Salim Akhtar, MA. L.L.B.
With effect from 01.04.2011, the Government has provided an equipped weapon to Revenue Officers by deletion a word i.e. ‘Setting-up’ from the definition of input services vide Notification No. 03/2011-CE(N.T.) dated 01.03.2011, to dispute the Cenvat Credit of Input Services, availed in relation to ‘setting-up’ a factory. Prior to 01.04.2011, there was no dispute for availing Cenvat Credit of Service Tax for ‘setting-up’ a factory or a plant, but after 01.04.2011, it became a villain in shape of disputes for the industries and also became an opportunity for the Revenue Officers to create disputes, as if they were waiting for the same. Whether! it was a simple misprinting of the word ‘setting-up’ or intentionally deletion from the definition of Input Services to create un-necessary hurdles to the assesses, particularly manufacturers, who always be in front to boost up our economy directly or indirectly.
Let us analysis of legal position of relevant portion of the definition of Input Services under Cenvat Credit Rules, 2004 prior to 01.04.2011 and post 01.04.2011.
Definition of Input Services Prior to 01.04.2011:
1. Rule 2(1) (i) relates to a service provider and it covers any service used by service provider of taxable service for providing of output service or
2. Rule 2 (1) (ii) relates to manufacturer and it covers any service used by the manufacture ‘in or in relation to the manufacture of final products’ and clearance of final products up-to the place of removal and also includes:
a) Setting up, modernization, renovation or repair of a factory or premises of output service provider or an office relating to such factory or premises;
b) Advertisement or sales promotion;
c) Market Research;
d) Storage of up-to the place of removal;
e) Procurement of Inputs;
f) Activities relating to business such as accounting, auditing, financing, recruitment and Quality control, coaching and training, computer networking, credit rating, share registry and security;
g) Inward transportation of Inputs or Capital Goods and
h) Outward transportation up to place of removal;
Now it is clear from the above definition of Input Services as defined under Cenvat Credit Rules, 2004, that, if any service is used for providing the services by a service provider or used by a manufacturer ‘directly or indirectly’ ‘in or in relation to manufacture of final products’, would be covered under Input Services and the Cenvat Credit would also be available. Thus it has a wide and expansive scope as it covers any service if used for the said purposes.
Definition of Input Services Post 01.04.2011:
1. Rule 2(1) (i) relates to a service provider and it covers any service used by service provider of taxable service for providing of output service or
2. Rule 2 (1) (ii) relates to manufacturer and it covers any service used by the Manufacturer ‘in or in relation to the manufacture of final products’ and clearance of final products up-to the place of removal; and includes:
a) Modernisation, Renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises,
b) Advertisement or sales promotion,
c) Market research,
d) Storage up to the place of removal,
e) Procurement of inputs,
f) Activities relating to business such as accounting, auditing, financing, recruitment, quality control, coaching and training, computer networking, credit rating, share registry and Security,
g) Inward transportation of inputs or capital goods and
h) Outward transportation up to the place of removal;
And includes two more services i.e.
i) Business exhibition,
j) Legal services,
So it is quite clear from the above definition that the word ‘Setting-up’ has not been mentioned or absent or specifically deleted from the new definition of input service, which was prefixed to the services in relation to factory or an office relating to such factory or premises of service provider.
But excludes seven specified services, mentioned in sub-clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act, if they are used for:
(a) Construction of a building or a civil structure or a part thereof; or
(b) Laying of foundation or making of structures for support of captal goods, except for the provision of one or more of the specified services, given hereunder
i) A service provided by an architect in his professional capacity;
ii) A service provided by a port or any person authorized by the port, in relation to port service;
iii) A service provided by other port or any person authorized by that port in relation to port service;
(iv) A service provided by airports authority or any person authorized by it, in an airport or civil enclave;
v) A service provided in relation to construction service;
vi) A service provided in relation of a complex and
vii) A service provided in relation to the execution of a works contract.
And also excludes four more specified services, mentioned in sub-clauses (d), (o), (zo) and (zzzzj) of clause (105) of section 65 of the Finance Act, given hereunder
i) General Insurance
iii) Authorized Service Station
iv) Supply of Tangible Goods
In so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods and these services are:
i) Courier Agency
ii) Tour Operator
iii) Rent-a Cab
iv) Cargo Handling Agency
v) Goods Transport Agency by Road
vi) Outdoor Catering Services
vii) Pandal or Shamiana Contractor
Further some more services have also been excluded when such services are used particularly for personal use or consumption of the employees and the same has also been clarified by the Board of Central Excise vide its Circular No. 334/3/2011-TRU dated 28.02.2011. In this circular a specific list of services has been provided by way of illustration, such services are:
i) Outdoor catering,
ii) Beauty Treatment,
iii) Health services,
iv) Cosmetic and plastic surgery,
v) Membership of a club,
vi) Health and Fitness Centre,
vii) Life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession.
However, it is immaterial to discuss here regarding conditions and timings for availing Cenvat Credit on Input Services since these are clearly mentioned in Rule-3 and 4 of Cenvat Credit Rules, 2004. But the issue for consideration is to determine the eligibility of Cenvat Credit on input services received by a manufacturer and used ‘in or in relation to setting-up of a factory’, including construction of civil structures or support of capital goods and for other purposes in view of the amended definition of input services.
The bullet point is that whether the conditions for taking Cenvat credit of input services have been changed due to deletion a tiny word i.e. ‘Setting-up’ of a factory from the definition of Input Services! Even though the main ingredient ‘in or in relation to’ is remain unchanged and existed, even after amendment of the definition of input service after 01.04.2011.
It is also necessary to discuss here, why it was needed to abscond or delete the word ‘Setting-up’ from the definition of input services and what was the intension or motive behind it! Since it was an un-disputed issue ever prior to amendment in the definition of input services before 01.04.2011 and let us leaves this question to answer…….!!. It is also quite strange that no changes were made in the definition of input and capital goods for availing Cenvat Credit even though these are also used for ‘setting-up’ a factory.
Here, it is again unable to understand that Input services are in-eligible services in the eyes of Revenue Officers if these are used for ‘setting-up’ a factory, even these are available in the inclusion list of services as illegible services which are used ‘directly or indirectly in or in relation to the manufacture of final products’. Whereas Cenvat Credit of Capital Goods and Inputs are illegible in their eyes, even though these are also used for ‘setting-up’ a factory before starting of commercial production. How strange it is!!!
Now come to the point and it is concluded that the Cenvat credit relating to civil construction or laying of foundation or construction of support of capital goods including some its allied services which are specifically debarred by the notification are not eligible for taking Cenvat credit and it cannot be disputed, even these are used in setting-up of a factory or otherwise and it has no dispute.
But on the other hand the services such as consulting engineers, management consultants, site preparation, erection, commissioning or installation, legal consultancy, technical inspection etc. excluding debarred services, which are received and used in ‘setting-up’ of a factory and have the direct link or nexus with the activities for ‘setting-up’ a factory, for manufacture of final products, may not be considered as in-eligible services for availing Cenvat Credit without any doubt, in light of main ingredient i.e. ‘in or in relation to manufacture of final products’ still available in the definition.
Thus, it is fact that the Cenvat Credit of such services cannot be denied only for hiding or deletion of a tiny word i.e. ‘setting-up’ of a factory from the definition of input services as the Revenue Officers are disputing it during conducting Audits and Inspections in the factory premises of the assesses, since the conditions of Cenvat Credit Rules, 2004 are remain unchanged. It may also be noted that a factory is nothing but a complex of a building or buildings where various types of machines with its mechanical and other systems are installed for producing or converting the raw materials into the finished products on large scale. So a manufacturer requires various types of services including capital goods and inputs which are used ‘in or in relation to the manufacture of final products’ to establish a factory and to make it operational for manufacture of final products.
The above views have also expressed by various Courts wherein the Courts allowed Cenvat Credit if the Services are used ‘in or in relation to the manufacture of final products’ without considering amended definition of input services and some case laws are cited below for references:
1. In the High Court of Karnataka, Bangalore, 2011 (23) STR. 444 (Kar.), Commissioner of CEX, Bangalore-III, Versus, M/s Stanzen Toyotetsu India (Pvt.) Ltd., (decided on 08.04.2011)
Refer Para 15 of the order: “Therefore, merely because these services are not expressly mentioned in the definition of input service it cannot be said that they do not constitute input service and the assessee is not entitled to the benefit of CENVAT credit. In fact, Rule 3 of the Cenvat [Credit] Rules, 2004, specifically provides that the manufacturer of final products shall be allowed to take credit, the service tax leviable under Section 66 of the Finance Act and paid on any input service received by the manufacturer of a final product. Therefore under the scheme of the Cenvat Credit Rules, 2004, the service tax paid on all those services which the assessee has utilized directly or indirectly in or in relation to the final product is entitled to claim the credit. Therefore, the judgment of the Tribunal is legal and valid and is in accordance with law and does not suffer from any legal infirmity which calls for any interference. Hence, the substantial questions of law framed in these appeals are answered against the revenue and in favour of the assessee.”
2. In the CESTAT, West Zonal Bench, Ahmadabad, 2012 (278) ELT. 625 (Tri. –Ahmd.), Commissioner, CEX, Vapi, Versus Parle International Pvt. Ltd.
Refer Para 3 of the order: “Cenvat Credit of Service Tax – Credit on courier charges – Courier Service used for sending samples to customers and correspondence with head office – Definition of services amended to substitute ‘up to place of removal’ in place of ‘from place of removal’ – HELD : Impugned activities definitely relatable to manufacture and clearly courier services falls under category of input service – Even if credit admissible up to place of removal, no indication or evidence to show service clearly recognizable as one received after removal taken place – Nexus with manufacture required and when service identifiable to show same not received after place of removal, credit cannot be denied – No merits in appeal – Sections 65(84) and 65(105)(L) of Finance Act, 1994.”
3. In the CESTAT, West Zonal Bench, Ahmadabad, 2012 (283) ELT. 388 (Tri. – Ahmd.), Surani Ceramics Ltd. Versus Commissioner, CEX, Rajkot
Refer Para 3 of the order: “Cenvat credit of Service tax – Input service – Credit of Service tax taken on the amount of insurance paid denied on the ground of being not used in relation to manufacture of final product – Insurance premium relatable to business activity and obligatory under law – Credit admissible on Service tax paid for the insurance taken – Rules 2 and 14 of Cenvat Credit Rules, 2004.”
Besides the above the Apex Court has clearly interpreted the phrase ‘in relation to manufacture of final products’ in its two historical judgments and the gist of these two cases is given hereunder:
4. In the Supreme Court of India, 2007 (214) ELT. 481 (S.C.), Mr. S.H. Kapadia and Mr. B. Sudershan Reddy, JJ., Collector of Central Excise, Versus Solaris Chemtech Limited
(Appeal Nos. 6465-6475 of 2001 with C.A. Nos. 6477, 6075-6080 of 2001, 3236, 3237-3239, 3240, 3241 of 2007, 649 of 2002, 6011 of 2004 and 2465-2469 of 2001, decided on 24-7-2007)
Refer Para 8 of the order: “Interpretation of statute – ‘In or in relation to the manufacture of final products’ under Rule 57A of erstwhile Central Excise Rules, 1944 – Expression ‘in relation to’ must be given a wide connotation. – The words ‘in relation to’ which find place in Section 2(f) of Central Excise Act, 1944 have been interpreted to cover processes generating intermediate products and it is in this context that it
has been repeatedly held that if manufacture of final product cannot take place without the process in question then that process is an integral part of the activity of manufacture of the final product. Therefore, the words ‘in relation to the manufacture’ have been used to widen and expand the scope, meaning and content of the expression ‘inputs’ so as to attract goods which do not enter into finished goods.”
5. In the Supreme Court of India 1997 (91) ELT. 34 (S.C.), Mr. K. Subba Rao, J.C. , Mr. Shah and Mr. S.M. Sikri, JJ. , J.K. Cotton Spinning and Weavings Mills Co. Ltd., Versus Sales Tax Officer Kanpur
(Civil Appeal No. 857 of 1964, decided on 28-10-1964)
Refer Para 8 & 9 of the order: “Words and Phrases – ‘In the manufacture of goods’ – Meaning – Section 8(3)(b) of Central Sales Tax Act, 1956 – Corresponding Rules 57A and 57Q of Central Excise Rules, 1944 relating to Modvat Credit. – The expression ‘in the manufacture of goods’ should normally encompass the entire process carried on by the dealer of converting raw materials into finished goods. Where any particular process or activity is so integrally related to the ultimate manufacture of goods so that without that process or activity manufacture may, even if theoretically possible, be commercially inexpedient, goods intended for use in the said process or activity would, in our judgment, fall within the expression ‘in the manufacture of goods’. They need not be ingredients or commodities used in the processes, nor must they be directly and actually needed for ‘turning out or the creation of goods’.
Ultimately it has established from the above discussion and case laws that Cenvat Credit may not be denied only for absconding, hiding or deletion any tine word unless the main ingredients are not changed.
(These are my personal views and are expected from the concerned to clarify the issue)
(Author is Manager (Taxation) With Jindal Steel & Power Limited, Angul ( Odisha))