Cenvat credit of service tax paid during setting up of factory is duly available

Basf Vs C.C.E. & S.T.-Vadodara-ii (CESTAT Ahmedabad)

CESTAT Ahmedabad held the eligible cenvat credit of service tax paid during setting up of the factory is duly available as without use of such service, the appellant could not have possibly manufactured the excisable goods.

Facts- The issue relates to availment of cenvat credit of the service tax paid by the appellant during the period April 2011 when the setting up of the factory started to the period March 2016 when the setting up of the factory was completed and commercial production started.

The appellant had availed various input services and the show cause notice seeks to deny cenvat credit of these services in relation to fabrication of plant and machinery in the factory and making plant and machinery operational. The show cause notice essentially relies on the changes made in the definition of input services appearing in Rule 2(l) of the Cenvat Credit Rules, 2004.

Conclusion- With regard to availment of cenvat credit of service tax paid during setting up of the factory, it is held that without use of these services, the appellant could not have possibly manufactured the excisable goods. Hence, cenvat credit of the same is duly available.

Also held that the exclusion clause of the definition ‘input service’ would obviously make such services ineligible for the cenvat credit under the head of ‘Input Service’. It is seen that the appellant has claimed that they have on their own not availed such credits relating to the exclusion clause.

FULL TEXT OF THE CESTAT AHMEDABAD ORDER

These two appeals have been filed by M/s Basf and Shrichandrashekhar Kate, Manager Taxation of the appellant.

1.1 The appellant company, BASF (India) Limited (BIL) is engaged in managing goods falling under Chapter 39 to First Schedule of the Central Excise Tariff Act, 1985.

1.2 The issue relates to availment of cenvat credit of the service tax paid by the appellant during the period April 2011 when the setting up of the factory started to the period March 2016 when the setting up of the factory was completed and commercial production started.

1.3 The appellant had availed various input services and the show cause notice seeks to deny cenvat credit of these services in relation to fabrication of plant and machinery in the factory and making plant and machinery operational. The show cause notice essentially relies on the changes made in the definition of input services appearing in Rule 2(l) of the Cenvat Credit Rules, 2004. The changes made in the definition are as follows:

Before 01.04.2011:

“2. (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 upto the place of removal, and includes services used in relation to setting up, modernization, renovation or repairs of a factory,……………………………………………………………………………………….. up to the place of removal:”

After 01.04.2011 and as amended

“2(l) “input service” means any service. –

(i) used by a provider of taxable 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 modemization, renovation or repairs of a factory……………………………………………………… outward transportation up to the place of removal;

After the issuance of Notification no. 28/2012-C.E. (NT) dated 20.06.2012.

RULE 2(l): Input Services

“Input Service” means any service

1. 1. used by a provider of output service for providing an output service; or ‘the word ‘taxable service’ is replaced by the word ‘output service’ is replaced.

The show cause notice allege that by virtue of this change of omission of the words ‘setting up’ credit of services availed during the period of setting up of the factory became ineligible for cenvat credit. The show cause notice mainly invoked this provision for denial of cenvat credit. The show cause notice also invoked Rule 4(7) of the Cenvat Credit Rules to hold that the credits availed after one year of the date of issue of the documents specified in sub-rule (1) of Rule 9 of Cenvat Credit Rules, 2004 is inadmissible.

2. Learned counsel for the appellant pointed out that the issue regarding admissibility of cenvat credit in respect of services used for setting up of factory has been examined by various course. He relied on the decision of Tribunal in the case of Reliance Industries Limited 2002 (4) TMI 729. He argued that if the services availed are covered by the definition of the term ‘input service’ otherwise then even if, the services are used for the purpose of initial setting up of the factory, the credit would admissible despite removal of the word ‘initial setting up’ from the definition of input service. The learned counsel have given the following details of the services availed by them.

He argued that all these services are covered under the definition of input service as it existed after amendment w.e.f. 01.04.2011 also i.e. even after deletion of word ‘setting up’ from the definition of the input service.

2.1 He argued that all these services are used in or in relation to manufacture of finished goods without availing these services, no manufacturing could have possibly taken place as there would have been no factory. He argued that in these circumstances, the input credit of these services is admissible in term of the main part of the definition of input service. He further argued that the same principle has been relied in the decision of Tribunal in case of Reliance Industries Limited (supra) wherein the credit under Erection Commissioning and Installation Services has been specifically allowed under main definition when the service was clearly received as initial setting up of the plant.

2.2 He further argued that they themselves have not availed cenvat credit of services relating to Civil Construction of the factory. He pointed out that the appellant have taken the construction related services from the service provider, namely, TOYO Engineering (India) Limited and Flour Daniel (India) Private Limited and on these services, the appellant have not availed any cenvat credit as these construction services fall under specific exclusion in the definition of Input Service. The appellant attached annexure-3 to the appeal No. E/10169/2019, some sample invoices to support its claim.

2.3 Learned counsel argued that the Show Cause Notice is cryptic and vague. The Show Cause Notice solely relies on the fact of the amendment in the definition of Input Service involving removal of word ‘initial setting up’ to assert that the credit is not admissible. He argued that the said argument of the Revenue gets totally demolished by the decision of Tribunal in case of Reliance Industries Limited (Supra).

2.4 It was also argued that credit of Rs. 29,29,272/- has been wrongly denied invoking Rule 4(7) of Cenvat Credit Rules 2004. Learned counsel relied on the ST-3 returns for the period April 2013 to September 2014 to assert that the said was reflecting in the said ST-3 returns within one year of the date of issue of invoices. The learned counsel however, admitted that it was a human error that this credit availed by the appellant was reflected belatedly in ER-1 return. He further argued that the credit denied for the month of September 2015 was also availed within one year of the date of invoice in the book of accounts, however the credit was reflected in ER-1 Returns belatedly. He argued that the impugned order does not consider these submissions of the appellant while passing the impugned order on this issue.

2.5 Learned counsel pointed out that the changes made in the definition of input service from 01.04.2022 to 01.04.2012 have been interpreted by various decisions of Tribunal. He argued that all the decisions of Tribunal held that ‘means portion of the input service definition has not been amended during this period’. He argued that the inclusive portion or definition includes all the activities for which the appellant has taken the credit. He pointed out that deletion of the words ‘setting up and activities relating to business’ has not implication as far as availment of credit by the appellant is concerned.

2.6 Learned counsel argued that all the amendments made in the definition of input service has to be read harmoniously. He pointed out that following changes have been made in the definition of input service.

E.3 In the inclusive clause of the new definition with effect from 1.4.2011, the following phrase have been specifically deleted:-

i) Setting up which prefixed services in relation to factory or an office relating to such factory

ii) Activities relating to business, such as which prefixed specific

E.4The following specified services, if they are used for construction of a building of a civil structure or a part thereof, or laying of foundation or making of structures for support of capital goods, have been excluded w.e.f. 1.4.2011:

i) A service provided by an architect in his professional capacity: or

ii) A service provided by a port or any person authorized by the port, in relation to port service; or

iii) A service provided by other port or any person authorized by that port in relation to port service; or

iv) A service provided by airports authority or any person authorized by it, in an airport or civil enclave; or v) A service provided in relation to construction service; or

vi) A service provided in relation to the construction of a complex; and

v) A service provided in relation to the execution of a works

2.7 Learned counsel argued that these changes are only intended to exclude construction relating services for setting up of the factory. He argued that the services on which cenvat credit has been availed by the appellant are only those which are not pertaining to civil construction and therefore, the said services are not covered under the exclusion portion of definition of input service. He argued that they themselves have not availed cenvat credit on such services which are related to civil construction.

2.8 Learned counsel argued that the means part of the definition is very widely worded and covers all the activities on which the appellant have vailed the credit. He relied on the decision of Hon’ble Apex Court in the case of Rajashtan State Chemical Works 1999 (55) ELT 444 (SC) and Ahmedabad Electricity Co. Ltd. 2003 (158) ELT 3 to assert that word in or in relation to expenditure the scope and meaning and content of the expression.

2.9 He argued that even the use of these services, the factory could not have come up and no finished goods could have been manufactured and therefore, all these services qualify as essential or the purpose of manufacture of goods and therefore, would qualify as input service within the main part of the definition of the term ‘input service’. He relied on the decision of Hon’ble High Court of Gujarat in case of Cadila Healthcare Ltd. 2013 (30) STR 3 (Guj.) and on the decision in the case of Mundra Port & SEZ 2015 (39) STR 726 (Guj.).

2.10 He further argued that the entire demand is beyond the normal period of limitation. He argued that the appellant have neither wilfully suppressed the fact nor misstated the fact with intent to evade payment of duty. He argued that the appellant started commercial production in the month of July 2014 and took credit of all the input services at that time, therefore all the facts were reflected in the returns filed by the appellant and there was no mala fide intent on the part of appellant to avail ineligible credit. The only allegation against the appellant is that they have not specifically intimated the fact that they are availing credit on input services for setting up of the factory. He argued that the said factory cannot be used against the appellant as it has been a subject matter of lot of litigation since the said amendment was made. He argued that no penalty in these circumstances can be imposed on the appellant.

3. Learned Authorized Representative relies on the impugned order. He particularly relied on para 4.3, 4.7, 4.8, 4.11, 4.12, 4.13, 4.14, 4.19 of the impugned order.

4. We have considered rival submissions. The appellants are engaged in manufacture of goods falling under Chapter 39 of the Central Excise Tariff Act, 1985 and availed cenvat credit of service tax during setting up of the factory. It is seen that the definition of input service prior to 2011 read as follows:

“(I) 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 upto 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;”

Certain amendments were made in the said definition and w.e.f. 01.04.2011, the said definition read as follows:

(l) “input service” means any service, –

(i) used by a provider of taxable 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 services,-

(A) specified in sub-clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and  (zzzza) of clause (105) of section 65 of the Finance Act (hereinafter referred as specified services), in so far as they are used for –

(a) construction of a building or a civil 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

(B) specified in sub-clauses (d), (o), (zo) and (zzzzj) of clause (105) of section 65 of the Finance Act, 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; or

(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;”

Further amendments were made in the definition of input service on 01.04.2012, the said definition, therefore, read as follows:

(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 upto 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

(B) specified in sub-clauses (o) and (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle which is not a capital goods, or

(BA) specified in sub-clauses (d) and (zo) of clause (105) of section 65 of the Finance Act, except when used by-

(a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by him; or

(b) a provider of output service as specified in sub-clause (d) of (105) of section 65 of the Finance Act, in respect of a motor vehicle insured or reinsured by him: or”.

(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;”

5. The cause of action for these proceedings arose on account of the following fact:

a) The word ‘Setting up´ were removed from the inclusive part of the definition of input service w.e.f. 01.04.2011.

b) Introduction of exclusion of above mentioned clause A(a) of the definition of input service w.e.f. 01.04.2012. It is contended by the appellant that they themselves have not availed the cenvat credit in respect of the abovementioned exclusion clauses A(a). It is the contention of the appellant that they have availed the cenvat credit of input service which are covered by the means part of the definition of input service only.

Revenue is of opinion that cenvat credit of services used for setting up of ‘factory, premises of provider of output service or the office relating to said factory or premises’ would not be admissible as the word setting put has been deleted from the definition of input service. This very issue has been examined by Tribunal in the case Reliance Industries Limited 2022- VIL-281-CESTAT-AHM-CE. In the said decision similar dispute was examined. The Tribunal in the case of Semco Electricals Private Limited 2010 (18) STR 177 has held that in order to qualify as an input service, the service has to either fall within the means part or inclusive part of the definition of input service, is reproduced below:

“Both parts of the definition have to be construed harmoniously

9.1 The definition of the term ^„Input service^‟ as defined under Rule 2(l) of the Cenvat Credit Rules, 2004 has two parts – (i) the ^„means^‟ part which is the main part of the definition and (ii) ^„inclusive^‟ part which is illustrative and certainly not exhaustive.

9.2 The ^„means^‟ part of the definition covers any service used directly or indirectly, in or in relation to manufacture of the final products and clearance of the final products from the place of removal. The definition is one of very wide connotation. It covers within its ambit all services received by the manufacturer of final products, as long as they are related to the manufacturing business of the assessee.

9.3 A service would qualify as ^„input service^‟ even if not covered by the ^„means^‟ portion, if it satisfies the ^„includes^‟ portion of the definition. In other words, in order to qualify as an input service, a service has to fall either within the ^„means^‟ part or ^„includes^‟ part of the said definition.

9.4  It is well settled that every clause of the statute should be construed with reference to the context and other clauses of the Act, as far as possible to make a consistent enactment of the whole of the statute. A bare mechanical interpretation of words and application of a legislative intent is devoid of concept and purpose will reduce the most of the remedial and beneficent legislation to futility. To be literal in meaning is to see the skin and miss the soul. Words, phrases and rules occurring in a statute are to be read together and not in an isolated manner.

9.5 If the interpretation canvassed by the Revenue is to be accepted, then the “includes” part of the definition would be rendered redundant. The legislature would have very well stopped with the means part of the definition.

9.6 In Union of India v. Hansoli Devi – (2002) 7 SCC 273, the Hon^‟ble Supreme Court has observed that the legislature never wastes it words or say anything in vain and a construction which attributes redundancy to legislation will not be accepted except for compelling reasons. Moreover, no one-to-one co-relation between the input services and the final products manufactured needs to be established by the appellants.”

Thus, any service which is covered under the means part of the definition, the credit cannot be denied even if, it does not appear in the inclusive part of the definition.

6. We find that without use of these services, the appellant could not have possibly manufactured the excisable goods. In this background, we do not find any merit in the argument of the Revenue that by deletion of word ‘setting up’ from the definition of input service any significant change has happened. However, w.e.f. 01.04.2012, a specific exclusion clause has been introduced in the definition of input service. The said exclusion clause includes following:

(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

Thus, the exclusion clause would obviously make such services ineligible for the cenvat credit under the head of ‘Input Service’. It is seen that the appellant has claimed that they have on their own not availed such credits relating to the exclusion clause.

7. Another issue relates to the denial of cenvat credit invoking Rule 4(7) of the Cenvat Credit Rules. The amount of Rs. Rs. 29,29,272/- has been denied invoking Rule 4(7) of the Cenvat Credit Rules. The appellant have contended that they have availed the said credit within the period prescribed under Rule 4(7) in their ST-3 Returns and they have claimed that they have produced the said returns before the original adjudicating authority however, no findings have been given by the original adjudicating authority on this deface of the appellant. We find that this issue has been examined in para 4.19 of the impugned order. It is apparent that the deface and documents in support of appellant’s claim has not been examined. In view of above, we find that demand on this count cannot be sustained as the order fails to examine the deface given by the appellant. In these circumstances, the demand on this count is set aside and matter is remanded to the original adjudicating authority.

8. On the issue of the credit of input services availed in respect of alleged ‘setting up of the factory’ as well as the suggestion of the appellant about the credit not availed on account of exclusion clause, the matter needs to be examined again by the original adjudicating authority in light of the decision of Tribunal in the case of Reliance Industries Limited (supra) which clearly holds that so long as input services on which the credit is taken by the appellant are covered under the means part of the definition, the credit even if, used for setting up of the plant or factory, cannot be denied.

9. In view of above, the impugned order is set aside and matter is remanded to the original adjudicating authority for fresh adjudication in the light of discussion above.