CENVAT Credit - Common input services - Manufacture and trading
WHEN a manufacturer uses common input services for manufacture of goods and trading of goods, how is the credit taken on the common input services regularized?
There is no problem after 1.4.2011, but prior to that trading was not defined as a service and there was no clarity on the amount of credit to be reversed. Trading was declared to be an exempted service from 1.4.2011. As nobody was clear on the amount to be reversed, one Commissioner demanded 6% on the total trading value.
As per the 2011 amendment to the Rules, value of trading was to be taken as the difference between the sale price and the cost of goods sold or ten per cent of the cost of goods sold, whichever is more.
But then the Department was not ready to accept this formula for the pre 2011 period. This was agitated in the case of Mercedes Benz - and the Tribunal noted:
For example, if the turnover in particular period is say Rs.1000 crore out of which turnover of Rs.700crore is pertaining to the indigenous cars and turnover of Rs.300 crores pertains to the imported and traded cars then if the input credit of 10 crores is available then 7 crore should be considered for the manufactured cars in India and credit of Rs.3 crore should be considered pertaining to imported and traded cars.
If we go by the argument of the Ld. Sr. Advocate then the value of traded cars will have to be taken as Rs.30 crores and total turnover will be considered as Rs.730 crores and credit of Rs.10 crores will have to have apportioned in the ratio of 700:30 or 70:3.
Obviously, this would be leading to incorrect results. It would amount to 96% expenditure (relating to sales promotion) is for the domestically manufactured goods and approximately 4% expenditure on the imported and traded cars.
And the Tribunal made a fantastic observation: "perhaps the said new method has been adopted to encourage the trading of the goods rather than the manufacturing of the goods.."
This case reached the High Court which recently held (), "The Tribunal must firstly refer to the substantive Rule and as operative prior to 1st April 2011 and then arrive at a conclusion in relation to the Explanation introduced with sub-clauses with effect from 1st April 2011. On its introduction and even prior thereto, we do not find any justification then to hold that the Parliament intended to encourage trading of goods rather than manufacturing of the same."
The High Court remanded the case to the Tribunal with a condition that "the Tribunal should not arrive at a conclusion that the amendment has been adopted to encourage trading in goods rather than manufacturing of the same."
If the CBEC is really serious about reducing litigation, this is one issue which calls for urgent attention. They can simply give a clarification that what applies after 1.4.2011 would also apply for the previous period, especially as there was no contrary provision during that period. What is the department's logic in not following the procedure for the previous period, except that Board corrected its mistake only in 2011. Should the assessees suffer for Board's mistakes?