Union Budget 2011-’12 has made radical changes to various provisions of Cenvat Credit Rules, 2004 (hereinafter, “Credit Rules”). These far reaching changes have ostensibly been carried out with the objective of augmenting revenues and also to simplify complicated legal provisions. One significant change which has been brought vide the Budget 2011-12 is the insertion of the Explanation to Rule 2(e) of the Credit Rules which provides that ‘exempted services’ includes trading. This has been done specifically to overcome the judgment of the Ahmedabad Tribunal in the case of Orion Appliances Ltd. vs. CST reported at 2010 (19) STR 205, wherein it was held that trading activity is covered under sales tax law and cannot be called as a service. Further, since trading was not considered as an exempted service, some of the manufacturers as well as the service providers were taking advantage of the loophole and were taking cenvat credit of service tax paid on input services used in trading activity without any limitation. However, later in the case of Metro Shoes Pvt. Limited v. CCE, 2008 (10) S.T.R. 382 (Tri. - Mumbai), it was held that credit is not admissible on services directly or wholly attributable to trading activities. By specifically bringing trading activities within the ambit of exempted services, the provisions of Rule 6 of the Credit Rules have been made applicable to a manufacturer or service provider undertaking trading activities apart from manufacturing dutiable goods or providing taxable service i.e., a person carrying on the manufacturing and trading activity is obligated to reverse the proportionate cenvat credit availed in respect of trading activity.
Although, the legislature is competent to create a legal fiction for the purpose of assuming existence of a fact which does not really exist, however, deeming trading as an exempted service has raised questions. In the case of Orion Appliances Ltd. (supra) it was held that trading is nothing but purchases and sales and is covered under sales tax law, it may not be appropriate to call it a service, more so exempted service. These raises a fundamental question as to whether an activity which is not in the nature of service can be deemed as a service by a legal fiction and brought under the rigors of Credit Rules that applies solely to the activities of manufacture and services.
While it is true that legislature has wide powers to create a legal fiction, but it is also an established tenet that such fiction should not offend the Constitution. The Constitution of India authorizes levy of sales tax on sales and purchase of goods and service tax on the rendition of services, as such; the distinction between the sale and purchase of goods (trading) and act of rendition of service is clearly brought out for the purpose of payment of tax. Thus, the legal fiction of deeming trading (sale and purchase of goods) as service does not seem to be in accordance with the touchstone of the principles enshrined in the Constitution of India.
(The author is an Associate with Lakshmi Kumaran & Sridharan, New Delhi)