Whether credit allowable on business auxiliary services used for expansion of factory?

PJ/Case Law /2016-17/3299

Case:-COMMISSIONER OF CENTRAL EXCISE, CHENNAI-I VERSUS HINDUJA FOUNDRIES LTD.

Citation:-2016 (44) S.T.R. 424 (Tri. - Chennai)

Brief Facts:-The brief facts of the case are as under, M/s. Hinduja Foundries Limited, the respondent herein, are manufacturers of cast articles of iron and aluminum for use in motor vehicles falling under Chapter Headings 73 and 76 respectively. The respondent was in the process of establishing another Greenfield Foundry near Hyderabad and Low Pressure Die and Gravity Casting (Aluminum) unit at Sriperumbudur. A show cause notice No. 18/2009 in C. No. V/15/73/37/09-ADJ, dated 27-8-2009 was issued to the respondent as to why the credit of service tax availed and utilized to the tune of Rs. 14,74,618/- should not be demanded from them besides proposal for penalty and interest. The reason for the demand of the service tax credit is that the respondent had in order to meet the increased domestic and international demands wanted to establish two units, one near Hyderabad and the other at Sriperumbudur. For the funding of these proposed units, the respondent had issued GDRs (Global Depository Receipt) for USD 15 Million during April, 2008. For the listing of these GDRs in the Luxemberg Stock Exchange, the respondent had approached M/s. Amas Bank (Switzerland) Limited, the Lead Manager to the proposed GDR issue. Since the provider of service was outside India, and who did not have an office in India and the respondent herein being the recipient of service had registered themselves under Business Auxiliary Service, for the service which was rendered to the respondent by the said M/s. Amas Bank. The reason for denial of credit in the show cause notice was that the payment was by Chennai Unit for the other two units referred supra and the Chennai Unit ought not to have availed the credit. The respondent has filed an interim reply dated 16-9-2009 wherein the allegations in the show cause notice were disputed and in essence stated that the GDR is to augment funds for the expansion of their business and these facts were available in the Directors Report based on which the show cause notice was issued and this fact is recorded in Para 2 of the show cause notice. The availment of credit was also reflected in the GR-1 Returns. The respondent had contended that credit cannot be denied if the Service Tax has been paid in respect of services which are used in or in relation to manufacture of final products. It was further contented that an expenditure which is a part of CAS-4 will be eligible for credit; that if an expenditure relating to a particular service had been allowed as business expenditure as per Income Tax Act, 1961, then such service will have to be considered as payment for activity relating to business. They had prayed for non-imposition of penalty. After affording an opportunity of hearing the adjudicating authority had confirmed the demand for the reason that an inclusive definition of input service is not wide enough to cover anything remotely connected with manufacture and had imposed an equal amount of penalty under Section 11AC besides the imposition of a penalty of Rs. 2,000/- under Rule 15(3) of the Cenvat Credit Rules, 2004. An appeal against this order was filed and after framing the issue which is as follows: The issue to be decided in this case is whether the appellant (respondent herein) is entitled for the input service credit of the service tax paid under “Business Auxiliary Service” under reverse charge mechanism. The learned Commissioner (Appeals) has held that the GDR was to fund expansion of business of the appellant; that even though the service received was with reference to establishing green field foundry near Hyderabad and Sriperumbudur, the payment was made only by the appellant from Ennore Unit and the credit was availed by the said Ennore Unit; that the payment of service tax is not denied by the Department and have been received with reference to the business of the appellant (the respondent herein - emphasis supplied); that the service received should be treated as input service; that the Commissioner (Appeals) had also held that the extended period of limitation cannot be invoked and had allowed the appeal.

Appellant’s Contention:-Being aggrieved by the order passed by the Commissioner (Appeals), the Revenue has filed the present appeal by contending that the Commissioner (Appeals) has not discussed the factual position prevailing in the present case; that the judgment of the Bombay High Court in the case of Ultratech Cement reported in 2010 (260)E.L.T.369 (Bom.), was as to whether the service of an outdoor caterer can be treated as an input service and the facts and circumstances of the case on hand are entirely different; that there was no nexus between the finished goods manufactured at Ennore Unit of the respondent and the credit taken by them and therefore, inadmissible; that the judgment of the Tribunal in the case of Sundaram Brake Linings is in favour of the Department; that in the instant case, the respondent has taken credit which has no relevance to their manufacturing activity; that the burden of proof regarding admissibility of credit lies on the manufacturer; the reliance on the Tribunal rulings in the case of Ambika Forgings and Aditya Birla are on entirely different facts and prayed for setting aside the impugned order and restore the order-in-original passed by the Joint Commissioner for the reasons stated above.

Respondent’s Contention:-The respondent-assessee has filed a cross-objection which is numbered as E/CO/5/2012 since this is only a counter to the Revenue’s appeal; it is treated as a written submission.

Reasoning of Judgment:-Heard both sides in the matter. The appellant was represented by Shri R. Subramaniyan, learned AC (AR) and the respondent was represented by Shri M. Kannan, Advocate. The issue is as to whether the respondents are right in the availment of credit for their payment rendered to M/s. Amas Bank for raising funds through GDRs for USD 1.5 Million during April, 2008. The definition of input service during the period of dispute, i.e., April, 2008 to November, 2008 is as follows :

Rule 2(l) of the Cenvat Credit Rules, 2004 ”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 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 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 Commissioner (Appeals) has rightly held that the issue has been settled by the Bombay High Court in the case of Ultratech Cement Limited (supra). Though the payment was made for establishing green field foundry near Hyderabad and Sriperumbudur, the payment was made by the respondent from their Ennore Unit and the credit was availed by the very same Ennore Unit. It is strange that when the payment from the Ennore Unit has been accepted by the Department, the denial of credit by the Department is not understandable. More so, in this case the payment of service tax is not denied by the Department. The finding by the Commissioner (Appeals) that the onus is on the department to seek a clarification or verify the details submitted by the appellants in their ER-1 returns, cannot be faulted and the further finding that the proviso to extended period cannot be invoked is proper. The reliance on the Tribunal ruling in the case of Sundram Brake Linings Ltd. is no longer good law and the same stands overruled by the Madras High Court in CMA No. 314/2011, dated 13-2-2015. The appellant has failed to note that without capital expenditure, the proposed foundries would not have been established and to augment funds through GDRs, the respondent had availed the services of M/s. Amas Bank. The definition of input service is of the widest amplitude inasmuch as the wording is ‘used by a manufacturer whether directly or indirectly’. The inclusive definition has been held by various courts to be expansive and the services used in relation to setting up of the factory. Modernization and renovation are held to be eligible for input service credit. The wordings ‘activities relating to business’ is also very apt for the factual scenario in this case inasmuch as the funds were used for setting up of two units which has not been disputed by the Revenue. Tribunal do not find any infirmity in the impugned order and in view of the observations made herein above, the impugned order is upheld.

Accordingly, the appeal filed by the Revenue is dismissed and the cross-objection is disposed of.

Decision:-Appeal dismissed.

Comment:- The crux of the case is that the various services availed for setting up/modernization of business is admissible as cenvat credit. The definition of input service is of the widest amplitude inasmuch as the wording is ‘used by a manufacturer whether directly or indirectly’ so that Modernization and renovation are held to be eligible for input service credit. The wordings ‘activities relating to business’ is also very apt for the factual scenario in this case inasmuch as the funds were used for setting up two units which has not been disputed by the Revenue.

Prepared By:- Mahesh Parmar

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PJ/Case Law /2016-17/3299

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