Whether credit admissible if a service is availed for venturing into a new business line which is ultimately abandoned?

Case:- LYKA LABS LTD. Vs COMMISSIONER OF CENTRAL EXCISE, SURAT

Citation:- 2013 (32) S.T.R. 79 (Tri. - Ahmd.)

Issue:- Whether credit admissible if a service is availed for venturing into a new business line which is ultimately abandoned?

Brief facts:- The facts of the case in brief are that the appellant availed Cenvat Credit amounting to Rs. 1,92,506/- on the service received from M/s. Millennium Herbal Care as per invoice No. 1 dated 2-1-2008, regarding the research formation, standardization of raw material and preclinical studies. The services were for the various herbal products which were not manufactured by the appellant. The department took a view that the services did not fall within the purview of input services and accordingly a show cause notice was issued which was adjudicated after due process of law and the adjudicating authority confirmed the demand of Rs. 1,92,506/- along with interest and imposed equal penalty vide impugned order-in-original. Aggrieved by such an order appellant filed an appeal before the first appellate authority. The first appellate authority also did not agree with the contentions raised by the appellant and rejected his appeal. Hence the present appeal before the Tribunal.

Appellant’s contention:-Ld. counsel who appeared on behalf of the appellant submitted that the appellant was a manufacturer of medicaments falling under Chapter No. 30. It was his submission that in order to diversify into various other activities, appellant shortlisted herbal products as one of the area wherein they would like to expand the business. After such policy decision, they engaged services of one M/s. Millennium Herbal Care for research, standardisations of raw material and preclinical studies. The said M/s. Millennium Herbal Care raised an invoice on which service tax liability was discharged which the appellant availed as Cenvat credit. He then took through the definition of input services as mentioned in Rule 2(l) of the Cenvat Credit Rules, 2004. Further he submitted that the input service had been used by the appellant for the business activity as appellant had an intention to diversify into herbal products. He also claimed that the Cenvat credit of the service tax paid on input service was eligible to be availed for the services rendered for setting up of a factory. It was his submission that if it is so, that activity needed to be considered as an activity in relation to the business. For the said proposition, he relied upon the judgment of Hon’ble High Court of Bombay in the case of Ultratech Cement Ltd. - 2010 (20)S.T.R.577 (Bom.) = 2010 (260)E.L.T.369 (Bom.). According to him, the Cenvat credit availed by the appellant was correct and hence interest could not be levied under the provisions of Section 11AB or the provisions of Rule 14 of the Cenvat Credit Rules, 2004 as was during the relevant period as the appellant had not taken the credit wrongly. The learned counsel also added that penalty could not be imposed on the appellant as the appellant had bona fide belief in availing the Cenvat credit of service tax paid by M/s. Millennium Herbal Care.

Respondent’s contention:- Ld. D.R. on the other hand read Rule 3 of the Cenvat Credit Rules, 2004 and submitted that eligibility to avail Cenvat credit was if it was utilised in the manufacturing of final product. He submitted that the provisions of Rule 2(l) could not be brought into play for the purpose of availment of Cenvat credit, as it was undisputed that the appellant had not produced any herbal products after availing Cenvat credit. It was his submission that there had to be a nexus between the final products manufactured and cleared for availing Cenvat credit of service tax paid on the services rendered. Ld. D.R. held that the judgment of the Hon’ble High Court in the case of Ind-Swift Laboratories Ltd. - 2011 (265)E.L.T.3 (S.C.) = 2012 (25)S.T.R.184 (S.C.)for imposition of interest would come into play as the Apex Court had held that once the credit had been availed wrongly, interest liability would arise. He also read the judgment of the Hon’ble Supreme Court in the case ofPradyumna Steel Ltd.- 1996 (82)E.L.T.441 (S.C.)for the proposition that mentioning or non-mentioning of wrong provisions of law in show cause notice was itself not sufficient to invalidate the exercise of such power. He further submitted that the said proposition was for the argument raised by the ld. counsel that a show cause notice was not invoked the imposition of penalty under sub-rule (2) of Rule 15 of Cenvat Credit Rules, 2004.
Reasoning of judgment:- The Hon’ble judge held that the factual matrix in the case was that appellant was a manufacturer of P or P medicaments and discharging appropriate duty on the final products so manufactured. It was also undisputed that in order to diversify, they had proposed to enter into manufacturing of herbal products, for which they had engaged services of consultant for ascertaining the market requirement, research requirement, standardization of materials and preclinical studies. On receipt of such report from the consultant, they were deliberating on the question of expansion/diversification. During the interregnum period till the decision was taken, appellant availed Cenvat credit of the service tax paid by such consultant as service provider. On a specific query from the Bench, ld. counsel for the appellant submitted that the appellant had abandoned the idea of venturing into the manufacturing of herbal products due to business exigencies.
According to him,factual matrix needed to be appreciated whether the availment of Cenvat credit by the appellant under Cenvat Credit Rules, 2004 of the service tax paid by the service provider was in accordance with law or not.

Plain reading of the definition of input service as enshrined in Rule 2(l) of the Cenvat Credit Rules, 2004 would indicate that input service is a service which is used by provider of a taxable service for providing output service or used by the manufacturer directly or indirectly, in or in relation to the manufacturer of final products. The service received by the appellant from service provider in the case was regarding the starting up of a formation for manufacturing of herbal products, which never materialised. The ld. counsel appearing for the appellant tried to emphasise that it was in course of the business activity, would not carry the case of the assessee any further inasmuch as, the definition of input service specifically talks about use of the said service by the manufacturer for the manufacture of final products either directly or indirectly, in or in relation to. In Tribunal’s view, the definition has to be read with the definition of final products under Rule 2(h) of the Cenvat Credit Rules, 2004 which reads as under :

“‘Final products’ means excisable goods manufactured or produced from input or using input service”.

On holistic reading of definition of final products and definition of input service as enshrined in Rule 2 of the Cenvat Credit Rules, 2004, it had to be held, in the said case, that having abandoned the plan of diversification in the manufacturing of herbal products, the services rendered by the consultant on this specific products, credit of said service tax, would not be available to the appellant. In view of the foregoing reasons, on merits, he found that the appellant had no case of availing Cenvat credit of the service tax paid by the service provider.
On merits of the case, the appellant was not eligible to avail Cenvat credit, and, the interest liability on the appellant arose in the case as had been held by the Hon’ble Supreme Court in the case of Ind-Swift Laboratories Ltd. As regards penalty imposed by the lower authorities under Rule 15 of Cenvat Credit Rules, 2004 read with Section 11AC of the Central Excise Act, 1944, Hon’ble judge found that the penalty seemed to be unwarranted as the appellant had an idea of diversification into manufacturing activity of herbal products. When they availed cenvat credit of the service tax paid on the services of the consultant, who was engaged for considering such an activity, they had an intention to start the activity of herbal products. They could have had a bonafide belief in availing the Cenvat credit on such a service tax. In view of this, he held that the penalty imposed by the adjudicating authority under Rule 15 of the Cenvat Credit Rules, 2004 seemed to be inconsistent as the said rules envisages imposition of penalty on the intention to avail wrong cenvat credit. In the case in hand, the intention of availment of Cenvat credit of the service tax paid, could not be considered as wrong, due to the reasons already mentioned hereinabove. These findings of the Tribunal were only for appreciating whether appellant should be visited with penalty in the given circumstances. In light of the facts as hereinabove stated, he was of the view that penalty imposed on the appellant is unwarranted and needs to be set aside and is done so.

Decision:- The appeal was disposed.

Comment:-The analogy drawn from the case is that input service is a service which is used by provider of a taxable service for providing output service or used by the manufacturer directly or indirectly, in or in relation to the manufacturer of final products, where final product means excisable goods manufactured or produced from input or using input service. On holistic reading of definition of final products and definition of input service enshrined in Rule 2 of the Cenvat Credit Rules, 2004, it can be held that having abandoned the plan of diversification in the manufacturing line, the services rendered by the consultant on the specific products, credit of said service tax, would not be available to the service recipient. However, penalty is not imposable as there was bonafide belief.

do�ْ@��ount during the pendency of the Appeal before the Supreme Court. The question was whether Section 27 of the Customs Act, 1962 was applicable. The Court held that any amount deposited during the pendency of appeal before the High Court or the Supreme Court would also be by way of deposit under Section 129E of the Customs Act. After a detailed discussion, the Division Bench held thus:
"7. However, if the person desirous of preferring appeal seeks waiver of the pre-deposit on the ground of undue hardship as contemplated under subsection (2) of section 129E, he is required to file an application seeking dispensation of such deposit, in which case he is required to make the pre-deposit in terms of the order that may be passed by the Commissioner (Appeals) or the Appellate Tribunal.
Thus, the contention that it is only the payment made pursuant to any order of many appellate authority or judicial forum under section 129E or section 131 of the Act would fall within the ambit of pre-deposit under the said provision is fallacious and contrary to the provisions of the section itself and as such does not merit acceptance.

8. Another aspect of the matter is that under section 129E of the Act in case of any appeal under the Chapter, the person desirous of appealing against an order relating to any duty and interest demanded in respect of goods which are not under the control of the customs authorities or any penalty levied under the Act, is required to deposit with the proper officer duty and interest demanded or penalty levied. Section 129-E of the Act falls under Chapter XV under the heading Appeals. Chapter XV of the Act is comprised of various provisions from section 128 to Section 131C of the Act. Section 130 of the Act which provides for appeal to High Court and Section 130-E of the Act which provides for appeal in Supreme Court also fall under Chapter XV. Thus, an appeal before the Supreme Court would
also be an appeal under the said Chapter as envisaged under Section 129E of the Act. Thus, any amount deposited during the pendency of an appeal before the High Court or the Supreme Court would also be by way of deposit under section 129E of the Act and has to be treated accordingly.

9. Adverting to the facts of the present case, it is an undisputed position that the amount in question had been deposited by the respondent during the pendency of the appeal before the Supreme Court. In the circumstances, it is apparent that the amount so deposited would squarely fall within the ambit of section 129-E of the Act and has to be treated as pre-deposit. Thus, the contention raised on behalf of the appellant that the amount has been paid by way of duty and not pre-deposit, being contrary to the provisions of section 129E of the Act, does not merit acceptance."

The Apex Court in the case of Commissioner of Central Excise, Hyderabad Vs. I.T.C. Ltd. reported in 2005 (179) E.L.T. 15 (S.C) = (2004-TIOL-112-SC-CX-LB), has held that in the event of refund of any pre-deposit when a question arises of giving interest on the delayed refund of pre-deposit, as provided under the Draft Circular by CBEC & the payment of interest on such delayed refunds beyond three months would require the payment of interest and the same is to be 12% per annum. Period of three months commences from the date of final disposal of the dispute between the parties. The Circular:802/35/2004 dated 08.12.2009 if is also examined, it relates to return of deposit made as per the direction of the Tribunal and it is specified therein that the deposit needs to be returned within three months of the disposal of the appeal.

This Court, in the case reported in 2010 (259) ELT 522 (Guj.) in the case of Commissioner of Customs (Preventive) Vs. Ghaziabad Ship Breakers Ltd. , examined such question and held that the issue is concluded and for the reasons given in that case, appeal was dismissed. The Ahmedabad Bench of the Tribunal in the case of delayed refund had considered the request of grant of interest by the Assistant Commissioner, while sanctioning the refund amount. The Commissioner (Appeals) also confirmed the said order of Assistant Commissioner (OIO) and the Tribunal had set aside both these orders and remanded the matter to the Assistant Commissioner for verifying the documents and allowing interest in accordance with the various decisions of the Tribunal. Thus, the Tribunal's order on the delayed refund of the amount in favour of the assessee came to be upheld by this Court, where it also held that the refund should have been allowed suo-motu within three months by the revenue once the assessment is finalized by the Tribunal.

It would be apt to refer to the judgment of the Apex Court rendered in the case of M/s. Ranbaxy Laboratories Ltd. Vs. Union of India & Ors = ( 2011-TIOL-105-SC-CX ). The question that arose before the Apex Court was the payment of interest on the delayed refund under Section 11BB of the Central Excise Act, 1944 and whether the liability of revenue to pay interest under Section 11BB would commence from the date of expiry of three months from the date of receipt of application for refund or on the expiry of the said period from the date on which the order of refund is made.

The Apex Court held that if any duty is ordered to be refunded under sub-section (2) of Section 11B, the same should be refunded within three months from the date of receipt of application. The same should be paid with interest at such rate, not below five percent and not exceeding thirty percent per annum. It also further held that the said provision would come into play only after the order of refund is made under Section 11B. If the duty is not refunded within a period of three months from the date of receipt of application to be submitted under subsection (1) of Section 11B, then question of interest would come into play under Section 11B at such rate of interest fixed by the Central Government on expiry of period of three months.

The Court held that the explanation appearing below subsection (2) to Section 11BB introduced a deeming fiction that where the order of refund of duty is not made by the Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise but, by the Appellate Authority or by the Court, then for the purpose of this Section, the order made by the higher Appellate Authority or the Court shall be deemed to be an order made under sub-section (2) of Section 11B of the Act. While further interpreting Section 11BB, the Apex Court held further that interest under the said Section 11B of the Act becomes payable on the expiry of a period of three months from the date of receipt of application under sub-section (1) of Section 11B of the Act and that the said explanation would not have any bearing or connection with the date from which the interest under Section 11BB becomes payable.

The Court further held that "it is a well settled proposition of law that a fiscal legislation has to be construed strictly and one has to look merely at what is said in the relevant provision; there is nothing to be read in; nothing to be implied and there is no room for any intendment."The Court finally held thus”:

"In view of the above analysis, our answer to the question formulated in para(1) supra is that the liability of the revenue to pay interest under Section 11BB of the Act commences from the date of expiry of three months from the date of receipt of application for refund under Section 11B(1) of the Act and not on the expiry of the said period from the date on which order of refund is made."

On collective reading of these decisions and on close examination of the same, it can be noted that the question here is not of interest on refund of the duty amount but of the pre-deposit. There is no express provision of payment of interest on the refund of pre-deposit.

However, drawing analogy from Section 11B of the Central Excise Act, which provides for the refund of the duty, Section 11BB as discussed hereinabove and as held by the Apex Court, herein above, speaks of the interest on the refund of the duty as there would arise a requirement of payment of interest if the duty is not refunded within a period of three months from the date of receipt of application to be submitted under subsection (1) of Section 11B of the Act. Such interest needs to be paid as such rate fixed by the Central Government on expiry of period of three months from the date of receipt of application. The deeming fiction under Section 11BB says that for the purpose of this Section, the order made by the Higher Appellate Authority or the Court shall be deemed to be the order made under sub-section (2) of Section11B.

In the instant case, application for refund was filed by the petitioner on March 29, 2000. However, the amount claimed as refund being the duty paid and continued to lie as pre-deposit. The Tribunal decided in favour of the present appellants on September 3, 2001, and also further held that payment of interest would start running from September 3, 2001. The Tribunal while so ordering to set aside the order of the Commissioner, ordered to refund the said amount. Any delay having been occasioned in refunding the amount beyond the period of thee months, would attract interest. The refund of amount considered as pre-deposit would be at par with the refund of duty and the interest would be payable on such pre-deposit, as is also clear from the judgment of the Apex Court in the case of Commissioner of Central Excise Vs. I.T.C. Limited (Supra).

Admittedly, in the facts and circumstances of the case, the refund of amount of Rs.20 Lacs had been made on February 4, 2004. Thus, there has been a delay of considerable period in returning the amount after the Appellate Tribunal held in favour of the appellant assessee. The interest on the pre-deposit is, therefore, required to be given when the Tribunal at New Delhi held that in its judgment that the claim was not barred by period prescribed under sub-section(1) of Section 11B of the Central Excise Act, but on September 3, 2001, when the Tribunal set aside the order of the Commissioner with consequential relief.
Resultantly, this petition is allowed. The petitioners herein are held to be entitled to the interest on the delayed refund of amount of Rs.20 Lacs for the period from September 3, 2001 to February 4, 2004. Respondents shall calculate the rate of interest prevalent during the period & shall make the payment within eight weeks on receipt of this order. Rule is made absolute to the extent above.

Decision:-Petition is allowed.

Comment:-The question in the present appeal was whether assessee is entitled to interest on the delay in refund granted of duty paid by them that was kept as pre-deposit by the appellate authority and the issue of commencement date of interest, i.e. interest is payable from the date of filing refund application or from the date of appellate order. It was held in this case that as the refund claim filed by the appellant was within time and was proper and it was merely withheld on account of show cause notice being issued in the same matter, the fact remained undisputed that there was delay in granting refund under section 11B of duty paid by the appellant and so interest was to be paid from the date of initial filing of the refund application.

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