Liabiltiy if service tax on service charges paid to Sub-contractor

PJ/Case Laws/2011-12/1302

Case: COMMISSIONER OF C. EX., CHENNAI v/s AREVA T & D INDIA LTD.

Citation: 2011 (23) S.T.R. 33 (TH. - Chennai)

Issue:- No service tax on service charges paid to sub-contractors when main service provider paid service tax on the service provided to ultimate consumer.

Assessee having manufacturing unit and also providing output service – no bar on utilization of credit for payment of service tax or excise duty.

Brief Facts:- On scrutiny of respondent’s private records for the period Oct.'05 to July, 2009, it was noticed that the service centre of M/s. Areva have appointed two engineering firms, viz., M/s. INEL Power Systems Engineers (P) Ltd., and M/s. INE Value Creators & Consultants, to undertake repair services at the customers' site. The services had been rendered on behalf of the respondents, and these firms raised invoices on the respondents including service tax, who in turn after availing credit raised invoices on the customers for service charges plus service tax. The respondents had taken credit of service tax so paid at their manufacturing unit and have utilised the same for payment of excise duty.

Department alleged that since the repairs are undertaken at customers' site, it appeared that the said services had no relevance to the manufacturing activities and hence would not qualify as input service. Hence, show-cause notice was issued demanding the wrongly availed credit along with interest and proposing penalty.

The Adjudicating Authority confirmed the demand along with interest under Rule 14 of the CENVAT Credit Rules, 2004 read with proviso to Section 11A(1) of the Central Excise Act, 1944.

Aggrieved by the impugned order, respondents filed appeal before the Commissioner (Appeals) who has set aside the order of the Adjudicating Authority.

Hence, Revenue is in appeal before the Tribunal.

Appellant’s Contention:- Revenue submits that respondents while rendering the service of 'Repair and Maintenance' engaged two engineering firms for executing the actual repair work at the customers' site. The contract for 'Repair and Maintenance' is between the respondent and the ultimate customers. The respondents receive service charges from the ultimate customers and pass on part of it to the engineering firms who have been engaged by the respondents for executing the repair activities. Original authority has rightly held that the engineering firms appointed by the respondents only did the repair services and that the respondents did not render even part of the repair services. Therefore, the services rendered by the engineering firms have no nexus with the services said to have been rendered by the respondents and therefore no credit of service tax paid by the engineering firms can be taken as credit. He also submits that credit even if eligible could not be utilised for paying excise duty on goods manufactured by the respondents merely because they are centrally registered.

Revenue also submits that the department is not disputing the eligibility of credit when the respondents are directly undertaking the repair services and raising invoices directly on the customers.

Respondent’s Contention:- Assessee draws attention to the findings of the original authority that the respondents are paying service tax in respect of the amounts collected from the ultimate customers for the activities executed through the engineering firms appointed by the respondents. The services rendered by the engineering firms are in connection with the overall services rendered by the respondents to the ultimate customers. Therefore, the services rendered by the engineering firms are clearly input services in respect of services ultimately rendered by them to the ultimate customers. It also submits that, as an assessee holding centralized Registration, they are entitled to utilise the CENVAT credit amount either for the purpose of paying excise duty or the service tax.

Reasoning of Judgment:- The Tribunal held that mere engagement of sub-contracts for some of the activities does not take away the role of respondents as service provider to their ultimate clients. The reasoning adopted by the original authority may lead to the conclusion that the respondents are not liable to pay any service tax at all in respect of activities undertaken through sub-contractors. Apparently, the implications are not being understood or appreciated by the original authority. From the facts of the case, it emerges that the respondents are rendering services to their ultimate customers and while rendering the said service they are receiving services from the engineering firms appointed by them. They receive payment of service charges from the ultimate customers and part of it is paid to the sub-contractors for the services rendered by them and naturally the respondents are making some profits. When service tax is being paid on the full amount paid by their customers to the respondents, the service charges paid by the respondents to the sub-contract engineering firms has to be treated as towards services received by them from the said firm and such services definitely qualify to be considered as input services. Therefore, the service tax paid by the engineering contracting firms has been rightly taken as credit by the respondents as held by the Commissioner (Appeals).

With regard to the second objection that the service tax credit has been used by the respondents in respect of goods manufactured and cleared by them, the Tribunal held that there is no merit in the same. Rule 3(1) of the CENVAT Credit Rules permit a 'manufacturer' or a 'service provider' to take credit of duty paid on inputs, capital goods and service tax paid on input service. In the present case, the respondents is both a 'manufacturer' and a 'service provider'. There is no stipulation in the rule that there should be separate CENVAT credit accounts maintained when the respondents are acting both as a 'manufacturer' and a 'service provider. The CENVAT credit is a kind of common kitty into which (a) credit of CVD paid on imported goods (if any) is taken; (b) credit of duty paid on inputs and capital goods procured locally from the domestic market is taken; and (c) credit of service tax paid on services utilised taken.

Rule 3(4) provide for manner of utilization of the credit. There is no violation, in utilizing the credit from the common kitty for payment of excise duty on goods manufactured and cleared by the respondents and for paying service tax on the services provided by the respondents. Therefore, the objection on this ground is also not valid.

Decision:- Appeal rejected.

Comment:- This decision has underlined that the service tax credit available can be utilized towards payment of service tax or for manufacture of final product. There is no one to one correlation between the same.

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PJ/Case Laws/2011-12/1302

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