Credit availment on cement and steel used in construction of new jetties.

Case:-MUNDRA PORTS & SPECIAL ECONOMIC ZONE LTD. VERSUS C.C.E. & CUS.

Citation:- 2015 (39) S.T.R. 726 (Guj.)

Brief facts:- This Tax Appeal filed under Section 35G of the Central Excise Act, 1944 is directed against the order No. A/2122/WZB/AHD/2008, dated 8-5-2008/30-9-2008 in Appeal No. ST/160/07 passed by the Customs, Excise and Service Tax Appellate Tribunal, Ahmedabad [2009 (13)S.T.R.178 (Tri.-Ahmd.)].
The short facts of the present case are that M/s. Mundra Port and Special Economic Zone Limited, Mundra Port, Mundra - appellant herein is inter alia engaged in providing Port Services. The appellant is registered for Service Tax under the taxing entries of “Port Services”, “Storage and Warehousing Services” and “Cargo Handling Services”. The appellant uses/consumes various input services during the course of providing output services. The appellant avails Cenvat credit of the Service Tax paid on such input services. A show cause notice No. V.ST/AR-G.dham/COMMR/035/2006, dated 17-4-2006 was issued wherein the appellant was asked to show cause as to why credit of the Excise duty paid on the cement and steel used in the construction of new jetties and other commercial buildings should not be denied to them. The appellant filed a reply dated 5-7-2006 to the show cause notice. In the said reply, the appellant denied the allegations made in the show cause notice in their entirety and submitted that the Cenvat credit of the Excise duty paid on cement and steel was available to them as they qualified as inputs as defined under the Cenvat Credit Rules, 2004. A second show cause notice No. V.ST/AR-G.dham/COMMR/032/2007, dated 13-4-2007 was issued wherein the appellant was asked to show cause as to why credit of (a) Excise duty paid on the cement and steel used in the construction of new jetties and other commercial buildings should not be denied to them; (b) Excise duty paid on air-conditioners installed in the premises of the appellant and used by the electrical department should not be denied to them; and (c) Service Tax paid on various services such as CHA Fees, Surveyors fees, Rent-a-Cab operator, bank charges, labour charges, installation charges, etc., should not be denied to them. The appellant filed a reply dated 1-6-2007 to the second show cause notice. In the said reply, the appellant denied the allegations made in the show cause notice in their entirety and submitted that the Cenvat credit of the Excise duty paid on cement and steel was available to them as they qualified as “inputs” and the services used by the appellant were “input services” as defined under the Credit Rules. A personal hearing in respect of both the show cause notices took place on 26-6-2007 wherein the factual background of the appellant was discussed in detail and in view of the nature of the business of the appellant, the submissions in the show cause notice replies on input and input services were reiterated.
The Commissioner of Central Excise, Rajkot vide common order dated 26-7-2007 in respect of both the show cause notices confirmed the demand along with interest and penalty upholding the allegations made in the show cause notices. Against which, the appellant preferred the appeal before the Tribunal. By the impugned order, to the extent cement and steel are used in the construction of jetty and port building are concerned, the Tribunal held that the same are not eligible inputs used in providing output service and accordingly confirmed the demand on this account. The said order of the Tribunal has been challenged in the present Tax Appeal.
This Tax Appeal has been admitted on 22-1-2009 on the following substantial question of law :
“Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in rejecting the claim of the assessee in light of the provisions of Rule 2(k) of the Cenvat Credit Rules, 2004?”

Appellant’s contention:- They have heard Mr. Hardik Modh, learned counsel for the appellant. The learned Counsel for the appellant submitted that the appellant is not manufacturer and, therefore, the provisions of Explanation 2 of Rule 2(k) would be applicable only to the factory and manufacturer. The appellant is neither having any factory nor he is manufacturer. The appellant is a service provider of port.

Respondent’s contention:- Mr. Y.N. Ravani, learned counsel for the Revenue has placed reliance on the decision of the Larger Bench of the Tribunal in Vandana Global Limitedv. Commissioner of Central Excise, Raipur, 2010 (253)E.L.T.440. They have carefully gone through the decision of the Larger Bench of the Tribunal. They do not find that amendment made in Cenvat Credit Rules, 2004 which come into force on 7-7-2009 was clarificatory amendment as there is nothing to suggest in the Amending Act that amendment made in Explanation 2 was clarificatory in nature. Wherever the Legislature wants to clarify the provision, it clearly mentions intention in the notification itself and seeks to clarify existing provision. Even, if the new provision is added then it will be new amendment and cannot be treated to be clarification of particular thing or goods and/or input and as such, the amendment could operate only prospectively. In their opinion, the view taken by the Tribunal is based on conjectures and surmises as the Larger Bench of the Tribunal used the expression that intention behind amendment was to clarify. The coverage under the input from where this intention has been gathered by the Tribunal has not been mentioned in the judgment. There is no material to support that there was any legislative intent to clarify any existing provision. For the same reason, as mentioned above, the decision of the Apex Court in Sangam Spinners Limitedv. Union of Indiaand Others, reported in (2011) 11 SCC 408 = 2011 (266)E.L.T.145 (S.C.)would not be applicable to the facts of the instant case.
Mr. Ravani has also vehemently urged that since jetty was constructed by the appellant through the contractor and construction of jetty is exempted and, therefore, input credit would not be available to the appellant as construction of jetty is exempted service. The argument though attractive cannot be accepted. The jetty is constructed by the appellant by purchasing iron, cement, grid, etc., which are used in construction of jetty. The contractor has constructed jetty. There are two methods, one is that the appellant would have given entire contract to the contractor for making jetty by giving material on his end and then make the payment, the other method was that the appellant would have provided material to the contractor and labour contract would have been given. The appellant claims that he has provided cement, steel, etc., for which he was entitled for input credit and, therefore, in our opinion, the appellant was entitled for input credit and it cannot be treated that since construction of jetty was exempted, the appellant would not be entitled for input credit. The view taken contrary by the Tribunal deserves to be set aside.

Reasoning of judgment:- Before deciding the question, they deem it appropriate to extract Rule 2(k) and 2(l) of the Cenvat Credit Rules, 2004.
“Rule 2(k) “input” means -
(i)        all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production;
(ii)        all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service.
            Explanation 1. - The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.
            Explanation 2.- Input includes goods used in the manufacture of capital goods which are further used in the factory of the manufacturer;
(l) ”input service” means any service, -
(i)        used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products up to the place of removal, and includes service used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage up to the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation up to the place of removal.”
It is not disputed that jetty was constructed and input credit was claimed on cement and steel. The aforesaid definition of Rule 2(k) was applicable and Explanation 2 did not provide that cement and steel would not be eligible for input credit. According to learned Counsel for the appellant, the appellant is not manufacturer and, therefore, the provisions of Explanation 2 of Rule 2(k) would be applicable only to the factory and manufacturer. The appellant is neither having any factory nor he is manufacturer. The appellant is a service provider of port. They need not go into this question as to whether the appellant is a factory or manufacturer or service provider in view of the fact that it is not disputed by Mr. Y.N. Ravani, learned counsel appearing for the Revenue in this Tax Appeal that the appellant provides service on port for which he is getting jetty constructed through the contractor and the appellant has claimed input credit on cement and steel. The cement and steel were not included in Explanation 2 from 2004 up to March, 2006. The Cenvat Credit Rules, 2004 were amended in exercise of the powers conferred by Section 37 of the Central Excise Act, 1944 with effect from 7-7-2009, the date on which it was notified by the Central Government from the date of the notification. According to learned Counsel for the appellant, this amended definition would apply only to the factory or manufacturer and would not apply to the service provider. According to him, either before the amendment made in the year 2009 or thereafter, the appellant was neither factory nor manufacturer and he has only constructed jetty by use of cement and steel for which he was entitled for input credit as jetty was constructed by the contractor, but the jetty is situated within the port area and the appellant is a service provider. According to the appellant, his case is squarely covered by the judgment of the Division Bench of the Andhra Pradesh High Court in Commissioner of Central Excise, Visakhapatnam-II v. Sai Sahmita Storages (P) Limited, 2011 (270)E.L.T.33 (A.P.) = 2011 (23)S.T.R.341 (A.P.)wherein in Paragraph 7, it has been clearly held that a plain reading of the definition of Rule 2(k) would demonstrate that all the goods used in relation to manufacture of final product or for any other purpose used by a provider of taxable service for providing an output service are eligible for Cenvat credit. It is not in dispute that the appellant is a taxable service provider on port under the category of port services. Therefore, the appellant was entitled for input credit and the decision of the Division Bench of the Andhra Pradesh High Court squarely applies to the facts of the case and answered the question on which the appeal has been admitted.

For the reasons given above, this Tax Appeal succeeds and is allowed. The denial of input credit to the appellant by the respondent is set aside. The appellant would be entitled for input credit. The question is answered in favour of the assessee-appellant and against the department. No order as to costs.

Decision:-Appeal allowed.

Comment:- The analogy of the case is that cenvat credit of steel and cement was denied by way of amendment in the defination of input with effect from 07.07.2009 and as the amendment was prospective in nature, the credit on such items cannot be denied for period prior to 07.07.2009. The amendment, unless and until specifically stated, is to be applied prospectively and cannot be applied retrospectively. The appellant provides service on port for which he is getting jetty constructed through the contractor and the appellant has claimed input credit on cement and steel. Appellant is entitled for input credit and it cannot be treated that since construction of jetty was exempted, appellant would not be entitled for input credit. Credit can be availed on goods used in relation to providing taxable output services.

Prepared by:- Monika Tak

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