Whether the Cenvat credit on services utilized in set up of residential colony is allowed?

Case:- Gujarat Guardian Ltd. Vs. C.C.E., Surat-II

Citation:-2012- TIOL-1702-CESTAT-AHM

Brief Facts:-The appellant is engaged in the manufacture of glass. During the course of audit of records of the appellant it was noticed that appellant had availed cenvat credit of service tax towards different services like manpower supply services, booking services, pest control services utilized in residential colony, guest house and sport complex or services utilized for the persons who are not employees of the company during the period July 2007 to June 2009. Proceedings were initiated taking a view that such credit is not admissible, which resulted in confirmation of demand for wrongly availed cenvat credit with interest and penalty equal to the amount demanded. The appellant filed an appeal before Commissioner (Appeals) against the said order but Commissioner (Appeals) has relied upon the decision of the hon’ble high court of Bombay in the case of Manikgarh Cement -2010 (20) STR 456 (Bom.) =(2010-TIOL-720-HC-MUM-ST) to hold that taxable service in the residential colony may be a welfare activity and such activity cannot be considered to be have a nexus with the business or manufacture and therefore, following the decision of the Hon’ble Supreme Court in the case of Maruti Suzuki, credit cannot be allowed. The commissioner (Appeals) upheld the order of lower authority. Thereafter, appellant filed appeal before Tribunal.

Appellant’s Contention:-The Appellant submits that in this case, the services like manpower supply services, booking services, pest control services were utilized in the staff colony, guest house and sport complex. The appellant also submits that the factory is located in a remote place in Ankleshwar and appellant is engaged in the manufacture of glass. For manufacture of glass, melting sand etc, furnace is used and furnace once it is started, it is not stopped in its life time and it is quite normal for the furnace to function 15 to 20 years before it is stopped for maintenance or repairs. Under these circumstances, since the factory, has to function continuously throughout the year without getting stopped any time and when the factory is located in a remote area, it becomes essential to establish residential colony so that staff is available 24 hours near the factory and they also have necessary facilities to make their stay comfortable so that their factory can run efficiently under these circumstances, the stand taken by the revenue that it has no nexus with the manufacture and input service has to have a nexus with the manufacture and therefore credit is not admissible, is not correct. In this case, it is his submission that manufacture in this case cannot be done efficiently unless a colony is not established near the factory. The appellant submits that commissioner (Appeals) has relied upon the decision of the hon’ble high court of Bombay in the case of Manikgarh Cement -2010 (20) STR 456 (Bom.) =(2010-TIOL-720-HC-MUM-ST) to hold that taxable service in the residential colony may be a welfare activity and such activity cannot be considered to be have a nexus with the business or manufacture and therefore, following the decision of the Hon’ble Supreme Court in the case of Maruti Suzuki, credit cannot be allowed.
The appellant further submits that in this case, the lower authorities have erred in relying upon the decision of the hon’ble Bombay high court since activity undertaken by the appellant is not welfare activity at all. It is a necessity for the appellant as already explained earlier. Appellant relies upon the decision of Hon’ble High Court of Chhattisgarh in the case of HEG Limited -2011 (24) STR 275 (Chhattisgarh) to submit that the decision has to based on facts of each case and Tribunal being the last fact finding authority, finding facts by the Tribunal is very important. The hon’ble high court also held that the question where a particular service availed by the assessee is input service is a question of fact which is to be decided on the basis of facts of the case. Therefore, it is his submission that this Tribunal is not bound by the decision of the Hon’ble High Court in the case of Manikgarh Cement since a view was taken that activities undertaken by the Company were welfare activities and there is no clear finding of the facts otherwise. In the case of Gujarat Heavy Chemicals Limited 2011 (22) STR 610 (Guj) also, the issue before the Hon’ble Court was eligibility of service tax paid on the service utilized in residential colony. In that case also there was no submission by the assessee that the activities undertaken in the residential colony or providing residence to the employees was a necessity for the manufacturer and was not a welfare activity. In the absence of any such submission, it cannot be said that decision would be binding on the Tribunal. It is his submission that in view of these decisions, mainly in the case of HEG Limited, Manikgarh Cement and Gujarat Heavy Chemicals limited, the conclusion that emerges is that the tribunal is required to find the facts and decide whether the service is an input service under the facts and circumstance in each case and thereafter decide the eligibility. According to him, the two decisions in the case of Manikgarh cement and Gujarat Heavy chemicals limited do not have precedence value in this case because in this case, it has been the submission of the appellant that what was undertaken was not welfare activity but was a necessity for manufacture and business of the assessee.
The appellant would rely upon the decision of the Tribunal in the case of ITC Limited-2010 (17) STR 146 (Tri-Bang.) where the Tribunal took the view that credit of service tax on various services provided in the staff colony is admissible in view of the fact that manufacture was not feasible if residential colony for employees is not provided near the factory. Appellant submits that decision in the case of ITC Limited is directly applicable to the facts of this case. He also relied upon the decision of theEuropean court in the case of Julius Fillibeck Shone GMB H & Company KG to submit that activity undertaken is necessary for the requirement of business service received has to be held as one received for business purpose. The appellant relied upon the para 34 of the decision, which is reproduced below:-
“34 The answer to the second question is therefore that Article 6 (2) of the Sixth Directive is to be interpreted as meaning that transport provided for employees free of charge by the employer between their homes and the workplace in a company vehicle serves, in principle, the employees’ private and thus serves purposes other than those of the business. However, that provision does not apply when, having regard to certain circumstances, such as the difficulty of finding other suitable means of transport and changes in the place of work, the requirements of the business make it necessary for the employer to provide transport for employees, in which case the supply of those transport services is not effected for purposes other than those of the business.”
The appellant also submits that decision of the Hon’ble High Court of Karnataka in the case of Toyota Kirloskar Motor Pvt. Ltd. 2011 (24) STR 645 (Kar.) would be directly applicable to this case. In that case, the hon’ble high court took the view that celebration of Karnataka Rajyosthaya day has to be considered as function as well as in relation to / in connection with manufacture since, if the same is not celebrated there is possibility of property of the appellant getting damaged and law and order problem getting created which can be normal subsequently but would have cost damage to the appellant. The appellant further submits that the decision of the hon’ble high court of Karnataka would clearly show that the decision as to whether a service is input service or not has to be based on the facts of the case and the circumstances of each case. He also relies upon several other decisions where Tribunal has taken a view that such credit of service tax paid on various services used in residential colony is admissible as cenvat credit.
As an alternative, the appellant also submits that in view of the facts that there are contrary three decisions during the relevant period as regards eligibility of credit of service tax paid on services utilized in the residential colony, extended period could not have been invoked in this case and no penalty could have been imposed. Therefore, as an alternate submission he would request that the demand may be limited to the normal period of limitation and penalty imposed may be set-aside.

Respondent’s contention:-The Respondent submits that decision of the Hon’ble Supreme Court in the case of Maruti Suzuki Ltd. makes it very clear that there has to be nexus between manufacture and input service. Further, the respondent submits that in the case of Gujarat Heavy Chemicals Limited and Manikgarh Cement, the Hon’ble High Court were aware that residential colony would have been established because the employees may be required in the same area. Just because of this fact they have not been mentioned in the decision does not mean that courts were not aware of the facts. The respondent also submits that residential colony for whatever purpose is established cannot be said to have a nexus with the manufacture and therefore, credit cannot be allowed in such a situation.

Reasoning of Judgment:The Tribunal considered that submission made by both sides. First of all, the submission that creation of residential colony need not be a welfare activity in all cases and it has to be considered in each case cannot be found fault with. The Tribunal also agreed with the submission of the leaned advocate that decision as to whether the input service can be considered as input service, is a question of fact. Therefore, first of all it becomes necessary to decide whether this can be considered as input services at all.
It is quite common in cement factories to provide residential colony to employees since cement factories are invariably located in remote areas. Similarly in the case of big chemical factories also residential colony virtually becomes a necessity since such big factories are established not always in the middle of the city where all facilities are available. Under these circumstances, the submission that residential colony is not welfare activity and when it is not welfare activity, credit is admissible does not seem to flow from the precedent decision before me. Both, Hon’ble High Court of Bombay in the case of Manikgarh cement and Hon’ble High Court of Gujarat in the case of Gujarat Heavy Chemicals Limited came to the conclusion that services received in residential colony cannot be considered as input service and did not fit into the necessity as the fact as to whether they were required or necessity or welfare activity of establishment because of legal compulsion. In the case of Ultratech Cement Limited, the Tribunal had taken a view that where there is legal compulsion, credit would be clearly admissible and this view was taken in respect of catering service. Therefore, where there is legal compulsion, it cannot be said that in terms of precedent decision, credit is admissible. However, as regards the services received in residential colony, the two decisions of two high courts which have been cited, do not consider that it is necessary to consider whether the service is a welfare activity. In fact, in Gujarat Heavy Chemicals Limited, a view was taken that provision of residential quarters by manufacturer was voluntary and therefore credit is not admissible. However, there is no decision was to what would be the position when it is not voluntary. In Manikgarh Cement case also the Hon’ble High Court of Bombay took the view that expenditure incurred on services received in residential colony was welfare activity. It has to be noted that there was no submission in both the cases on the part of the assessee that it was a necessity for manufacture. However, in tribunal’s opinion, it cannot be said that high courts were not aware of the fact that these two units are big units located away from the town and residential colony is generally be practice, created and maintained by companies. Therefore, even though the decisions do not specifically say that it is a welfare activity or voluntary only, credit has to be denied. As regards the decision ofEuropean Court, unless it is examined the decision vis-à-vis the definition of input service and statutory provisions, it would not be appropriate to adopt the ratio. As regards the decision in the case of ITC limited, it has to be noted that decision was rendered much before the subsequent decision of the Hon’ble High Courts cited before me. Therefore, tribunal did not get benefit of these decisions at that time. It has to be noted that while rendering the decision in the case of Gujarat heavy Chemicals, the decision of Karnataka High Court in the case of Toyota Kirloskar Limited was not available. However, decision in the case of Gujarat heavy Chemicals is a subsequent decision and it is to be noted that hon’ble Gujarat High Court had taken note of the decision in the case of Ultratech cement, Manikgarh cement to come to the conclusion that credit is not admissible. In the case ofUltratech Cement, view taken was that where there is legal compulsion, credit has to be allowed. In the case of Manikgarh Cement, it was held that in case of welfare activity credit cannot be allowed. In my opinion, since the facts in Manikgarh Cement and Ultratech Cement as well as in present case are almost similar, it will not be appropriate to come to a conclusion that courts would have taken a different view had they been apprised of the need for residential colony and maintenance at the cost of the assessee. Under these circumstances, we consider it appropriate to follow the decision of the High Court of Bombay as well as Gujarat rather than following the precedent decision of Tribunal which are in favour of the appellants. Under these circumstances, we do not consider that appellant has a case of merits as far as credit of service tax paid on various services received in the residential colony, are concerned.
The Tribunal further finds that appellant would have entertained a belief that they are eligible for credit in view of the fact that there were several decision that services received in residential colony on which service tax has been paid, can be considered as input services. Under these circumstances, the demand for service tax for the period beyond one year cannot be sustained and has to be set-aside. In this case, the show cause notice for the period covered in July 2007 to June 2009. Therefore, the demand for the period from March 2009 to June 2009 only can be sustained and demand for the earlier period is set aside. Needless to say that interest is required to be paid. As regards the penalty, in view of the fact that issue involved is a pure question of interpretation of law, question of imposition of penalty does not arise. Accordingly, penalty is set aside.

Decision:-Appeal is decided on above terms.

Comment:-The analogy drawn from this case is that department is refraining from allowing cenvat credit in respect of welfare activities of employer and is thus denying credit in respect of services availed for setting up residential colony for employees.

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PJ/Case Laws/2012-13/1332

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