whether the credit of Service tax paid by unit-I for unit-II admissible ?

Case:-GREAVES COTTON LTD. VersusCOMMISSIONER OF C. EX., CHENNAI-II & IV

Citation :-2015 (37) S.T.R. 395 (Tri. - Chennai)

Brief facts: -The relevant facts of the case, in brief, were that M/s. Greaves Cotton Ltd. were having two units, namely Petrol Engine Unit (Unit-I) and Diesel Engine Unit (Unit-II). Both the units were situated at difference places, Thoraipakkam (presently at Gummidipoondi) and Ranipet. The present appeals were filed by Unit-I. Five show cause notices were issued proposing to deny cenvat credit availed on input services on advertisement charges on the ground that Unit-I availed Service Tax credit on advertisement charges which was used in respect of the product manufactured by the other unit. The adjudicating authority by different adjudication orders denied the cenvat credit along with interest and penalty. By the impugned orders, Commissioner (Appeals) rejected the appeals filed by the appellants and upheld the adjudication orders.

Appellant’s contention:-Learned Consultant on behalf of the appellant submitted that Unit-I paid the amount of advertisement charges and duly recoded in their books of accounts which was related to their Unit-II. He submitted that the definition of “input services” under 2(l) of the Cenvat Credit Rules did not envisage its use in the factory of production of final product. He further submitted that the adjudicating authority clearly observed that the Unit-II was entitled to avail the credit. Thus there was no reason to deny the credit to Unit-I as both the units were under a common manufacturer. He strongly relied upon the following decisions of the Tribunal in the case of

(a) ECOF Industries Pvt. Ltd. v.CCE, Bangalore - 2009 (10) LCX 0078 = 2010 (17)S.T.R.515 (Tri.-Bom.) [para-8] which was upheld by the Hon’ble Karnataka High Court in the case of CCE, Bangalore v.ECOF Industries Pvt. Ltd. - 2011 (271)E.L.T.58 (Kar.) = 2011 (23)S.T.R.337 (Kar.). [Para-10]

(b) CCE, Bangalore v. ECOF Industries Pvt. Ltd. - 2012 (277)E.L.T.317 (Kar.) = 2013 (29)S.T.R.107 (Kar.).

(c) Coco Cola India Pvt. Ltd. v. CCE, Pune - 2009-TIOL-449-HC-MUM.-ST = 2009 (15)S.T.R.657 (Bom.) = 2009 (242)E.L.T.168 (Bom.). [para 43]

(d) Doshion Ltd. v. CCE, Ahmedabad - 2013 (288)E.L.T.291 (Tri. - Ahmd.). [para-5]

He further submitted that it was a case of revenue-neutrality insofar as that credit could be availed by Unit-II instead of Unit-I. Thus there was no revenue loss.

Respondent’s contention:-On the other hand, ld. Authorized Representative on behalf of Revenue submitted that it was well settled by the decisions of the various High Courts and the Tribunal that the expression “relating to business” in Rule 2(l) of Cenvat Credit Rules, 2004 would apply to the activities integrally related to the business activity of the assessee and the credit would be available only if nexus between the relevant services and the business of the assessee was established. In the present case, Unit-I was manufacturing petrol engine and the advertisement for the other unit of diesel engine was of different activity and therefore Unit-I cannot avail the credit in the manufacturing activity of the Unit-II. He relied upon the decision of the Hon’ble High Court as under :-

(1)        CCE, Nagpur v. Manikgarh Cement- 2010 (20)S.T.R.456 (Bom.)
(2)        CCE, Ahmedabad v. Cadila Healthcare Ltd. - 2013 (30)S.T.R.3 (Guj.)
(3)        TELCO Construction Equipment Co. Ltd. v. CCE & Cus., Belgaum - 2013 (32)S.T.R.482 (Tri. - Bang.).

He further submits that the decision of the Tribunal in the case of ECOF Industries Pvt. Ltd. (supra) would not apply to the present case as in that case, the issue involved was regarding distribution of the credit by the Input Service Distributor (ISD). In the present case, Unit-I was not input service distributor and case law would not apply.

Reasoning of judgment:-The Commissioner (Appeals) observed that as per Rule 2(l) of Rules, 2004, “input service” means any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal. It was observed that the input service credit availed by Unit-I should be used in relation to the manufacture of the final product of IC Engine. But, the input service credit availed by Unit-I on advertisement of diesel engine manufactured at Unit-II was in no way related to the goods manufactured by Unit-II. It was also observed that in terms of Rule 2(m) of the Rules, 2004, “Input Service Distributor” means an office of the manufacturer, which received invoices issued under Rule 4A of the Service Tax Rules, 1994 towards purchase of input services and issued invoice, bill or as the case may be challan for the purpose of distributing the credit of Service Tax paid on the said service to such manufacturer or producer or provider, as the case may be. It was contended that invoices issued under Rule 4A of Service Tax Rules, 1994 towards purchase of input services have to be distributed to the credit of the said services to such manufacturers only. The ld. A.R relied upon various decisions wherein it has been held that the activity must have nexus with business of assessee qualify as “input service”.

In the present case, M/s. Greaves Cotton Ltd. was engaged in the manufacture of IC Engine and Diesel Engine through their Unit-I and Unit-II respectively. There was no dispute that Unit-I availed the credit on the Service Tax paid on advertisement charges which had been accounted as an expense to the appellant-company. It was a fact that the appellant-company was eligible to avail the benefit of the input service credit on the advertisement charges. The dispute was related to Unit-II should avail the credit instead of Unit-I. The adjudicating authority accepted this fact. In terms of Rule 2(m) of Cenvat Credit Rules, 2004, the appellant-company viz. Unit-I could have distributed the credit of Service Tax paid on the advertisement charges to Unit-II. Rule 7 of the Rules, 2004 provided the manner of distribution of credit by input service distributor. In the case of ECOF Industries Pvt. Ltd. (supra), the issue involved whether the appellant was correct in distributing the credit of service tax in respect of their Malur Unit even though the Service Tax had been paid in respect of their Cuttack unit. The Tribunal while dealing with Rule 7 of Cenvat Credit Rules, 2004 and para 2.3 of the Master Circular of Service tax dated 23-8-2007 held as under :-

“8. The combined reading of the Rule 7 and the clarificatory Circular dated 23-8-2007 clearly shows that there are only two restrictions regarding the distribution of the credit. The first restriction is that the credit should not exceed the amount of Service Tax paid. The second restriction is that the credit should not be attributable to services used in manufacture of exempted goods or providing of exempted services. There are no other restrictions under the rules. The restrictions sought to be applied by the Department in this case in limiting the distribution of the Service Tax credit made in respect of the Malur unit on the ground that the services were used in respect of the Cuttack Unit finds no mention in the relevant rules. As such, restricting the distribution of Service Tax credit in a manner as has been done by the impugned order of the lower appellate authority (original authority had approved of such distribution) cannot be upheld. In case the Department wants to place such restriction as is sought to be placed in the case, the rule is required to be amended.”

The Hon’ble Karnataka High Court upheld the decision of the Tribunal in the case of ECOF Industries Pvt. Ltd. as reported in 2011 (271)E.L.T.58 (Kar.) = 2011 (23)S.T.R.337 (Kar.) held as under :-

“10. Therefore, these are the only two limitations, which are imposed in Rule 7 preventing the manufacturer from utilizing the CENVAT credit, otherwise, he is entitled to the said credit. Merely because the input Service Tax is paid at a particular unit and the benefit is sought to be availed at another unit, the same is not prohibited under law. It is in this context, the manufacturer is expected to register himself as a input service distributor and thereafter, he is entitled to distribution of credit of such input in the manner prescribed under law. Therefore, the order passed by the tribunal is legal and valid and does not suffer from any legal infirmity and does not call for any interference and therefore it is dismissed.”

In the case of Doshion Ltd. (supra), the Tribunal observed that there being no restriction for utilization of cenvat credit of input service without allocating proportionately to various units during the relevant period, the omission to take registration as input service distributor can at best be considered as procedural irregularity. In that case, the assessee was utilizing the credit of Service Tax paid for services such as telephone, security, insurance etc. and rendered at its other manufacturing units at Kathwada for payment of Central Excise duty for the clearance made at their main unit Vatva Unit. The Tribunal allowed the appeal filed by the assessee and held as under :-

“5. We have considered the submissions made by both sides. We find considerable force in the arguments advanced by the learned counsel. The registered office and Vatva office both are located in the same place and appellant has simply utilised the credit at Vatva instead of distributing it to various units. As submitted by the learned counsel, during the relevant period, there was no restriction for utilisation of such credit without allocating proportionately to various units. The omission to take registration as an Input Service Distributor can at best be considered as procedural irregularity and in view of the decisions cited, has to be considered sympathetically. Further, it is also noticed that appellant has not got any extra benefit by doing this. In fact from the statement of Shri Chandresh C. Shah, as explained that above Cenvat credit available to them, 20% of Service Tax payable only was paid and balance was paid in cash. In fact, proper distribution would have enabled them to utilise full credit. It would show that the exercise is totally Revenue neutral and no loss has been caused to the Revenue (in fact Revenue has gained). In the absence of any legal requirement to avail credit based on the services received during the relevant time and in the light of the decision cited by the learned counsel, the procedural irregularity has to be ignored and the demand confirmed has to be set-aside on this ground. In the result, demand for Cenvat credit of Rs. 1,07,07,142/- with interest and penalty equal to the same imposed under Section 11AC of Central Excise Act, 1944 are set-aside.”

On perusal of the above decisions, he was of the view that in the present case, credit cannot be denied merely because the Service Tax on advertisement charges was paid by the Unit-I for the advertisement of product of Unit-II, while both were under the umbrella of the same company. At any event, Unit-I could be registered as input service distributor under the Rules 2004. The Tribunal held that credit should not be denied for such procedural infraction when substantial part of the rule was complied. The another aspect of this case is that Unit-I, appellant herein, was eligible to avail the credit on Service Tax paid on advertisement charges. The reason for denial of the credit was that the contents of the advertisement were in respect of product of other unit. It was contended by the appellant that the advertisement charges incurred by the appellant had been added to the cost. The Hon’ble Bombay High Court in the case of M/s. Coca Cola India Pvt. Ltd. (supra) allowed the credit of Service Tax paid on advertisement. In that case, the appellant manufactured non-alcoholic beverage bases known as “concentrates”. These ‘concentrates’ sold under respective brand names such as Coca Cola, Fanta etc. The concentrate was sold by the appellant to bottling companies who, in turn, sold aerated beverages from the concentrates to distributors who, in turn, sold to retailers for the ultimate sale to the consumer. The advertisement and sales promotion activities including market research was undertaken by the appellant. Revenue denied the credit on the ground that the advertisement did not relate to “concentrates” manufactured by the appellant. The Hon’ble Court held as under :-

“43. What follows from the above discussion is that the credit is availed on the tax paid on the input service, which is advertisement and not on the contents of the advertisement thus it is not necessary that the contents of the advertisement must be that of the final product manufactured by the person advertising, as long as the manufacturer can demonstrate that the advertisement services availed have an effect of or impact on the manufacture of the final product and establish the relationship between the input service and the manufacturer of the final product. The manufacturer thereby can avail the credit of the Service Tax paid by him. Once the cost incurred by the service has to be added to the cost, and is so assessed, it is a recognition by Revenue of the advertisement services having a connection with the manufacture of the final product. This test will also apply in the case of sales promotion.”

The inclusive part of definition of “input service” under Rule 2(l) of Cenvat Credit Rules, 2004, consists of “advertisement or sales promotion ...., activities relating to business”. The Hon’ble Bombay High Court in the case of Manikgarh Cement (supra) as relied upon by the ld. A.R., held that Cenvat credit of input service was allowable only if nexus between relevant services and business of the assessee established. In the present case, it was apparent that input service credit on advertisement charges were related to the business of the assessee. Taking into account of the facts and circumstances of the present case, insofar as both the units were under the same manufacturer and the input service credit was related to the advertisement charges, “relating to business” of the same assessee, there was no reason to deny the input service credit to the appellants.

Accordingly, the impugned orders are set aside and all the appeals were allowed with consequential relief.

Decision:-appeal allowed

Comment:-the gist of this case is that as both the units belonged to common owner therefore the credit of advertisement charges for unit-II paid by unit-I was admissible. Further it was held that failure of taking the registration as the input service distributor was a procedural lapse and the benefit of credit could not be denied as such. Also as the nexus between the business of assessee and the advertisement charges could be drawn the credit was rightly admissible.

{prepared by:-Prayushi Jain}

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