As we all are aware that the definition of “input service” under Cenvat Credit Rules, 2004 has been amended drastically w.e.f. April 2011 and because of such drastic amendments, majority of interpretations and settled positions have taken U-turn. One of the settled position was CENVAT credit on canteen service was allowed prior to April 2011. However, w.e.f. April 2011, there is specific exclusion of canteen service from the definition of “input service” and accordingly, almost all the companies have stopped taking CENVAT credit on canteen service.
In this connection, very recently, one interesting decision was published in the case of M/s Hindustan Coca Cola Beverages Pvt. Ltd. v/s CCE, Nashik reported in 2014-TIOL-2460-CESTAT-MUM wherein the Hon’ble CESTAT, Mumbai Bench held that post 2011, canteen service is excluded from input service definition only when such service is primarily for personal use or consumption of any employee. When the company has borne the cost of canteen and not recovered from the employees, then in that case, it cannot be treated as such canteen service is primarily for personal use or consumption of employee and accordingly, CENVAT credit is allowed. In other words, canteen service would be treated as primarily used for consumption of employee only when any cost of canteen is recovered from the employees of the company.
Now, before I discuss the grounds relied on by the Hon’ble CESTAT, I would like to give relevant text of the definition of the term “input service” for your ready reference:
“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 upto the place of removal,
and includes services used in relation to modernization, …………………………………
but excludes, –
(B) services provided by way of renting of a motor vehicle, in so far as they relate to a motor vehicle which is not a capital goods;
(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;
While arriving at the above decision, the Hon’ble CESTAT relied on the following aspects:
“9. On the same lines, a service meant primarily for the personal use or consumption of employees will not constitute an input service. A list of specific services has also been given by way of example in the definition. Most of these services constitute a part of the cost-to-company package of the employee and are provided either free of charge or on concessional basis to company employees.”
2. Circular No. 943/4/2011-CX., dated 29 April 2011 which clarifies as under :
|2.||Is the credit of only specified goods and services listed in the definition of inputs and input services not allowed such as goods used in a club, outdoor catering etc. or is the list only illustrative?||The list is only illustrative. The principle is that cenvat credit is not allowed when any goods and services are used primarily for personal use or consumption of employees.|
3. After referring to the exclusion part of the definition i.e. clause (C), the Hon’ble CESTAT observed that when the Government has specifically used the words such as “used primarily for personal use or consumption of any employee”, the same has to be given due effect to. In the present case, the outdoor catering service is used in relation to business activities of the company and the service is used by all employees in general. Also, the Revenue has not rebutted the contention of the company, that the costs of these input services form part of the cost of final product. Further, the services covered in clause (B) of the definition are excluded from the ambit of CENVAT credit without any such qualification of use of service for personal or official purpose.
4. While concluding the decision, the Hon’ble CESTAT observed that the Government while issuing the budget clarification or subsequent circular has clarified that what is not eligible is that service which is meant for personal use or consumption by an employee or the cost of which is included as part of salary of the employee as a cost to company basis. In the present case, the cost of such services, are admittedly borne by the company and not by the employee and based on this aspect, CENVAT credit on outdoor catering service was allowed.
Now, the biggest question arises as to how to determine whether a particular service used for personal use / consumption of employee or for business use. This is because the neither the definition of “input service” nor this judgment of the Hon’ble CESTAT clarifies the principles for determining the same.
I personally feel that the following aspects / steps may be considered before arriving at the conclusion that a particular service is used not for personal use or consumption by an employee:
It may be noted that the above steps are simply based on the grounds taken in the judgment and I am sure that there will addition to the above steps once time and litigation on this subject progress.
Credit to be taken within six months
As you all are aware that w.e.f. 1st September 2014, CENVAT credit on inputs and input services can be taken within six months from the date of invoice. Now, if any company wants to take CENVAT credit on canteen services based on the above decision, then this condition needs to be followed. In other words, if the company decides to take CENVAT credit on canteen service in the month of December 2014 then such company is required to consider only those invoices which are bearing date after June 2014.
However, if any company wants to play safely, then in that case, such company may have following two options:
No penalty for taking canteen service credit
It may be noted that even if eventually the Government declares canteen services as inadmissible input service and due to which any company requires to reverse CENVAT credit even in that case, 100% penalty (which is normally imposed by the department) can be waived or strongly argued based on the bona fide act of the company since credit was taken totally based on the present decision of the Hon’ble CESTAT.
Now, even after discussing positive grounds of the case, it may also be noted that the department will be definitely reacting aggressively against this decision of the Hon’ble CESTAT and therefore, in near future, it would be very interesting to see how the CBE&C and the Government reacts on the aggression of the department.
(Author Details -Mr. Manas Joshi, B.Com., DTL, LLB, CLM – Director at Proficient Partners Consultancy Pvt. Ltd.)