Cenvat Credit on Security Services used in captive salt pan outside Factory

PJ/Case Laws/2011-12/1304

Case: C.C.E., TIRUNELVELI v/s TUTICORIN ALKALI CHEM. & FERTILIZERS LTD.

Citation: 2011 (23) S.T.R. 372 (Tri- Chennai.)

Issue:- Whether assessee is eligible to take credit of service tax paid on security agency services utilized in a captive saltpan located outside factory premises?

Brief Facts:- Respondent are manufacturer of products like soda ash and ammonium chloride etc. At about a distance of 5 km from their factory they have a ‘captive’ saltpan and salt produced there is being used by the respondents entirely in their factory as raw material. The dispute relates to availability of credit of service tax paid on security services which was provided for the saltpan. Two Show Cause Notices were issued covering the period from January, 2005 to September, 2006 and proposing imposition of penalties.

The Original Authority confirmed the demand and imposed penalties under Senior 76 and 78 of the Finance Act, 1994. On appeal, the Commissioner (A) set aside the orders of the Original Authority.

Hence, Revenue is in appeal before the Tribunal.

Appellant’s Contention:- Revenue contended that the saltpan is not part of the factory manufacturing excisable goods. The definition of factory as per Section 2(e) of the Central Excise Act specifically excludes premises where saltpan is produced. Therefore, whatever services utilized in a saltpan cannot be treated as input services in relation to the factory which uses the salt as input. Revenue also submitted that the respondents, while taking credit of service tax, have not indicated that the security services were provided to saltpan.

Respondent’s Contention:- Respondent-assessee argued that salt is undisputedly the input for their factory and saltpan was also owned by them. The entire salt produced in the saltpan is being utilized in the respondent's factory. The entire process is integrally connected. The respondents also procure raw materials from other saltpan as they are not able to meet the entire demand from the saltpan owned by them. The equipments in use in the saltpan are also entered in the asset register maintained by the respondent's company. In view of the above, the security services provided to the saltpan should be treated as used "indirectly" and "in relation to" manufacture of soda ash etc., by the respondent’s company. The term input service as defined in Rule 2(l) of Cenvat Credit Rules, is vide enough to cover such services utilized in captive saltpan of respondents. In this regard, reliance is placed on the decision in the case of CCE, Nagpur v. Ultratech Cement Ltd. [2010 (20) S.T.R. 577 (Bom.)].

Further Respondent alternatively submitted that invocation of extended period is not justified. The fact of captive saltpan supplying salt to the respondent’s company is a well known fact and no relevant information has been suppressed. Mere payment of duty as pointed out by the audit does not amount to admission of any guilt. The demand beyond normal period is clearly time barred.

Reasoning of Judgment:- The Tribunal held that Section 2(e) of the Central Excise Act, 1944 clearly excludes salt factory/works from the ambit of definition of factory. It was observed that this definition is clearly applicable to service tax matters as clarified by Rule 2 (l) of CCR, 2004. It was held that there is no doubt that the term input services is vide enough in respect of certain services, for example, in respect of advertisement services, the same is not linked to the factory of the manufacturer. Advertisements are required to be given mostly outside the factory as they are aimed at the ultimate consumers. However, security services are area specific services. In the context of a factory, the security services have to be rendered within the factory and within the precincts of the factory. The security services used within the factory of the respondents are clearly input services. The security services used in the saltpan though belonging to the respondents are clearly outside the factory premises as recognized under the central excise law. In view of the specific exclusion of salt pan from the definition of the term factory which definition is applicable to the Cenvat Rules, the security services which are area specific cannot be treated as input services. Further the respondents also procuring salt from other saltpans. Salt is subject to ‘nil’ rate of duty. Therefore, other independent suppliers of salt cannot avail credit of security services utilized in their saltpan.

It was further held that as the issue involved interpretation of legal provisions and respondent had not suppressed any relevant information and extended period of limitation is not invokable, therefore, no penalty can be imposed on the respondent. Respondent had acted under bona fide belief that they were eligible to take credit of service tax paid on security services utilized in a captive saltpan. Therefore, demand beyond extended period not invokable and imposition of penalties not justified. Impugned order of the Commissioner (Appeal) set aside. Order of the Original Authority restored to the extent confirming the demand for normal period with interest.

Decision:- Appeal disposed off.

Comment:- This important decision has underlined that in case of area specific services, the credit will not be allowed on services used outside the factory. This is another point of interpretation on credit available on “input services”. Although the earlier decisions referred that when the service tax is business expenditure then credit will be allowed. But this decision has come out with a new concept of “area specific services”. The credit will not be allowed on such services. But the assessee will not accept the same. Let us hope that the matters are finally decided by Supreme Court of India so that all issues are settled. But it will not settle soon as the department has also changed the definition of “input services” Till date, old disputes are not settled but the department has changed the definition. It will have another round of litigation and by the time GST will come.

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PJ/Case Laws/2011-12/1304

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