R S Sharma : Trading is neither service nor exempted service under Credit Rules

Manufacturers engaged in manufacture of dutiable as well as exempted goods or service providers engaged in taxable as well as exempted services and availing credit on common inputs/input services are required to follow the rigours of Rule 6 of CENVAT Credit Rules. 
Rule 6 (1) of CENVAT Credit Rules provides 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). Sub-rule(2) stipulates that where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services, and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on  that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable.
If the manufacturer of goods or the provider of output service, opts not to maintain separate accounts, he is required to follow either of the following options-
(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 per cent. 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).
Now the issue arises when a manufacturer or service provider is also engaged in Trading activity and avails credit on common input services whether he is also required to follow Rule 6 of CENVAT Credit Rules.
Orion Appliances Ltd was engaged in providing maintenance and repair services and commissioning and installation service of “RO” systems. They were  availing the credit on advertising, security, courier, telephone and banking services.  These services were not entirely used in providing Maintenance and Repair services but also used in trading activity.  Credit of input services, which were entirely used in trading activity, was not available to the appellants for payment of service tax.  
Service Tax Department took a view that in view of the provisions of Rule 3 and Rule 6 of Cenvat Credit Rules, the appellant should have maintained separate accounts in respect of input services used for trading activity and other services which are liable to service tax.  
Under Credit Rules; “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.
The issue was decided by CESTAT Ahmedabad vide Order dated 7th May 2010 in case of M/s. Orion Appliances Ltd Versus Commissioner Service Tax Ahmedabad in Appeal No.ST/120/09 wherein it was held:
1. Trading activity cannot be called a service and therefore it cannot be considered as an exempted service also.  
2. Rule 6 of Cenvat Credit Rules would not be applicable when input services are used in respect of trading activity as well as taxable services
3. The procedure which can be followed by the assessee for availing input service tax credit is that he can choose and segregate the quantum of input service attributable to trading activity and exclude the same from the records maintained for availment of credit.  Naturally this cannot be done in advance since it may not be possible to forecast what would be the quantum of trading activity and other activity which is liable to service tax. 
 The only obvious solution which would be legally correct appears to be 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 deducted and the balance only availed for the purpose of 
payment of service tax of output service.