Whether credit of services availed for installation of gasifier plant admissible?

Case:-RADHE RENEWABLE ENERGY DEVELOPMENT PVT. LTD. VERSUSC.C.E. & S.T., RAJKOT

Citation:- 2015 (315) E.L.T. 33 (Tri. - Ahmd.)

Brief facts:- This appeal has been filed by the appellant against the OIA No. 318/2012/COMMR(A)/RBT/RAJ dated 6-6-2012 passed by Commissioner (Appeals), Rajkot. Under this OIA, dated 6-6-2012, first appellate authority has upheld the OIO No. 47 to 49/ADC/2011 dated 15-12-2011 passed by the adjudicating authority. The issue involved in the present proceeding is whether the demands regarding denial of Cenvat credit on Installation and Erection services availed by the appellant are sustainable or not.

Appellant’s contention:- Shri P.V. Sheth (Advocate) appearing on behalf of the appellant argued that appellant is manufacturing and installing Gasifier plants at the site of the clients. That the contract entered between the appellant and its client is a composite contract which include Designing, Engineering, Manufacture, Supply, Erection and Installation and Commissioning of ‘Gasifier Systems’. He made the bench go through one such contract dated 17-7-2010 entered between the appellant and M/s. R.S. Steels and Engineering Limited and argued that the entire contract is for Designing, Manufacturing, Installation and Commissioning. That as per Clause 9 of this contract, it is the responsibility of the appellant to depute engineers for Erection, Installation and Commissioning of the ‘Gasifier System’ free of cost. That for such Erection, Installation and Commissioning appellant availed the services of others and has taken credit of such Service Tax paid by the service providers. That as per the invoices raised by the appellant Central Excise duty is paid on the entire contracted value including Erection, Installation and Commissioning charges. That certain conditions mentioned on the invoices are general and have been incorrectly relied upon by the first appellate authority in Para 8 of the OIA dated 6-6-2012. That both the lower authorities have failed to appreciate the clauses of the contracts entered wherein entire responsibility of Erection and Installation up to Commissioning of the Gasifier plant lies with the appellant. That general conditions specified on the invoices are subordinate to the contract clauses as no separate freight or installation/Erection charges are paid by the clients to the appellant.

Learned Advocate relied upon the following case laws to support his case that Cenvat credit of services availing with respect to Erection/Installation of machines is admissible as these activities are in relation to manufacture :-

(a)        CCE, Vapiv. Ultratech Cement Limited - 2010 (260)E.L.T.369 (Bom.) = 2010 (20)S.T.R.577 (Bom.)

(b)        Alidhara Textool Engineers Pvt. Limitedv. CCE, Vapi - 2009 (14)S.T.R.304 (T) = 2009 (14)S.T.R.305 (Tri.-Ahmd.)

(c)        Autoprint Machinery Mfr. Pvt. Limitedv. CCE, Coimbatore - 2010 (19)S.T.R.428 (Tri.-Chennai)

(d)        Alidhara Texspin Engineersv. CCE, Vapi - 2010 (20)S.T.R.315 (Tri.-Ahmd.)

(e)       Gujarat State Petronet Limited v. CCE, Ahmd. - 2010 (20)S.T.R.366 (Tri.-Ahmd.)

(f)       Veena Industries Limited v. CCE, Vapi - 2012 (28)S.T.R.147 (Tri.-Ahmd.)

(g)       Oudh Sugar Mills Limited v. CCE, Lucknow - 2012 (282)E.L.T.541 (Tri.-Del.) = 2014 (34)S.T.R.309 (T)

Learned advocate appearing on behalf of the appellant specifically made the bench go through Paras 4.1 and 4.2 of the order passed by this bench in the case of CCE, Vapi v. Alidhara Textool Engineers Pvt. Limited (supra) to drive home the point that installation/Erection services are availed in relation to their manufacturing activity as the contracts are composite one and include manufacturing of Gasifier plant, its transportation and installation. That the above case laws were also relied upon by the appellant before the lower authorities but no reasoning is given by them about the non-applicability of case laws relied upon.

It was also the case of the learned advocate that demand beyond one year is also time barred because in Para 3.3 of the OIO dated 15-12-2011 adjudicating authority has conceded that before 1-4-2008 the words used in the definition of ‘Input Services’ in Rule 2(l) of the Cenvat Credit Rules, 2004 were from the place of removal and in the present proceedings the period involved is from November 2007 to March 2011. That once extended period is not applicable then penalties are also not imposable up on the appellant.

Respondent’s contention:- Shri Jeetesh Nagori (AR) appearing on behalf of the Revenue argued that with effect from 1-4-2008 the words ‘from the place of removal’ were replaced by the words ‘up to the place of removal’ in the definition of ‘Input Services’ as given in the CENVAT Credit Rules, 2004. That even after this amendment also appellant continued to take CENVAT credit which was beyond the place of removal. It was his case that in spite of clear cut provisions of the CENVAT Credit Rules, 2004 appellant took CENVAT credit, therefore, extended period is applicable and appellant has been correctly visited with penalties.

On merits learned AR argued that services of Erection, Installation and Commissioning are availed beyond the place of removal and cannot be considered as services availed in relation to manufacture as these services availed has nothing to do with the manufacturing activities. He relied upon the following case laws in support of his arguments:-

(i)        Quality Steel Tubes (P) Limitedv. CCE, UP - 1995 (75)E.L.T.17 (S.C.)
(ii)       Maruti Suzuki Limited v. CCE, Delhi-III - 2009 (240)E.L.T.641 (S.C.)
(iii)      Thermax Limited v. CCE - 1998 (99)E.L.T.481 (S.C.)
(iv)    CCE, Nagpur v. Ultratech Cement Limited - 2010 (20)S.T.R.577 (Bom.) = 2010      (260)E.L.T.369 (Bom.)
(v)       CCE, Ahmedabad-II v. Cadila Healthcare Limited - 2013 (30)S.T.R.3 (Guj.)

It was strongly argued by the learned AR that as per Supreme Court’s judgment in the case of Thermax Limited v. CCE (supra), it has been categorically held by Apex Court that Installation, Erection and Commissioning charges for equipment installed at customer’s premises are not includible in the assessable value of the equipment under Section 4 of the Central Excise Act, 1944. That if such charges are not includible in the assessable value then it cannot be said that the Installation/Erection is a part of the manufacturing process of the ‘Gasifier Plant’. That after installation the equipments are getting fixed to the earth which are not excisable and thus no credit of services used for creating immovable properties will be admissible. That as per Apex Court’s judgment in the case of Maruti Suzuki Limited v. CCE, Delhi-III (supra) credit of services availed beyond the place of removal are not admissible. That as per judgment of Bombay High Court in the case of CCE, Nagpur v. Ultratech Cement Limited (supra) and CCE, Ahmedabad v. Cadila Healthcare Limited (supra) Installation/Erection activities are not in relation to the manufacturing activities of the appellant and hence will not be covered by the inclusive part of the definition of ‘Input Services’ given in Rule 2(l) of the Cenvat Credit Rules, 2004.

Reasoning of judgement:- The issues involved in the present proceedings are :-

(i)         Whether Cenvat credit of Input Services of Installation/Erection of Gasifier Plant, at customer’s premises, availed by the appellant is admissible as a service availed in relation to their manufacturing activity under Rule 2(l) of the Cenvat Credit Rules, 2004?

(ii)        Whether the extended period and imposition of penalties are attracted against the appellant in the present facts and circumstances?

Definition of ‘Input Services’ as given in Rule 2(l) of the Cenvat Credit Rules, 2004 during the relevant period after 1-4-2008 was as follows :-

2(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 up to 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 up to 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 relating, share registry, and security, inward transportation of inputs or capital goods and outward transportation up to the place of removal :”

Before 1-4-2008, for the words ‘up to the place of removal’ the words ‘from the place of removal’ were existing in the inclusive portion of definition of ‘Input Services’ under Rule 2(l) of the Cenvat Credit Rules, 2004.

It is observed from the case records that appellant enters into comprehensive contracts with the customers which includes activities from Designing, Engineering, Manufacturing, Transporting to Erection, Installation and Commissioning of ‘Gasifier Plant’ to the customer’s premises. A lump sum amount as contracted is charged by the appellant from the customers including all the elements and excise duty is paid on the entire amount so recovered. There is a specific Clause in the contract that it is the responsibility of the appellant to depute engineers for Erection, Installation and Commissioning of ‘Gasifier Plant’ free of cost. There is no evidence on record that any extra amount is recovered by the appellant from the customer. Therefore, reliance placed by the first appellate authority, in Para 8 of the OIA, dated 6-6-2012, upon some general clauses printed on the invoices is not proper. First appellate authority has also observed in this Para that appellant has failed to submit the relevant contracts whereas Para 2.6 of the OIO, dated 15-12-2011, containing defence submissions of the appellant, clearly convey that such contract copies were provided to the lower authorities. In view of the express clauses of the contracts and in the absence of any documentary evidence that any extra amount is recovered for erection, installation and commissioning, it has to be held that entire transaction from the designing to manufacturing and installation is one. In this regard the observation made by this Bench, in Paras 4.1 and 4.2 of the case law of CCE, Vapi v. Alidhara Textool Engineers Pvt. Limited [2009 (14)S.T.R.305 (Tri.-Ahmd.)], are very relevant and are reproduced below :-

“4.1 In this case erection and commissioning charges have been included in the cost of the machines sold. The appellants have selected the agency to do this work and once the purchaser enters into an agreement for supply of the machine including the erection and commissioning charges, the responsibility for erection and commissioning is of the manufacturer. Therefore, what is happening in this case is that the supplier of the machine is not only selling the machine but is also providing the service of erection and commissioning. Once erection and commissioning cost is included, in the transaction value, the natural conclusion that would emerge is that the processes undertaken in the buyer’s premises are actually incidental to manufacturing activity undertaken in the manufacturer’s premises. What has been sold in this case is the complete machine duly erected and commissioned and operational. The incidental process of erection and commissioning being incidental to manufacture, has to be treated as continuation of the earlier process which started in the manufacturer’s premises. In this case even though the position of the machine in CKD condition gets transferred to the buyer when it is removed from the factory as per the contract, the question to be examined is whether such a service is related directly or indirectly to the manufacture of their goods in question. As already mentioned by me earlier, the process of erection and commissioning at the buyer’s premises is incidental to the manufacture of the machine and therefore, the erection and commissioning services provided also can be said to be in relation to the manufacture, since the process in this case is complete only after the erection and commissioning takes place. As rightly pointed out by the Learned Advocate, Rule 2(l) of Cenvat Credit Rules does not require that service has to be rendered at the factory of the manufacturer for the purpose of eligibility for Service Tax credit. Therefore, the stand of the revenue that since the service was provided at the buyer’s premises credit is not admissible cannot be accepted. What has to be examined is whether the service provided is in or in relation to manufacture.

4.2 Another point that has been relied upon by the revenue is that Service Tax credit is not admissible since the erection and commissioning activity is a post removal/post manufacturing activity. I have already mentioned earlier that in the case of Service Tax what is required to be examined is whether the service has been used in or in relation to manufacture directly or indirectly. While the eligibility for Service Tax credit on outward transport services is to be examined in connection with place of removal, there is no such requirement as regards other services. In respect of other services what is to be examined is whether they can be held to be rendered in or in relation to manufacture directly or indirectly. Once the whole transaction of manufacture of the machine, erection and commissioning and supply is treated as one transaction and excise duty is charged on the whole transaction value, services rendered for the purpose of completion of this whole transaction has to be treated to have been rendered in or in relation to the manufacture.”

The above case law was also followed by Chennai Bench in the case of Autoprint Machinery Manufacturer Pvt. Limited v. CCE, Coimbatore [2010 (19)S.T.R.428 (Tri.-Chennai)]and by this bench in the case of Alidhara Texspin Engineers v. CCE, Vapi (supra). It is observed from the decision of this bench in the case of CCE, Vapi v. Alidhara Textool Engineers Pvt. Limited (supra) that in a contract of composite nature the activities of erection and installation have to be considered as an activity in relation to manufacture. It is not a case for interpreting the inclusive part of the definition given in Rule 2(l) of the Cenvat Credit Rules, 2004 but the present case of the appellant is covered by the main body of definition of ‘Input Service’ given in Rule 2(l) of the Cenvat Credit Rules, 2004. This part of the definition has not undergone any change either before 1-4-2008 or after 1-4-2008. Case law of CCE, Ahmedabad-II v. Cadila Healthcare Limited (supra) relied upon by the Revenue rather fortifies the above view. In Para 5.1 (xix) Hon’ble Gujarat High Court has observed as follows:-

“5.1(xix) In the facts of the present case the assessee is engaged in the manufacture of medicaments. By their very nature, the drugs manufactured by the assessee prior to final production thereof are required to be subjected to technical testing and analysis before entering into commercial production. For such purpose, the products are manufactured in small trial batches and thereafter, sent for testing and analysis purpose. Undisputedly, when the goods are removed for testing and analysis, excise duty has been paid thereon. Since production of medicaments are subject to approval by the regulatory authorities of various countries to which such drugs are exported, the assessee is required to obtain approval before starting commercial production. Thus the final product can be manufactured only upon approval of the regulatory authority after the product undergoes technical testing and analysis. Under the circumstances, it cannot be gainsaid that the activity of testing and analysis of the trial batches is in relation to the manufacture of final product. Unless such testing and analysis is carried out, it would not be possible to produce the final product inasmuch as unless the trial batches are sent for testing and analysis and approval is obtained, the final product cannot be manufactured. Under the circumstances, the services availed in respect of technical testing and analysis services are directly related to the manufacture of the final product. The contention of the department that unless the goods have reached the commercial production stage, Cenvat credit is not admissible in respect of the technical testing and analysis services availed in respect of the product at trial production stage, does not merit acceptance. Besides, the learned counsel for the assessee is justified in contending that when the product which is sent for testing and analysis is subject to payment of excise duty, the respondents cannot be heard to contend that Cenvat credit is not admissible on the Service Tax paid in respect of such service. Under the circumstances, the Tribunal was justified in holding that the assessee was entitled to avail of Cenvat credit in relation to Service Tax paid in relation to technical testing and analysis services availed by it.”

In the above case law certain services availed by M/s. Cadila Healthcare Limited with respect to Research and Development activities outside the factory were also held to be admissible for Cenvat credit when the drugs were not even commercially manufactured. In the light of the above observations they do not find any justification in taking a different view than what is taken by this bench in the case of CCE, Vapi v. Alidhara Textool Engineers Pvt. Limited. Appellant’s case is thus covered by the main body of the definition of ‘Input Services’ and it has to be held that services availed by the appellant are in relation to the manufacturing of the excisable goods. The case laws of Quality Steel Tubes (P) Limited v. CCE, UP (supra), Thermax Limited v. CCE (supra) and Maruti Suzuki Ltd. v. CCE, Delhi-III (supra), relied upon by the learned AR are not applicable to the facts and circumstances of the present proceedings as the same were delivered either with respect to eligibility of Cenvat credit as ‘Inputs’ or for determining assessable value under Section 4 of the Central Excise Act, 1944 and were not with respect to eligibility of Cenvat credit on ‘Input Services’. It is now a settled legal position that Cenvat credit on ‘Input Services’ is also admissible if the same are availed beyond the ‘place of removal’ provided such services are availed in relation to manufacture. On merits case goes in favour of the appellant and against the Revenue.

Appellant has also raised the issue of time bar. Adjudicating authority in Para 3.3 of OIO, dated 15-12-2011 has observed that before 1-4-2008 the wording used in the definition of ‘Input Service’ was ‘from the place of removal’. Further, the issue was contentious one and was decided by this bench in January 2009 in the case of CCE, Vapi v. Alidhara Textool Engineers Pvt. Limited (supra) and no evidence is brought to the notice of the bench that ratio of this case law has been reversed. Reliance placed on this case law decided by this Bench by other CESTAT benches, also fortifies the view that the interpretation made by the appellant could also be possible. In view of the facts and circumstances of this case, extended period cannot be invoked and accordingly, there is no point in imposition of penalties upon the appellant.

Based upon the above observations appeal filed by the appellant is allowed on merits as well as on time bar.

Decision:-Appeal allowed.

Comment:-The analogy of the case is that the cenvat credit of service tax paid on services of errection of gasifier plant is admissible if the entire transaction from designing to manufacture and installation is one and there is no evidence of receipt of any extra amount for erection, installation and commissioning. The invoices raised by the appellant reveal that the Central Excise duty is paid on the entire contracted value including Erection, Installation and Commissioning charges. Contract being of composite nature, activities are to be considered as manufacture. Also relying in various cases, where in a contract of composite nature the activities of erection and installation have to be considered as an activity in relation to manufacture. Hence CENVAT credit of services availed with respect to Erection/Installation of machines is admissible.

Prepared by:- Monika Tak

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