Sale of input at cost by manufacturer is it trading?

A manufacturer of goods sold the input raw material at cost to vendor. Considering the same as trading activity, the Central Excise department disallows input service tax CENVAT. The department's contention is that there was trading activity. However, manufacturer has contended that it was sale of inputs as such without incurring any profit as the vendor was going to manufacture some part and in turn, the vendor was to supply the same to manufacturer. The department has taken sale of goods as such as "Trading" activity and slapped SCN to the manufacturer. Manufacturer argues that it was sale of inputs at cost and without any profit. Is the department justified in disallowing input credit of service tax?

if sales invoice is raised then input credit would be reversed,

if sales invoice is not raised then

Under earlier Rule 4(5)(a) of Cenvat Credit Rules, the Cenvat credit was allowed even if any inputs or capital goods as such or after being partially processed were sent to job worker for further processing, testing, repair, re-conditioning (or for the manufacture of intermediate goods necessary for the manufacturing of final products) or any other purposes, and it was established from the records, challans or memos or any other document produced by the manufacturer or the provider of output service, taking the cenvat credit that the goods are received back in the factory within one hundred and eighty days of their being sent from the factory or premises of the provider of output service, as the case may be. And if the inputs or the capital goods were not received back within one hundred eighty days, the manufacturer or provider of output service was required to pay an amount equivalent to the CENVAT credit attributable to the inputs or capital goods by debiting the CENVAT credit or otherwise, but the manufacturer or provider of output service could take the CENVAT credit again when the inputs or capital goods were received back in his factory or in the premises of the provider of output service.

ii) the CENVAT credit on capital goods shall be allowed even if any capital goods as such are sent to a job worker for further processing, testing, repair, re-conditioning or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose, and it is established from the records, challans or memos or any other document produced by the manufacturer or the provider of output service taking the CENVAT credit that the capital goods are received back by the manufacturer or the provider of output service, as the case may be, within two years of their being so sent:

Provided that credit shall be allowed even if any capital goods are directly sent to a job worker without their being first brought to the premises of the manufacturer or the provider of output service, as the case may be, and in such a case, the period of two years shall be counted from the date of receipt of the capital goods by the job worker;

(iii) if the inputs or capital goods, as the case may be, are not received back within the time specified under sub-clause (i) or (ii), as the case may be, by the manufacturer or the provider of output service, the manufacturer or the provider of output service shall pay an amount equivalent to the CENVAT credit attributable to the inputs or capital goods, as the case may be, by debiting the CENVAT credit or otherwise, but the manufacturer or the provider of output service may take the CENVAT credit again when the inputs or capital goods, as the case may be, are received back in the factory or in the premises of the provider of output service.”