Cenvat Credit on Outdoor catering service

PJ/Case Laws/2010-11/1008

Case: Commissioner of C. Ex., Nagpur v/s Ultratech Cement Ltd.

Citation: 2010 (20) STR 577 (Bom.)

Issue:- Whether the outdoor 'catering services' provided in the factory for employees of the factory is an input service falling under the ambit of the definition of "Input service" specified under Rule 2(l) of Cenvat Credit Rules, 2004?

Brief facts:- Respondent-assessee is engaged in the manufacture of cement. On scrutiny of their records, the Excise Authorities noted that during the period 2004-08, the respondent had availed credit of service tax paid on outdoor catering services under the provisions of CC R, 2004 & utilized the same in paying excise duty on clearance of cement manufactured by the appellant.

Revenue was of the opinion that outdoor catering services was not a "Input service" under Rule 2 (l) of the 2004 Rules and therefore, the respondent was not entitled to take credit of service tax paid on outdoor catering services. Show cause notice was issued. The Adjudicating Authority disallowed the credit so taken and imposed penalties and demanded interest.

Being aggrieved by the same, respondent filed appeal before the Commissioner (A). The Commissioner (A) allowed the appeal by following the Larger Bench decision in Commissioner of Central Excise vs. GTC Industries Ltd [2008 (12) STR 468 (T-LB)]. The Larger Bench in the case of GTC Industries Ltd had held that the cost of food borne by the factory would form part of the cost of production and hence, credit of duty paid thereon was allowable.

Against this order, Revenue filed appeal before the Tribunal. The Tribunal upheld the order of the Commissioner (A) by following the Larger Bench decision in GTC Industries Ltd.

Challenging the said order of the Tribunal, the Revenue has filed the present appeal before the High Court.

Reasoning of Judgment:-The High Court held that after taking into consideration, the definition of “input services” in brief, the definition of 'input service' not only covers services, which fall in the substantial part, but also covers services, which are covered under the inclusive part of the definition.

On the facts of the present case, the High Court noted that the services covered under the inclusive part of the definition of input service are services which are rendered prior to the commencement of manufacturing activity as well as services rendered after the manufacture of final products and includes services rendered in relation to business such as auditing, financing …..... etc. Thus, the substantive part of the definition "input service" covers services used directly or indirectly in or in relation to the manufacture of final products, whereas the inclusive part of the definition of "input service" covers various services used in relation to the business of manufacturing the final products. In other words, the definition of "input service" is very wide and covers not only services, which are directly or indirectly used in or in relation to the manufacture of final products but also includes various services used in relation to the business of manufacture of final products, be it prior to the manufacture of final products or after the manufacture of final products. To put it differently, the definition of input service is not restricted to services used in or in relation to manufacture of final products, but extends to all services used in relation to the business of manufacturing the final product.

The expression "activities in relation to business" in the definition of "input service" postulates activities which are integrally connected with the business of the appellant. If the activity is not integrally connected with the business of the manufacture of final product, the service would not qualify to be a input service under Rule 2(l) of the 2004 Rules.

In the opinion of the High Court, the ratio laid down by the Apex Court in the case of Maruti Suzuki Ltd in the context of the definition of 'input' in Rule 2(k) of 2004 Rules would equally apply while interpreting the expression "activities relating to business" in Rule 2(l) of 2004 Rules. No doubt that the inclusive part of the definition of `input' is restricted to the inputs used in or in relation to the manufacture of final products, whereas the inclusive part of the definition of input service extends to services used prior to/during the course of/after the manufacture of the final products. The fact that the definition of `input service' is wider than the definition of `input' would make no difference in applying the ratio laid down in the case of Maruti Suzuki Ltd while interpreting the scope of `input service'. Accordingly, in the light of the judgment of the Apex Court in the case of Maruti Suzuki Ltd, it was held that the services having nexus or integral connection with the manufacture of final products as well as the business of manufacture of final product would qualify to be input service under Rule 2(l) of 2004 Rules.

It was further held that in the facts of the present case, use of the services of an outdoor caterer has nexus or integral connection with the business of manufacturing the final product namely, cement. Hence, it was held that the Tribunal was justified in following the Larger Bench decision of the Tribunal in the case of GTC Industries Ltd and holding that the appellant is entitled to the credit of service tax paid on outdoor catering service.

The High Court held that in view of the ratio laid down by the Apex Court in the case of Maruti Suzuki Ltd, it cannot be said that the definition of `input service' is restricted to the services used in relation to the manufacture of final products, because the definition of `input service' is wider than the definition of `input'.

Therefore, it was held that the definition of input service read as a whole makes it clear that the said definition not only covers services, which are used directly or indirectly in or in relation to the manufacture of final product, but also includes other services, which have direct nexus or which are integrally connected with the business of manufacturing the final product. In the facts of the present case, use of the outdoor catering services is integrally connected with the business of manufacturing cement and therefore, credit of service tax paid on outdoor catering services would be allowable.

The High Court rejected the argument of the Revenue that the expression "such as" in the definition of input service is exhaustive and is restricted to the services named therein. It was held that the substantive part of the definition of `input service' as well as the inclusive part of the definition of `input service' purport to cover not only services used prior to the manufacture of final products, subsequent to the manufacture of final products but also services relating to the business such as accounting, auditing..... etc. Thus the definition of input service seeks to cover every conceivable service used in the business of manufacturing the final products. Moreover, the categories of services enumerated after the expression 'such as' in the definition of 'input service' do not relate to any particular class or category of services, but refer to variety of services used in the business of manufacturing the final products. There is nothing in the definition of `input service' to suggest that the Legislature intended to define that expression restrictively. Therefore, in the absence of any intention of the Legislature to restrict the definition of 'input service' to any particular class or category of services used in the business, it would be reasonable to construe that the expression 'such as' in the inclusive part of the definition of input service is only illustrative and not exhaustive. Accordingly, High Court held that all services used in relation to the business of manufacturing the final product are covered under the definition of `input service' and in the present case, the outdoor catering services being integrally connected with the business of the manufacture of cement, credit of service tax paid out on catering services has been rightly allowed by the Tribunal.

The argument of the Revenue that the expression "such as" in Rule 2(l) of 2004 Rules is restricted to the categories specified therein, runs counter to the C.B.E.C. Circular No.97, dated 23rd August, 2007. In that Circular the CBEC has held that the credit of service tax paid in respect of mobile phone service is admissible provided the mobile phone is used for providing output service or used in or in relation to manufacture of finished goods. Mobile phone service is neither used in the manufacture of final product nor it is specifically included in the definition of input service. Even then, the C.B.E.C. has construed the definition of input service widely so as to cover not only the services specifically enumerated in the definition of 'input service' but also cover all services which are used in relation to the business of manufacturing the final products. Therefore, the argument of the revenue which runs counter to stand taken by the C.B.E.C. cannot be accepted.

The High Court agreed with the judgment given in the case of Coca Cola India Pvt Ltd. But held that the observation of the Division Bench in the case of Coca Cola India Pvt Ltd has to be construed to mean that where the input service used is integrally connected with the business of manufacturing the final product and the cost of that input service forms part of the cost of the final product, then credit of service tax paid on such input service would be allowable.

The High Court held that Larger Bench in GTC Industries Ltd has also observed that the credit of service tax would be allowable to a manufacturer even in cases where the cost of the food is borne by the worker. It was held that that part of the observation made by the Larger Bench cannot be upheld, because, once the service tax is borne by the ultimate consumer of the service, namely the worker, the manufacturer cannot take credit of that part of the service tax which is borne by the consumer.

Respondent has fairly conceded to the above position in law and have submitted that the proportionate credit to the extent embedded in the cost of food recovered from the employee/worker has been reversed by them.

Question of law answered in favour of the respondent-assessee and against the revenue.

However, the CENVAT credit reversed by the respondent, belatedly, having not been verified by the Excise Authorities, the Excise Authorities are directed to verify the same and pass an appropriate order in that behalf.

Decision:- Appeal disposed of accordingly.

********

Comments

PJ/Case Laws/2010-11/1008

Post a Comment

Query