Whether Credit of input service of Canteen Service, Rent a Cab Service and Group Insurance service is available to the assessee, if these expenses incurred by the assessee are considered for fixing price of final product?

Case:-COMMR. OF C. EX., BANGALORE-III versus STANZEN TOYOTETSU INDIA (P) LTD.

Citation:- 2011-TIOL-866-HC-KAR-ST

Brief Facts:-The Respondent is manufacturers of parts and accessories of motor vehicles. They are also availing Cenvat Credit of duty paid on inputs capital goods and service tax paid on services used in or in relation to manufacture of their final products. By the audit of the records, the revenue found that the respondent had availed and utilized input service tax credit relating to canteen services, rent a cab service and on the group health insurance services. Therefore a show cause notice was issued to the respondent on the ground of wrong availment and utilization of input service credit and asking why the same should not be recovered under Rule 14 of the Cenvat Credit Rules, 2004 and also interest and penalty on the duty leviable. The respondent filed reply to show cause notice. The adjudicating authority passed the order against the respondent holding that the respondent has availed and utilized cenvat credit wrongly and levied duty, interest and penalty. Aggrieved by the said order, the respondent filed appeal before Commissioner (Appeals). The Commissioner (Appeals) dismissed the appeal upholding the order of the adjudicating authority. Aggrieved by the same, the respondent preferred an appeal to the Tribunal.

The Tribunal taking note of the judgment of the tribunal in the case of CCE V. Cable corporation of India -2008 (12) S.T.R. 598 (Tri.-Mumbai) on the point and also taking note of the definition of input service contained in the Rules held that since rent a cab service is used for bringing employees to work in the factory for manufacture of goods it is to be considered as if used indirectly in relation to the manufacture or as a part of promoting business as any facility given to the employees will result in greater efficiency and promotion of business. The service tax on outdoor catering services is paid by the manufacturer for running the canteen, irrespective of the fact that subsidized food is provided or not. Whether the cost of the food is borne by the worker or by the factory, the same will form part of the expenditure incurred by the manufacturer and will have a bearing on the cost of production. Therefore employment of outdoor caterer for providing catering service has to be considered as an input service relating to the business and the Cenvat credit in respect of the same credit is admissible. The Group Health Insurance Policy is taken to protect the interest of the employees either during the course of their journey to the factory or while working in the factory and the cost of that insurance premium is also a factor that the manufacturer takes into consideration in fixing the price of the goods manufactured. The Tribunal considered that the service tax paid on the said service by the manufacturer is entitled to Cenvat credit. The tribunal set aside the order of Commissioner (Appeals) and the benefit of Cenvat Credit was restored. Aggrieved by the same, the revenue filed appeal before high court.

Appellant’s contention:-The learned counsel appearing for the Revenue, assailing the impugned order contends that the definition of input service as contained in Rule 2(l) did not include outdoor catering, rent a cab service or group health insurance and therefore the Tribunal was in error in holding that those services fall within the definition of input service and in extending the benefit to the assessee. He also contended that those services are in the nature of welfare measure to the employees and it has nothing to do with the manufacturing activity of the assessee. Therefore the appellant contends that the order of the Tribunal is liable to be set aside and the assessee is liable to pay duty, interest and penalty, in respect of wrong availment of Cenvat credit.

Respondent’s contention:-The Respondent submits that all the aforesaid three services are provided by the them to their employees and it falls within the definition of input service inasmuch as those services are used by the assessee indirectly or in relating to the manufacture of final product and clearance of final products from the place of removal and it also falls within the phrase “activities relating to business” as contained in the inclusive part of the definition and therefore the Tribunal was justified in setting aside the order passed by the authorities and granting the benefit. The respondent also submits that the Tribunals throughout the country have taken the said view and therefore no case for interference with the order of the Tribunal is made out.

Reasoning of judgment:-The High Court considered that these appeals were admitted to consider the following substantial questions of law:

1.    Whether the canteen services, provided in the factory of respondent, through the outdoor caterers, was an input service, in or in relation to manufacture, whether directly or indirectly, of the final products, within the meaning and comprehension of Rule 2(l) of the Cenvat Credit Rules, 2004?

2.    Consequently, whether the Cenvat credit of the Service tax, so paid for receiving the outdoor caterer’s services by them for providing canteen services to their employees, was eligible for availment and utilization in terms of Rule 3 read with Rule 2(l) and Rule 9 thereof?

3.    Whether, the CESTAT, while passing the order had properly exercised their appellate function, while deciding the Appeal?

The High Court finds that in order to answer the aforesaid questions it is necessary to have a glance at the definition of input service as contained in Section 2(l) reads as under:-

“(l) “Input service” means any service,-

(i)            used by a provider of taxable service for providing an output service, or
(ii)           Used by the 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 setting up, 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, activities relating to business, such as accounting auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation up to the place of removal;”

The High Court also finds that it is clear from the definition any service used by the manufacturer whether directly or indirectly in or in relation to the manufacture of final products constitutes input service. If the credit is availed by the manufacturer, then the said service should have been utilized by the manufacturer directly or indirectly in or in relation to the manufacture of final products or used in relation to activities relating to business. If any one of these two tests is satisfied, then such a service falls within the definition of “input service” and the manufacturer is eligible to avail cenvat credit of the service tax paid on such service.

The High Court further considered that it is also useful to refer to CAS-4 Standards wherein all the elements of costs which are required to be included in the costing of final product have been enumerated. It reads as under:-

Cost of production: cost of production shall consist of material consumed, direct wages and salaries, direct expenses, works overheads, quality control cost, research and development cost, packing cost, administrative overheads relating to production. To arrive at cost of production of goods dispatched for captive consumption, adjustment for stock of work-in-process, finished goods, recoveries for sales of scrap, wastage, etc., shall be made.

Direct wages and salaries shall include house rent allowance, overtime and incentive payments made to employees directly engaged in the manufacturing activities.

Contribution of provident funds and ESIS

Bonus/ Ex gratia payment to employees

Provisions for retirement benefits such as gratuity and superannuation

Medical benefits

Subsidized food

Leave with pay and holiday payment

Leave encashment

Other allowances such as children’s education allowance, conveyance allowance which are payable to employees in the normal course of business etc.”

The High Court finds that following facts:-

Canteen Service:

It is this context that when the respondent provides outdoor canteen facilities because of a statutory obligation imposed on him under Section 46 of the Factories Act, it becomes a condition of service as far as the employees are concerned. The respondent has paid the service tax on outdoor canteen services. The said expenses incurred by the respondent will also be taken into consideration before fixing the price of the final product. It may be a welfare measure but certainly it is not a charity provided by the employer to the employees. It is an onerous legal obligation imposed on him. The cost incurred in rendering such service will be included in the cost of production.

Rent-A-Cab Service/ Transportation:

Rent a cab service is provided by the respondent to these workers to reach the factory premises in time which has a direct bearing on the manufacturing activity. In fact the employee is also entitled to conveyance allowance. It also would from part of a condition of service and the amounts spent on the conveyance of the employees is also a factor which will be taken into consideration by the employees in fixing the price of the final product. By no stretch of imagination can it be construed as a welfare measure. It is a basic necessity. To ensure that the work force comes on time at the work place, the employers have taken this measure which has a direct bearing on the manufacturing activity. At any rate it is an activity relating to business.

Insurance/ Health Policy:

Insurance coverage to the employees is concerned in the course of employment if the employees suffer injury or dies, there is a vicarious liability imposed on the employer to compensate the employee. If the employer employs its own transportation facility in order to cover the risk which also includes the risk of workers who are covered in that statutory establishment. He has to take the insurance policy without which the vehicle cannot go on the road. Under the workmen’s compensation Act he has to obtain the insurance policy covering the risk of the employees. The employees, state insurance act takes care of the health of the employees also and casts an obligation on the employer to provide insurance services. Under these circumstances, this Group Insurance Health Policy though is also a welfare measure is an obligation which is cast under the statute that the employer has to obey. Section 38 of the Employees’ State Insurance Act, 1948, mandates that subject to the provisions of the Act, all employees in factories or establishments to which this act applies shall be insured in the manner provided by this act. May be the employees also have to contribute but the employer is under an obligation to take an insurance policy and contribute his share. Therefore, the said group insurance health taken by the respondent is a service which would constitute an activity relating to business which is specifically included in the input service definition.

Therefore, merely because these services are not expressly mentioned in the definition of input service it cannot be said that they do not constitute input service and the respondent is not entitled to the benefit of CENVAT credit. In fact, Rule 3 of the Cenvat [credit] Rules, 2004, specifically provides that the manufacturer of final products shall be allowed to take credit, the service tax leviable under Section 66 of the Finance Act and paid on any input service received by the manufacturer of a final product. Therefore under the scheme of the Cenvat credit Rules, 2004, the service tax paid on all those services which the respondent has utilized directly or indirectly in or in relation to the final product is entitled to claim the credit. The High Court further finds that the judgment of the Tribunal is legal and valid and is in accordance with law and does not suffer from any legal infirmity which calls for any interference. Hence, the substantial questions of law framed in these appeals are answered against the revenue and in favour of the respondent.

Decision:- Revenue’s appeal dismissed.

Comment:- The analogy drawn from this case is that the definition of input service is inclusive and the list of services specified therein are illustrative only. It will depend on the facts and circumstances whether a service can be considered to be input service eligible for Cenvat Credit as to be eligible for availing Cenvat Credit, the said service should be used in or in relation to manufacture of final dutiable product.

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PJ/Case Laws/2012-13/1312

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