Credit eligibility of security services availed at residential colony for staff.

PJ/CASE LAW/2015-16/2741

Case:-MAHINDRA & MAHINDRA LTD. VsCOMMISSIONER OF C. EX., NASIK

Citation:-2015 (39) S.T.R. 316 (Tri. - Mumbai)

Brief Facts:-The brief facts of the case are that the appellant is having a housing colony and club room attached to their manufacturing unit at Igatpuri, Nashik. They have availed credit of Service Tax paid on security services provided at the residential colony and club room, repair of mixer used in the canteen, civil work done at the colony, furniture/wooden partition done for VIP rooms and telephone lines installed at residence of the officers/club rooms during the period November, 2005 to September, 2010. A demand amounting to Rs. 7,31,472/- was issued to them which was confirmed along with interest and penalty by the original authority vide OIO 27/Addl./Adj/2011, dated 21-3-2011. Appellant filed appeal before the Commissioner (Appeals) who vide Order dated 30-6-2011 dismissed the appeal of the appellant except allowing credit of Rs. 5611/- and corresponding interest and penalty in respect of Service Tax paid on furniture/wooden partition on VIP room and repairing of mixer used in the canteen. Another show cause notice was also issued for the similar services for the period October, 2010 to March, 2011 for recovery of Rs. 4,27,335/- which was also confirmed along with interest and penalty by the Adjudicating Authority vide Order No. 395/CEX/PC/001/2011, dated 30-11-2011. The appellant filed an appeal against the said order, which was rejected by the Commissioner (Appeals) vide order dated 29-2-2012. Commissioner (Appeals) in his order upheld the order of the original authority; however, the penalty under Rule 15 was set aside. Aggrieved by the said two orders, the appellants are before Tribunal.

Appellant contentions:-The main contention of the appellant is that in view of the Hon’ble High Court judgment in Ultratech Cement Ltd.- 2010 (20) S.T.R. 577 (Bom.), they are entitled to the credit keeping in view the fact that residential colony and the club room are absolutely essential for the functioning of the factory at the relevant place. The authorised representative of the appellant further stated that they had set up the said unit in 1983 and 1989 when there were no facilities available in the area and it was absolutely necessary for them to have housing colony and club facility and in view of the Hon’ble High Court judgment in the case of Ultra-tech Cement Ltd. (supra) as also the judgment of the Hon’ble High Court of Andhra Pradesh in ITCreported in 2012-TIOL-199-HC-AP-ST = 2013 (32) S.T.R. 288 (A.P.), they are entitled to the Cenvat credit. Ld. Authorised Representative of the appellant firm further stated that in this case no penalty is imposable in view of this Tribunal’s decision in the case of Bhushan Steel- 2014-TIOL-144-CESTAT-MUM = 2014 (310) E.L.T. 918 (Tri.-Mum.) and also in view of the decision of the Tribunal in 2014-TIOL-2122-CESTAT = 2015 (37) S.T.R. 533 (Tri.-Mum.).

Respondent contention:-Ld. AR appearing on behalf of Revenue, on the other hand, stated that the case is squarely covered by the decision of Hon’ble High Court of Bombay in Manikgarh Cement- 2010 (20) S.T.R. 456 (Bom.) and appellants are therefore, not entitled to take any credit. Ld. AR also further stated that the said decision of the Hon’ble High Court is based upon the decision of the Hon’ble Supreme Court in the case of Maruti Suzuki Ltd.- 2009 (240) E.L.T. 641 (S.C.) and is by the same Bench who issued judgment in the case of Ultratech Cement Ltd.(supra) and is specific to housing colony/club.

Reasoning of Judgment:-Tribunal has considered the submission made by both sides.
There is no dispute that the credit has been taken in respect of services which were availed in the residential colony/club house of the appellant. Hon’ble High Court of Bombay in the case of Manikgarh Cement (supra) has observed as under :-
“8. In our opinion, establishing a residential colony for the employees and rendering taxable services in that residential colony may be a welfare activity undertaken while carrying on the business and such an expenditure may be allowable under the Income Tax Act. However, to qualify as an input service, the activity must have nexus with the business of the assessee. The expression ‘relating to business’ in Rule 2(1) of Cenvat Credit Rules, 2004 refers to activities which are integrally related to the business activity of the assessee and not welfare activities undertaken by the assessee.
9. Applying the ratio laid down by the Hon’ble Apex Court in the case of Maruti Suzuki Limited v. Commissioner of Central Excise, Delhi (supra), we hold that unless the nexus is established between the services rendered and the business carried on by the assessee, the benefit of Cenvat credit is not allowable. In the present case, in our opinion, rendering taxable services at the residential colony established by the assessee for the benefit of the employees, is not an activity integrally connected with the business of the assessee and therefore, the Tribunal was not justified in holding that the services such as repairs, maintenance and civil construction rendered at the residential colony constitutes ‘input service’ so as to claim credit of Service Tax paid on such services under Rule 2(1) of the Cenvat Credit Rules, 2004.”
Tribunal also studied the judgment of the Hon’ble High Court of Bombay in Ultratech Cement Ltd. (supra). In the said judgment in para 34, the Hon’ble High Court observed as under :-
“34. Therefore, 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.”
A combined of the two judgments will make it clear that what is permitted is the input services which are integrally connected with the manufacturing of the final product, and residential colony for the employees and the clubs are welfare activity for the staff undertaken by the appellant while carrying the business but has no nexus with the business of the manufacturing the final product. Under these circumstances, the appeals filed by the appellant are devoid of any merits.
However, keeping in view the fact that during the period there was disputes on the issue and different authorities were taking different interpretation; for, e.g., the Hon’ble High Court of Andhra Pradesh in ITC Ltd. (supra) had taken a different view, in Tribunal’s view, this is not a fit case for imposition of penalty under Section 11AC read with Rule 15(2) of Cenvat Credit Rules. Accordingly, the said penalty was set aside.
Except for the above modification relating to penalty, the appeals are dismissed.

Decision:- Appeals dismissed.

Comment:- The crux of the case is that Cenvat credit of input services permissible in respect of input services which are integrally connected with manufacturing of final product. Moreover, Residential colony for employees and clubs are welfare activity for staff and has no nexus with business of manufacturing of final product. Hence, the credit was disallowed but penalty was set aside on account of contrary decisions on the issue during the material period of time.

Prepared By: Meet Jain

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PJ/CASE LAW/2015-16/2741

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