Commission paid to foreign agents not covered by the definition of ‘input service’ so ineligible for credit.

Case:- COMMISSIONER OF CENTRAL EXCISE, AHMEDABAD – II Vs M/s CADILA HEALTHCARE LTD

Citation: - 2013-TIOL-12-HC-AHM-ST

Brief facts:- The Respondent-assessee is engaged in the manufacture of P. & P. medicines classifiable under Chapter 30 of the First Schedule of the Central Excise Tariff Act, 1985 and is also availing CENVAT facility as provided under the Central Credit Rules, 2004. During the course of Audit by the Head Quarters Audit, it was noticed that the assessee had availed CENVAT credit in respect of services, which according to the department were not eligible as input services as defined under rule 2(l) of the Rules.
Accordingly, two show cause notices came to be issued to the assessee. Show cause notice dated 8.6.07 amounted to Rs Rs.2,06,32,909/- came to be issued in respect of the following input services: 1).Technical Testing and Analysis - Rs.1,23,09,894/- 2.) Commission paid to the foreign agents - Rs.39,45,791/- 3.) Courier service - Rs.36,54,709/- 4.) Clearing and Forwarding Service - Rs.6,87,098/- 5.) Miscellaneous Service : (i) Repairs and maintenance of ACs, Split ACs, water cooler, cold room -Rs.1908/-, (ii) Repairs and maintenance of photocopier - Rs.7,166/-, (iii) Management Consultancy service - Rs.24,480/-, (iv) Interior Decorator service - Rs.137/, (v) Construction service - Rs.1,726/- (Rs.35,416/-)

Show cause notice dated 04.03.2007 came to be issued in respect of the following input services: (1) Technical Testing and Analysis - Rs.1,70,24,431/-, (2) Technical Inspection and Certification - Rs.6,08,226/- (3) Commission paid to the foreign agents - Rs.1,93,421/-,(4) Courier service - Rs.1,72,58,378/-, (5) Clearing and Forwarding Service - Rs.6,41,977/-, and (6) (i) Repairs and maintenance service Rs.7,23,330/- (ii) Commercial Construction service - Rs.2,41,404/-, (iii) Management Consultancy service - Rs.1,09,48,135/- (iv) Interior Decorator service - Rs.31,750/- (Rs.1,19,44,619/-) Total Rs.4,76,71,052/. Under the said show cause notices the assessee was called upon to show cause as to why the aforesaid amounts should not be recovered under rule 14 of the Rules read with section 11A(1) of the Central Excise Act,1944 (hereinafter referred to as "the Act").The aforesaid two show cause notices came to be adjudicated by the Commissioner, Central Excise, Ahmedabad-II vide Orders-in-Original dated 31.03.2008 and 31.07.2008 respectively, whereby the demand came to be confirmed in respect of both the show cause notices alongwith interest as well as penalty under rule 15(3) of the Rules. The assessee carried the matter in appeals before the Tribunal. Both the appeals came to be decided by the Tribunal by a common order dated 03.08.2009, which is subject matter of challenge in these appeals before High Court.

Appellant’s Contention: - The learned Senior Standing Counsel for the appellant invited the attention of the court to the provisions of rule 2(l) of the Rules which defines "input service" to submit that the definition is in two parts. One is the main definition, which is followed by the clarifying inclusive part. Accordingly, all those services are defined as input services which are used by the manufacturer, whether directly or indirectly, in or in relation to manufacture of final product and clearance of final product from the place of removal. In the inclusive part some services which are related to specified activities are listed. It means that if the service is not used in or in relation to manufacture of final product and clearance of the same from the place of removal and further does not fall within the inclusive part, then such service cannot be treated as an input service and CENVAT credit taken on such service is not admissible.
Further submitted that insofar as input service tax credit in respect of Technical Testing and Analysis services is concerned, the said service was rendered in respect of a final product which was produced on trial basis but has not been manufactured and sold. Hence, the service tax, if any, paid in respect of such services cannot be taken credit of. Reference was made to the definition of manufacture as defined under section 2(f) of the Act, to submit that from the said definition it is clear that the Technical Testing and Analysis service availed by the assessee is not used for manufacture of final product or for clearance of the final product from the place of removal and is also not related to the activities specified in the inclusive part of the definition of input service. The input credit on a service is available in or in relation to the manufacture of final product only and not for Research and Development (R& D) of the product of which production has not been started. The definition of input credit is in the context of tax paid on input services used in or in relation to the manufacture of final product and cannot be extended to the product which is not manufactured on commercial basis. Therefore, this service does not fall within the ambit of input service, hence, CENVAT credit was not admissible in respect of the service tax paid in respect thereof.

As regards commission paid to foreign agent, it is submitted that there is a clear distinction between sales promotion and sale. A commission agent is directly concerned with sales rather than sales promotion. He, accordingly, held that service provided by commission agent does not fall within the purview of the main or inclusive part of the definition of ‘input service' as laid down in rule 2(l) of the Rules and, therefore, the assessee was not eligible for CENVAT credit in respect of the service tax paid on commission paid to foreign agents.

As regards the Courier Services, the learned counsel for the appellant submitted that the courier service used by the respondent is not used in or in relation to the manufacture of final product and is also not used for clearance of final product from the place of removal. Such service is also not related to any activity specified in the inclusive part of the definition of input service. Hence, CENVAT credit is not admissible on the service tax paid in respect of such service.

As regards the Clearing and forwarding service, the learned counsel for the appellant submitted that the service rendered by the C&F agents is also related to sales. It is used after the manufacturing activity is over and after clearance of the final products, that is, after the place of removal, therefore, it does not fall in the main part of the definition of input service and is also not in relation to any of the activities specified in the inclusive part of the definition. It was further submitted that the services rendered by C&F agents can in no manner said to be sales promotion so as to fall within the ambit of the expression ‘input service.

As regards various services, viz. Repair and Maintenance of copier machine, air conditioner, water cooler, Management Consultancy, Interior Decorator, Commercial or Industrial Construction Service, learned counsel for the appellant submitted that the referred miscellaneous services availed by the assessee do not fall in the main clause of the definition of input service and are also not related to the activities specified in the inclusive part of the definition of input service.

As regards Technical Inspection & Certification, learned counsel for the appellant reiterated the reasoning adopted by the adjudicating authority and submitted that such service is not used in or in relation to the manufacture of final products directly or indirectly and is, therefore, not covered by the definition of input service.

Respondent’s Contention:- The learned counsel for the respondent-assessee submitted that input service as provided in rule 2(l) of the Rules is divided into two parts. The first part giving specific meaning and the second part gives the inclusive meaning of the same. In the second part, and inclusive meaning is given to an input service, which otherwise would not have been covered in the main first part.The expression used in the rule is "such as" which means the stipulated activities that follow the said expression in the definition are only illustrative. The expanded part of the definition is an inclusive one and not an exhaustive list of the activities on which the input service credit can be taken by a manufacturer. In support of such submission, the learned counsel placed strong reliance upon the decision of this court in case of Commissioner of C. Ex. & Customs v. Parth Poly Wooven Pvt. Ltd., 2012(25) S.T.R. 4(Guj.) = (2011-TIOL-891-HC-AHM-ST), wherein the court has, bearing in mind various judicial pronouncements on the question of interpretation, held that the definition of ‘input service' which is coined in the phraseology of "means and includes" is wide in its expression and includes a large number of services used by the manufacturer. Such services may have been used either directly or indirectly. To qualify for input service, such service should have been used for the manufacture of the final products or in relation to manufacture of final product or even in the clearance of the final product from the place of removal. The expression 'in relation to manufacture' is wider than 'for the purpose of manufacture'. Reliance was also placed upon the decision of the Karnataka High Court in the case of Commr. Of C. Ex., Bangalore-III v. StanzenToyotetsu India(P) Ltd, 2011(23)S.T.R. 444(Kar.) = (2011-TIOL-866-HC-KAR-ST), wherein the court in the context of the definition of ‘input service' as contained in rule 2(l) of the Rules held that test is whether the services utilised by the assessee are for the manufacture of final product. Such services may be utilised directly or indirectly. The services mentioned in the section are only illustrative and not exhaustive. Therefore, when a particular service not mentioned in the definition clause, is utilised by the assessee/manufacturer and service tax paid on such service is claimed as CENVAT credit, the question is as to what are the ingredients that are to be satisfied for availing such credit. If the credit is availed by the manufacturer, then the said service should have been utilised by the manufacturer directly or indirectly in or in relation to the manufacture of final product or used in relation to activities relating to business. If any one of these two tests is satisfied, then such a service falls within the definition of "input service" and the manufacturer is eligible to avail CENVAT credit of the service tax paid on such service.

As regards technical testing and analysis it is further submitted that the assessee is engaged in the manufacture of drugs/medicines under the authority of Drug Manufacturing Licence issued under the Drugs and Cosmetics Act, 1940 and the Drugs and Cosmetic Rules, 1945 which provide for issue of licence to manufacture a drug for the purpose of examination, test or analysis. Before any new drug can be manufactured for sale, the assessee is required under rule 122-B of the Drugs and Cosmetic Rules, 1945, to obtain the approval of the licensing authority. For the purpose of obtaining such approval, it is necessary to first manufacture small batches of such drug and get the same subjected to clinical trial and to submit to the licensing authority, the results of such clinical trials. The assessee manufactures small batches of such new drug under the authority of a licence issued under rule 89 of the Drugs and Cosmetic Rules, 1945. The same are then cleared on payment of Central Excise duty and sent to laboratories which carry out clinical testing/trials in respect of such new drugs. Such clinical testing/trials of drugs/formulations constitutes the taxable service of technical "testing and analysis" as defined under Section 65(106) of the Finance Act 1994 and is liable to service tax. The laboratories which provide the said service to the respondent, pay service tax on the said service and the respondent takes CENVAT credit of the same. It was further submitted that the process of developing a new drug and getting its approval from the Drug Licensing Authority is an ongoing process which may be spread over a long period of time. If the results of the clinical trials are not satisfactory or are not approved by the licensing authority, the assessee has to carry out the necessary improvements until satisfactory results are obtained on clinical trials/testing. After satisfactory results are obtained on clinical trials/ testing which are approved by the licensing authority, the assessee can manufacture the new drug for sale. It would thus be seen that such service of "technical testing and analysis" has necessarily to be availed by the assessee for the purpose of carrying out the manufacture of new drugs and without availing such service it is impossible for the assessee to manufacture new drugs. Such service is, therefore, clearly a service used by a manufacturer in relation to its activity of manufacture of final products and it cannot be said that the said service is unrelated to the assessee's activity of manufacture of final products. The same is, therefore, covered by the "means” part of the definition of input service contained in rule 2(l) of the CENVAT Credit Rules, 2004. It was argued that the department has sought to deny the CENVAT credit of the service tax paid on the said service on the ground that many of such new drugs in respect of which the assessee availed the said service had not reached the stage of commercial production. It was submitted that the mere fact that the stage of commercial production had not been reached at the time of the issuance of the show cause notice cannot mean that the said service was not received in relation to the assessee's activity of manufacture of final products. The fact however remains that without availing the said service, it would be impossible to undertake manufacture of any new drug. Many of the drugs which had not reached stage of commercial production at the time when the show cause notice was issued have now reached stage of commercial production and the same is an ongoing process. The said service is, therefore, clearly used in relation to the activity of manufacture of the final products.
It was further submitted that the respondent is in the business of manufacture and sale of drugs. The service of "technical testing and analysis" is received solely for the purpose of and in the course of the said business activity and for no other purpose. The same is, therefore, clearly in relation to the respondent's business activity. The significance of "service received in relation to activity relating to business in the "includes" portion of the said definition would become apparent if it is borne in mind that service tax is a consumption based tax to be borne by the consumer and which cannot be a charge on the business. In this regard, the learned counsel placed reliance upon the following observations of the Supreme Court in the case of All-India Federation of Tax Practitioners and ors v. Union of India, (2007) 7 SCC 527 = (2007-TIOL-149-SC-ST):
"6. At this stage we may refer to the concept of "Value Added Tax (VAT) which is a general tax that applies, in principle, to all commercial activities involving production of goods and provision of services. VAT is a consumption tax as it is borne by the consumer. In the light of what is stated above, it is clear that service tax is a VAT which in turn is destination based consumption tax in the sense that it is on commercial activities and is not a charge on the business but on the consumer..."

If CENVAT credit is to be denied in respect of a service received in relation to business, it would mean that the manufacturer who received such service in relation to his business has to bear the burden thereof and it would thereby be a charge on his business, which is against the very nature of service tax as laid down by the Supreme Court in the aforesaid decision.

As regards commission paid to foreign agent, the learned counsel for the assessee supported the impugned order of the Tribunal by submitting that the assessee avails of services of commission agents for sale of its final products. The commission agents find buyers for the assessee's goods and thereby promote the sales of the assessee's goods. The ‘includes' portion of the definition specifically mentions services used in relation to sales promotion. The service of commission agents is, therefore, covered by the definition of input service. Moreover, such service is received in relation to the assessee's business only and not for any other purpose. The same is, therefore, a service in relation to the activity relating to business which is also covered by the ‘includes' portion of the definition. It was argued that the show cause notice had proposed to deny CENVAT credit merely on the ground that the said service is a post-manufacturing activity and is not used directly or indirectly in the manufacture of final products, completely ignoring the ‘includes' portion of the definition. It was also submitted that the service tax paid to a commission agent for sale of final product would fall within the ambit of sales promotion which is a ‘business auxiliary service' and would, therefore, also fall within the purview of ‘input service'.

As regards Courier services, the respondent submitted that courier service is used for clearance of the goods from the place of removal and is, therefore, covered by the ‘means' portion of the definition of input service. Moreover, such service is availed by the respondent only in relation to its business activity and not for any other purpose. The same is, therefore, also covered by the ‘includes' portion of the definition. They have placed reliance upon the decision of the Tribunal where the definition of ‘input service' permitted the credit of outward transportation upto the place of removal. In this regard it may be relevant to refer to the decision of this court in Commissioner of Central Excise & Customs v. Parth Poly Wooven Pvt. Ltd. = (2011-TIOL-891-HC-AHM-ST) (supra).

As regards Clearing and Forwarding Services, submitted that the respondent appointed C&F agents in different States for the purpose of sale of the respondent's final products. The goods are stock transferred to the C&F agents who store the same and thereafter sell them. In these cases there is no sale from the respondent's factory gate. The goods are sold from the premises of the C&F agents. Accordingly, in these cases "the place of removal" is the premises of the C&F agents. As per section 4(3)(iii) of the Central Excise Act, where goods are sold from the premises of the consignment agent or any other place or premises after clearance from the factory, such premises from where the goods are sold is the ‘place of removal'. The services of the C&F agents are, therefore, received for clearance of goods at the place of removal. The same is, therefore, input service in terms of the ‘means' portion of the definition.

As regards various services, viz. Repair and Maintenance of copier machine, air conditioner, water cooler, Management Consultancy, Interior Decorator, Commercial or Industrial Construction Service, the learned counsel for the assessee drew the attention of the court to the provisions of sub-rule (5) of rule 6 of the Rules to submit that in the light of the said provision it is apparent that credit of the whole of service tax paid on taxable service specified there under is admissible unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services. It was pointed out that the services availed by the assessee are specifically mentioned in the said sub-rule and as such the CENVAT credit is admissible in respect of the service tax paid on such input services.

As regards Technical Inspection & Certification, the Learned Counsel for the assessee submitted that in the course of manufacture of drugs/medicines, the respondent uses various instruments/equipment such as gauges, scales, vernier calipers, temperature indicators, thermo hygrometers, etc. In terms of the Drugs and Cosmetics Rules, 1945, the respondent is required to observe "Good Manufacturing Practices", one of the requirements of which is that instruments, balances and other equipments have to be of appropriate range, accuracy and precision and these have to be properly calibrated and checked from time to time. The respondent, therefore, avails services of "Technical Inspection and Certification agencies" that inspect/examine such instruments/equipment, and certify their standards/accuracy. These agencies pay service tax on the said service and the respondent avails CENVAT credit on the same. It was further submitted that the said instruments/equipment are used for the manufacture of final products and for that purpose they have to be of the desired standards/accuracy/precision. The service of "Technical Inspection and Certification agencies" is availed to ensure that the said instruments/equipments are of the standard/accuracy/ precision which is required for manufacture of the final products. There can, therefore, be no manner of doubt that the said service is received in relation to the manufacture of final products. The ‘means' portion of the definition is an expansive one and covers all services used in or in relation to the manufacture of final products and it is immaterial whether such use is direct or indirect. Further, such service is used in relation to the respondents business.

Reasoning of Judgment:- The Hon’ble High courtheld that the Tribunal in the impugned order has agreed with the submission made on behalf of the respondent that the manufacturing process of medicaments is not comparable to other products. A medicine, before it is released in the market, has to undergo several stages of testing and technical analysis, etc. All such products taken up by the Company for production may not reach the customers as commercial products. However, even the trial manufacture and R & D conducted in respect of such drugs which did not reach to the market has to be considered as part of the manufacturing process and business activity. The Tribunal, therefore, did not agree with the view taken by the department that in case the goods have not reached the commercial production stage, credit is not admissible.

As regards Technical Testing and Analysis Service, it was further held that the final product can be manufactured only upon approval of the regulatory authority after the product undergoes technical testing and analysis. Under the circumstances, it cannot be gain said that the activity of testing and analysis of the trial batches is in relation to the manufacture of final product. Unless such testing and analysis is carried out, it would not be possible to produce the final product inasmuch as unless the trial batches are sent for testing and analysis and approval is obtained, the final product cannot be manufactured. Under the circumstances, the services availed in respect of technical testing and analysis services are directly related to the manufacture of the final product. The contention of the department that unless the goods have reached the commercial production stage, CENVAT credit is not admissible in respect of the technical testing and analysis services availed in respect of the product at trial production stage, does not merit acceptance. Besides, the learned counsel for the assessee is justified in contending that when the product which is sent for testing and analysis is subject to payment of excise duty, the respondents cannot be heard to contend that CENVAT credit is not admissible on the service tax paid in respect of such service. Under the circumstances, the Tribunal was justified in holding that the assessee was entitled to avail of CENVAT credit in relation to service tax paid in relation to technical testing and analysis services availed by it.

As regards commission paid to foreign agent, reference may be made to the definition of ‘business auxiliary service' as defined under section 65(19) of the Finance Act, 1994, which to the extent the same is relevant for the present purpose reads thus:
Business Auxiliary Service" means any service in relation to, -
(i) Promotion or marketing or sale of goods produced or provided by or belonging to the client; or promotion or marketing of service provided on behalf of the client; or and includes services as a commission agent but does not include any information technology service and any activity that amounts to manufacture within the meaning of clause(f) of section 2 of Central Excise Act, 1944
Explanation - For the removal of doubts, it is hereby declared that for the purposes of this clause, - (a)"Commission Agent" means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person -
(i) Deals with goods or services or documents of title to such goods or services; or
(ii) Collects payment of sale price of such goods or services; or
(iii) Guarantees for collection or payment for such goods; or
(iv) Undertakes any activities relating to such sale or purchase of such goods or services;"

As regards the commission paid to foreign agent the hon’ble High Court held that it is the case of the assessee that service tax had been paid on commission paid to the commission agent for sale of final product. However, there is nothing to indicate that such commission agents were actually involved in any sales promotion activities as envisaged under the said expression. As regards the contention that in any event the service rendered by a commission agent is a service received in relation to the assessee's activity relating to business, it may be noted that the includes part of the definition of ‘input service' includes"activities relating to the business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security". The words "activities relating to business" are followed by the words "such as". Therefore, the words "such as" must be given some meaning. In Royal Hatcheries (P) Ltd. v. State of A.P., 1994 Supp (1) SCC429, the Supreme Court held that the words "such as" indicate that what are mentioned thereafter are only illustrative and not exhaustive. Thus, the activities that follow the words "such as" are illustrative of the activities relating to business which are included in the definition of input service and are not exhaustive. Therefore, activities relating to business could also be other than the activities mentioned in the sub-rule. However, that does not mean that every activity related to the business of the assessee would fall within the inclusive part of the definition. For an activity related to the business, it has to be an activity which is analogous to the activities mentioned after the words "such as". What follows the words "such as" is "accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security". Thus, what is required to be examined is as to whether the service rendered by commission agents can be said to be an activity which is analogous to any of the said activities. The activity of commission agent, therefore, should bear some similarity to the illustrative activities. In the opinion of this court, none of the illustrative activities, viz., "accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security" is in any manner similar to the services rendered by commission agents nor are the same in any manner related to such services. Under the circumstances, though the business activities mentioned in the definition are not exhaustive, the service rendered by the commission agents not being analogous to the activities mentioned in the definition, would not fall within the ambit of the expression "activities relating to business". Consequently, CENVAT credit would not be admissible in respect of the commission paid to foreign agents. Thus court is unable to concur with the contrary view taken by the Punjab and Haryana High Court in Commissioner of Central Excise, Ludhiana v. Ambika Overseas (supra). Insofar as this issue is concerned, the question is answered in favour of the revenue and against the assessee.

As regards Courier Service, the decision of this court in Commissioner of Central Excise & Customs v. Parth Poly Wooven Pvt. Ltd. = (2011-TIOL-891-HC-AHM-ST) (supra) wherein it has been held thus:

18. Bearing in mind the above judicial pronouncements, if we revert back to the definition of the term ‘input service', as already noticed, it is coined in the phraseology of "means and includes". Portion of the definition which goes with the expression means, is any service used by the manufacturer whether directly or indirectly in or in relation to the manufacture of final products and clearance of final products from the place of removal. This definition itself is wide in its expression and includes large number of services used by the manufacturer. Such service may have been used either directly or even indirectly. To qualify for input service, such service should have been used for the manufacture of the final products or in relation to manufacture of final product or even in clearance of the final product from the place of removal. The expression ‘in relation to manufacture' is wider than ‘for the purpose of manufacture' The words ‘and clearance of the final products from the place of removal' are also significant. Means part of the definition has not limited the services only upto the place of removal, but covers services used by the manufacturer for the clearance of the final products even from the place of removal. It can thus be seen that main body of the definition of term ‘input service' is wide and expansive and covers variety of services utilized by the manufacturer. By no stretch of imagination can it be stated that outward transportation service would not be a service used by the manufacturer for clearance of final products from the place of removal.

19. When we hold that outward transportation would be an input service as covered in the expression ‘means' part of the definition, it would be difficult to exclude such service on the basis of any interpretation that may be offered of the later portion of the definition which is couched in the expression ‘includes'. As already observed, it is held in several decisions that the expression ‘includes' cannot be used to oust any activity from the main body of the definition if it is otherwise covered by the expression ‘means'. In other words, the expression ‘includes' followed by ‘means' in any definition is generally understood to be expanding the definition of the term to make it exhaustive, but in no manner can the expression ‘includes' be utilized to limit the scope of definition provided in the main body of the definition. To our mind this was also not the intention of the Legislature in the present case.

20. There, of course, are certain areas which still remain to be cleared. It was vehemently contended before us by the counsel for the Revenue that later portion of the definition which provides for the inclusion clause limits the outward transportation service up to the place of removal. That being so, according to them, the outward transport service utilized by the manufacturer beyond the place of removal would not qualify as an input service within the definition of Rule 2(l). We may only notice two things in this regard. Firstly, in our view, when we find that outward transport service is covered by the main body of the definition which provides for means part, as specifically including any service directly or indirectly in or in relation to manufacture of final product or clearance of final product from the place of removal, no interpretation of the later part of the definition would permit us to exclude such a service form the sweep of the definition. Secondly, we notice that the definition of the term ‘input service' came to be amended with effect from 1-4-08 and instead of words "clearance of final products from the place of removal", the words "clearance of final products upto the place of removal" came to be substituted. What would be the position if the case had arisen after 1-4-2008 is a situation we are not confronted with. We, therefore, refrain from making any observations in this regard. We, however, cannot help noticing the change in the statutory provisions which is at the heart of the entire controversy. In so far as the cases on hand are concerned, the statutory provisions cover the service used by the manufacturer in relation to the manufacture of the final products or even the clearance of final products from the place of removal.

21. We must, however, for our curiosity reconcile the expression "from the place of removal" occurring in the earlier part of the definition with words ‘upto the place of removal" used in inclusive part of the definition. Counsel for the assessees submitted that when a manufacturer transports his finished products from the factory without clearance to any other place, such as godown, warehouse etc. from where it would be ultimately removed, such service is covered in the expression ‘outward transportation up to the place of removal" since such place other than factory gate would be the place of removal. We do appreciate that this could be one of the areas of the application of the expression ‘outward transportation upto the place of removal'. We are unable to see whether this could be the sole reason for using such expression by the Legislature.

22. Be that as it may, we are of the opinion that the outward transport service used by the manufacturers for transportation of finished goods from the place of removal upto the premises of the purchaser is covered within the definition of "input service" provided in Rule 2(l) of the CENVAT Credit Rules, 2004."

The Hon’ble High Court held that in the light of the aforesaid decision, it may be noted that the period is from 01.02.2007 to 30.09.2007, that is before the definition of the term ‘input service' came to be amended with effect from 1.4.2008 and instead of the words ‘clearance of final products from the place of removal' the words "clearance of final products upto the place of removal came to be substituted. Under the circumstances, this case would be squarely covered by the above decision and the courier services availed by the assessee whereby the courier collects the parcel from the factory gate for further transportation would fall within the ambit of the term ‘input service' as defined under rule 2(l) of the Rules. The question, insofar as this issue is concerned is answered in favour of the assessee and against the revenue.

As regards the Clearing and Forwarding agent , the Hon’ble High Court made reference to the definition of "clearing and forwarding agent" as defined under section 65(25) of the Finance Act, 1994 which reads thus:

" Clearing and forwarding agent" means any person who is engaged in providing any service, either directly or indirectly connected with the clearing and forwarding operations in any manner to any other person and includes a consignment agent. "

The Hon’ble High Court Held that ordinarily, a C & F agent receives goods from the factory or premises of the manufacturer (the Principal) or his agents and stores these goods, dispatches these goods as per orders received from the Principal, arranges transport, etc. for the purpose and prepares invoices on behalf of the Principal. In respect of such service, the C&F agent receives commission on the basis of agreed terms. Therefore, an essential characteristic of any service, to fall in the category of C & F agent, is that the relationship between the service provider and receiver should be in the nature of principal (owner) and agent. The C & F Agent carries out all activities in respect of goods right from the stage of their clearances from the premises of the principal to its storage and delivery to the customers. At this stage reference may be made to the definition of the expression "place of removal" as defined under clause (c) of sub-section (3) of section 4 of the Act which reads thus:

(c)"place of removal" means-
(i) a factory or any other place or premises of production or manufacture of excisable goods;
(ii) a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty;
(iii) a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory; from where such goods are removed.

Thus the clearing and forwarding agent is an agent of the principal. The goods stored by him after clearance from the factory would therefore, be stored on behalf of the principal, and as such the place where such goods are stored by the C & F agent would fall within the purview of sub-clause (iii) of clause (c) of section 4(3) of the Act and as such would be the place of removal. Viewed from that light the services rendered by the C & F agent of clearing the goods from the factory premises, storing the same and delivering the same to the customer would fall within the ambit of rule 2(l) of the Rules as it stood prior to its amendment with effect from 1.4.2008, namely clearance of final products from the place of removal. However, this court is not in agreement with the view adopted by the Tribunal that such services would amount to sales promotion and is, therefore, an input service. For the reasons stated while discussing the issue as regards service commission paid to foreign agent, the services rendered by the C & F agents cannot be said to be in the nature of sales promotion. This issue stands answered accordingly, in favour of the assessee and against the revenue.

As regards various services, viz. Repair and Maintenance of copier machine, air conditioner, water cooler, Management Consultancy, Interior Decorator, Commercial or Industrial Construction Service, the Hon’ble High Court refer to the provisions of sub-rule (5) of rule 6 of the Rules which read thus:

6(5) Notwithstanding anything contained in sub rules (1),(2) and (3), credit of the whole of service tax paid on taxable service as specified in sub-clause (g), (p), (q), (r),(v), (w), (za), (zm), (zp), (zy), (zzd), (zzg),(zzh), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance Act shall be allowed unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services.

The present case undisputedly does not relate to the manufacture of exempted goods. Hence, what is required to be examined is as to whether the miscellaneous services availed by the assessee fall within the categories specified in sub-rule (5) of rule 6 of the Rules. It may be pertinent to note that repair and maintenance services fall under sub-clause (zzg), Management Consultancy services are covered under sub-clause (r), services rendered by an Interior Decorator fall under sub-clause (q) and Commercial or Industrial Construction Services fall under sub-clause (zzq) of clause (105) of section 65 of the Finance Act. Thus, all the above miscellaneous services availed by the assessee find a specific mention in sub-rule (5) of rule 6 of the Rules in respect of which credit of the whole of service tax paid on taxable service is admissible.

The Hon’ble High Court Held further that next question arises for consideration is as to whether the provisions of sub-rule (5) of rule 6 of the Rules can be taken into consideration while construing the import of the term ‘input service'. It is well settled as a canon of construction that no provision or word in a statute has to be read in isolation. In fact, the statute has to be read as a whole. A statute is an edict of the legislature. It is incumbent on the court to avoid the construction if possible on the language which would render a part of the statute devoid of any meaning or application. In the interpretation of statutes, the courts always presume that the legislature inserted every part thereof for a purpose and the legislative intention is that every part of the statute should have an effect.(V. Jaggannadha Rao v. State of A.P..,(2001) 10 SCC 401). The Supreme Court in RBI v. Peerless General Finance & Investment Co. Ltd., (1987) 1 SCC 424 = (2002-TIOL-670-SC-MISC),held thus:

"33. Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at, in the context of its enactment, with the glasses of the statute-maker, provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With these glasses we must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act. No part of a statute and no word of a statute can be construed in isolation. Statutes have to be construed so that every word has a place and everything is in its place."

Thus, for the purpose of determining the intention of the legislative or the rule making authority, the statute has to be read as a whole. The above principles would also be applicable to subordinate legislation. Therefore, for the purpose of understanding the scope of the definition of ‘input service' it is permissible to look to the provisions of sub-rule (5) of rule 6 which gives an insight of the intention of the rule making body. Sub-rule (5) of rule 6 gives a clear indication that the rule making body intended the services mentioned therein to be input service. Otherwise, there was no necessity for specifically providing that CENVAT credit would be admissible in respect of the services specified therein. If the services mentioned in sub-rule (5) of rule 6 of the Rules are not considered to be ‘input services' it would not be possible to reconcile rule 2(l) and sub-rule (5) of rule 6 of the Rules, inasmuch as the rules contemplate entitlement to CENVAT credit on service tax paid on input service. If the services mentioned in sub-rule (5) are not considered as ‘input services' one fails to understand how the said provision can be given effect to. It may be noted that rule 3 of the Rules makes provision for CENVAT credit, and, interalia, provides that a manufacturer or producer of final products or a provider of taxable service shall be allowed to take CENVAT credit of the duties, service tax leviable under section 66 of the Finance Act and cesses enumerated thereunder, paid on (ii) any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, 2004. Thus, CENVAT credit is admissible on service tax paid on any input service. If the services mentioned in sub-rule (5) of rule 6 of the Rules are not in the nature of input service, the provisions of sub-rule (5) would be in conflict with the provisions of rule 3 of the Rules which certainly cannot be the intention of the rule making body. Besides, the inclusive part of the definition of ‘input service' specifically includes services used in relation to renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, activities relating to business, such as accounting, computer networking etc. Thus, the services rendered by interior decorator, commercial and industrial construction services would squarely fall within the inclusive definition of ‘input service'. Such services would, therefore, fall within the ambit of ‘input service' as defined under rule 2(l) of the Rules. As regards services availed by the assessee towards repair and maintenance of copier machine, air conditioner, water cooler, etc. it cannot be gainsaid that such equipment are necessary for factory buildings as well as for activities relating to business and are, therefore, integrally connected with the business of the assessee. Under the circumstances, no infirmity can be found in the view taken by the Tribunal that such services are eligible services for the purpose of taking CENVAT credit on the service tax paid thereon.

As regards Technical Inspection and Certification, it is apparent that technical inspection and certification services have been availed of by the assessee in respect of inspection and checking of instruments which are used for the purpose of measuring size: gauges and vernier calipers, measuring weight: scales, and measuring temperature: temperature indicators, and instruments like thermo hygrometers for measuring humidity and temperature, etc. which are all in the nature of precision instruments which measure various factors with precision. Such instruments/equipments, by their very nature are required to be of the required standards, accurate and precise. For the purpose of maintaining such qualities the instruments/equipments are required to be checked and properly calibrated from time to time for which purpose the respondent requires to avail of the services of technical inspection and certification agencies. It cannot be gainsaid that the above instruments are used in or in relation to the manufacture of final products.

Considering the fact that it is a requirement of the Drugs and Cosmetics Act and the rules framed there under that such instruments/equipment be properly calibrated and checked from time to time, it would appear that such certification is a statutory requirement and it is necessary for the assessee to avail of such service, inasmuch as in the absence of such certification, the assessee may have to face the consequences of breach of such statutory provisions. When, the above referred instruments/equipment are used in and in relation to the manufacture of the final products, maintenance, checking and calibration of such instruments would as a necessary corollary, also fall within the expression "in relation to manufacture of the final products". Under the circumstances, the service of technical inspection and certification agencies availed by the assessee would clearly fall within the ambit of input service. The contention that such certification has no nexus with the manufacture of final product is evidently fallacious as it would not be permissible for the assessee to use the necessary instruments without certification. Another aspect of the matter is that services rendered by a technical inspection and certification agency fall under sub-clause (zzi) of clause (105) of section 65 of the Finance Act which is one of the clauses specified under sub-rule (5) of rule 6 of the Rules. The Tribunal was, therefore, justified in holding that such service fell within the purview of input service as contemplated under rule 2(l) of the Rules. This issue, accordingly, stands answered in favour of the assessee and against the revenue.

In the light of the above discussion, the appeal partly succeeds and is allowed to that extent. The impugned order of the Tribunal to the extent the issues are decided in favour of the revenue is hereby quashed and set aside. The rest of the order is sustained.

Decision:- Appeal partly allowed.

Comment:- The case mainly discussed the admissibility of credit in respect of Technical Testing and Analysis services and credit on service tax paid on commission paid to foreign agents in detail. As regards technical testing services, it has been held by the High court that as the assessee being pharmaceutical company, testing is statutorily required during the research and development stage and so credit is admissible even if the product is run on trail stage only. As regards commission paid to foreign agent, it was held that the said service is more directly related to sales rather than sales promotion and so does not comes within the ambit of the definition of ‘input service’.

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PJ/Case Laws/2012-13/1382

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