Introduction: The case between Bhagwati Power & Steels Ltd. and the Commissioner (CESTAT Delhi) was centered on the disallowance of Cenvat Credit of ₹ 2,10,808 under Rule 14 of the Cenvat Credit Rules, 2004. The significant issue was whether Bhagwati Power & Steels Ltd. could avail Cenvat Credit on the fabrication and erection services for the installation of an SMS Plant under the categories of ‘Modernization, Renovation or Repair.’
The Appellant’s Position: Bhagwati Power & Steels Ltd. contested that the Cenvat Credit should not have been denied, citing several past judgments to affirm that their case fell under the inclusive clauses of the ‘Input Service’ definition. They specifically emphasized that the credit availed for services used in repair and renovation, and for the provision of fabrication and erection services, should be allowed as it directly related to the company’s production activity.
The Department’s Stand: On the other hand, the Department asserted that the appellant availed input service credit on ineligible grounds. They argued that the construction services involving modernization and renovation were outside the scope of the input service definition post its amendment.
CESTAT Delhi’s Judgment: CESTAT Delhi concluded that the services availed for the construction of the Steel Melting of Continuous Castings Machine (SMS) and the installation services for the SMS plant fall under the definition of ‘modernization, renovation or repair.’ Hence, they should be included in the scope of ‘input service,’ making them eligible for credit.
Legal Precedents: Various legal precedents were cited by the appellant’s counsel to argue that the credit on such services has consistently been allowed. Some of the cases referenced include ‘W. M. Global Sourcing India Pvt. Ltd Vs Commissioner of Central Tax’ and ‘Mercedes-Benz Research & Development India Pvt. Ltd., Vs Commissioner of Central Tax.’
Implications of the Decision: The decision not only clarifies the inclusion of services availed for construction under modernization, renovation, or repair but also sets a precedent for future cases dealing with the interpretation of Cenvat Credit under Rule 14 of the Cenvat Credit Rules, 2004.
FULL TEXT OF THE CESTAT DELHI ORDER
1. The current appeal has been filed to assail the Order in Appeal no. RPR-EXCUS-000-APP-050-2022-23 dated 13.09.2022 by M/s Bhagwati Power & Steel Ltd., Raipur (hereinafter referred to as the appellant) wherein the Cenvat credit of ₹ 2,10,808/– under Rule 14 of the Cenvat Credit Rules, 2004 was denied, interest was demanded and penalty equal to the Cenvat credit was imposed on the appellant.
2. The brief facts are that consequent to audit of the books of accounts of the appellant, it was noticed that they had availed in credit of service tax on ineligible input services such as construction of civil structures for newly setup of Steel Melting of Continuous Castings Machine (SMS), services of Hydra for erection of chimney, erection and commissioning, enhancement of cash credit limit for new SMS, bank service charges for SMS, membership and subscription fees service for design and engineering for setup of SMS making support for capital goods , amounting to Rs. 4,78,528/- during the period 2015–16 and 2016–17. The Department alleged that the input services were not covered under the definition of input service. The Department also alleged that the facts regarding development of inadmissible Cenvat credit by the appellant came to notice of the Department only during the course of audit. Therefore, the extended period of limitation of five years for recovery of the same is invokable. Consequently show cause notice dated 10.07.2019 was issued. The jurisdictional Assistant Commissioner vide his Order-inOriginal dated 10.02.2021 allowed the input service credit of ₹2,67,720/– and disallowed Cenvat credit of ₹2,10,808/– along with interest and imposed equal penalty. Being aggrieved, the appellant preferred appeal before Commissioner (Appeals), who vide the impugned order upheld the Order-in-Original, and dismissed the appeal.
3. The learned counsel for the appellant submitted that they had availed credit of Rs.42,780/– on the bill raised by M/s Sai Construction, which is related to repair of civil construction at the factory premises of the appellant. He submitted that the above service was clearly covered under the inclusive clause of input service as the said service was used in repair and renovation of factory.
Service tax paid on construction service involving modernization, renovation and repair work within the factory is clearly eligible for credit and covered within the definition of service. He further submitted that after the amendment to the definition of input service, a clarification was issued by the Board vide Circular No. 943/4/2011-CX dated 29.04.20 11 wherein it was clarified that the credit of service tax paid on construction services as an input service used in modernization, renovation or repair are eligible to credit. Thus, a harmonious reading of the inclusive part of the definition and the exclusion clause mentioned at clause (a) relating to construction service of the definition of in-service, it is clear that the construction service relating to modernization, renovation and repair of the factory continued to be within the meaning of the service and is eligible for credit. In this context the counsel relied on the following decisions:
i. W. M.Global Sourcing India Pvt. Ltd Vs Commissioner of Central Tax [2021-TIOL-407-CESTAT-Bang ];
ii. Mercedes-Benz Research & Development India Pvt. Ltd., Vs Commissioner of Central tax, Bengaluru East[2021- TIOL- 1 58-CESTAT-Bang ];
iii. Menzies Aviation Bobba(Bangalore) Pvt Ltd., Vs CCE [2020-TIOL-989-CESTAT-Bang ];
iv. Samsung R & D Institute India Bangalore Pvt ltd., Vs Commissioner of Central Excise & Service Tax Bangalore [2020(34)GSTL.213(Tri-Bang)] and
v. Ion Exchange (I) Ltd., Vs CCE, Customs and Service Tax, Surat-II-2018-TIOL-752-CESTAT-AHMD].
3.1. The learned Counsel for the submitted that the appellant had availed credit of ₹.1,68,08/– on the bill raised by M/s S.N. Services, for the provision of fabrication and erection services for the SMS plant. He submitted that the impugned service is directly connected with the production activity of the appellant and was clearly an input service for the appellant for use in relation to the manufacture of the finished goods. He further added that the said services is not specified service in the exclusion clause and therefore the credit of the same cannot be denied. The learned Counsel relied on several decisions in this regard, and some of them are as follows:
a. Thermax Ltd., Vs Commissioner of C.Ex. & S.T, Vadodara[2020(35) GSTL 118(Tri-Ahm)]
b. Maruti Udyog Ltd., Vs Commissioner of Central Excise, Noida[2009(238)ELT 180(Tri-Del)]
He thus prayed that the impugned order may be set-aside.
4. The learned Authorised Representative submitted that there is a specific exclusion for construction services from the input service definition which makes it very clear that the appellant were not eligible for such service. He reiterated the findings of the impugned order and prayed that the impugned order may be upheld.
5. I have heard the learned Counsel and the learned Authorised Representative. The short issue involved for determination in the present case is whether the appellants are eligible to the credit of service tax paid on construction and erection services in their factory. It is the contention of the Department that after the amendment to the definition of the input service, all construction services undertaken within the factory premises fall outside the scope of the said definition. It may be pertinent to reproduce the definition of input service prior and post amendment:
Prior to 1-4-2011
(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 up to 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 up to 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 up to the place of removal;
(l) “input service” means any service, –
(i) used by a provider of output 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 up to 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 up to 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 up to the place of removal;
but excludes, –
(A) service portion in the execution of a works contract and construction services including service listed under clause (b) of Section 66E of the Finance Act (hereinafter referred as specified services) in so far as they are used for –
(a) construction or execution of works contract 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 ”
6. A plain reading of the said provisions makes it clear that the service utilized in relation to modernization, renovation and repair of the factory will fall within the scope of the meaning of ‘input service’ even though; construction of a building or civil structure or part thereof has been placed under exclusion clause of the said definition of ‘input service’. I note that post the amendment to the definition of the ‘input service’, a clarification issued by the Board vide Circular No. 943/4/2011-CX, dated 29-4-2011 whereunder in response to the issue raised on the eligibility of credit of service tax paid on construction service as an ‘input service’ used in modernization, renovation or repair, the Board has clarified that the said services being provided in the inclusive part of definition of ’input service’ are definitely eligible to credit. Therefore, I conclude that a harmonious reading of the inclusive part of the definition and the exclusion clause mentioned at clause (a) relating to construction service of the definition of ‘input service’, it is apparent that the construction service relating to modernization, renovation and repair of the factory continued to be within the meaning of ‘input service’ and accordingly, the Service Tax paid on such service is eligible to credit. It is a fact that the appellant took credit on the services used in the construction of civil structure for newly setup of Steel Melting of Continuous Castings Machine (SMS), and for provision of fabrication and erection service for the installation of the SMS plant, which is covered under the definition ‘modernization, renovation or repair’. I note that the Tribunal has consistently held that credit on such services is available to the taxpayer, which have been quoted by the learned counsel while making his arguments.
7. In view of the above, the impugned order is set-aside and the appeal is allowed.
(Pronounced in the open court on 25.08.2023 )