services. In absence of such evidence, it cannot be presumed that the amount so recovered is liable to service tax. Further, it is also not brought on record that the assessee had acted as an agent on some body’s behalf. Under the circumstances, I find no justification in confirming such demand which is just based on assumption.

10.9 Further, in this regard I observed that as a general practice the customs authority in the case of High sea sales, adding 2% or 3% of CIF value in the assessable value for the valuation of goods imported and sold in High sea sales, such charges are being added as “high sea sale service charges” as is evident from the circular No. 32/2004-Cus dated 11.05.2004. the text of the said circular is as under.

Valuation (Customs) — High sea sales charges, includibility of — Clarifications Circular No. 32/2004-Cus., dated 11-5-2004 F.No. 467/08/2004-Cus.V Government of India Ministry of Finance (Department of Revenue) Central Board of Excise & Customs, New Delhi Subject : Customs Valuation Rules, 1988 - Determination of assessable value for goods sold on high seas - Regarding.

Representations have been received on the Ministry to clarify the manner of determining the value of imported goods imported on high-sea-sales basis. As per the existing practice in Mumbai Custom House, the “high-seas-sales-charges” are added to the declared CIF value in terms of Public Notice No. 145/2002, dated 3-12-2002. Such “high-seas-sales-charges” are taken to be 2% of the CIF value as a general practice. In case the actual high-sea-sale contract price is more than “the CIF value plus 2%”, then the “actual contract price” paid by the last buyer is being taken as the value for the purpose of assessment. In some of the custom houses, however, audit has raised objection stating that if, in a particular transaction, there were about three/four high-sea-sales, then high-sea-sales service charges @ 2% has to be added to the CIF value, for each such transaction.

2. The matter has been examined taking into account the Advisory Opinion 14.1 of the GATT. Valuation Code, which stipulates that if the importer can demonstrate that the immediate sale under consideration took place with a view to export the goods to the country of importation, then such transaction would constitute an international transfer of goods. The later transaction which led to the import would be the relevant transaction for assessment and Rule 4 of Customs Valuation Rules, 1988 would apply. Hon’ble Supreme Court, in the case of M/s. Hyderabad Industries Limited [2000 (115) E.L.T. 593 (S.C)] have also upheld that the service charges/high-seas-sales-commission (‘actuals) are includable in the CIF value of imported goods. Therefore, it is clarified that the actual high-seas-sale-contract price paid by the last buyer would constitute the transaction value under Rule 4 of Customs Valuation Rules, 1988 and inclusion of commission on notional basis may not be appropriate. However, the responsibility to prove that the high- seas-sales-transaction constituted an international transfer of goods lies with the importer. The importer would be required to furnish the entire chain of documents, such as Original Invoice, high-seas-sales- contract, details of service charges/commission paid etc., to establish a link between the first international transfer of goods to the last transaction. In case of doubt regarding the truth or accuracy of the declared value, the Department may reject the declared transaction value and follow the sequential methods of valuation under Customs Valuation Rules, 1988.

10.10 It is the contention of the assessee that as the customs authorities were adding the said 2% of CIF for the valuation of such sales, they charge the said amount from the buyer who buys their goods on high sea sales. The said amount is also collected by them under the debit notes. 67

10.11 Here I also note that the said charges collected by the assessee were not for providing any services. However the assessee construed that such charges were liable to service tax, accordingly they were paying service tax. However, they stopped to pay service tax with effect from November,2006 onwards. In this regard I have also gone through the following decision passed by CESTAT, WZB, Mumbai in the case of M/s Indian Oil Corporation vs Commissioner of Central Excise, Goa. In the said decision it was held that” Since Facilitation charges and additional handling charges are included in assessable value, they are not liable for Service Tax – Prima facie case in favour – Pre-deposit waived and Stay granted: CESTAT.” The text of the said decision is reported as 2012-IST-67-CESTAT-MUM is as under:-

IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL WEST ZONAL BENCH, MUMBAI

Application No.ST/Stay-2209/2010 Appeal No.ST/677/2010

Arising out of Order-in-Original no. 1/Commissioner/Goa/ST/4/10-11 Dated: 31.8.2010 Passed by the Commissioner of Customs, Central Excise & Service Tax, Goa

Date of Decision: 06.01.2012

INDIAN OIL CORPORATION LTD

Vs

COMMISSIONER OF CENTRAL EXCISE, GOA

Appellant Rep by: Mr M H Patil, Adv. Respondent Rep by: Mr V K Singh, Additional Commissioner (AR)

CORAM: Ashok Jindal, Member (J) P R Chandrasekharan, Member (T)

Since Facilitation charges and additional handling charges are included in the assessable value, they are not liable for Service Tax – Prima facie case in favour – Pre-deposit waived and Stay granted: CESTAT [ para 6, 7]

Cases cited -

Pratap Singh & Sons - 2006-IST-391-CESTAT-MUM …para 3

Tata Power Co. Ltd. - 2008-IST-852-CESTAT-BANG …para 3

Madras Hire Purchase Association - 2009-IST-21-HC-MAD-ST …para 4

Association of Leasing and Financial Service Companies - 2010-IST-02-SC-ST-LB ...para 4

ORDER NO.S/108/2012/CSTB/C-I

Per: Ashok Jindal:

The appellant M/s Indian Oil Corporation Ltd., is seeking waiver of pre-deposit of Rs.10,55,03,909/- along with interest and various penalties under the Finance Act, 1994.

2. The facts of the case are that M/s Indian Oil Corporation Ltd. (IOCL) is having an agreement of sale with M/s Zuari Industries Ltd. (ZIL) for sale of naphtha and Furnace oil on high seas sale basis. In pursuance to the agreement entered into between the parties, M/s IOCL imported the above goods and sold the same on High Seas Sale bass to M/s ZIL. In the agreement of sale there is bifurcation given to arrive at the value of the goods and as per the agreement the applicant has to charge Rs.25 PMT on account of additional handling charges and 2.5% of CIF value on account of facilitation charges. The department is of the view that these are the services rendered by the applicant during the sale of goods on High Seas Sale 68

basis, therefore, these services are liable to Service Tax under the category of ‘Business Auxiliary Service'. A show cause notice was issued and service tax demands were confirmed by the impugned order along with interest and various penalties. Against the said order, the applicant are seeking waiver of pre-deposit at this stage.

3. Shri M.H.Patil, learned counsel for the applicant appeared and submitted that the transaction between the parties is total sale transaction on principal-to-principal basis and in this case they have entered into an agreement with M/s ZIL for sale of Naphtha and Furnace oil. As per the agreement, the goods were cleared provisionally and as the final product was exempt no duty was to be paid but assessable value was arrived at on the basis of the agreement. He further submitted that in the case of Tata Power Co. Ltd. vs. Commissioner of Customs, Mangalore 2009(240)ELT 742(Tri-Bang) = ( 2008-IST-852-CESTAT-BANG ) the charges on account of facilitation charges and additional handling charges are held to be includable for arriving at the assessable value. He further submitted that in the case of Pratap Singh & Sons vs. Commissioner of Central Excise, Mumbai-I 2007(5)STR 389(Tri-Mumbai) = ( 2006-IST-391-CESTAT- MUM ) it was held that when there is an agreement for sale and purchase of the product and element of service is absent no service tax can be charged on the services included in the value of the goods. He further drew our attention in their own case wherein the Commissioner of Central Excise (Appeals), Mangalore, in order-in-appeal no. 206/2007-CE passed on 29.11.2007 has taken the same view and the same has been accepted by the department. Therefore, he prays that waive of be granted.

4. On the other hand, Shri V.K.Singh, learned AR opposed the stay application and submitted, in this case, the issue before this Tribunal is that whether the services rendered by the applicant to M/s ZIL during the course of their transaction of sale of goods are taxable or not and to support this contention he placed reliance on the judgments of Madras Hire Purchase Association vs. Union of India 2009(16)STR 13(Mad.) = ( 2009-IST-21-HC-MAD-ST ) and Association of Leasing and Financial Service Companies vs. Union of India 2010 (20)STR 417(SC) = ( 2010-IST-02-SC-ST-LB ) . The learned AR further submitted that whether the activity undertaken by the applicant during the course of execution of their agreement are services are not, it is an admitted fact that the facilitation charges and additional handling charges are in the nature of services rendered by the applicant to their buyer. Therefore, service tax is leviable.

5. Heard both the sides.

6. After hearing both the sides and after perusing the records and various judicial pronouncements, we find that, in this case, there is an agreement for sale of the goods imported by the applicant on High Seas Sale basis to M/s ZIL. M/s ZIL has included facilitation charges and additional handling charges in the assessable value as per the agreement. Prima facie, we are of the view that these charges, are included in the assessable value, therefore, they are not liable for service tax.

7. In view of the above observation, we find that the applicant has made out a strong prima facie case in their favour. Accordingly, we waive the requirement of pre-deposit of the entire amount of service tax, interest and various penalties under the Finance Act, 1994 and stay demand thereof during the pendency of the appeal.

(Dictated in Court)

10.12 In the aforesaid case M/s Indian Oil Corporation Ltd. (IOCL) was having an agreement of sale with M/s Zuari Industries Ltd. (ZIL) for sale of Naphtha and Furnace oil on high seas sale basis. In pursuance to the agreement entered into between the parties, M/s IOCL imported the above goods and sold the same on High Seas Sale basis to M/s ZIL. In the agreement of sale there is bifurcation given to arrive at the value of the goods and as per the agreement the applicant has to charge Rs.25 PMT on account of additional handling charges and 2.5% of CIF value on account of facilitation charges.

10.13 In the aforesaid case it was the view of the department that these services rendered by the applicant are liable to Service Tax under the category of ‘Business Auxiliary Service'. The demand notice was confirmed along with imposition of interest and various penalties. For the record, the amount involved is Rs.10.55 Crores. 69

Against the said order, the applicant is before the CESTAT and seeks waiver of pre-deposit.

It was submitted that –

++ The transaction between the parties is sale transaction on principal-to-principal basis;

++ As per the agreement, the goods were cleared provisionally and as the final product was exempt, no duty was to be paid but assessable value was arrived at on the basis of the agreement.

++ Reliance is placed on the CESTAT decisions in -

++ Pratap Singh & Sons = (2006-TIOL-1646-CESTAT-Mum) wherein it is held that when there is an agreement for sale and purchase of the product and element of service is absent no service tax can be charged on the services included in the value of the goods; that in their own case, the Commissioner of Central Excise (Appeals), Mangalore, in order- in-appeal dated 29.11.2007 has taken the same view and the order has been accepted by the department.

++ Tata Power Co. Ltd. = (2008-TIOL-2682-CESTAT-Bang) where it is held that the charges on account of facilitation charges and additional handling charges are held to be includable for arriving at the assessable value.

The Revenue representative opposed the Stay Application by relying on the judgments of Madras Hire Purchase Association = (2009-TIOL-338-HC-Mad-ST) and Association of Leasing and Financial Service Companies = (2010-TIOL-87- SC-ST-LB) and submitted that since the facilitation charges and additional handling charges are in the nature of services rendered by the applicant to their buyer, service tax is leviable.

The Bench observed –

“6. After hearing both the sides and after perusing the records and various judicial pronouncements, we find that, in this case, there is an agreement for sale of the goods imported by the applicant on High Seas Sale basis to M/s ZIL. M/s ZIL has included facilitation charges and additional handling charges in the assessable value as per the agreement. Prima facie, we are of the view that these charges, are included in the assessable value, therefore, they are not liable for service tax.”

Holding that the applicant has made out a strong prima facie case in their favour, pre-deposit was waived and the recovery of the adjudged dues was stayed.

(See 2012-TIOL-180-CESTAT-MUM in 'Service Tax')

10.14 Thus, I find that addition of 2% or 4% of CIF charges by the customs authorities in the assessable value of the goods sold on high sale basis for charging customs duties at the time of customs clearance can not be charged to service tax. Further it is noticed that the assessee was recovering said 2% of CIF value by way of debit notes on which though they were not required to pay service tax they had paid service tax up to November, 2006. Thereafter they had stopped to recover the said amount and stopped to pay service tax on the same. In this regard vide their letter dated 05.12.2006 they had intimated to the Range officer, Service tax having jurisdiction over them. Therefore, demand of service tax of Rs.8,10,686/- (as per Annexure D-1) pertaining to November, 2006 onward [2006-07] is not sustainable and requires to be dropped.

10.15 As regard the demand of Rs. 36,19,143/- (as per Annexure D-2) for the period from 2007-08 to 2010-11, the assessee had not recovered such amount, and instead had issued invoice for High sea sales inclusive of their profit. It is the contention in the show cause notice that the said 2% of CIF value was included by the assessee in the sales price shown in the invoices, it was further alleged in the show cause notice that as per the agreement the said assessee was preparing documents which comprises of payment of cost of documents- full payment of cost of documents comprising of CIF value, L/c opening / amendment charges, bank interest, 70 commission & other charges for retirement of documents to be made by the actual user to them. The said expenditures are towards recovery of cost and not for rendering any service by the assessee. The assessee is importer of goods and not provider of services such as CHA, Banking and Other financial services. The recovery on account of CIF value, L/c opening/amendment charges, bank interest, commission [ 2% or 4% added by the customs] & other charges for retirement of documents to be made by the actual user to them are nothing but the contributors of cost of import of goods before the same was sold in high sea sales. Any business men who is trading goods will naturally recover all input costs and will ensure that he do not loss money in the transaction. It is facts on record that the assessee is required to open LC for import of goods, that they had to deposits certain amount for opening of LC for such imports, that they are borrowing finance from the bank and by that they had to pay interest on borrowings, that banks charges for amendment if any taken place subsequent to opening of LC. Therefore I find that whatever charges which are alleged to have been recovered by the assessee is nothing but cost of Import of goods, which was sold on high sea sale basis on certain amount of profit. I find that even if I assume that the said 2% of CIF is included in the sale price shown in the invoices, the said demand is also not sustainable as discussed above. From the submission of the assessee I observe that such transactions are on principal to principal basis. The assessee is not an agent of the buyer who buys their goods on high sale basis. There is nothing on record that the assessee had acted as an agent of buyer of goods on high sea sale. Therefore the allegation in the show cause notice that the assessee had procured inputs on behalf of the clients does not survives and accordingly demand of Rs. 36,19,143/- was worked out as shown in the Annexure D-2 of the show cause notice does not survives on merits.

11. Now I decide the demand of Rs.1,54,500/- demanded under the category of Renting of Immovable properties.

11.1 In this regard it was submitted by the assessee that the service tax on renting of immovable property was enacted from 1-6-2007. However, the said service was challenged in various High Courts and all the High Court’s unanimously held that service tax on the renting of immovable property is not payable. However, by a retrospective amendment in the Finance Act,2010 scope of renting of immovable property was enlarged and the service tax on renting of immovable property was required to be paid. Here, it is submitted that the vires of renting of immovable property service was challenged and its constitutional validity has been upheld by the Hon’ble High Court of Punjab and Haryana. In the matter before the Hon’ble Supreme Court on this issue, the Hon’ble Supreme Court has remarked that the service tax is payable on renting of immovable property and there would be no stay on recovery of service tax payable on the renting of immovable property after October, 2011 and the issue of taxability has still not been decided. But, the vires on the constitutional validity have been upheld, it was decided by them that the amount of service tax payable on renting of immovable property be paid and accordingly the said amount was paid by them [under protest] with interest. So there is no issue to decide. 71

11.2 Therefore, the assessee’s contention for payment of service tax under protest is not acceptable and the said demand is required to be confirmed by dislodging their protest.

11.3 Further I observe that the assessee have discharged service tax of Rs.1,54,500/- under protest vide Cenvat credit a/c. E. No. 00103 dated 28/05/2011 under protest, along with Interest of Rs. 33,334/- challan dated 06/10/2011.

11.4 In this regard, I dislodge the protest and appropriate Rs. 1,54,500/- against the demand of service tax under the category of Renting of Immovable Property. The said assessee had also paid the interest of Rs. 33,334/- vide challan dated 06/10/2011 I also appropriate the said Interest towards the Interest payable on the said demand of service tax.

11.5 As regard the penalty for non payment of service tax of Rs.1,54,500/- I observed that the Finance Act, 2012 inserted a new Section 80(2) in the Finance Act, 1994 to waive penalty for Service Tax on renting of immovable property if the tax is paid with interest by 27th November 2012.

The new Section 80(2) reads as:

Notwithstanding anything contained in the provisions of section 76 or section 77 or section 78, no penalty shall be imposable for failure to pay service tax payable, as on the 6th day of March, 2012, on the taxable service referred to in sub-clause (zzzz) of clause (105) of section 65, subject to the condition that the amount of service tax along with interest is paid in full within a period of six months from the date on which the Finance Bill, 2012 receives the assent of the President.

The Budget Memorandum explained this provision as,

RENTING OF IMMOVABLE PROPERTY SERVICE:

Constitutional validity of the levy of service tax on renting of immovable property has been the subject matter of litigation leading to pronouncement of court judgments favorable to revenue, including those of Honourable Delhi High Court and Honourable Supreme Court. Taking an overall view, the Government has decided to waive the penalty for those taxpayers who pay the service tax due on the renting of immovable property service (as on 06.03.2012), in full along with interest. For this purpose, a new section 80A [sic - this is 80(2)] is being inserted in the Finance Act, 1994. This scheme of penalty waiver will be open only for a period of six months from the date of enactment of the Finance Bill, 2012.

The Finance Bill was enacted on 28th May 2012 and thus the scheme is open till 27th of November 2012.

11.6 In the case on hand I find that the assessee had paid said service tax on 28.05.2011 along with Interest on 06.10.2011 i.e. the assessee had paid the said amount even prior to aforesaid provisions have been made they are not liable to penalty for this payment.

12. Thus corollary of findings of entire demand stands as under:-

Demand of Amount Dropped Sr. Annexur service tax/ Confirme amount in Interest Penalty Remarks No. e to SCN amount in d in Rs. Rs. Rs. 72

Yes To be paid in cash under and Cenvat of 1 A-1 1763224 1763224 0 Yes Rule 15 Rs.17,63,224/- to of CCR, be restored 2004 Yes under Common cenvat 2 A-2 13569665 4651659 8918006 Yes Rule 15 credit disallowed of CCR, 2004 Yes To be paid in cash under and Cenvat of 3 B 139461 139461 0 Yes section Rs.139461/- to be 76,77 and restored 78 Yes under 54216 54216 0 Yes section Confirmed and to 76,77 and be paid in cash and 78 cenvat of Rs. 4 C Yes 54,216/- + Rs. under 38,363/- to be 38363 38363 0 Yes section restored 76,77 and 78

810686 0 810686 No No D-1 5 and D-2 3619143 0 3619143 No No

Renting No. of under Immovab section 6 154500 154500 0 Yes le 80(2) of Property the service FA,1994 GT. 20149258 6801423 13347835

12.1 With regard to imposition of penalties and recovery of Interest the issue is discussed as under.

12.2 As discussed above, I had confirmed the demand of Rs. 17,63,224/- and held that the said amount is liable to be paid in cash in view of provision in erstwhile Rule 6(3)(c) of the Cenvat credit Rules, 2004. In this regard I observed that the assessee had utilized Cenvat credit in excess of 20% of service tax liability and thereby violated the provisions of Rule 6(3)(c) of the Cenvat credit Rules, 2004 I held them liable to penalty under Rule 15 of the Cenvat Credit Rules, 2004. Further, the said amount was not paid in cash by the due date, on which the same was required to be paid , I hold that they are liable to pay Interest thereon. 73

12.3 As regard to demand of Rs. 1,35,69,665/- as discussed in para supra, I have confirmed an amount of Rs. 46,51,659/- . In this regard I observed that the assessee have grossly violated the provisions of Rules, 6(1),6(2) and 6(3) of Cenvat Credit Rules,2004, I held them liable to penalty under Rule 15 of Cenvat Credit Rules, 2004. As they had failed to pay the said amount, I held them liable to pay Interest under Rule 14 of the Cenvat Credit Rules, 2004 read with section 73(1) of the Finance Act,1994.

12.4 As regard to demand of Rs. 1,39,461/- I held that the said amount is liable to be paid in cash which was required to be paid in cash in terms of Rule 5 of Service tax [Import of service from outside India and received in India] Rules,2005. I observed that the assessee had violated the provisions of said Rules, I held them liable to penalty under Section 78 of the Finance Act, 1994. As they failed to pay service tax in cash by due date, I held them liable to pay Interest in terms of Section 75 of the Finance Act,1994.

12.5 As regard to recovery of service tax of Rs. 54,216/-+ Rs.38,363/- in cash, I held that the said amount is liable to be paid in cash which was required to be paid in cash in terms of Rule 5 of Service tax [Import of service from outside India and received in India] Rules,2005. I observed that the assessee had violated the provisions of said Rules, I held them liable to penalty under Section 78 of the Finance Act,1994. As they failed to pay service tax in cash by due date, I held them liable to pay Interest in terms of Section 75 of the Finance Act,1994.

12.6 As regard to demand of service tax of Rs.1,54,500/- under the category of Renting of Immovable Property, I find that the assessee had paid the said amount along with Interest, and in view of section 80(2) of the Finance Act,1994 introduced vide Finance Act,2012, the assessee is entitled for waiver of penalty and as they had discharged their liability along with Interest even before the introduction of the said section. Accordingly I held that no penalty is imposable for this amount of service tax, and the said amount of service tax and Interest are liable to be appropriated.

13. As regard to suppression of facts I find that the said assessee has neither disclosed the details/data in their ST-3 returns nor has submitted any such documents along with the ST-3 returns or at any other point of time. The ST-3 returns are arithmetical in nature and the details utilization of cenvat credit etc on exempted services cannot be ascertained from the returns. The liability to pay service tax under reverse mechanism as well as the liability to pay service tax only came to the notice of the department on scrutiny of Financial Books of Accounts and agreements and contracts. The short payment of service tax and wrong utilization/availment of Cenvat credit been detected during the course of audit, and the same would have gone undetected if the records were not audited. Therefore, there is definite element of suppression of facts on the part of the said assessee. All the above acts of contravention on the part of the said assessee 74 appear to have been committed by way of suppression of facts with an intent to evade payment of service tax and, therefore, the service tax not paid by the assessee is required to be demanded and recovered along with interest from them under the proviso to Section 73 (1) of the Finance Act, 1994 by invoking extended period of five years. All these acts of contravention of the provisions of Section 67, Section 68 and Section 70 of the Finance Act, 1994 read with Rule 6 and Rule 7 of the Service Tax Rules, 1994; Rule 6 and Rule 9 of the Cenvat Credit Rules, 2004 are punishable under the provisions of Section 76 and Section 78 of the Finance Act, 1994 as amended time to time along with Rule 15 of the Cenvat Credit Rules, 2004. In addition to the contravention, omission and commissions on the part of the said assessee as stated in above the assessee has willfully suppressed the facts, nature and value of service provided and received by them with an intent to evade the payment of Service Tax for the services provided and received by them, rendering themselves liable for penalty under Section 78 of the Finance Act, 1994 along with Rule 15(3)/15(4) (for the respective period) of the Cenvat Credit Rules, 2004.

14. As regards imposition of simultaneous penalty, I place my reliance on the judgment of Hon’ble High Court of Kerala in the case of Assistant Commissioner of Central Excise v. Krishna Poduval as reported at [2006] 3 STT 96 (KER) which is aptly applicable to the present case. I find that the imposition of penalty under sections 76 and 78 of the Act is for nonpayment of service tax and suppression of value of taxable service respectively which are two distinct and separate offences attracting separate penalties. I find that the said assessee has committed both the offences and therefore penalties under section 76 and 78 of the Finance Act, 1994 are imposable on the said assessee for the period up-to 9.5.2008.

15. The assessee is also liable to pay interest at the appropriate rates for the period from due date of payment of Service Tax till the date of actual payment as per the provisions of section 75 of the Finance Act, 1994.

16. In view of the above I pass the order as follows:

ORDER

(i) I confirm the demand of service tax amounting to Rs. 17,63,224/- (as per Annexure A-1) for the period from 2006-07 to 2007-08 as discussed hereinabove, which is equivalent to the CENVAT credit utilized in excess of the permissible limit of 20% of the amount of service tax payable as per Sub-Rule (3) (c) of Rule 6 of the Cenvat Credit Rules, 2004 and the same is ordered to be recovered from the assessee in Cash, under Rule 14 of the Cenvat Credit Rules, 2004 read with proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years.

(ii) I confirm the demand of Rs.46,51,659/- against an amount of Rs. 1,35,69,665/- (as per Annexure A-2) as discussed hereinabove for the period 2008-09, 2009-10 and 2010-11, which is equivalent to common input service wrongly availed by contraventions of Rule 6(1) of Cenvat Credit Rules, 2004 under Rule 14 of the Cenvat Credit Rules, 2004 read with 75

proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years.

(iii) I confirm the Services received by the assessee in respect of Commission paid to a foreigner be considered as taxable service under the category of “Business Auxiliary Services” as specified in clause (zzb) of section 65 (105) of the Finance Act, 1994 as amended and the amount of Rs. 4,41,494/- paid as Commission to a foreigner be considered as taxable value and confirm that the Service Tax amounting Rs. 54,216/- (Rs. 52,979/- as Service Tax and Rs. 1,237/- as Education Cess) (as per Annexure-C) paid for the period 2006-07 & 2008-09 through Cenvat credit account E. no. 00104 dated 28/05/2011 be recovered in Cash from them under Section 73 (1) of the Finance Act,1994, invoking the larger period of five years as discussed hereinabove. I also order that the amount of interest of Rs. 26,218/- already paid vide the challan dated 06/10/2011 be adjusted towards the demand of Interest. I also confirm the Service Tax amounting to Rs. 38,363/- (Rs. 37,246/- Service Tax and Rs. 1,117/- Education Cess) on the Commission amount of Rs. 3,72,456/- for the year 2009-10 which is paid through Cenvat credit account be recovered in Cash from the assessee under proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years.

(iv) I also drop the demand of service tax of Rs. 8,10,686/- (Rs. 7,94,790/- as Service Tax and Rs. 15,896/- as Education Cess) (as per Annexure D-1) for the year 2006-07 and Rs. 36,19,143/- (Rs. 35,13,731/- as Service Tax and Rs. 1,05,411/- as Education Cess) (as per Annexure D-2) for the period from 2007-08 to 2010-11 in respect of High Seas Sales demanded under the category of “Business Auxiliary Services” as specified in clause (zzb) of section 65 (105) of the Finance Act, 1994 as amended

(v) I confirm the Services rendered by the assessee in respect of rent income be considered as taxable service under the category of “Renting of Immovable Property Service” as defined under Section 65 (105) (zzzz) of the Finance Act 1994, as amended, and the amount of taxable value of Rs. 15,00,000/- received as payment/recovered by them from their customers be considered as taxable value and confirm the demand of Service Tax amounting to Rs. 1,54,500/- (Rs. 1,50,000/- as Service Tax and Rs. 4,500/- as Education cess) for the year 2009-10 under proviso to Section 73(1) of the Finance Act, 1994, invoking the larger period of five years. The amount of Service tax already paid under protest vide Cenvat credit a/c. E. No. 00103 dated 28/05/2011 mentioned above ordered to be adjusted towards the demand of Service Tax. I also order that the amount of interest of Rs.33,334/- already paid vide challan dated 06/10/2011 be adjusted towards the demand of Interest.

(vi) I confirm the demand for Service Tax amounting Rs.1,39,461/- (Rs. 135,756/- as Service Tax and Rs. 3,705/- as Education Cess) (as per Annexure-B) under the category of Banking and other Financial Services to be paid in cash and restore the Cenvat credit of Rs.1,39,461/- as discussed hereinabove. 76

(vii) I order that the interest at the prescribed rate on the amount of service tax liability as shown in (i) to (vi) above for the period from 2006-07 to 2010-11 be paid by the assessee for the delay in making the payment, under section 75 of the Finance Act, 1994 as amended and the payment of Rs.26,218/- and Rs.33,334/- made by the assessee be adjusted towards the demand of interest.

(viii) I impose Penalty on the assessee under Section 76 of the Finance Act, 1994 [for the demand of service tax confirmed as ordered in (iii) and (vi) above] of two hundred rupees, for every day during which such failure continued or at the rate of Two per cent of such tax, per month, whichever is higher, starting with the first day after the due date till the date of actual payment of the outstanding amount of service tax for the failure to make the payment of Service Tax payable by them within prescribed time limit; the total amount of the penalty payable in terms of this section shall not exceed the service tax payable for the period up to 09/05/2008.

(ix) I hereby impose Penalty on the assessee under Rule 15(3)/15(4) (for the respective period) of the Cenvat Credit Rules, 2004 read Section 78 of the Finance Act, 1994 amounting to Rs.64,14,883/- [Rs. 17,63,224/- + Rs. 46,51,659/- demand confirmed as reflected in (i) and (ii) above] (Rupees Sixty four Lakhs fourteen thousand eight hundred eighty three only). In the event of the assessee opting to pay the amount of service tax along with all other dues as confirmed and ordered to be recovered, within thirty days from the date of communication of this order, the amount of penalty liable to be paid by them under Section 78 of the Finance Act, 1994 shall be 25% of the said amount. However, the benefit of reduced penalty shall be available only if the amount of penalty is also paid within the period of thirty days from the communication of this order; otherwise full penalty shall be paid as imposed in the above order.

(x) I impose penalty of Rs.2,32,440/-, [Rs.54216/-+38363/-+139461/- demand of service tax confirmed at (iii) and (vi) above] ( Rupees two lakhs thirty two thousand four hundred and forty only) under section 78 of the Finance Act,1994. In the event of the assessee opting to pay the amount of service tax along with all other dues as confirmed and ordered to be recovered, within thirty days from the date of communication of this order, the amount of penalty liable to be paid by them under Section 78 of the Finance Act, 1994 shall be 25% of the said amount. However, the benefit of reduced penalty shall be available only if the amount of penalty is also paid within the period of thirty days from the communication of this order; otherwise full penalty shall be paid as imposed in the above order.

( Tejasvini P. Kumar) Commissioner Service Tax, Ahmedabad. 77

F. No.STC/4-88/O&A/11-12 Date: ______/2013

By Regd. Post A.D.

To,

M/s. Hindprakash International Pvt. Ltd. 201, Hindprakash House, Plot no. 10/6, GIDC, Phase-I, Vatva, Ahmedabad

Copy to :

(1) The Chief Commissioner of Central Excise & Service Tax, Ahmedabad zone, Ahmedabad. (2) The Commissioner, Central Excise, Ahmedabad-I. (3) The Additional Commissioner (Prev.), Service Tax, Ahmedabad [Attn: Group-VII] (4) The Assistant Commissioner, Service Tax, Division-III, Ahmedabad. (5) The Superintendent, Service Tax, Range-XIII, Division-III, Ahmedabad. (6) Guard File.

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