Solar Industries India Limited.Vs Commissioner (Bombay High Court)
Material Facts
Solar Industries India Limited (the appellant) manufactures explosives at Mouza Chakdoh and Bazargaon, Taluka and District Nagpur. The factory is situated approximately 40 km from Nagpur City. To transport its employees from designated pickup spots in Nagpur to the factory, the appellant hired buses through a service provider, Hansa Travels. Hansa Travels levied service tax under the category of service operator, which the appellant paid and subsequently claimed as CENVAT Credit.
Read SC Judgment in this case: SC Upholds Denial of Input Tax Credit on Employee Transport Service
Procedural History
The Adjudicating Authority issued eleven show-cause notices to the appellant covering the period from July 2009 to December 2015. After the appellant filed replies, the Adjudicating Authority permitted CENVAT Credit for the period from July 2009 to March 2011, but disallowed CENVAT Credit for the period from 01.04.2011 to 31.12.2015 by an order dated 28.12.2016. The authority ordered recovery of the disallowed credit along with interest under Rule 14 of the CENVAT Credit Rules, 2004, and imposed a penalty under Rule 15.
The Commissioner (Appeals), by an order dated 28.11.2017, partly allowed the appellant’s appeal by maintaining the disallowance of CENVAT Credit but reducing the penalty. On further appeal, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), by an order dated 23.05.2018, maintained the disallowance of CENVAT Credit while setting aside the penalty order. The appellant subsequently filed Central Excise Appeal No. 12/2019 before the High Court of Judicature at Bombay under Section 35(G) of the Central Excise Tariff Act, 1985.
Legal Issues & Statutory Provisions
The appeal was admitted on substantial questions of law involving:
- Whether the exclusion in Clause (C) [and Clause (B)] to Rule 2(l) of the CENVAT Credit Rules, 2004 (defining “input service”) includes employee transportation by bus from pickup points to the workplace, so as to deny CENVAT Credit to the manufacturer.
- Whether bus transportation services provided to employees amount to a service for personal use or consumption of employees.
- Whether expenses incurred by a manufacturer for employee bus transport to reach the factory in time (taken into consideration while determining the final product price) constitute a component leading to manufacturing activity entitling CENVAT Credit.
- Whether the recipient of services is entitled to claim CENVAT Credit of service tax charged on renting of a motor vehicle (capital goods for the service provider) under Rule 2(l)(B) of the CENVAT Credit Rules, 2004.
- Relevant statutory provisions: Rule 2(l), Rule 14, and Rule 15 of the CENVAT Credit Rules, 2004; Section 35(G) of the Central Excise Tariff Act, 1985; Section 65(105) of the Finance Act.
Parties’ Submissions
- Appellant’s Submissions: The appellant argued that transportation facilities had a direct nexus with manufacturing activities. Without it, manufacturing would be hampered, making it a basic necessity. Even with the post-01.04.2011 deletion of “activities relating to business” from the “input service” definition, employee transport was in relation to final product manufacture and eligible for CENVAT Credit.
- Respondent’s Submissions: The respondent argued that “input service” was restricted to activities or movement within factory premises. Transporting employees from 40 km away had no relation to manufacturing activity and fell under services for personal use/consumption excluded under Clause (B) to Rule 2(l) post-01.04.2011 amendment.
Court’s Observations, Findings & Final Decision
The High Court observed that post-01.04.2011 amendments to Rule 2(l) of the CENVAT Credit Rules, 2004 excluded rent-a-cab/motor vehicle renting services used for personal consumption of employees. Transporting employees from a distance of about 40 km to reach the factory is not part of manufacturing activity; it merely provides personal convenience to enable employees to reach the factory premises.
The Court distinguished the precedents cited by the appellant and relied on judicial precedents establishing that post-01.04.2011 services used primarily for personal use or consumption of employees do not qualify for CENVAT Credit.
The High Court held that the Tribunal committed no error in disallowing CENVAT Credit to the appellant for the period post-01.04.2011. The substantial questions of law were answered against the appellant, the Tribunal’s order was upheld, and Central Excise Appeal No. 12/2019 was dismissed with no order as to costs.
Cases Discussed
- Toyota Kirloskar Motor Private Limited v. The Commissioner of Central Tax (Karnataka High Court), CEA No.36/2018 with CEA No.7/2019 [Upheld by Supreme Court in SLP(C) No. 17903/2021]
- Kalyani Maxion Wheels Ltd. v. Commissioner of Central Excise, Pune-II (CESTAT), 2019 (366) ELT 918
- C.C.E. and S.T., Mangalore v. Mangalore Refinery and Petrochemicals Ltd. (Karnataka High Court), 2016 (42) STR 6
- The Principal Commissioner v. M/s. Essar Oil Limited (Gujarat High Court), Tax Appeal No. 939/2015
- Commissioner of Central Excise and Service Tax v. M/s. Turbo Energy Ltd. (Madras High Court), C.M.A. No. 157/2010
- Commissioner of Central Excise v. M/s. Stezen Toyotetsu India (P) Ltd. (Karnataka High Court), 2011 (23) STR 444
Five Alternative SEO Titles
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HC Rejects CENVAT Credit Claim for Employee Bus Transport Under Service Tax
HC Denies CENVAT Credit on Employee Transportation Services Under CENVAT Credit Rules
HC Upholds Disallowance of CENVAT Credit for Employee Bus Transport
HC Affirms Denial of CENVAT Credit on Renting Vehicles for Employee Transport
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
This appeal under Section 35(G) of the Central Excise Tariff Act, 1985 has been admitted on the following substantial questions of law :
(I) Whether the exclusion as defined in Clause (C) to Rule 2(1) of Cenvat Credit Rules, 2004, which defines “input service”, includes transportation of employees by a manufacturer from their designated pick up points to their workplace, by Bus, so as to deny the benefit of Cenvat Credit, to the Appellant/Manufacturer ?
I. Whether the services provided by a Manufacturer of transportation of its employees, from their designated pick up points to their workplace, by Bus, would amount to a service for personal use or consumption of any of the employees?
II. Whether the activity of providing bus transport services to its employees, at the cost of the Manufacturer, to reach factory in time and the expenses incurred by the Manufacturer in providing such service, (which amount is taken into consideration, while determining the final price of the product) can be said to be a component leading to the manufacturing activity, so as to entitle the Manufacturer, the benefit of Cenvat Credit ?
III. Whether the recipient of services is entitled to claim Cenvat Credit of Service Tax charged by Service Provider in respect of renting of motor vehicle, which is Capital Goods for Service Provider in view of Rule 2(1)(B) of Cenvat Credit Rules, 2004?
2. The facts in brief giving rise to this appeal are that it is the case of the appellant that it carries out manufacturing activities of explosives at Mouza Chakdoh and Bazargaon, Taluka and District Nagpur. The said factory where the manufacturing activity is carried out is at a distance of about 40 kms. from the City of Nagpur and the appellant with a view to provide facility to its employees hired a bus through one Hansa Travels to pick up its employees from a designated spot in Nagpur for dropping them at the factory situated at a distance of about 40 kms. Hansa Travels being service provider levied service tax in the category of service operator and the appellant after paying service tax has thereafter sought to avail cenvat credit in that regard.
The Adjudicating Authority issued eleven show cause notices to the appellant for the period from July 2009 to December, 2015. These show cause notices were replied by the appellant after which the Adjudicating Authority permitted the appellant to avail cenvat credit for the period from July 2009 to March 2011. From 01.04.2011 definition of the term “input service” in Rule 2(1) of the Cenvat Credit Rules, 2004 (for short, ‘the said Rules’) was amended. On that premise the Adjudicating Authority disallowed cenvat credit on the ground that after the amendment, services used primarily for personal use or consumption of any employee stands excluded from the scope of “input service” and the same was thus ineligible for cenvat credit. The Adjudicating Authority therefore by the order dated 28.12.2016 disallowed cenvat credit for the period from 01.04.2011 to 31.12.2015 and ordered recovery of the same with interest under Rule 14 of the said Rules. Penalty was also imposed on the amount of said disallowed cenvat credit under Rule 15 of the said Rules. This order was challenged before the Commissioner (Appeals) who by the order dated 28.11.2017 partly allowed that appeal and maintained disallowance of cenvat credit but reduced the amount of penalty. Further appeal before the Customs, Excise and Service Tax Appellate Tribunal-the Tribunal was decided on 23.05.2018 by maintaining the order passed by the Commissioner (Appeals) as regards disallowance by setting aside the order imposing penalty. Being aggrieved, the present appeal has been filed.
3. Shri Gopal Sawal, learned counsel for the appellant submitted that the Authorities erred in holding that the appellant was not entitled to cenvat credit after 01.04.2011. Rule 2(1) of the said Rules had been misinterpreted ignoring the fact that the provision of transportation facilities to the employees from the designated place at Nagpur to the factory premises had a direct nexus with the manufacturing activity of the appellant. The services were not for any personal use or consumption of any employee but was on account of the need of the manufacturing activity of the appellant. If such facility was not provided, the manufacturing activity would have been hampered and was thus a basic necessity for the appellant. He further submitted that even if the expression “activities relating to business” had been deleted from the definition of “input service” from 01.04.2011 as the transportation of the employees was in relation to the manufacture of final product, such service was eligible for cenvat credit. In support of his submissions the learned counsel for the appellant has placed reliance on the decisions in Tax Appeal No. 939/2015 decided on 09/12/2015 (The Principal Commissioner vs. M/s. Essar Oil Limited), C.M.A.No.157/2010 with connected matters ( Commissioner of Central Excise and Service Tax Vs. M/s.Turbo Energy Ltd.) decided on 26.02.2015, C.C.E. and S.T., Mangalore vs. Mangalore Refinery and Petrochemicals Ltd. 2016 (42) STR 6. and Commissioner of Central Excise vs. M/s. Stazen Toyotetsu India (P) Ltd. 2011(23) STR 444 and submitted that on proper interpretation of the definition of the term “input service” it was clear that the appellant was entitled to seek cenvat credit even after 01.04.2011.
4. Shri S.N.Bhattad, learned counsel for the respondent on the other hand submitted that the Authorities were justified in disallowing the cenvat credit from 01.04.2011 onwards. According to him, input service was restricted to activities or movement within the factory premises and transportation of employees from a distance of 40 kms for reaching the factory premises had no relation with the manufacturing activity. Inviting attention to Clause (B) in Rule 2(1) of the said Rules it was submitted that the provision of service of transportation of employees from their residence to the factory premises was not covered by the term “input service”. He referred to the reply submitted by the appellant to the show cause notices and submitted that the appellant had relied upon the definition of the said term prior to its amendment. After the amendment from 01.04.2011 such transportation was not a part of “input service”. In that regard, the learned counsel placed reliance on the decisions in CEA No.36/2018 with CEA No.7/2019 (Toyota Kirloskar Motor Private Limited vs. The Commissioner of Central Tax) decided on 21.04.2021 by the Karnataka High Court as upheld by the Supreme Court in SLP(C)No.17903/2021 on 18.11.2021 and Kalyani Maxion Wheels Ltd. vs. Commissioner of Central Excise, Pune-II, 2019 (366) ELT 918 decided by the Tribunal.
5. We have heard the learned counsel for the parties at length and we have perused the order passed by the Tribunal disallowing the claim for cenvat credit. It was found by the Tribunal that by virtue of the amendment dated 01.04.2011 rent-a-cab service had been excluded from the definition of the term “input service”. The same was in three limbs and the material basis for denying such cenvat credit was in view of Clause (B) to Rule 2(1) of the said Rules. We find that the Tribunal was justified in disallowing cenvat credit for the reasons mentioned in the impugned order. This is also clear from a reading of Section 65(105) of the Finance Act which excludes rent-a-cab scheme. The transportation of employees from distance of about 40 kms for reaching factory is not an activity which could be said to be a part of manufacturing activity. It is merely for personal convenience of the employees to enable them to reach the premises of the factory so as to thereafter participate in the manufacturing activity.
In this regard, the learned counsel for the respondent is justified in placing reliance on the judgment of the Karnataka High Court in Toyota Kirloskar Motor Private Limited (supra) wherein food and beverages were provided by the appellant therein to its employees by engaging the services of an outdoor caterer. This was sought to be treated as “input service” since there was a statutory duty on the appellant to establish a canteen for its employees. Considering the effect of definition of “input service” after 01.04.2011 it was found that establishment of such canteen was primarily for personal use or consumption of the employees and after such amendment no cenvat credit could be availed. This view has been upheld by the Hon’ble Supreme Court while dismissing the Special Leave Petition on 18.11.2021 preferred by the said appellant. The facts of the present case also indicate that the facility of transportation provided by the appellant to its employees was merely in the nature of service for personal use or consumption of its employees.
6. The decisions relied upon by the learned counsel for the appellant are clearly distinguishable. In M/s. Essar Oil Limited (supra) there was no dispute by the Department in that case that the services consumed by an assessee were related to various stages of its manufacturing and business activities. The same is not the case herein. The other decision in Mangalore Refinery & Petrochemicals Ltd. (supra) pertains to availing of service tax credit prior to 01.04.2011.
7. Thus considering the material on record, we find that the Tribunal did not commit any error whatsoever in disallowing cenvat credit to the appellant after 01.04.2011 in view of the amended provisions. The service provided was mere in the nature of personal service to its employees which is Accordingly the substantial questions of law as framed are answered against the appellant. The order passed by the Tribunal is upheld. Central Excise Appeal No.12/2019 stands dismissed with no order as to costs.
