Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2009-10/024

25 December 2009

Case Study

Prepared by: - CA. Pradeep Jain

Sukhvinder Kaur, LLB(FYIC)

Mayank Palgauta

Introduction: -

The definition of “Input services” under the Cenvat Credit Rules, 2004 has been a matter of litigation between the department and the manufacturers. In the earlier case study of Coca Cola India Pvt. Limited, we have brought that the Hon’ble High Court has given a very liberal interpretation of definition of input services and allowed the credit on any expenditure of business. We have commented that all the manufacturers will feel relieved that this decision will bring the relief to them and most of cases will be decided in favour of assessee. But this hope was short lived. The Tribunal has overruled this decision of High Court by relying on the Apex Court decision in case of Maruti Suzuki Limited. We are preparing the case study on this decision of Tribunal only.

Relevant Legal Provisions: -

Rule 2(l) of the CENVAT Credit Rules, 2004

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 from 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 upto 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 rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal;”

Commissioner of Central Excise, Nagpur v/s M/s Manikgarh Cement Works

[2009-TIOL-2059-CESTAT-MUM]

Brief Facts of the Case: -

- The respondent-assessee had taken Cenvat credit of service tax paid on construction of buildings, repairs and maintenance of such buildings, man power recruitment (recruitment of security guards) and cleaning services during the material time. These services were undertaken in a residential colony situated outside the factory premises.

- At the Adjudication stage, the original Authority held that these services were outside the purview of the definition of “input services” given under Rule 2 (l) of the Cenvat Credit Rules and disallowed the credit in question to the respondent.

- In further appeal, the Commissioner (Appeal) allowed the respondent’s appeal and held that credit was admissible on the said services.

- Aggrieved by the order of the Commissioner (A), the Revenue has come in appeal before the Tribunal.

Appellant’s Contentions: -

¨ Revenue contended that with reference to the definition of Input Services in CCR, 2004 none of the said services can be recognized as input service because they lack nexus with the activities of the manufacture and clearance of excisable goods. It is contended that only those services which are used in or in relation to the manufacture and/or clearance of excisable goods could be held to be “input services”.

¨ It was further contended that the Tribunal’s decision dated 04.12.07 which went in favour of the respondent in an earlier case involving identical issue has not been accepted by the Revenue department and they have filed an appeal against the said decision which is admitted in the High Court and is pending.

¨ The Revenue has further drawn an analogy between the definition of ‘input service’ and ‘input’ given in Rule 2 (k) of CCR, 2004 and argued that the item specified in both the definitions is that the items specified in the inclusive part of the definition should necessarily satisfy the essential legal requirements laid down in the main part of the definition so as to qualify as input service.

¨ Revenue has relied upon the judgment given in Maruti Suzuki Ltd v/s CCE, Delhi [2009 (240) ELT 641 (SC)] and it is submitted that the definition if input service given in Rule 2 (l) has to be considered as a whole and that anything mentioned in the inclusive part of the definition which is considered for claiming of Cenvat Credit then the nexus should be established between the main part and inclusive part of the definition.

¨ Therefore, the Appellant has submitted that mere mention of a service in the inclusive part of the definition would not be entitled for service recipient to avail the Cenvat Credit of service tax paid on such above mentioned services.

Respondent’s Contentions: -

Ø The Respondent-assessee has sought to distinguish the case of Maruti Suzuki from the instant case. It is pointed out that in Maruti Suzuki case the definition of “Input” was split into three parts i.e. main part, the inclusive part and the place of use. Respondent contends that the main part and the inclusive part of the definition of “input” were held to be qualified by the third part i.e. place of use. But in the interpretation of the definition of the “Input Service”, the place of use is irrelevant because many of services are rendered outside the factory.

Ø The Respondent has submitted that in the definition of “input service”, the main part contains the expression like “in or in relation to the manufacturing of final product” whereas the inclusive part of the definition contains expression like “in or in relation to business” and “in or in relation to setting up” etc. Therefore, the definition does not require showing the nexus between the main part of the definition and the inclusive part of the definition. The Respondent argued that the inclusive part of the definition should be considered as independent and thus every activity or group of activities mentioned in the inclusive part of the definition should be unaffected by anything mentioned in the main part of the definition.

Ø The Respondent referred to the case of Coca Cola India P. Ltd v/s CCE, Pune [2009 (242) ELT 168 (Bom)] wherein the Hon’ble High Court has given decision that every part of the definition of “Input Service” is to be considered as an independent part. If an assessee could satisfy any one of the five parts then he would be entitled to take credit of service tax paid on such relevant services. Assessee need not to be satisfied all other parts of the definition.

Ø The respondent also relied upon the Tribunal’s decision in respondent’s own case [reported at 2008 (9) STR 554 (Tri-Mum)] which is in conformity with the judgment in Coca Cola case. They have also relied upon the Order no. A/55/09 dated 16.01.09 passed by this bench in another earlier case of the same assessee wherein the order dated 13.12.07 was followed as blinding precedent.

Ø Thus, the Respondent has submitted that Cenvat Credit should not be denied on the ground that such services do not satisfy the requirements of the main part of the definition but these are included in the inclusive part of the definition and said services falls under the inclusive part of the definition.

Question for Consideration: -

The question for consideration before the Tribunal was: -

Whether Cenvat Credit of service tax paid on construction of buildings, repairs and maintenance of buildings, man power recruitment and cleaning services which were undertaken in a residential colony situated outside the factory premises can be allowed even if such services do not satisfy the quintessential requirements lay down in the main part of the definition?

Order of the Tribunal: -

The Hon’ble Tribunal of Bombay held as under: -

v The Tribunal held that the Apex Court decision in Maruti Suzuki case impliedly overrules the decision of the High Court given in the case of Coca Cola. Relying upon the judgment of the Apex Court in the case of Maruti Suzuki, The Tribunal held that any service which is apparently covered by the parameters of the Inclusive part of the definition of “input service” should also satisfy the quintessential requirements of the main part of the definition and accordingly, any person claiming the benefit of Cenvat credit on input service in terms of the inclusive part of the definition of “input service” should establish that such service was used, directly or indirectly, in or in relation to the manufacture of his final products or the clearance of such products from his factory.

v The Tribunal clarified that the definition of “Input” is not mainly relying merely on the expression “in or in relation to manufacture of final product” but it should be read in entirety as ” used in or in relation to manufacture of final product whether directly or indirectly and whether contained in the final product or not”. In the other words, the definition should be read in entirety and the inclusive part is dependent on main part of the definition.

v The Tribunal held that if any service is complying with the inclusive part of the definition then it should necessarily comply with the requirements of the Main part of the definition. If a person is claiming Cenvat Credit on the services which satisfy the conditions of the inclusive part of the definition then the service should satisfy the conditions of the Main part too. Otherwise the Cenvat Credit of Service Tax paid on the said service will not be admissible to the assessee.

v The Tribunal also held that the Apex Court’s ruling in Maruti Suzuki case is to the contra and the same is constitutionally binding on this Tribunal.

v Accordingly, the Tribunal held that impugned order is not sustainable because such services do not satisfy the nexus between the above mentioned four services and manufacture and clearance of excisable goods. Hence, the assessee will not be eligible to avail Cenvat Credit of Service Tax paid on the said services.

Decision of the Tribunal: -

Appeal disposed of accordingly.

Comments & Conclusion: -

The Tribunal held that the Respondent has not established nexus between any of the four services and the manufacturing or clearance of the excisable goods, the benefit of the Cenvat Credit in respect of such services cannot be allowed. Such decision is based on the strength of the Hon’ble Supreme Court’s ruling in Maruti Suzuki Case in which definition is considered as a whole and every service written in the inclusive part of the definition must fulfill the requirements of the main part of the definition.

Thus, the litigation is still not over. The decision of Tribunal overruling the verdict of the High Court will again go to High Court. Two main issues have come up from this decision. Whether the place of providing service is important for definition of “input services” and secondly whether it is necessary that the input services should be used in or in relation of manufacture of final product when the inclusive definition itself covers the services which do not have nexus with main definition. Let us wait for the final decision in the matter.

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PJ/CASE STUDY/2009-10/024
25 December 2009

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