F.No.V.32/15-76/Bodal/OA-1/09-10

BRIEF FACTS OF THE CASE:

M/s. Bodal Chemicals Ltd., (Unit-I) situated at Plot No.110, Phase-

II, GIDC, Vatva, Ahmedabad (hereinafter referred to as the “said assessee”) are

registered with the Central Excise department for manufacture of Dyes and Dyes

Intermediates falling under Chapter 32 of Central Excise Tariff Act, 1985 and

holding Central Excise Registration No.AAACD5352MXM001. The said assessee

is also registered with Service tax Department and paying service tax under the

category of Business Auxiliary Services. The assessee also receives Cenvat

credits of Service tax paid on the services utilized, through their Input Service

Distributor M/s. Bodal Chemicals Ltd. (Head Office), Plot No.123,124 & C-1-B

111-114, Phase-I,G.I.D.C., Vatva, Ahmedabad-382445, registered as Input

Service Distributor (‘ISD’) with the Service Tax Department and holding

Distribution No.SD/AH/ISD/130/2005.

2. During the course of Service Tax audit of M/s. Bodal Chemicals

Ltd. (ISD), conducted by the officers of Service Tax (Audit), Ahmedabad, it is

noticed that the ISD assessee has wrongly distributed Cenvat credit on the

Service Tax invoices-

(i) For input service received from Clearing & Forwarding agents for

clearance of goods for export and service tax paid as a recipient under

Section 66A,

(ii) For commission paid to Foreign Agent in respect of exported goods,

(iii) For commission paid to the foreign Bank in foreign currency for

realization of money of exported goods

The wrong Cenvat credit distributed amount of Rs. 96, 85,814/- during the period 2005-06 to 2007-08, on the input services related to and used

for export of excisable goods. The said Cenvat credit has been distributed by the

ISD assessee to their various excisable units (i.e. Unit I to Unit. VII). Out of such

distribution, Cenvat credit of Rs.16,924/- for the period from 2005-06 to 2007-08,

was distributed to M/s. Bodal Chemicals Limited (Unit. I), i.e. the said assessee.

(Particulars are mentioned in Annexure-A to the show cause notice.)

3. Based on the above audit report, on further inquiry with the said

assessee, the assessee has submitted the data regarding receipts of Cenvat

credit of Service tax wrongly distributed by their Input Service Distributor Unit and

wrongly taken and utilized by them during the period from 2008-09 to 2009-10 (up to November 2009) vide their letter No. Nil dated 1.1.2010 addressed to the

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jurisdictional Superintendent of Central Excise, which worked out to the tune of

Rs.11,89,041/-. (Particulars are mentioned in Annexure-B to the show cause

notice). Thus the said assessee have received and utilized wrongly distributed

Cenvat credit of Service Tax, totaling to Rs.12,05,965/- (i.e. Rs.16,924/- + Rs.11, 89,041/-), which pertained to the service tax paid on services mentioned at Para

2 hereinabove.

4. The definition of the term “input service” as given at Rule 2(l) of

Cenvat Credit Rules, 2004, is reproduced below:

“(l) "input service" means 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 upto 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 upto the place of removal;”

5. The provisions of Rule 3(1) of Cenvat Credit Rules, 2004, allowing

a manufacturer or producer of final product or a provider of taxable service to

take CENVAT Credit of various duties/taxes leviable under different provisions of

law are reproduced below for ready reference:

“RULE 3. CENVAT Credit. - (1) A manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of -

(i) the duty of excise specified in the First Schedule to the Excise Tariff Act, leviable under the Excise Act;

(ii) the duty of excise specified in the Second Schedule to the Excise Tariff Act, leviable under the Excise Act;

(iii) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act,1978 ( 40 of 1978);

(iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 ( 58 of 1957);

(v) the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001);

(vi) the Education Cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004 (23 of 2004);

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(via) the Secondary and Higher Education Cess on excisable goods leviable under section 136 read with section 138 of the Finance Act, 2007 (22 of 2007);

(vii) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv), (v) (vi) and (via);

(viia) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act,

Provided that a provider of taxable service shall not be eligible to take credit of such additional duty;

(viii) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003);

(ix) the service tax leviable under section 66 of the Finance Act; and

(x) the Education Cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004 (23 of 2004),(xa) the Secondary and Higher Education Cess on taxable services leviable under section 136 read with section 140 of the Finance Act, 2007  (22 of 2007); and

(xi) the additional duty of excise leviable under section 85 of Finance Act, 2005 (18 of 2005 )

paid on-

(i) any input or capital goods received in the factory of manufacture of final product or premises of the provider of output service on or after the 10th day of September, 2004; and

(ii) any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, 2004,

including the said duties, or tax, or cess paid on any input or input service, as the case may be, used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 214/86- Central Excise, dated the 25th March, 1986, published in the Gazette of India vide number G.S.R. 547 (E), dated the 25th March, 1986, and received by the manufacturer for use in, or in relation to, the manufacture of final product, on or after the 10th day of September, 2004.”

6. From the above, it is clear that the credit of any input service can

be taken by a manufacturer of final product, but with a condition that such input service should be received for use in, or in relation to the manufacture of final product.

7. In the present case, the assessee has wrongly taken Cenvat credit

distributed on the basis of the invoices in respect of service tax paid on input

service received from Foreign Bank for realization of money of export goods and

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paid commission in foreign Currency, which is chargeable to Service tax under

the category of “Business Auxiliary Service.” The service received from Foreign

Bank and commission paid to the Foreign Bank fall under the category of

“Business Auxiliary Service” and can not be termed as “Input Service” and

therefore, the credit taken and utilized is required to be recovered under the

provisions of Rule 14 of Cenvat Credit Rules, 2004 read with Section 11A of the

Central Excise Act, 1944.

8. A statement of Shri Alkesh Jani, Manager, (Excise) of M/s. Bodal

Chemicals Ltd., was recorded under Section 14 of CEA, 1944 on 08.02.2010,

wherein he interalia stated that the Service Tax Credit was taken by them in M/s.

Bodal Chemicals Ltd, Unit-I on the basis of challans issued by their Input Service

Distributor i.e. M/s. Bodal Chemicals Limited, Plot No. 123-124, Phase I, GIDC,

Vatva, Ahmedabad, which they knowingly continued to avail till they commenced

to claim Service Tax refund under Notification No. 41/2007- ST dated

06.10.2007.

9. It appeared that while wrongly availing/utilizing Cenvat credit during

the period in question, they have neither submitted any document /information to

the department nor have they disclosed any fact relevant to the issue. Thus, it

appeared that the assessee acted with malafide intention by wrongly availing

/utilizing Cenvat credit in respect of such service and thereby rendered

themselves liable to penal action under Rule 15(3) of Cenvat Credit Rules,2004.

10. It further appeared that the said assessee had not informed the

details of the above wrongly taken credit and utilization thereof, to the

department, with intent to utilize the same towards payment of Central Excise

duties, which otherwise, would have to be paid from their PLA and therefore,

their this very act justified invocation of extended period of Five Years for

recovery under proviso to Section 11A of the Central Excise Act, 1944 and

applied in this case, as made applicable by Rule 14 of the Cenvat Credit Rules,

2004.

11. Moreover it appeared that the said assessee had wrongly taken

and utilized inadmissible Cenvat Credit as mentioned hereinabove & thereby,

they have violated the provisions of Rule 3 read with Rule 2(l) of the Cenvat

Credit Rules, 2004, with intent to evade the payment of Central Excise duty as

discussed above. Their this very act, constitute an offence of the nature and type

as described under Rule 15(3) of the Cenvat Credit Rules, 2004 and renders

them liable for penalty under provisions of Rule 15(3) ibid.

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12. Therefore, M/s. Bodal Chemicals Ltd., Unit -.I, Plot No.110, Phase-

II, GIDC, Vatva, Ahmedabad were issued a Show Cause Notice bearing

F.No.V.32/15-76/Bodal/OA-I/09-10 dated 26.02.2010 wherein they were called

upon to show cause as to why :-

(a) Credit of Service Tax of Rs.16,924/- (Rs. 16,582/- + 2% E. Cess

Rs. 342/-) for the period 2005-06 to 2007-08 and Rs.11,89,041/- (Rs.11,54,406/- + Education Cess of Rs. 23,089/- + Secondary &

Higher Education Cess of Rs. 11,546/-) for the period of 2008-09 to 2009-10 (up to November,09) totaling to Rs.12,05,965/- (Rupees

Twelve lakh Five thousand Nine hundred Sixty-five only)

taken/utilized on ineligible services should not be held ineligible and

recovered from them under Rule 14 of the Cenvat Credit Rules,

2004 read with Section 11A of Central Excise Act, 1944 along with

interest at applicable rate as prescribed under Section 11AB of

Central Excise Act, 1944.

(b) Penalty as provided under Rule 15(3) of Cenvat Credit Rules, 2004

should not be imposed on them on the grounds and evidences

mentioned above.

PERSONAL HEARING & DEFENCE REPLY:

13. Personal Hearing in the matter was held on 24.01.2011 which was

attended by Shri N. K. Tiwari, Authorised Representative of the assessee. During

the course of personal hearing he submitted a written reply dated 21.01.2010,

wherein the assessee inter alia stated that the entire case of the department has

been based on an audit objection; that the Audit Objection No 133/09-10, was

forwarded to them by the Assistant Commissioner (Audit), Service Tax,

Ahmedabad under his letter F. No. ST/4-283/AP-IV/08-09, dated 21.12.2009; that

in the said Audit Report, a Procedural Para No. 1 was raised for wrong

distribution of Cenvat credit under the category of Input Service Distributor; that

the said para further alleges that the assessee, M/s Bodal Chemicals Ltd., had

wrongly distributed the Cenvat credit; that the audit report did not specify that the

Cenvat credit was not admissible; that it only alleged that it had wrongly been

distributed and accordingly, a procedural para was raised; that the term

procedural para has not been defined under the Central Excise Act or Rules, and

as such, the normal meaning has to be assigned to it; that the normal meaning

would be that the proper procedure has not been followed, but there is no

revenue implication; that the audit para being procedural, the demand of any

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amount based on such procedural para is legally not sustainable; that it is an

undisputed fact that they have taken Cenvat credit on the basis of Challans

issued by the ISD; that 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; that 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 is legally not tenable.

14. They further stated that the subject notice was received by them on

05.07.2010 seeking to recover Cenvat Credit under Rule 14 of the said Rules

read with section 11 A of the said Act; that the credit sought to be recovered

pertains to period from 2005-06 to 2008-09 ; that the recovery is proposed to be

made for a period beyond one year; that the said recovery can be made after

invoking the extended period of limitation of five years provided under section 11

A of the said Act; that the extended period of limitation of five years can be

invoked only in case of fraud or collusion or willful mis-statement or suppression

of facts, or contravention of any of the provisions of Central Excise Act or Rules

with an intent to evade the payment of duty of excise; that on going through the

subject notice, it is revealed that at para 7 the allegation of willful suppression of

the fact with an intention to avail inadmissible CENVAT credit has been made;

that the subject notice did not reveal as to what has been suppressed by them;

that in order to demand duty under section 11 A 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 producer or conscious or deliberate

withholding of any information which the manufacturer otherwise knew, is

required to be established; that 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; that in support of their 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); that the entire

activity was known to the department; that not only that, the details of CENVAT

credit taken by them was furnished along with the monthly returns; that the

CENVAT credit was taken by them on the amount of service tax paid by ISD on

various services; that there was no suppression of any fact or any inaction on

their part, as such, the extended period of limitation cannot be invoked for

recovery from them.

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15. They referred the case of Padmini Products reported at 1989 (43)

ELT 195 (SC), wherein 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 them are not tenable as the entire activity was well within 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 them for recovery and the proceedings initiated vide

the subject notice are required to be withdrawn.

16. They further relied on the judgment of 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.) wherein it was held that if any information is not required to

be disclosed and if the same is not disclosed, then 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 them as also whether they were under statutory obligation to

disclose the said facts and still they did not disclosed it. They contented that in

view of above, the allegation of suppression invoked in the subject notice is not

tenable.

17. They further referred case of Vasant Sahkari Sakhar Karkhana Ltd.

Vs. Collector of Central Excise reported at 1989 (43) ELT 98 (Tribunal) wherein it

was 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, they have

taken Cenvat credit based on the Challans issued by the ISD. The nature of

product and the premises clearly revealed the activity to be carried out by them.

The department in such a situation can hardly be allowed to even allege that they

were not aware of the activity being carried out by them. As such, the extended

period of limitation for recovery is not available to the department.

18. They also stated that the word suppression came up for judicial

scrutiny in the case of Pushpam Pharmaceuticals Vs. Collector reported at 1995

(78) ELT 401 (SC); that the Hon'ble Court observed that the expression

suppression has to be construed strictly in view of strong contiguous words like

fraud, collusion; that the expression does not mean any omission; that the act

must be deliberate i.e. the correct information was not disclosed deliberately to

escape from payment of duty; that the Hon'ble Court further observed that where

facts are known to both the parties, the omission by one to do what he might

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have done and not that he must have done does not render it suppression; that

in the present case, there is absolutely nothing brought on record as to what they

were required to do and the same has not been done by them; that the escape

from duty cannot be the intention as the goods were meant for exports. As such,

the allegation of suppression of facts is not tenable.

19.1 They also submitted that the Input Service Distributor (ISD) has

been defined under Rule 2 (m) of the said Rules, which means as follows:

(m) "input service distributor" means an office of the manufacturer or

producer of final products or provider of output service, which receives

invoices issued under Rule 4A of the Service Tax Rules, 1994 towards

purchases of input services and issues invoice, bill or, as the case may be,

challan for the purposes of distributing the credit of service tax. paid on the

said services to such manufacturer or producer or provider, as the case

may be;

19.2 It is not the case of the department that M/s Bodal Chemicals Ltd., is not

registered as ISD or that the said ISD has not received invoices for input services

and that the said ISD has not issued any Challan based on which they have

taken the credit. They have taken Cenvat credit based on the Challan issued by

the ISD. It appears that no show cause notice has been issued to the ISD for

reversing or demanding the amount on the allegation of inadmissibility of the

CENVAT credit. That being so, so long the Cenvat credit is not denied or

reversed by the ISD, the show cause notice demanding the amount of Cenvat

credit from the recipient of the service by way of distribution is legally not

sustainable. They crave leave to refer and to rely on the decision in the case of

Commr. of Service Tax, Ahmedabad Versus Godfrey Philips India Ltd. reported

at 2009 (239) E.L.T. 323 (Tri. - Ahmd.), wherein, the Hon'ble Tribunal made the

following observations:

"4.2 The definition of the input service distributor clearly says that he is not merely a dealer. The input service distributor has to be a office of the manufacturer or producer of final products or provider of output service who will distribute the credit to his manufacturing units or service providing units as the case may be. The dealer buys the manufactured goods on which duties have been paid and passes on the actual duty paid by issue of an invoice. He does not take any responsibility as regards eligibility of Cenvat credit by his buyers. He may not even be aware as to whether buyer avails the Cenvat credit or not. He does not produce any input services which he is required to distribute among others. Whereas an input service distributor independently receives invoice and in fact he could be compared to a buyer of goods or service from the manufacturer or a output service provider. The concept of input service distributor has been introduced in view of the fact that definition of input service includes "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,

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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". The definition shows that many of services could be performed in places other than where the manufacturer or receiver of the service might have been located and quite often a single manufacturer may be having several branches and services can be received in several places.4.3 According to Rule 4A(2) of Service Tax Rules, 1994 every input services distributor distributing credit of taxable services is required to indicate the following details in the documents issued by him for distributing the credit viz.(i) the name, address and registration number of the person providing input services and the serial number and date of invoice, bill, or as the case may be, challan issued under sub-rule (1);

(ii) the name and address of the said input services distributor;(iii) the name and address of the recipient of the credit

distributed;(iv)the amount of the credit distributed.

5. When they look at the functions of the input service distributor and the documents to be issued by him for passing on the credit, it becomes quite clear that the document issued by him for passing on the credit does not contain the nature of service provided and the details of services. It contains the service provider's details, distributor's details and the amount. Obviously the eligibility or otherwise of the service tax credit has to be examined at the end of input service distributor only. This is further supported by the fact that both Central Excise assessees and Service Tax assessees are under the regime of self-assessment and therefore it is the assessee himself who has to specify that the credit availed by him is admissible. Therefore the input service distributor cannot say that he is not required to prove the eligibility or otherwise of the service tax credit since at the receiver's end which could be a branch or a factory of the distributor, no details would be available regarding the nature of service. Therefore the preliminary objection raised by the Id. Advocate has to be rejected and it has to be held that it is the responsibility of the jurisdictional officer with whom input service distributor has registered to decide the dispute regarding eligibility or otherwise of the service tax credit that the input service distributor has taken and proposes to pass on to others."

20. They further submitted that the manner of distribution of Cenvat

credit by ISD has been provided under Rule 7 of the said Rules. The said Rule 7

provides that the input service distributor may distribute the CENVAT credit in

respect of the service tax paid on the input service to its manufacturing units or

units providing output service, subject to the following conditions, namely-

(a) the credit distributed against a document referred to in rule 9 does not

exceed the amount of service tax paid thereon or;

(b) credit of service tax attributable to service use in a unit exclusively

engaged in manufacture of exempted goods or providing of exempted

services shall not be distributed.

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On going through the above Rule 7 of the said Rules, it is observed that Cenvat

credit can be distributed to manufacturing units subject to the condition

mentioned at clause (a) and (b). It is not the case of the department that they

have taken the Cenvat Credit on the Challans in contravention of any of the

clauses mentioned above. As such, the credit taken by them being admissible,

legal and proper, there is no ground for seeking reversal of the same. The

subject notice fails on this ground also.

21. They also referred to Circular No. 97/8/2007-S.T., dated 23-8-2007,

issued by the Board from F. No. 137/85/2007-CX.4, wherein, it has been clarified

that an ‘input service distributor' is an office or establishment of a manufacturer of

excisable goods or provider of taxable service. It receives tax paid invoices/bills

of input services procured (on which Cenvat credits can be taken) and distributes

such credits to its units providing taxable services or manufacturing excisable

goods. The distribution of credit is subject to the conditions that, - (a) the credit

distributed against an eligible document shall not exceed the amount of service

tax paid thereon, and (b) credit of service tax attributable to services used in a

unit either exclusively manufacturing exempted goods or exclusively providing

exempted services shall not be distributed. An input service distributor is required

(under Section 69 of the Act, read with Notification No. 26/2005-S.T.) to take a

separate registration. It has further been clarified that Input service distributor is

an office or premises of the manufacturer or taxable service provider which

receives bills/invoices etc., of input services. The input service distributor can

distribute the eligible credit to any unit of the manufacturer or any premises/office

of taxable service provider. Thus, even as per the Board Circular, ISD can

distribute the eligible credit to any of the manufacturing units. The eligibility of

Cenvat credit having not been disputed at the ISD end, the demand at the

recipient end is not sustainable.

22. They further stated that the term input service has been defined

under the Cenvat Credit Rules, 2004. As per Rule 2(l) "input service" means 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, ( This clause has been amended vide Notification 10/2008 C.E.(N.T.)-dated 01.03.2008)

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 upto the place of removal, procurement of inputs, activities relating to business, such as accounting,

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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 upto the place of removal;

On going through the definition of 'input service', it is observed that the definition

is broadly in two parts - first i.e. main part and second i.e. inclusive part. First part

of the definition is restrictive in scope as it covers input services directly or

indirectly used for providing output service or used in relation to manufacture or

clearance of final product. However, second i.e. inclusive part of the definition

expands the scope much beyond the coverage of first part. Further, the inclusive

part itself is of two sub-parts. The first sub-part gives some illustrations of input

services while second part covers all services used in relation to 'activities

relating to business, such as - -'. Some illustrations are given in second sub-part

of the definition, but these are preceded by the term 'such as'. It means these are

only illustrations. Any service in relation to business would be 'input service'.

Thus, the allegation that Commission paid to overseas buyer and Clearing and

Forwarding charges are not covered under the ambit of input service is not

sustainable.

23. They further contended that inclusive part expands the scope of

main definition; that the inclusive part can cover items which are not getting

covered in main part of definition; that it is also well settled that 'in relation to'

widens the scope of definition; that it is not restrictive; that input services which

have only remote or no nexus with output services or manufacture of goods will

get covered so long as these are related to activities of business; that this is also

clear from the fact that service tax paid at Head Office and branches/depots can

be utilized as Cenvat credit through the mechanism of 'input service distributor'.

24. They relied on the decision in the case of ABB Ltd. v. CCE, Appeal

No. ST/336/2007, decided on 18-5-2009, (CESTAT Bang - 3 Member Larger

Bench), wherein various aspects of definition of 'input service' have been

clarified. The Hon'ble Tribunal has summarized below the various aspects of

definition of input service:-

The definition of 'input service' can be conveniently divided into following

five categories, so far as the manufacturers are concerned -

(a) Any service used by the manufacturer, whether directly or indirectly, in

or in relation to the manufacture of final products

(b) Any service used by the manufacturer, whether directly or indirectly, in

or in relation to clearance of final products, upto the place of removal (that

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time it was from the place of removal but that does not change the

conclusion of Tribunal's decision)

(c) 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 premise

(d) Services used in relation to advertisement or sales promotion, market

research, storage upto the place of removal, procurement of inputs

(e) Services used in relation to and outward transportation upto the place

of removal

25. They also submitted that each of the above categories is an

independent benefit/concession. If an assessee can satisfy anyone of above, the

credit of input service would be admissible, even if the assessee does not satisfy

the other limbs.

26. They further submitted that there is no qualification to the word

'activities'; that there is no restriction that activities relating to business should be

relating to only main activities or essential activities; that all activity relating to

business fall within the definition of 'input service'; that it is not the case of the

department that the Commission paid to the agents and Clearing and Forwarding

Charges are not activities relating to business; that being so, the allegation made

in the subject notice that the aforesaid two services are not covered under the

definition of input service is legally not sustainable.

27. They also stated that the inclusive definition of input service is

preceded by word 'such as’. The expression 'such as' is purely illustrative. 'Such

as' means 'for example' or 'of a kind that' (Concise Oxford Dictionary), 'for

example' (Chambers Dictionary). As such, there is no reason for not considering

the services mentioned in clause (a), (b) and (c) of Para 2 of the subject notice

as not covered under the ambit of input service.

28. They further stated that it has been alleged in show cause notice

that the activities relating to business, which are input service used in relation to

manufacture of final product from the place of removal alone would be eligible.;

that the subject notice further alleges that after the clearance of final products

from the place of removal, there is no scope of subsequent use of service to be

treated as input service. On going through the extended and inclusive part of the

definition of input service, it is observed that the phrase has been used is

"activities relating to business". The said phrase is preceded and succeeded by

",", which means that activities which are related to business are covered under

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the ambit of input service. Here, they would like to submit that it is a well settled

law that while interpreting a fiscal statute, there is no room for intendment.

Therefore the allegation made in the subject notice by adding the phrase "place

of removal", which has not been mentioned in the definition of input service in

conjunction with activities relating to business activities, is not legally sustainable.

The Hon'ble Tribunal in the case of Commissioner of Central Excise, Vapi Versus

Nilkamal Crates and Bins, reported at 2010 (19) STR 431(Tri-Ahd), after relying

on the decision of the Hon'ble High Court of Bombay in the case of Coca Cola

India Pvt. Ltd. Versus Commissioner reported at 2009 (15) S.T.R. 657 (Bom),

held that that Cenvat credit is admissible on input services used in relation to

business activities. The Hon'ble Tribunal further held that Commission agent

service helps in increasing of sale and has to be considered as sales promotion

and is therefore relatable to business activities, which is admissible for Cenvat

credit under the Cenvat Credit Rules, 2004.

29. They also relied on the decision of the Hon'ble Tribunal in the case

of Cadila Healthcare Ltd. Versus Commissioner of Central Excise, Ahmedabad,

reported at 2010 (17) S.T.R. 134 (Tri. - Ahmd.), wherein the admissibility of

Service Tax paid on Clearing and Forwarding Agent Service, as input service

was in dispute. The Hon'ble Tribunal held that Clearing & Forwarding Agent

service has a definite role to play in promotion of sales by storing the goods and

supplying the same to the customers, actually promoting the sales. The Hon'ble

Tribunal further held that service even though rendered beyond the place of

removal of goods, the Cenvat credit in terms of the provisions of Rule 2(l) of

Cenvat Credit Rules, 2004, is admissible. Applying the ratio of the above

decision in the present case, the Cenvat credit on the service tax paid on the

Clearing and Forwarding Charges is admissible as input service credit.

30. They also referred the decision of the Hon'ble Tribunal in the case

of JSW Steel Ltd. Versus Commissioner of Central Excise, Salem, reported in

2009 (14) S.T.R. 310 (Tri. - Chennai), wherein it is held that Service tax paid by

assessee themselves on "Banking and financial services" received from bank,

the assessee is entitled to avail credit of such tax and utilize the same for

payment of duty on their final products as per Rules 3 and 14 of Cenvat Credit

Rules, 2004. As such, the service tax paid is admissible as input service credit

under the Cenvat Credit Rules, 2004.

31. They further stated that the subject notice has reproduced Rule 3 of

the Cenvat Credit Rules, 2004 and thereafter alleges that the credit of any input

service tax can be taken by a manufacturer of final product but with a condition

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that such service should be received for use in or in relation to the manufacture

of final products. On going through the provisions of Rule 3 (1) of the said Rules,

it is revealed that no such condition, as alleged in the subject notice has been

incorporated in the said clause (1) of Rule 3 of the said Rules. As such, the said

allegation is totally without any basis and cannot be the basis for denying the

input service credit of the service tax paid on the services, which otherwise are

covered under the definition of "input service" under Rule 2(l) of the said Rules.

32. They also stated that the allegation made of the subject notice is

entirely mis-conceived. Rule 9 (6) of the said Rules provide that the manufacturer

has to maintain proper records for receipt and consumption of services along

with the value, tax paid and from the person from whom input service tax has

been procured. They have taken Cenvat credit based on the Challans issued by

the ISD. As regards admissibility of Cenvat, it is only the allegation made vide the

subject notice that the input service credit is not admissible. Such an allegation

can be equated to consider and conclude that the provisions of Rule 9 (6) of the

said Rules have been contravened by them. As submitted herein above, the

input service tax credit is admissible to them, the allegation of contravention of

Rule 9(6) of the said Rules is not tenable.

33. They also stated that the subject notice proposes to impose penalty

on them under Rule 15 (3) of the Cenvat Credit Rules, 2004, as applicable during

the relevant period. It is submitted that Rule 15 was incorporated under the

Cenvat Credit Rules, 2004, vide Notification No. 23/2004-Central Excise (N.T.),

dated 10.09.2004. The said Rule 15 (3) as it stood at the relevant time is

reproduced below:

"(3) If any person, takes CENVAT credit in respect of input services,

wrongly or without taking reasonable steps to ensure that appropriate

service tax on the said input services has been paid as indicated in the

document accompanying the input services specified in Rule 9, or

contravenes any of the provisions of these rules in respect of any input

service, then, such person, shall be liable to a penalty which may extend

to an amount not exceeding ten thousand rupees.”

Further, the Rule 15 (3) was substituted by the present Rule 15 vide Notification

No. 6/2010-CE (NT), dated 27.02.2010. Thus, the provisions of the present Rule

15 (3) as it existed at the relevant time can only be invoked for imposition of

penalty on them and the same has rightly been incorporated in the charging para

of the subject notice.

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34. They also submitted that for imposition of penalty under the said

Rule 15 (3) of the said Rules, some degree of involvement or knowledge of

contravention on the part of the abettor must be shown. In the impugned order,

no evidence direct or even indirect has been adduced to show that they had

some knowledge of contravention of law. As such, imposition of penalty is not

justified. In support of above, they crave to refer and rely on the decision of the

Hon'ble Tribunal in the case of Liladhar Pasoo Forwarders P. Ltd. Vs.

Commissioner of Customs, Mumbai reported at 2000 (122) ELT 737 (T).

35. They further submitted that the various Courts and Tribunals have

consistently held that the penalty should not be imposed in an ordinary course,

unless it can be shown that the appellant had acted deliberately in defiance of

Law; that the Hon'ble Supreme Court in case of Southern Steel Ltd. Vs. State of

Andhra Pradesh reported in AIR 1970 SC (253) (1979 ELT (J402) has held that

for imposition of penalty, it is to be brought on record that the party had acted

deliberately in defiance of the Law; that in the present case there is nothing on

the record which reveals that they had acted in any way in defiance of Law; that

as such, the subject notice having been passed without any material evidence on

record, is legally not tenable and the same deserves to be withdrawn.

36. They also submitted that before imposing penalty the requisite

means area 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); that the words typically imposing a means area requirement

include willfully, maliciously, fraudulently, recklessly, negligently, corruptly,

feloniously and wantonly; that in the present proceeding, the element of means

area being absent, the imposition of penalty is not warranted.

37. They further stated that the subject notice also proposes to recover

interest under Rule 14 of the said Rules read with section 11 AB of the said Act;

that for effecting recovery under Rule 14 of the said Rules, it has first to be

established that the Cenvat credit was taken or utilized by them wrongly and

thereafter the provisions of Section 11 A and Section 11 AB of the said Act shall

apply mutatis mutandis for recovery; that on going through the provisions of

Section 11 AB, it is revealed that the interest is required to be paid after the duty

is determined, in this case, it is determined that the Cenvat credit was wrongly

taken by them; that therefore, demand of interest before determining the

admissibility of CENVAT credit is not tenable, as such, the proposal to demand

interest is also tenable.

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38. They moreover stated that the subject notice has computed the

amount of input Service Tax credit alleged to have been taken by them wrongly;

that as an amount of Rs. 16,924/, is sought to be recovered under the Head

Agency Charges (CHA Charges and Clearing and Forwarding); that it did not

come out from the subject notice as to whether the amount sought to be

recovered pertains to the finished goods or raw materials imported by them or

both; that in case of service tax paid on Agency Charges for import of raw

materials, which are used by them in or in relation to manufacture of finished

goods, the said service is specifically covered under the inclusive definition under

"procurement of inputs"; that as such, the amount of service tax paid on the

services used in procurement of inputs is admissible as input service credit.

39. They also stated that in the aforesaid premises, the service tax paid

on Agency Charges and Commission paid to the foreign agents having been paid

by ISD, who has not been issued any notice and being covered under definition

of input service is admissible as input service credit under Cenvat Credit Rules,

2004 and the proceedings initiated vide the subject notice deserves to be

withdrawn.

DISCUSSIONS & FINDINGS:

40.1. I have carefully gone through the Show Cause Notice, the assessee’s

reply & facts available on file. The issues to be examined are as under:-

i) Whether the services received from Clearing & Forwarding agents

for clearance of goods for export can be termed as ‘input services’?

ii) Whether the services of Foreign Commission Agent utilized for

export of goods can be termed as ‘input services’?

iii) Whether the services of the Foreign Bank availed for realization of

money of exported goods can be termed as ‘input services’?

40.2.1 The assessee has argued that the Audit had raised the objection

treating it as procedural para, which according to them means that proper

procedure has not been followed. Since there was no revenue implication,

demand was not sustainable. I find that assessee has raised a baseless

argument. The Audit para is primary level objection which is then investigated &

amount involved is ascertained by Range Office. After due vetting by the Division

office and the competent authority, the Show Cause Notice is issued in the

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matter for the recovery of duty evaded or inadmissible Cenvat credit, as the case

may be.

40.3.1 The definition of the term “input service” as given under Rule 2(l) of the

CCR, 2004, is reproduced hereunder:

(l) "input service" means 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 from* / 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 upto 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 upto the place of removal;

* (The word “from”, as given at “(ii)” above, was prevailed upto 31.3.2008; thereafter it was substituted with the word “upto” by Notification 10/2008-CE (NT), dated 01-03-2008).

40.3.2 I would like to reproduce the definition of the term “place of removal” as

given under Section 4(3) (c) of the Central Excise Act, 1944.

 (c) “place of removal” – means

(i)   factory or any other place or premises of production or manufacture of the excisable goods;

(ii)  warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without [payment of duty;]

(iii) depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after

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their clearance from the factory;

from where such goods are removed;

40.4.1 As far as the agencies services viz. Clearing & Forwarding agents

which have been utilized for clearance of goods for export; it is obvious that

these services were utilized after removal of the goods from the factory. Thus,

these services have not been used by the assessee, directly or indirectly, in or in

relation to the manufacture of final products or clearance of final products

from/upto the place of removal, in as much as the place of removal is factory

gate in this case, as defined under Section 4(3)(c) of the Central Excise

Act,1944. Thus, as these services are availed after clearance of the goods from

the factory gate i.e. the place of removal, they cannot be termed as input

services for the purpose of availing Cenvat Credit.

40.4.2. The case law of ABB LTD. Vs. COMMISSIONER OF C. EX. & S.T., BANGALORE - 2009 (15) S.T.R. 23 (Tri. – LB), referred to by the assessee,

pertains to outward freight paid for transportation which is different from present

case.

40.4.3. However, I find that after pronouncement of the decision in case of

Commissioner of Central Excise, Vapi Vs Nilkamal Crates & Bins - 2010 (19) S.T.R. 431 (Tri. – Ahmd.), referred to by the assessee, a recent decision in

case of Commissioner of C. Ex., Chennai Vs Sundaram Brake Linings - 2010 (19) S.T.R. 172 (Tri. – Chennai) is applicable in the present case.

In the case of Commissioner of C. Ex., Chennai Vs Sundaram Brake Linings, Hon’ble CESTAT, Chennai, relying on a decision of Hon’ble Supreme

Court in case of Maruti Suzuki Ltd. v. CCE, Delhi - 2009 (240) E.L.T. 641 (S.C.), held that use of the input service must be integrally connected with the

manufacture of the final product. The input service must have nexus with the

process of manufacture. It has to be necessarily established that the input

service is used in or in relation to the manufacture of the final product. One of the

relevant tests would be can the final product emerge without the use of the input

service in question.

In the present case the Agency Services were utilized beyond the

factory gate i.e. after removal of finished goods for export, hence the Nexus

theory and Relevance test as broadly discussed by the Hon’ble Supreme Court

in case of Maruti Suzuki (Supra) is not established.

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40.4.4. Moreover, I find that in the case of Nirma Ltd. Vs CCE, Bhavnagar - 2009 (13) STR 64 (Tri.-Ahmd.), Hon’ble CESTAT has relied upon the case of

Excel Crop Care Ltd. Vs Commissioner as reported at 2007 (7) STR 451 (Tri.-Ahmd.) wherein it has been held that – “The CHA services availed in respect of

export does not have any nexus with the manufacture and clearance of the

product from the factory. The business activities which are sought to be included

in the extending arm of the definition, in my opinion, cannot include the services

rendered at port area.” Accordingly, Hon’ble CESTAT has rejected the appeal

filed by the appellant. Thus I find that these case laws are squarely applicable to

the present case.

40.5.1 As regards the services of Foreign Commission Agent/ Foreign Bank,

the services of Foreign Commission Agent availed for export of goods and the

services of the Foreign Bank availed for realization of money of exported goods

cannot be termed as ‘input services’. The services provided by the Foreign

Commission Agents fall under the definition of ‘Business Auxiliary Services’,

which is a taxable service. Besides, the services provided by the Foreign Bank

fall under the definition of ‘Banking and Financial Services’, which is also a

taxable service. In the instant case, I find that the assessee had taken Cenvat

Credit of Service Tax paid by them on commission paid to Foreign Commission

Agents for the goods exported and on commission paid to Foreign Banks for

realization of money of exported goods. I note that Rule 2(l)(ii) of Cenvat Credit

Rules, 2004 defines the eligible category of Services for availing credit according

to which services should have been used directly or indirectly in the manufacture

or clearance of their final products. Thus, it is apparent that there should be a nexus between the ‘input service’ and the activity of ‘manufacture’. In the

instant case, there is no nexus between the Foreign Commission Agent’s /

Foreign Bank’s activities and the manufacturing activities. Manufacturing can be

undertaken without availing the services of Foreign Commission Agent / Foreign

Bank. Though the activity of ‘sales promotion’ is specifically included in the

definition of ‘input service’; I find that the term ‘sales promotion’ includes activities

like advertisement and exhibitions, but not activities of Foreign Commission

Agent / Foreign Bank. Thus the services of Foreign Commission Agent / Foreign

Bank cannot be termed as ‘input service’.

40.5.2. As far as the case law of JSW Steel Ltd. Vs Commissioner of Central Excise, Salem - [2009 (14) S.T.R. 310 (Tri. - Chennai] , referred to by

the assessee is concerned, I find that the said case mainly deals with the issue

pertaining to the dispute of documents for availing credit which is not the issue in

present case. The case law also deals with "Banking and financial services"

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received from the bank. It is not clear from the case law that the said services

were not used by the manufacturer, directly or indirectly, in or in relation to the

manufacture of final products and clearance of final products upto the place of

removal. The instant case is different in as much as it is apparent that services of

the Foreign Bank, in realization of money of exported goods, are availed beyond

the factory gate.

40.6. Thus I find that the facts and situations in the afore-referred cases

are different than the present case. Therefore, the aforesaid case laws does not

apply to the instant case.

40.7.1 Moreover the recent decision delivered by the Hon’ble CESTAT,

Chennai, in case of Commissioner of C. Ex., Chennai Vs Sundaram Brake Linings - 2010 (19) S.T.R. 172 (Tri. – Chennai), states that the input service

must have nexus with the process of manufacture; that the input service is used

in or in relation to the manufacture of the final product should be established

whereas in the present case the manufacturing process of assessee has no

nexus with the services availed.

40.7.2 Furthermore, I find that the said assessee could not establish nexus

between the export related services availed by them and the manufacture of the

finished excisable goods as per the ruling in the case of Vikram Ispat Vs CCE,

Raigad - 2009 (16) S.T.R. 195. It was also held in the said case that any service

to be brought within the ambit of definition of ‘input service’ should be one which

should satisfy the essential requirement contained in the main part of the

definition. This requirement is equally applicable to the various items mentioned

in the inclusive part of the definition as well. The Tribunal also held that no credit

can be allowed unless the assessee provides evidence to establish the nexus

between the services and the manufacture of the final products. Based on the

above decision, I find that the services in the subject issue are not falling within

the definition of “input service”. In view of above, I hold that the assessee is not

entitled to Cenvat Credit on any of the services mentioned in the Show Cause

Notice.

40.7.3 The Hon’ble Tribunal in the case of CCE, Nagpur Vs Manikgarh Cement Works - 2010 (18) S.T.R. 275 has also held that to fall within the scope

of definition of input service, a service must have been used in or in relation to

the manufacture or clearance of final product, directly or indirectly. Moreover it is

further held by Tribunal that the Hon’ble Supreme Court in the case of Maruti Suzuki Ltd. Vs CCE, Delhi - 2009 (240) E.L.T. 641 (S.C.) has overruled the

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decision of the Bombay High Court in the case of Coca Cola India Pvt. Ltd. Vs CCE, Pune - 2009 (15) S.T.R. 657 (Bom.) = 2009 (242) E.L.T. 168 (Bom.). The

Tribunal has also held that in view of the main part of decision that the decision

of the Hon’ble Supreme Court in Maruti Suzuki (supra) though rendered in a case

relating to ‘inputs’ is also applicable to a case of ‘input service’.

40.7.4 I also note that in the case of Maruti Suzuki Vs Commissioner [2009 (240) E.L.T. 641 (S.C.)], the Hon’ble Supreme Court has laid down that the

nexus has to be established between the inputs or input service.

40.7.5 Even the larger Bench of Tribunal in the case of Vandana Global Ltd. Vs CCE, Raigad - 2010 (253) E.L.T. 440 (Tri. -LB), has applied the decision of

the Hon’ble Supreme Court in the case of Maruti Suzuki (supra) according to

which credit in respect of input or input service is admissible only if it is integrally

connected to the manufacture of the finished excisable goods.

40.8 Further, in respect of decision by the Hon'ble Tribunal referred by the

assessee in the case of Indian Plastics Ltd. Vs. CCE, [1988 (35) ELT 434 (T)] and in the case of Swastik Tin Works Vs. Collector of Central Excise, Kanpur- [1986 (25) ELT 198 (Tribunal)], wherein it has been held that the show

cause notice issued merely on the basis of audit objection is invalid. However, in

the instant case though the subject notice is based on the audit objection, it has

been issued only after detailed examination by the Range Officer. Further, the

assessee has not informed the dept. either through periodical returns or in any

other manner the matter of taking of Cenvat Credit of Service Tax paid on the

services availed beyond the factory gate. Thus, the stand taken by the assessee

that the notice has been issued solely on the basis of audit objection without any

investigation is not correct. Hence the case law cited by the assessee is not

applicable to the instant case.

40.9.1 The assessee has contended that extended period was not-applicable

in the present case and has quoted following case laws in their favour:

Collector of Central Excise Vs Chemphar Drugs & Liniments - [1989 (40) ELT 276 (SC)].

Padmini Products Vs Collector of C. Ex. - [1989 (43) ELT 195 (SC) .

Apex Electricals P. Ltd. Vs. Union of India - [1992 (61) ELT 413 (Guj.) ] .

Vasant Sahkari Sakhar Karkhana Ltd. Vs. Collector of C.Ex. - [1989 (43) ELT 98 (Tribunal) ] .

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Pushpam Pharmaceuticals Vs. Collector - [1995 (78) ELT 401 (SC)].

40.9.2 In this regard I find that case laws quoted by the assessee do not

apply to the instant case. The assessee’s contention that the entire activity was

known to the department and that the details of CENVAT credit taken by them

was furnished along with the monthly returns is far from truth, I find that the

assessee did not inform the department that they were taking Cenvat Credit of

Service Tax paid on the services availed beyond the factory gate. The said facts

were neither mentioned in their periodical returns as the assessee had just

mentioned in their periodical return the gross Cenvat Credit of the said Service

Tax they have availed and subsequently utilized for the payment of the Central

Excise Duty. The assessee never specified the nature of input services for which

they have availed the Cenvat Credit. Thus it was not possible for the scrutinizing

officer to detect the nature of the input services. The assessee has thus,

suppressed from the department, the nature of input services availed by them

and took Cenvat Credit of Service Tax in respect of the said services which had

been actually availed beyond the factory gate. During the course of the audit of

financial records of the ISD and on demand of further details, the dept. came to

know about the said facts. Thus, it is obvious that the assessee has suppressed

the vital facts regarding availment of Cenvat Credit on services which did not

qualify as input services. It goes without saying that had the ISD not been

audited, department could have never known the wrong availment of such huge

amount of Cenvat Credit on the ineligible services utilized by the said assessee. 40.9.3. Moreover I find that the assessee also claims that the Show

Cause Notice was received by them 05.07.2010. However, as evident from the

records, it was actually served upon them on 02.03.2010. They have also

contended that the Show Cause Notice in question is hit by time limitation. In this

matter, I disagree with the same in as much as I find that the assessee had never

informed Department of their wrong availment of Cenvat credit of service tax paid

on such services which were availed beyond the factory gate. The assessee has

taken Cenvat Credit of service tax paid on such services, which cannot be

termed as ‘input service’. The fact regarding the assessee having taken the

Cenvat Credit of Service Tax paid on Agency Services [Clearing & Forwarding

Services, Customs House Agent Services] utilized for export of finished goods

and services of Foreign Agents/Foreign Banks utilized in export of finished

goods/realization of export proceeds came to light only during the course of audit

of the accounts of their Input Service Distributor [ISD] i.e. M/s. Bodal Chemicals

Ltd. (Head Office), Plot No.123,124 & C-1-B 111-114, Phase-I, G.I.D.C., Vatva,

Ahmedabad-382445,

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40.9.4. I find that the assessee did not specify in the Part 4 (Details of duty

paid on excisable gods) and Part 5 (Details of the Cenvat Credit availed and

utilized) of their periodical Returns, the nature of input services against which

they had availed Cenvat Credit. Thus, it was not possible for the scrutinizing

officer to know from the periodical returns the nature of the Input services availed

in as much as the assessee had furnished just the cumulative total of all the input

services (at Part 5). Besides, these facts came to knowledge only during audit of

the records of the ISD and only after further details were sought and obtained

from the said assessee. Thus, it is forthcoming that the assessee had not

revealed the vital facts about availing of Cenvat Credit on services which did not

qualify as ‘input services’. Therefore, I find that extended period of 5 years from

the relevant date in terms of the proviso to Section 11A(1) of the Central Excise

Act, 1944 is rightly applicable in this case as invoked in the Show Cause Notice.

The assessee has been availing inadmissible Cenvat Credit on input services for

the period from 2005-06 onwards. The assessee has been filing monthly returns

in ER-1 Forms. Considering the earliest month of taking such credit as April

2005, extended period of five years can be invoked upto March 2010. The Show

Cause Notice was issued on 26.02.2010. As can be seen there is no delay in

issue of the Show Cause Notice i.e. the Notice has not exceeded the extended

period of five years from the date of taking the wrong Cenvat credit in question.

So, the ruling referred by the assessee regarding limitation has no bearing on the

instant case.

40.9.5. Besides, I find that the Rule 9(6) of the Cenvat Credit Rules, 2004,

stipulates that the burden of proof regarding admissibility of Cenvat Credit shall

lie upon the manufacturer or provider of output service taking such credit. Thus in

this era of self assessment, the onus of taking legitimate Cenvat credit lies on the

assessee in terms of the aforesaid Rule which means before taking credit

assessee had to ensure its admissibility. In the present case, I further find that

despite knowing very well that the services in respect of which they had availed

Cenvat credit were those services, availed beyond the factory gate and not

having been used in or in relation to the manufacture of final products, the

assessee intentionally availed the Cenvat Credit of the Service Tax paid on such

services. This clearly proves the malafide intention on the part of the said

assessee to avail inadmissible Cenvat Credit and thus the extended period has

rightly been invoked for recovery of Cenvat Credit from the said assessee.

40.10.1 Moreover quoting the decision of Hon’ble CESTAT,

Ahmedabad in the case of Commissioner of Service Tax, Ahmedabad Vs

Godfrey Philips India Ltd. - 2009 (239) E.L.T. 323 (Tri. - Ahmd.), the assessee

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has contended that as the eligibility of Cenvat credit by Input Service Distributor

(ISD) have not been disputed the demand from the recipient is not sustainable.

They have further elaborated that they have taken Cenvat credit based on the

Challan issued by the Input Service Distributor [ISD] and that no show cause

notice has been issued to the ISD for reversing or demanding the amount on the

allegation of inadmissibility of the CENVAT credit and that therefore the show

cause notice demanding the amount of Cenvat credit from the recipient of the

service is not legally correct. On going through the aforementioned case law

(supra), I find that the matter has been remanded back to the Original

Adjudicating Authority for taking decision afresh as to the eligibility of the

services.

40.10.2 I notice that by referring such case law (supra), the assessee is

trying to divert attention from his misdeeds i.e., from the main issue of ineligibility

of the services utilized by them after removal of the finished goods from the

factory gate.

40.10.3 The Rule 3 of Cenvat Credit Rules is the enabling provision, which

provides that a 'manufacturer or producer of final products' or a 'provider of taxable

service' shall be allowed to take credit of various specified duties paid on inputs or

capital goods or any input services.

Besides definition of “Input Service Distributor” under Cenvat Credit Rules (CCR)

is reproduced below:

"Input Service Distributor means an office of the manufacturer or producer of

final products or provider of output service, which receives invoices issued

under rule 4A of the Service Tax Rules, 1994 towards purchases of input

services and issues invoice, bill or, as the case may be, challan for the

purposes of distributing the credit of service tax paid on the said services to such

manufacturer or producer or provider, as the case may be;"

These bills, challans, invoices etc., as aforementioned contains details of tax

paid which can be distributed. It becomes ‘Cenvat Credit’ only when an assessee is

enabled by the Cenvat Credit Rules, 2004, to take the credit of such duty as ‘Cenvat

Credit’.

40.10.4 Thus, Rule 3 of the Cenvat Credit Rules, 2004 is the provision of law

that allows taking of Cenvat Credit. Hence I find that an Input Service distributor (ISD)

is neither a ‘producer/manufacturer of final products’ nor a ‘provider of taxable service’

and therefore the Rule 3 does not apply to Input Service Distributor whereby an Input

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service Distributor cannot take credit on the strength of Rule 3 of Cenvat Credit Rules,

2004.

40.10.5. It is worth mentioning that Rule 7 of Cenvat Credit Rules permits

distribution of 'Cenvat Credit' by an ISD. The text of Rule 7 is reproduced below:-

"The input service distributor may distribute the Cenvat credit in respect of the

service tax paid on the input service to its manufacturing units or units providing output

service, subject to the following conditions namely : .

(a) the credit distributed against a document referred to in rule 9 does not

exceed the amount of service tax paid thereon;

or

(b) credit of service tax attributable to service used in a unit exclusively

engaged in manufacture of exempted goods or providing of exempted services shall

not be distributed."

40.10.6 Here I find that there is no rule that permits an ISD to take credit.

Moreover Rule 3 of Cenvat Credit Rules applies only to a 'manufacturer or producer of

final products' or a 'provider of taxable service'. I find that ISD cannot take credit on the

strength of Rule 3 of CCR. Further, it would be pertinent to reproduce Rule 14 of the

Cenvat Credit Rules, 2004. I find that aforementioned Rule prescribes recovery

provision for the manufacturer or provider of goods / service. There is no mechanism

for recovery of Cenvat Credit from an Input Service Distributor. Rule 14 which states

that:-

"Where the Cenvat credit has been taken or utilized wrongly or has been

erroneously refunded, the same along with interest shall be recovered from the

manufacturer or the provider of the output service and the provisions of section 11A

and 11AB of the Excise Act or sections 73 and 75 of the Finance Act, shall apply

mutatis mutandis for effecting such recoveries."

Besides I find that that there is no provision enabling an Input Service Distributor

(ISD) to avail Cenvat Credit. It is obvious that ISD acts only as distributor. Hence

recovery can be affected only from a person who has wrongly availed it. Therefore,

show cause notice demanding the amount of Cenvat Credit from the recipient of the

service is legally justified.

41. Further, I find that in the Annexure-A to the subject notice an amount of

Rs16,924/- is shown recoverable under the Head Agency Charges (CHA

Charges and Clearing and Forwarding). The assessee has argued that it was not

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forthcoming from the subject notice as to whether the amount sought to be

recovered pertained to the finished goods or raw materials imported by them

Here I find that though the assessee has claimed that service tax paid on Agency

Charges was for import of raw materials, which were used by them in or in

relation to manufacture of finished goods, and that the said service is covered

under the inclusive definition under “procurement of inputs”, they however have

totally failed to produce any concrete evidence in support of their argument.

They have also not produced any evidences to show that Service Tax involved is

in respect of the input services which pertained to raw materials imported by

them.

42.1 So far as imposition of penalty is concerned the assessee has relied

upon the following case laws:

Liladhar Pasoo Forwarders P. Ltd. Vs. Commissioner of Customs, Mumbai - 2000 (122) ELT 737 (T).

Southern Steel Ltd. Vs. State of Andhra Pradesh - AIR 1970 SC (253) (1979 ELT (J402) ,

Akbar Badruddin Jiwani Vs. Collector of Customs - 1990 (47) ELT 161 (SC).

After going through the Supreme Court decisions, I find that none of them have

any applicability to the present case. Besides, I find that the assessee has

nothing to prove that they have no knowledge of contravention on their part.

Albeit their act is nothing short of defiance of law to evade payment of duty and

hence are liable to penalty.

42.2 Moreover I find that it was only on demand by the Range Officer, the said

assessee furnished the requisite details regarding receipts of Cenvat credit of

Service tax wrongly distributed by their ISD and wrongly taken and utilised by

them. Also, in his statement dated 08.02.2010, Shri Alkesh Jani, Manager

(Excise) of M/s Bodal Chemicals Ltd., interalia admitted that Service Tax credit

was taken by M/s Bodal Chemicals Ltd, Unit-I on the basis of challans issued by

their Input Service Distributor i.e. M/s. Bodal Chemicals Limited, Plot No. 123-

124, Phase I, GIDC, Vatva, Ahmedabad, which they knowingly continued to

avail till they started to claim refund of Service Tax under erstwhile Notification

No. 41/2007- ST, dated 06.10.2007.

42.3 Therefore, I sum up that the assessee had wrongly availed the Cenvat

Credit in respect of Service Tax paid on services received under the categories

like Agency Charges, Clearing & Forwarding Services and Foreign Commission

Agent / Foreign Bank services which are nothing but export related services and

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which cannot be termed as “Input Services”. Besides I find that though the

assessee was wrongly availing/utilizing Cenvat Credit during the period in

question, they never disclosed the said facts to the department which confirms

their malafide intent to utilize the same towards payment of Central Excise

duties, which otherwise, would have to be paid in cash from their personal

Ledger Accounts. Thus I find that the assessee has willfully suppressed the

material facts from the knowledge of department rendering themselves liable for

imposition of penalty.

42.4. In this connection, I find that the case of Goodyear India Ltd. Vs Commissioner Of Central Excise, New Delhi - 2002 (149) E.L.T. 618 (Tri. - Del.), Hon’ble CEGAT, Northern Bench, New Delhi, is applicable to the current

case wherein it was held that penalty is indeed imposable on assessee, if they

have not acted in a bona fide manner. In the instant case the assessee has

availed the Cenvat Credit in contravention to the provisions of Rule 3 of Cenvat

Credit Rules, 2004 read with rule 2(l) (ii) of the Cenvat Credit Rules, 2004. Hence

this deliberate act on the part of assessee certainly warrants imposition of

penalty

43.1 As discussed in the foregoing paras, I find that the assessee has not

divulged the particulars and nature of the services availed by them and that they

had availed Cenvat Credit on these services, which became known to

Department only at the time of Audit of records of the ISD. Thus I find that the

assessee had suppressed the material facts with intent to avail Cenvat credit in

contravention of the provisions of Rules2(l) (ii), 9 (6) read with Rule 3(1) of the

Cenvat Credit Rules, 2004 and thus the credit wrongly taken by them is required

to be recovered from them alongwith interest thereon by invoking extended

period of limitation under the provisions of Rule 14 of the Cenvat Credit Rules,

2004 read with the provisions of Section 11A(1) and Section 11AB of the Central

Excise Act, 1944.

43.2 I further hold that services on which assessee had availed Cenvat credit

cannot be termed as ‘input service’ and thereby the assessee has contravened

the provisions of Rule 2(l) (ii) read with Rule 3(1) of Cenvat Credit Rules, 2004.

Besides the assessee had not divulged these facts to the department either

through their periodical returns or through separate communication and which

become known to the department only during audit of the Input Service

Distributor. As all these contraventions have been committed by suppressing

facts with an intent to evade payment of central excise duty, the said credit

amounts are required to be recovered from the assessee with interest under rule

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14 of the CCR, 2004 read with the proviso to Section 11A and Section 11AB of

Central Excise Act, 1944. Besides on account of these contraventions the

assessee has rendered themselves liable for penal action under Rule 15(3) of

Cenvat Credit Rules, 2004.

44.1 In respect of penalty, I hereby reproduce the provisions of Rule 15 of the

Cenvat Credit Rules, 2004, as existed on upto the date 26/2/2010, which are as

under:

“15. Confiscation and penalty.- (1) If any person, takes CENVAT credit in respect of input or capital goods, wrongly or in contravention of any of the provisions of these rules in respect of any input or capital goods, then, all such goods shall be liable to confiscation and such person, shall be liable to a penalty not exceeding the duty on the excisable goods in respect of which any contravention has been committed, or two thousand rupees, whichever is greater.

(2) In a case, where the CENVAT credit in respect of input or capital goods has been taken or utilized wrongly on account of fraud, willful mis-statement, collusion or suppression of facts, or contravention of any of the provisions of the Excise Act or the rules made thereunder with intention to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Excise Act.

(3) If any person, takes CENVAT credit in respect of input services, wrongly or in contravention of any of the provisions of these rules in respect of any input service, then, such person, shall be liable to a penalty which may extend to an amount not exceeding two thousand rupees.

(4) In a case, where the CENVAT credit in respect of input services has been taken or utilized wrongly by reason of fraud, collusion, willful mis-statement, suppression of facts, or contravention of any of the provisions of the Finance Act or of the rules made thereunder with intention to evade payment of service tax, then, the provider of output service shall also be liable to pay penalty in terms of the provisions of section 78 of the Finance Act.

(5) Any order under sub-rule (1), sub-rule (2), sub-rule (3) or sub-rule (4) shall be issued by the Central Excise Officer following the principles of natural justice.”

44.2. In the instant case, the noticee is a ‘manufacturer; who have wrongly

availed Cenvat credit in respect of ‘input services’ contravening the provisions of

the Cenvat Credit Rules, 2004 and therefore penal provisions of Rule 15(3) of the

Cenvat Credit Rules, 2004 (prevailing upto the date 26.02.2010) will only apply &

hence rightly invoked in the Show Cause Notice. It is worth mentioning here that

the provisions of Section 11AC are made applicable under Rule 15(2), only in

respect of wrong availment of Cenvat Credit on ‘input’ or ‘capital goods’ but not

to ‘input services’. Therefore, I hold that penalty under rule 15(3) [prevailing at

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the material time] not exceeding rupees two thousand only is only imposable in

this case.

45. Besides I find that the provisions of Rule 15 of the Cenvat Credit Rules,

2004 have been replaced by Notification No. 6/2010-CX (NT), dated 27.02.2010

with effect from the date 27.02.2010 and However, the new provisions of Rule 15

is effective from 27.02.2010 does not apply to the instant case as the period

covered in this case is much prior to the date 27.02.2010. But in view of the

saving provisions contained in Section 38A of the Central Excise Act, 1944,

penalty under erstwhile Rule 15(3) of Cenvat Credit Rules, 2004 (i.e. prevailing

upto 26.2.2010) can be imposed in this order.

46. On the basis of the foregoing discussions, I hereby pass the following

order:

O R D E R

(i) I disallow the Cenvat Credit of Service Tax Rs.12,05,965/- (Rupees

Twelve lakh Five thousand Nine hundred Sixty-five only) and order for

reversal / recovery of the same under the provisions of Section 11A(2)

of Central Excise Act, 1944 read with Rule 14 of Cenvat Credit Rules,

2004.

(ii) I also impose a penalty of Rs.2,000/- (Rupees Two thousand only) under Rule 15(3) of the Cenvat Credit Rules, 2004, as discussed at

Para 44 and Para 45 of this order.

(iii) I order recovery of interest at the prescribed rate on the amount of

wrongly availed Cenvat Credit under the provisions Section 11AB of

the Central Excise Act, 1944 read with Rule 14 of the Cenvat Credit

Rules, 2004.

The Show Cause Notice bearing F.No. F. No. V.32/15-76/Bodal/ OA-I/09-

10 dated 26.02.2010 stands disposed of in above terms.

(M.Rahman)Joint Commissioner,

Central Excise, Ahmedabad-I

F. No. V.32/15-76/Bodal/OA-I/09-10 Date: 23.02.2011

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By R.P.A.D./ HAND DELIVERYTo,

M/s. Bodal Chemicals Ltd. Unit-I,Plot No.110, Phase-II, GIDC, Vatva, Ahmedabad – 382 445.

Copy to: 1. The Commissioner, Central Excise, Ahmedabad-I

[Attn: Assistant Commissioner (RRA), C.Ex., A’abd-I]

2. The Assistant Commissioner, C.Ex., Div-III, Ahmedabad-I

3. The Superintendent of Central Excise, AR-V, Division-III, Ahmedabad-I

4. Guard file.

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