Reliance Industries Ltd Vs Commissioner Central Excise & Service Tax (CESTAT Mumbai)
The two issues that have been referred to the Larger Bench of the Tribunal are, therefore, answered in following manner:
(i) The answer to the first issue would be:
a. The Bombay High Court in Coca Cola India and Ultratech Cement has settled the interpretation of „input service‟ in rule 2(l) of the 2004 Rules, as it stood prior to its amendment on 01.04.2011;
b. The definition of input service can be effectively divided into the following five categories, in so far as a manufacturer is concerned:
(i) Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products;
(ii) Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal;
(iii) Services used in relation to setting up, modernization, renovation or repairs of a factory, or an office relating to such factory;
(iv) Services used in relation to advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs; and
(v) Services used in relation to activities relating to business and outward transportation upto the place of removal.
c. So far as it concerns the dispute raised in this appeal, the definition would cover not only „input services‟ which have a nexus with the manufacture of the final product (covered by the first limb in the definition), but also other „input services‟, which do not have such a nexus but are covered by either of the other four limbs of the definition;
d. Each limb of the definition is independent and benefit of CENVAT credit would be available even if any one of them is satisfied;
e. So far as the first limb is concerned, the requirement of establishing a nexus between the „input services‟ and the process of manufacture would stand satisfied if the expenditure incurred for the „input service‟ forms part of the cost of production/value of the final product on which duty of the excise is levied;
f. In this view of the matter, the appellant would be entitled to avail CENVAT credit on the service tax paid on insurance premium for employees who had opted for the „Voluntary Separation Scheme‟;
and
(ii) Cost Accounting Standard-4 would be applicable for determination of eligibility to CENVAT credit even if the goods are not captively consumed.
FULL TEXT OF THE CESTAT MUMBAI ORDER
The issue that arises for consideration before this Larger Bench of the Tribunal is whether CENVAT credit could have been availed by the appellant on the service tax paid on insurance premium for availing medi-claim facility for employees who had opted for „Voluntary Separation Scheme‟1 announced for regular employees of the Vadodara Complex who had attained 40 years of age or had completed 10 years of service as regular employees with the Indian Petrochemicals Corporation Limited2, which had been taken over by the appellant. CENVAT credit of Rs. 1,33,37,699/-, thus availed by the appellant, was disallowed by the Commissioner of Customs, Excise and Service Tax, Mumbai3 by an order dated 29.12.2011 and its recovery was directed under rule 14 of the CENVAT Credit Rules, 20044 read with the proviso to section 11A (1) of the Central Excise Act, 19445.
2. At the time of hearing of the appeal, the Division Bench of the Tribunal noticed that conflicting views had been expressed by benches of the Tribunal while interpreting „input service‟ defined in rule 2(l) of the 2004 Rules, as it stood prior to its amendment on 01.04.2011 and, therefore, referred the matter to the President of the Tribunal for constituting a Larger Bench of the Tribunal to decide the following two issues:-
i. Interpretation of rule 2 (l) of the 2004 Rules for the period prior to the amendment made in the year 2011.
ii. Applicability of Cost Accounting Standard-46 for determination of eligibility to CENVAT credit in cases other than where the goods are captively consumed and valued in terms of rule 4 of Central Excise Rules, 2000.
3. The appellant has a manufacturing unit at Vadodara, wherein it manufactures petrochemical products such as LDPE, HDPE and related products, which are cleared on payment of duty of central excise. The appellant avails insurance cover for the medical expenses of its employees working at Vadodara. The appellant also takes a group health insurance for employees at the time of their retirement.
4. On March 06, 2007, the appellant also announced a VSS for certain category of employees working at its Vadodara Complex and the Introduction to the Scheme, as contained in the Circular, is as follows:-
“Benchmarking human capital productivity in the globalised competitive milieu is a major challenge. Ever changing business environment and processes lay more emphasis on meaningful employment at optimum cost. Besides building capabilities through continuous improvement of skills, it calls for adaptability to change as well as readiness to move with the business requirements both physically and mentally. Redeployments/transfers across locations and businesses, reorientation of mindsets, skills upgradation, and education enhancement are same of the options to optimise human productivity. While management has tremendous faith in human potentialities, it appreciates the fact that interplay of situational aspects may make it difficult for many to join the journey to the new era where only knowledge & skills will sustain.
Keeping such human aspects in view, it has been decided to provide opportunity of voluntary separation to the employees.
Currently the scope of the scheme is being limited to regular non-supervisory employees of Baroda Complex (including offices located in the Regions) and appropriate scheme will be framed and announced shortly for supervisory employees keeping in view certain decisions by Board of Directors and their implementation.”
(emphasis supplied)
5. The compensation/ benefits to be provided to such employees who opted for VSS was indicated in this Scheme, which was to remain open up to March 20, 2007. The Scheme provides that an employee whose application for voluntary separation is accepted by the Department, would be entitled to the following compensation/benefits:
“2.1 Compensation
a) Lump sum payment will be calculated by one of the following methods;
A. 2 months (Two months) of salary for each completed year of service subject to minimum of Rs. 10 Lakhs (Ten lakhs) PLUS 2 months (Two months) of salary for each year of service remaining before attaining the age of superannuation.
B. 5 months (One and half months) of salary for each completed year of service subject to minimum of Rs. 10 Lakhs (Ten lakhs) PLUS 2.5 months (Two and half months) of salary for each year of service remaining before attaining the age of superannuation.
Between the amounts arrived at from methods A & B, more beneficial ones for an optee will be considered, but subject to overall ceiling of Rs. 16 Lakhs (Sixteen Lakhs) OR the salary for the remaining months in service till the age of superannuation, whichever is less.
[Note: Salary means Basic Pay plus IDA per month]
The company would facilitate purchase of annuities with monthly payment facility for part/full lump sum payment at optee‟s request.
b) The company will bear the premium for the following insurance coverage.
i. Medi-claim for self and spouse for a total sum assured Rs 5 lakhs (Rupees Five Lakhs Only) till the notional age of superannuation or death of the optee, whichever is earlier. The salient features of this medi-claim scheme are given in Annexure-1.
ii. Group Term Assurance for an amount of Rs. 5 Lakhs (Rupees Five Lakhs only) payable to the nominee in the unfortunate event of death of the optee before attaining the notional age of superannuation.
2.2 Cash equivalent to accumulated Privilege Leave.
2.3 Cash equivalent to accumulated Sick Leave subject to maximum of 100 days.
2.4 Encashment of unavailed Leave Travel Concession (up to the block year 2007-08) for Non-supervisory employees and their dependents.
2.5 Transfer benefits for self and dependents as admissible under the Travelling Allowance Rules on superannuation.
2.6 The balance in Provident Fund Account payable as per the PF Rules.
2.7 Payment of Gratuity as per the Gratuity Scheme.
2.8 One month Notice Pay (Basic pay plus IDA) in lieu of notice period.”
6. In terms of the aforesaid Scheme, the appellant took insurance coverage in the month of March, 2008, for such employees who had opted for VSS under the “Special Contingency Insurance Nivrutti Raksha Policy7” issued by the Oriental Insurance Company Limited and availed CENVAT credit of the service tax paid on the insurance premium.
7. A show cause notice dated 25.06.2010 was, however, issued to the appellant inter alia alleging that:
a. The premium paid by the appellant towards medi-claim policies for IPCL employees who had opted for VSS was paid on behalf of employees who were no more employees of the company and would, therefore, be not be covered under the definition of “input service” in rule 2(l) of the 2004 Rules.;
b. The CENVAT credit of service tax availed in the month of March 2008, against the above payment, is inadmissible since CENVAT credit is admissible only in respect of “input services” which are directly or indirectly used in relation to the manufacture, clearance, sale or storage of final products and not on welfare measures offered by the appellant to its former employees; and
c. The appellant knowingly suppressed the fact of availment of the above credit with an intent to wrongly avail ineligible CENVAT credit in contravention of various provisions.
8. The Commissioner, by order dated 29.12.2011, confirmed the demand made in the show cause notice observing that from a perusal of the definition of „input service‟ in rule 2(l) of the 2004 Rules it transpired that it was necessary for an assessee to establish that the premium paid to the insurance company for the medical insurance of its retired employees under VSS had some connection or nexus with the manufacturing activities of the assessee in order to avail CENVAT credit of the service tax paid on the insurance premium. The Commissioner further observed that the welfare measures offered by the appellant can at best be considered as an activity related to the welfare of ex-employees and the incentives/ compensation that was offered to the employees was for the purpose of saving unwanted expenses by weeding them out, but such employees had no connection with the activity of manufacture of the finished products.
9. At the time of hearing of the appeal before the Division Bench, learned counsel for the appellant placed reliance upon the decision of the Tribunal rendered by a learned Member of the Tribunal in its own matter in Reliance Industries Ltd. v/s Commissioner of Central Excise & Service Tax (LTU), Mumbai8 as also upon the Division Bench decision of the Tribunal rendered in its own matter in Reliance Industries Ltd. v/s Commissioner of Central Excise & Service Tax (LTU), Mumbai9. The learned counsel also placed reliance upon the judgment of the Bombay High Court in Coca Cola India Pvt. Ltd. v/s Commissioner of Central Excise, Pune-III10 as also of the Karnataka High Court in Commissioner of Central Excise, Bangalore-II v/s Millipore India Pvt. Ltd.11, which decisions were followed by a learned member of the Tribunal in Essel Propack Ltd. v/s Commissioner of CGST, Bhiwandi12
10. The Division Bench, while hearing the appeal, noted that the issue involved was not in respect of serving employees of the appellant but was in respect of employees who had opted to avail VSS. The Bench observed that the observation of the Commissioner that it was necessary to establish that the premium paid to the insurance companies for medical insurance of retired employees had some connection or nexus with the manufacturing activities was in line with the decisions of the Tribunal in Telco Construction Equipment Co. Ltd. v/s C.C.E. & CUS., Belgaum13 and Sundaram Brake Linings v/s Commissioner of Central Excise., Chennai-II14. However, the Division Bench felt it necessary to also observe that credit would not be admissible for that part of service tax that was paid for insurance premium of the family members of such employees. The decisions of the Tribunal that were referred to by the Division Bench on this aspect are:
1. Oudh Sugar Mills Ltd. v/s Commissioner of C. Ex., Lucknow15
2. Emerson Export Engineering Centre v/s Commissioner of C. Ex., Pune-III16
3. Titan Industries Ltd. v/s Commissioner of C.Ex., Chennai-III17
4. Maruti Suzuki India Ltd. v/s Commissioner of C.Ex., Delhi-III18
5. Mercedes Benz India Pvt. Ltd. v/s Commissioner of C.Ex. Pune-II19
11. And the relevant observations of the Division Bench in this context are as follows:
“4.10. Undisputedly in the case of the serving employees, the law has been settled by the various decisions of the tribunal and High Courts that the service tax paid on the premium paid for the medical insurance, group insurance, workman insurance policies will be admissible to CENVAT Credit. However it is worth noting that the view that emerges in all these decisions is that CENVAT Credit would not be admissible in respect of that part of service tax which is paid on the insurance premium for the medical insurance cover provided to the family members.”
(emphasis supplied)
12. The Division Bench hearing the appeal also noticed that the Division Bench of the Tribunal in Deloitte Support Services India Pvt. Ltd. v/s CCE, Hyderabad-IV20 had rejected the contention of the Department that group insurance premium for retired employees did not directly or indirectly relate to the output services rendered. The Division Bench also noticed that the aforesaid decision of the Tribunal was upheld by the Andhra Pradesh High Court, but the Appeal filed by the Department against the judgment of the Andhra Pradesh High Court was pending in the Supreme Court.
13. The decisions rendered by the Tribunal in the two matters of the appellant in Reliance Industries would, according to the Division Bench, require reconsideration for the following reason:
“4.20. In both of the above decisions the CENVAT credit has been allowed just by referring to the decisions of Hon’ble Karnataka High Court and CAS-4, however the same has been done even without determining whether the assessable value of the goods captively consumed was determined under Rule 8. Such a theoretical application of the principles laid down in CAS-4, without even determining the applicability of the same to the appellant assessee may not be what has been stated by the Hon’ble Karnataka High Court. In para 4.16 we have already stated that all such decisions need reconsideration.”
14. The Division Bench also observed that the decision of the Tribunal in Essel Propack would also require reconsideration for following reason:
“4.22 Though the above decision has been rendered by a coordinate bench, we are not in position to agree with the same. The settled position in law is that the services, which are considered as input services should qualify as per the test laid down by the Rule 2 (0) of the CENVAT Credit Rule, 2004. Even without any reference to the said definition and the test laid down therein as held in various decisions referred earlier by us, the bench have ‘proceeded to hold the admissibility to CENVAT Credit on the basis of beneficial aspects of the CSR activities Undertaken by the Companies as per the provisions of Companies Act. What was the nexus direct or indirect between the manufactured goods and the activities undertaken has not been established. In our view this decision also needs a re-consideration in view of the earlier decisions referred to by us.”
15. The Division Bench, therefore, directed that the matter may be referred to the President of the Tribunal for constituting a Larger Bench of the Tribunal for reconsideration of the interpretation of rule 2(l) of the 2004 Rules, as it stood prior to its amendment on 01.04.2011, and the reference is as follows:-
“5.0 In view of the discussions as above we refer this matter to Hon‟ble President to resolve the difference in the view expressed by coordinate benches on the issue of
