Whether the service tax paid on insurance of plant and machinery, machinery breakdown, company's vehicles, finished goods in stock and in transit, cash in transit and the insurance of employees against accident and sickness is covered by the definition o

PJ/CASE STUDY/ 2012-13/22

08 September 2012

CASE STUDY

Introduction:

This case study relates to cenvat credit on Input Service. We have seen various decisions on this issue. Various High Courts has allowed the credit on all inputs services relating to business. Hence, the tribunal , adjudication authorities as well as appellate authorities are interpreting the same. They try to show what constitutes business expenditure and non business expenditure? Before the matter could be settled, the department has come out with new definition of “input service” and interpretation of the same will start shortly. The things which were going to settle are once again going to be unsettled. But the case study in instant case relates to old definition only.
In the instant case, The manufacturer took Cenvat credit on input services of insurance of Plant and Machinery, company’s vehicle, finished goods in stock. The matter went to the tribunal and it was decided whether the credit of the same is available or not.

OUDH SUGAR MILLS LTD. v/s COMMISSIONER OF C. EX., LUCKNOW [2012(282) ELT 541 (Tri.-Del.)]

Relevant Legal Provisions:

Rule 2 (l) of Cenvat Credit Rules, 2004:-
“Input service” means any service, -
(i) used by a provider of taxable service for providing an output service; or
(ii) used by a 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 modernisation, 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, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal;
but excludes services, -
(A) specified in sub-clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act (hereinafter referred as specified services), in so far as they are used for- (a) construction of a building or a civil structure or a part thereof; or (b) laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or
(B) specified in sub-clauses (d), (o), (zo) and (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods; or
(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee.

Brief Facts:

Ø The appellant manufactures sugar and molasses chargeable to Central Excise duty. They avail Cenvat credit of Central Excise duty paid on inputs and capital goods and of service tax paid on input service used in or in relation to the manufacture of their final products. The dispute here in this case is relating to eligibility for Cenvat credit in respect of the services of insurance of Plant & machinery, Company’s vehicles, finished goods in stock etc.
Ø According to the Department, the appellant are not eligible for Cenvat credit of service tax paid on premium for the said insurance policies as these services have no nexcus with the manufacture of final product and hence are not covered by the definition of ‘input service’ in Rule (l) of Cenvat Credit Rules, 2004 and secondly, the appellant have not provided specific information to the Department regarding details of these services and the items in respect of which the insurance service were used.
Ø On this basis a show cause notice dated 30-10-2009 was issued to the appellant seeking recovery of allegedly wrongly taken Cenvat credit amounting to Rs. 24,86,526/- along with interest under Rule 14 of the Cenvat Credit Rules, 2004, read with Section 11A(1) and 11AB of Central Excise Act, 1944 and imposition of penalty on the appellant under Rule 15 of Cenvat Credit Rules, 2004. This show cause notice was adjudicated by the Additional Commissioner vide order-in-original dated 19-8-2010 by which the Cenvat credit demand was confirmed along with interest and penalty of equal amount was imposed on the appellant under Rule 15 of the Cenvat Credit Rules, 2004. On appeal against the above-mentioned order-in-original of the Additional Commissioner, the same was upheld in toto by the CCE (appeals) vide order-in-appeal dated 29-3-2011.
Ø Against the above order of CCE (Appeals), this appeal and stay application has been filed. A Miscellaneous Application No. E/M/1004/2011-EX has been filed for admission as additional evidence of the list of documents along with a chart showing the details of credit taken by the appellant on various insurance premiums paid in connection with the business of the appellant along with some copies of the bills/vouchers issued by the service providers.

Appellant’s Contention:

Appellant contended that the insurance service for insurance of the plant and machinery, finished goods in stock and in transit and of the cash in safe and in transit are the services related to their manufacturing business and hence are eligible for Cenvat credit. In this regard, he relies upon Tribunal judgment in case of Finolex Cables Ltd. v. CCE, Pune-II reported in 2009 (14) S.T.R. 303 and CCE, Raipur v. Beekay Engg. & Castings Ltd. reported in 2009 (16) S.T.R. 709 (Tri.- Delhi), that insurance service for cash in transit, and company's vehicles are eligible for Cenvat credit and in this regard he relies upon judgments of the Tribunal in cases of HEG Ltd. v. CCE, Raipur reported in 2010 (17) S.T.R. 178, that insurance of employees against accident and sickness is eligible for Cenvat credit and in this regard he relies upon Tribunal's judgments in cases of CCE, Aurangabad v. Endurance Systems India Pvt. Ltd. reported in 2009 (237) E.L.T. 204 = 2010 (20) S.T.R. 267, Millipore India Ltd. v. CCE, Bangalore-II reported in 2009 (13) S.T.R. 616 = 2009 (236) E.L.T. 145, that they have all the details regarding receipt of various insurance services from various insurance companies, all of which are public sector companies, along with the details of invoices on the basis of which Cenvat credit had been taken, that the original adjudicating authority and the first appellate authority disallowed the Cenvat credit without giving them an opportunity to produce these documents that the appellant may be allowed to place on record this additional evidence and, that from these documents it will clear that the Cenvat credit, in question, has been correctly taken by them and the impugned order is therefore not acceptable.
Further they plead that the lower authorities decided the case against them without giving them opportunity to produce these documents and that they are in a position to produce these documents and they went to place these documents on record.

Issue Involved:

The Following issue was involved in this case:-
Whether the service tax paid on insurance of plant and machinery, machinery breakdown, company's vehicles, finished goods in stock and in transit, cash in transit and the insurance of employees against accident and sickness is covered by the definition of 'input service' and eligible for Cenvat credit?

Order of CESTAT: -

The Hon’ble CESTAT held that however the matter was listed for hearing of stay application and miscellaneous application, after hearing the same for sometime, they were of the view that the appeal itself can be taken up for final disposal and accordingly, with the consent of both the sides, the matter was heard for final disposal after waiving the requirement of pre- deposit.

The definition of 'input service', as given in Rule 2(1) of Cenvat Credit Rules, 2004 has two parts. The main definition part during the period of dispute covered - "any service used by a provider of taxable service for providing in output service, or used by a 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." The inclusive portion during the period of dispute covered certain service and group of service specifically mentioned. The group of services mentioned in the inclusive portion is - "activities relating to business, such as auditing, accounting, financing ...”.

The main definition part in respect of manufacture, because of use of the expression - "used whether directly or indirectly, in or in relation to the manufacture of final product" would cover all the services, which have nexus with manufacture whether directly or indirectly and accordingly in addition to services directly required for manufacture such as erection. installation and commissioning of plant, research and development, technical testing, technical consultancy, repair and maintenance of plant and machinery, services for optimising the productivity etc., the services required to be availed for compliance with statutory provision by a manufacturer like Factories Act, labour laws, environmental laws etc. without which manufacturing operations will not be allowed will also be covered. If providing mediclaim insurance policy and accident insurance cover to employees is the requirement of some statutory provision, to be complied by the manufacturer, the same would have to be treated as covered by the main definition part of the input service. If, however, there is no statutory requirement for providing such insurance cover for the employees, and the same is pure welfare activity, in view of judgment of Hon'ble Bombay High Court in case of CCE, Nagpur v. Manikgarh Cement reported in 2010 (20) S.T.R. 456 (Bom.) will not be covered by the definition of input service'. While the inclusive portion of the definition of 'input service' does not specifically cover insurance of plant, machinery, goods in storage or transit etc., it does cover - "activities relating to business, such as accounting, auditing, financing,....". Because of use of the words "such as" the scope of "activities relating to business" is very wide and the list of services covered by this expression mentioned in the definition i.e. "accounting, auditing, financing, recruitment ...” is not exhaustive.

Hon'ble Bombay High Court in case of CCE, Nagpur v. Ultratech Cement Ltd. reported in 2010 (260) E.L.T. 369 (Bom.) = 2010 (20) S.T.R. 577 (Bom.) has held that the expression - "activities relating to business" covers the activities which are integrally connected with the business of manufacturing of the final product. Any prudent businessman in manufacturing business would insure his plant and machinery, goods in storage, cash in transit and goods in transit if his sales are on FOR destination basis. Therefore these services are integrally connected with the manufacturing business of an assessee and the same have to be treated as "activities relating to business" and hence covered by the definition of input service. Same view has been taken by the Tribunal in case of Finolex Cables Ltd. v. CCE, Pune-II (supra). Another objection of the Department to permitting the Cenvat credit, in question, is that the appellant have not provided the details of the item of machines etc. insured and the details of the invoices of insurance companies on the basis of which the Cenvat credit has been taken. The appellant plead that the lower authorities decided the case against them without giving them opportunity to produce these documents and that they are in a position to produce these documents and they went to place these documents on record. Since these documents go to the root of the matter, the miscellaneous application filed by the appellant for admitting this additional evidence is allowed. However, since the appellant's claim regarding Cenvat credit can be examined with regard to these documents only by the original adjudicating authority, tine matter has to be remanded to the original adjudicating authority for this purpose.

Decision:
The appeal was disposed off.

Conclusion:

There are number of verdicts on the issue of availment of credit on input services. Now-a-days, the dispute relates to service tax only. In audit, 80% of audit paras raised relates to service tax only. Either the credit is not available on this input services or the service tax is payable on this service also.
The credit on ‘input service” was settled by High Court in Ultra tech cement saying that the credit is admissible on business expenditure. Thereafter, the interpretation came that the expenditure which are not related to business but are statutory requirement then the credit will be allowed. But if there is no statutory requirement then credit will not be allowed.

Now, the department has changed the definition. Certain exclusion clause has been introduced. Moreover, the credit will not be allowed related to personal nature expenditure of employees or directors. Now, the dispute will revolve around the business or personal expenditure.

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PJ/CASE STUDY/ 2012-13/22
08 September 2012

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