Denial of credit on input services used for collecting capital through IPO by the assessee, Whether correct?

PJ/Case Law /2016-17/3278

Case-KERNEX MICROSYSTEMS (INDIA) LTD. Versus C.C.E., CUS. & S.T., HYDERABAD-II

Citation-2016 (42) S.T.R. 533 (Tri. - Bang.)

Brief Facts- The issue is denial of Cenvat credit for the input services viz. advertisement, DVD film production, campaigning in electronic and print media etc. which were used for collecting capital through IPO by the appellant. The appellant states that the basic objective of the IPO was to collect the capital for expansion of manufacturing facilities of their products viz. anti-collision devices and also for creation of manufacturing facilities for auto driving devices by setting up of exclusive manufacturing factory at Hardware Technology Park, Shamshabad in State of Andhra Pradesh.
Appellants Contention-Appellant has, inter alia, argued that they are entitled to Cenvat credit for the input services as the definition of Rule 2(l) of Cenvat Credit Rules, 2004 is very clear; it defines ‘input service(s)’ by including all kinds of services which are used directly or indirectly in relation to setting up, modernization, renovation or repairs of a factory. The learned advocate for the appellant also cites the decision of Hon’ble Bombay High Court in the case of CCE, Nagpur v. Ultratech Cement Ltd. - 2010 (260)E.L.T.369 (Bom.) = 2010 (20)S.T.R.577 (Bom.) saying that it supports their stand that the relevant input services are covered by the definition of Rule 2(l) of Cenvat Credit Rules, 2004 and they are entitled to claim Cenvat credit for the service tax paid for the said input services. He also cites a decision in their own case by the CESTAT in Appeal No. ST/1186/2010-SM issued vide Final Order No. 20466/2015, dated 2-3-2015.
Respondents Contention-Learned AR appearing for the respondent viz. CC, CE & ST, Hyderabad-II argues that the appellant could be entitled to the Cenvat credit only in favour of new unit, which was to be set up for expansion of manufacturing facilities.
Reasoning of Judgment-All the facts of the case and the submissions of both the sides have been carefully considered. It is observed that as the definition of Rule 2(l) of Cenvat Credit Rules, 2004 is very wide and clear that all the input services which are used “directly or indirectly, in or in relation to the manufacture of the final products” would be eligible for claiming Cenvat credit. The definition of ‘input service’ also includes all the input services which are used in relation to setting up of a factory and specifically mentions advertisement or sales promotion, activities relating to business, financing and so on. The decision by Hon’ble Bombay High Court in the case of CCE, Nagpur v. Ultratech Cement Ltd. (supra) also makes this position very clear that the service tax paid for the input services which are used directly or indirectly in relation to the manufacture would be admissible for Cenvat credit. The definition as given in Rule 2(l) of Cenvat Credit Rules, 2004 is quoted below : -
Rule 2(l) “input service” means any service, -
(i) used by a provider of [output service] for providing an output service; or
(ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal,
and includes services used in relation to modernisation, 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 upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal;
The impugned order, when it has denied the Cenvat credit available to the appellant, has not talked about the new unit or the old unit. The learned advocate for the appellant however says that they would like to claim Cenvat credit in case of the new unit of the appellant company. Considering this averment of the appellant, there cannot be any dispute now whether credit should go to the old unit or the new unit; and if as claimed by the learned AR appearing for the respondent, that old unit is not entitled to claim the Cenvat credit, it is not an issue now when the appellant is pleading to claim Cenvat credit only in respect of new unit.
Considering the above discussion and the decision of the Hon’ble Bombay High Court quoted above, the appellant is entitled to the Cenvat credit which was denied by the impugned order. When the appellant has been found to be entitled to the Cenvat credit, there cannot be any question of imposition of penalty. Consequently, the impugned order is set aside and appeal is hereby allowed. Appeal is disposed of in above terms.

Decision-Appeal disposed off

Comment- The analogy of the case is that as thedefinition of Rule 2(l) of Cenvat Credit Rules, 2004 is very wide and clear that all the input services which are used “directly or indirectly, in or in relation to the manufacture of the final products” would be eligible for claiming Cenvat credit. The definition also includes all input services which are used in relation to setting up of a factory and specifically mentions advertisement or sales promotion, activities relating to business, financing and so on. Accordingly the Cenvat credit on input services used for collecting capital through IPO by the assessee could not be denied and thereby requirement of penalty is also set aside. This decision were also supported by the remarkable decision of Bombay High Court in case of CCE, Nagpur v. Ultratech Cement Ltd.
And, as while claiming the cenvat credit the learned advocate for the appellant himself states that they would like to claim credit only in respect of new unit of the appellant company. Considering this averment, there cannot be any dispute regarding the issue that whether credit should go to the old unit or the new unit. It should go to new unit only.

Prepared by-Neelam Jain

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PJ/Case Law /2016-17/3278

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