Court:Bombay High Court
Citation :Commissioner of Central Excise v. M/s Manikgarh Cement [AIT-2010-465-HC1
Factual background- The tax payer is engaged in the manufacture of cement. The adjudicating authority had disallowed the CENVAT Credit of service tax paid on services of repairs, maintenance and civil construction etc. as the services were used in the residential colony of the tax payer on the ground that the said services were not covered under the definition of input service and hence ineligible as input service defined under Rule 2(1) of the CENVAT Credit Rules, 2004.
The first appellant authority rejected the appeal filed by the tax payer and upheld the order of the adjudicating authority.
The Hon’ble Tribunal in its order [2008 (9) STR 554 (Tri-Mum)] dated 4 December 2007 allowed the appeal of the tax payer and held that the CENVAT Credit of service tax paid on services of repairs, maintenance and civil construction used in the residential colony is admissible.
The Department preferred a civil appeal with the Hon’ble Bombay High Court
Question before the Court :-Whether the CESTAT was correct in holding that the Service tax Credit on services of repair, maintenance and Civil constructions used in the residential colony is admissible when such services are not related to manufacture whether directly or indirectly in or in relation to the manufacture of final product.
Decision of the Bombay High Court Court
The Hon’ble Bombay High Court held that establishing a residential colony for the employees and rendering taxable services in that residential colony may be a welfare activity undertaken while carrying on the business and such an expenditure may be allowable under the Income Tax Act. However, to qualify as an input service, the activity must have nexus with the business of the tax payer.
The Hon’ble High Court further held that the expression ‘activities relating to business’ referred to activities which are integrally related to the business activity and not welfare activities undertaken by the tax payer.
The Hon’ble High Court, while applying the ratio of the Supreme Court’s decision in Maruti Suzuki [2009 (240) ELT 641 SC] held that unless the nexus is established between the services rendered and the business carried on by the tax payer, CENVAT Credit is not admissible.
The Hon’ble High Court finally held that rendering taxable services at the residential colony established by the tax payer for the benefit of the employees, is not an activity integrally connected with the business of the tax payer and hence CENVAT Credit of repairs, maintenance and civil construction rendered at the residential colony are not ‘input service’ as per the definition under the CENVAT Credit Rules, 2004
Comments and analysis
The Hon’ble Bombay High Court’s decision has far reaching implications on the Manufacturing sector on the admissibility of CENVAT Credit of services received by the tax payer in the residential colonies established by the tax payer for the benefit of its employees or any other such remote level input services availed.
The Hon’ble Bombay High Court has extended the restrictive interpretation of ‘inputs’ by the Hon’ble Supreme Court in the case of Maruti Suzuki to ‘input services’.
The Tribunals recently have denied CENVAT Credit of service tax on outdoor catering by applying the ratio laid down in the Maruti Suzuki decision (supra).
This present decision of the Hon’ble High Court albeit on services received in a residential colony may start a new phase of litigation on outdoor catering and similar services received by tax payers.