whether manpower supply relating to get good quality sugarcane, weighment and unloading, cleaning of the yard are admissible to credit?

Case:-MAWANA SUGARS LTD. VersusCOMMR. OF C. EX. & SERVICE TAX, LTU, DELHI

Citation:-2015 (38) S.T.R. 424 (Tri. - Del.)

Brief facts:-The appellant are a sugar mill engaged in manufacture of sugar and molasses chargeable to Central Excise Duty. During period from 1-10-2008 to 30-10-2009 they took Cenvat credit of Rs. 8,01,508/- on the manpower supply service availed by them from manpower supply contractors. This manpower had been used for three categories of works. The first category of jobs for which the manpower supply was used was cane area survey, sugarcane development by educating the farmers by various means to get good quality sugarcane. The second type of jobs for which the manpower supply was used was for the jobs related to supply of sugarcane to the factory, its weighment and unloading at the factory. The third type of jobs for which the manpower supply was used was cleaning of the yard within the sugar mill. The Department was of the view that the jobs for which the manpower supply by the contractors was used have no nexus whatsoever with the manufacture of sugar and molasses and, therefore, these services would not be eligible for Cenvat credit. Accordingly, after issue of show cause notice dated 6-9-2010, the Jurisdictional Additional Commissioner vide order-in-original dated 31-1-2012 confirmed the Cenvat credit demand of the above amount along with interest and imposed penalty of equal amount on the appellant under Rule 15(2) of Cenvat Credit Rules, 2004 read with Section 11AC of Central Excise Act, 1944. On appeal being filed to Commissioner (Appeals) against this order of the Additional Commissioner, the same was upheld vide order-in-appeal dated 2-1-2013. Against this order of the Commissioner (Appeals), this appeal has been filed.

Appellant’s contention:-Shri Mayank Garg, Advocate, the learned Counsel for the appellant, pleaded that as regards the service of cleaning of the factory yard, in accordance with the provisions of the Factories Act, a manufacturer is required to keep the factory premises neat and clean and, therefore, the manpower employed for keeping the yard within the factory neat and clean has to be treated as having been used in or in relation to manufacture of the final products and, hence, same would be eligible for Cenvat credit, that the Tribunal in the case of CCE, Salem v. ITC Ltd. reported In 2012 (26)S.T.R.92 (T) = 2011 (268)E.L.T.89 (Tri. - Chennai) has held that the supply of JCB for yard cleaning and internal road levelling, plastic removal and cleaning of yard, would be eligible for Cenvat credit, that as regards the second category of jobs for which the manpower supply was used, these jobs were relating to weighment of the sugarcane and unloading of sugarcane at the factory, that these services are relating to procurement of inputs, which was specifically covered by the definition of ‘input service’ during the period of dispute, that as regards the manpower used for cane area survey and sugarcane development work, this activity has close nexus with the business of manufacture of sugar, as good quality sugarcane is a must for any sugar factory, that Hon’ble Bombay High Court in the case of CCE, Nagpur v. Ultratech Cement Ltd. reported in 2010 (20)S.T.R.577 (Bom.) = 2010 (260)E.L.T.369 (Bom.) in paras 28 and 29 of the judgment has held that the definition of “input service” in Rule 2(l) of Cenvat Credit Rules, 2004 is very wide and covers not only services which are directly or indirectly used in or in relation to manufacture of final product, but also includes the services which are used in relation to the business of manufacture of final product, be it prior to manufacture of final product or after the manufacture of final product and to put it differently, the definition of ‘input service’ is not restricted to services used in or in relation to manufacture of final products, but extends to all services used in relation to the business of manufacturing the final product and that the expression “activities in relation to business” in the definition of “input service” postulates activities which are integrally connected with the manufacturing business of the assessee, and if an activity is not integrally connected with the business of the manufacture of final product, that activity would not qualify to be an input service under Rule 2(l) of the Cenvat Credit Rules, that in this judgment the Hon’ble Bombay High Court also discussed the Apex Court’s judgment in the case of Maruti Suzuki Ltd. v. Commissioner reported in 2009 (240)E.L.T.641 (S.C.) and observed the fact that definition of “input service” is wider than the definition of “input” would make no difference in applying the ratio laid down in the case of Maruti Suzuki Ltd. (supra) while interpreting the scope of ‘input service’ and accordingly in the light of the judgment of Apex Court in the case of Maruti Suzuki Ltd. the services having nexus or integrally connected with the manufacture of final products as well as business of manufacture of final product would qualify as input service under Rule 2(l) of the Cenvat Credit Rules, 2004, that the activity of cane area survey and sugarcane development has close nexus with the business of manufacture of sugar, as good quality sugarcane is necessary for the business of manufacture of sugar and that in view of this, the manpower supply service used for cane area survey and sugarcane development would also qualify for Cenvat credit. He, therefore, pleaded that the impugned order is not correct.

Respondent’s contention:-Shri V.P. Batra, the learned DR, defended the impugned order by reiterating the findings of the Commissioner (Appeals) and pleaded that the sugarcane area survey and sugarcane development in respect of which Cenvat credit has been taken are welfare activities having no nexus with manufacture of the appellant’s final products and, therefore, these services would not be eligible for Cenvat credit. He also drew attention to the list of invoices annexed with the show cause notice and pointed out that in a number of cases the nature of work has no nexus with the manufacture of sugar. He also pleaded that in terms of the Apex Court’s judgment in the case of Maruti Suzuki Ltd. (supra), an input or input services for being eligible for Cenvat credit must have nexus with the manufacture of final product while the services availed in this case have no such nexus whatsoever. Shri Batra also pleaded that the appellant have not produced any evidence to prove that the cost of the services in respect of which Cenvat credit had been taken by them, had been included in the price of their final product and for this reason also, Cenvat credit would not be eligible for Cenvat credit. He, therefore, pleaded that there is no infirmity in the impugned order.

Reasoning of judgment:-As regards cleaning of the yard within the factory, as per the provisions of the Factories Act provision of Section 11 of the Factories Act it is the responsibility of a manufacturer to keep the factory premises neat and clean, therefore, the cleaning of the factory has to be treated as activity in or in relation to manufacture of the final product. Therefore, the Cenvat credit in respect of this activity would be admissible.
As regards the weighment of sugarcane and its unloading at the factory, this activity has to be treated as activity in relation to manufacture of sugar and molasses. Therefore, it was held that Cenvat credit would be admissible in respect of this activity also and the same has been wrongly denied.
As regards the cane area survey and sugarcane development by educating the farmers and by other means, the purpose of this activity is to ensure supply of good quality sugarcane, which is a must for any sugar manufacturing business. In view of this, this activity has to be treated as having nexus with manufacturing business of the appellant. During the period of dispute, the definition of input service covered “activities relating to business” and interpreting this expression, Hon’ble Bombay High Court in the case of Ultratech Cement Ltd. (supra) has in paras 28 and 29 of the judgment held that “thus the substantive part of the definition of input service covers services used directly or indirectly in or in relation to manufacture of final product, whereas the inclusive part of ‘input service’ covers various services in relation to the business of manufacturing of final product. In other words, the definition of ‘input service’ is very wide and covers not only services which are directly or indirectly used in or in relation to manufacture of final product but also includes various services used in relation to business of manufacture of final product, be it prior to manufacture of final product or after the manufacture of final product and to put it differently, the definition of input service is not restricted to services used in or in relation to manufacture of final products, but extends to all services used in relation to the business of manufacturing the final product and that the expression “activities in relation to business” in the definition of “input service” postulates activities which are integrally connected with the business of the assessee. If the activity is not integrally connected with the business of the manufacture of final product, the service would not qualify to be an input service under Rule 2(l) of the Cenvat Credit Rules.“ In this judgment the Hon’ble Bombay High Court also discussed the Apex Court’s judgment in the case of Maruti Suzuki Ltd. v. Commissioner reported in 2009 (240)E.L.T.641 (S.C.) wherein it was held that an input to be eligible for Cenvat credit must have nexus with the manufacture of final product. Hon’ble Bombay High Court after discussing this judgment has observed that “in our opinion the ratio laid down by the Apex Court in the case of Maruti Suzuki Ltd. (supra) in the context of definition of input in Rule 2(l) of Cenvat Credit Rules, 2004 would equally apply while interpreting the expression “activities relating to business” in Rule 2(l) of 2004 Rules. No doubt that inclusive part of the definition of ‘input’ is restricted to the inputs used in relation to manufacture of final product, whereas the inclusive part of the definition of ‘input service’ extends to the services used prior to/during the course of/after the manufacture of final product. The fact that the definition of ‘input service’ is wider than the definition of “input” would make no difference in applying the ratio in the case of Maruti Suzuki Ltd. (supra), while interpreting the scope of ‘input service’. Accordingly we hold that the services having nexus or integrally connection with the manufacture of final products as well as the business of manufacture of final product would qualify to be ‘input services’ under Rule 2(l) of 2004 Rules.” The emphasis in this judgment of Hon’ble Bombay High Court is that in case of ‘input service’ Cenvat credit, what has to be seen is as to whether the service claimed to be an input service has nexus either with the manufacture of final product or with the business of manufacture of final product, while in the case of input Cenvat credit nexus with the manufacture of final product is required not the nexus with the business of manufacture of final product. In this case, the question of eligibility for Cenvat credit of the activities of sugarcane area survey and sugarcane development has to be seen on the basis as to whether these activities have nexus with the business of manufacture of sugar. In their view, while these activities may not have nexus with manufacture of sugar, these activities certainly have nexus with the business of manufacture of sugar, as the supply of good quality sugarcane with good sugar recovery is a must for the business of manufacture of sugar. Therefore, they hold that the Cenvat credit in respect of these activities would be admissible.
As regards the learned DR’s submission that there is no evidence that the cost of these services was part of the price of the final product, it is well settled that any expenditure incurred by a manufacturer is deemed to be included in the price charged by him from his customers and therefore the manufacture is not required to prove that the expenses incurred by him on various inputs and input services used in the manufacture of the final product has been included in the price charged by him.
In view of the above discussion, the impugned order is not sustainable. The same is set aside. The appeal is allowed.

Decision:-Appeal allowed

Comment:- The crux of the case is that as per Factories Act, 1948, it is the responsibility of a manufacturer to keep the factory premises neat and clean and therefore cleaning of factory has to be treated in or in relation to manufacture of final product. Manpower Supply Services used for weighment of sugarcane and its unloading at the factory. This activity has to be treated as activity in relation to manufacture of sugar and molasses. Manpower Supply Services used for cane area survey and sugarcane development by educating farmers and by other means by a sugar mill for purpose of to ensure supply of good quality sugarcane, which is a must for any sugar manufacturing business. Activity has to be treated as having nexus with manufacturing business of appellant. These activities have nexus with business of manufacture of sugar as the supply of good quality sugarcane with good sugar recovery is a must for business of manufacture of sugar. Hence Cenvat credit would be admissible. Any expenditure incurred by a manufacturer is deemed to be included in the price charged by him from his customers and therefore manufacturer is not required to prove that expenses incurred by him on various inputs and input services used in the manufacture of final product has been included in the price charged by him.

Prepared by:- Monika Tak

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PJ/CASE LAW/2015-16/2752

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