CESTAT Allows CENVAT Credit on Factory Construction, Canteen, Insurance & Air Travel Services

Ahresty India Private Limited Vs Commissioner of Central Goods & Service Tax (CESTAT Chandigarh)

The appeals arose from a common order dated 17.02.2014 passed by the Commissioner of Central Excise, Delhi-III, confirming denial of CENVAT credit of ₹1,33,40,371, along with interest and penalty, in respect of three show cause notices covering the period from February 2009 to November 2011. The dispute related to CENVAT credit claimed on Commercial or Industrial Construction (setting up/expansion of factory building), Outdoor Catering, Insurance Services and Air Travel Agent Services.

The Tribunal noted that this was the second round of litigation. In the first round, the Commissioner had confirmed demands on several input services. On appeal, the Tribunal remanded the matter for fresh adjudication. During de novo proceedings, the Commissioner dropped demands relating to several services but confirmed the demand only with respect to the four disputed services, leading to the present appeals.

Regarding Commercial or Industrial Construction Service, the appellant submitted that the services were used for setting up and expansion of its factory building and qualified as “input service” under Rule 2(l) of the CENVAT Credit Rules because “setting up” was specifically included in the definition applicable during the relevant period. The appellant also contended that the factory was already operational and the services were used only for expansion of production capacity. The Revenue maintained that construction of buildings lacked nexus with manufacture.

On Outdoor Catering Services, the appellant argued that maintenance of a factory canteen was a statutory obligation under Section 46 of the Factories Act, 1948, and therefore the service was indirectly used in manufacture and qualified as an input service. The Revenue contended that catering constituted merely an employee welfare activity.

In respect of Insurance Services, the appellant submitted that insurance of the factory building protected business operations against risks affecting production, while group health insurance of employees was procured to ensure continuity of manufacturing activities. The Commissioner had denied credit on the ground that insurance of the building related to immovable property and insurance of employees was for their welfare.

Regarding Air Travel Agent Services, the appellant stated that the services related to official travel of expatriate employees to Japan for purchasing plant and machinery, tools and dies, and for technical training connected with manufacture of final products. The Commissioner had denied credit on the ground that the travel related to employees visiting their home country and lacked nexus with manufacture.

The Tribunal observed that although the disputed period extended to November 2011, the appellant categorically stated that it had not availed any credit on the disputed services after 01.04.2011. Accordingly, the Tribunal examined the eligibility of credit only under the unamended definition of “input service” applicable up to 31.03.2011.

After reproducing the definition of “input service” applicable during the relevant period, the Tribunal held that construction services used for setting up the factory building were directly covered by the inclusive part of the definition relating to setting up, modernisation, renovation or repairs of a factory. It further noted that construction services were specifically excluded only with effect from 01.04.2011. The Tribunal therefore held that the appellant was entitled to CENVAT credit on these services.

On Outdoor Catering Services, the Tribunal held that, prior to 01.04.2011, such services were covered under the definition of input service as activities relating to the appellant’s business and also formed part of the statutory obligation under the Factories Act. However, it held that the appellant remained liable to pay interest on the amount already reversed in respect of the portion recovered from employees, with such interest to be calculated by the original authority.

With regard to Insurance Services, the Tribunal held that group health insurance policies for employees constituted activities relating to the business and therefore qualified as input services. It accordingly allowed the credit denied on insurance of employees.

In relation to Air Travel Agent Services, the Tribunal found that the services were used for international travel connected with purchase of plant and machinery, tools and dies and technical training at the appellant’s Japan office, which were related to manufacture of final products. It held that such services were covered by Rule 2(l) of the CENVAT Credit Rules during the relevant period.

Following the decisions cited before it, the Tribunal set aside the impugned order and allowed all three appeals, except to the extent that the appellant was liable to pay interest on the amount reversed in respect of outdoor catering services.

Cases Discussed

• Goldman Sachs India Securities Pvt Ltd vs. CST, (2024) 22 Centax 118 (Tri. Mumbai)
• Kansal Nerolac Paints Ltd vs. CCE, 2024 (3) TMI 1038 CESTAT Chandigarh
• Kansal Nerolac Paints Limited vs. CCE, 2024 (3) TMI 1039 CESTAT Chandigarh
• Rico Auto Industries Ltd vs. CCE, (2023) 7 Centax 197 (Tri. Chan.)
• Keihin fie Pvt Ltd vs. CCE, 2023 (10) TMI 53 CESTAT Chandigarh
• Zoloto Industries vs. CCE, 2023 (5) TMI 758 CESTAT Chandigarh
• RMZ Infotech Pvt Ltd vs. Commr of Central Tax, 2022 (64) GSTL 599 (Tri. Bang.)
• Ganesan Builders Limited vs. CST, 2019 (20) GSTL 39 (Mad.)
• Vandana Global Limited vs. CCE, 2018 (16) GSTL 462 (Chhattisgarh)
• Maruti Suzuki India Ltd vs. CCE, 2017 (47) STR 273 (Tri. Chan.)
• Sarita Handa Exports P Ltd vs. CCE, 2016 (44) STR 654 (Tri. Chan.)
• Xilinx India Technology Services Pvt Ltd vs. CCE&ST, 2016 (44) STR 129 (Tri. Hyd.)
• CCE vs. Munjal Kiriu Industries Limited, 2016 (9) TMI 490 CESTAT Chandigarh
• CCE vs. Bellsonica Auto Components India P Ltd, 2015 (40) STR 41 (P&H)
• Innovasynth Technologies Limited India Limited vs. CCE, 2015 (38) STR 1232 (Tri. Mumbai)
• CCE vs. Ultratech Cement Limited, 2010 (20) STR 577 (Bom.)
• Vandana Global Limited vs. CCE, 2010 (253) ELT 440 (Tri. LB)

FULL TEXT OF THE CESTAT CHANDIGARH ORDER

These three appeals are directed against a common impugned order dated 17.02.2014 passed by the Commissioner of Central Excise, Delhi-III, vide which the learned Commissioner has decided three SCNs issued from February 2009 to November 2011 by denying the Cenvat Credit of Rs.1,33,40,371/- along with interest and penalty under provisions of Cenvat Credit Rules, 2004 read with sections of Central Excise Act, 1944. Since the impugned services involved in these three appeals are identical and there is one common impugned order, all the appeals are taken up together for discussion and decision. The summary of appeal wise demands in dispute is given herein below:

2.1 This is the second round of proceedings. Briefly stated facts of the case are that the appellant is engaged in manufacture of auto parts and is availing Cenvat Credit on various inputs and input services. The department entertained the view that the appellant is not entitled to Cenvat Credit on the impugned input services; consequently, three SCNs were issued to the appellant. After following the due process, the learned Commissioner vide the Order-in-Original dated 13.12.2012 confirmed the demands of Cenvat Credit as raised in the aforesaid SCNs for the period February 2009 to November 2011 on various services viz. Air Travel Agent, Outdoor Catering, Clearing & Forwarding, Commercial or Industrial Construction, GTA Services, Insurance, Labour Contractor, Pest Control, Rent-a-cab, Courier Agency, Erection & Commissioning, Renting of Immovable Property and Printing & Photocopy.

2.2 Aggrieved by the Order-in-Original dated 13.12.2012, the appellant filed the appeal before the Tribunal and the Tribunal, in the first round of proceedings, vide its order dated 22.07.2013, remanded the matter back to the learned Commissioner for de-novo adjudication.

2.3 In remand proceedings, the learned Commissioner heard the matter again and vide the impugned order, confirmed the demand only on four services namely ‘Air Travel Agent’, ‘Outdoor Catering’, ‘Commercial or Industrial Construction’ and ‘Insurance Services’; and dropped the demand in respect of other services confirmed in the earlier order date 13.12.2012. Against the demand on aforesaid four services, the appellant preferred the present appeals.

3. Heard both the parties and perused the material on record.

4.1 The learned Consultant for the appellant submits that the impugned order is not sustainable in law and is liable to be set aside as the same has been passed without properly appreciating the facts and the law and by ignoring the binding judicial precedents.

4.2 As regards the denial of Cenvat Credit on setting up and expansion of the factory (i.e. Commercial or Industrial Construction), the learned Consultant submits that the credit has been denied on the ground that the services were used for construction of building or civil structure and not for manufacture or provision of service. To rebut this ground, he submits that the Cenvat Credit is eligible on setting up of the factory building because the said services are used for setting up the factory premises for providing taxable goods manufactured by the appellant and the input services were availed for construction of factory building. He also submits that such services are eligible for Cenvat Credit as per the definition of ‘input services’ under Rule 2(1) of the Cenvat Credit Rules as “setting up” is specifically included in ‘means’ part of the definition. He further submits that these services are intrinsically related to business of the appellant as without having an appropriate factory premises, the business cannot be carried out. This satisfies the ‘includes’ part i.e. ‘activities related to business’ under Rule 2(1) of the Cenvat Credit Rules. He also submits that the appellant’s factory is already existing and running in production and it is only expansion of existing production capacity for which these services were availed and Cenvat Credit cannot be denied thereon. He further submits that the learned Commissioner has wrongly relied upon the judgment of the Larger Bench of the Tribunal in the case of Vandana Global Limited vs. CCE – 2010 (253) ELT 440 (Tri. LB) as the same has been overruled by the Hon’ble Chhattisgarh High Court as reported in 2018 (16) GSTL 462 (Chhattisgarh). He also submits that the said judgment of Vandana Global Limited was in the context of interpretation of the term “inputs” and not “input services”. He further submits that Circular No. 98/1/2008-ST dated 04.01.2008, relied upon by the Commissioner in the impugned order, is not applicable in the present case. In this regard, he relies on the following decisions:

• CCE vs. Bellsonica Auto Components India P Ltd – 2015 (40) STR 41 (P&H).
• Rico Auto Industries Ltd vs. CCE – (2023) 7 Centax 197 (Tri. Chan.)
• Kansal Nerolac Paints Ltd vs. CCE – 2024 (3) TMI 1038 CESTAT Chandigarh
• Maruti Suzuki India Ltd vs. CCE – 2017 (47) STR 273 (Tri. Chan.)

4.3 As regards the denial of Cenvat Credit on Outdoor Catering Services, the learned Consultant submits that the Cenvat Credit has been denied by the learned Commissioner on the ground that catering services cannot be treated as activity relating to the business of the appellant even if it is obligatory as per Factories Act, 1948, because it is merely a welfare activity and not in the nature of business. To rebut this finding of the learned Commissioner, he submits that canteen services provided to employees in the factory premises form part of statutory obligation under Section 46 of the Factories Act, 1948 which means said services are indirectly used in the manufacture of final products coupled with statutory obligation as it enhances productivity of the appellant and fall within ‘means’ clause of definition of input services under Rule 2(1) of the Cenvat Credit Rules. In this regard, he relies on the following decisions:

• CCE vs. Ultratech Cement Limited – 2010 (20) STR 577 (Bom.)
• Kansal Nerolac Paints Limited vs. CCE – 2024 (3) TMI 1039 CESTAT Chandigarh
• Keihin fie Pvt Ltd vs. CCE – 2023 (10) TMI 53 CESTAT Chandigarh
• Ganesan Builders Limited vs. CST – 2019 (20) GSTL 39 (Mad.)

4.4 As regards the denial of Cenvat Credit on Insurance Services, the learned Consultant submits that the Cenvat Credit has been denied in the impugned order on the ground that the factory building is an immovable property and is not capital goods and therefore, insurance services received for factory building are not used for providing output services. As regards the insurance for employees is concerned, the Cenvat Credit has been denied on the ground that services are for welfare and personal consumption of employees and therefore, the same are not eligible for Cenvat Credit as per Circular No. 943/4/2011-CX dated 29.04.2011.

4.4.1 To rebut the finding of the learned Commissioner regarding insurance of factory building, the learned Consultant submits that factory building is an integral part of the appellant’s business as it is where manufacturing activity is carried out and insuring factory building covers loss of profit due to stoppage of work, due to perils like fire, riots, terrorist attack etc against any unwarranted situation of business and therefore, these services are used in relation to manufacture of the product and fall within ‘means’ clause of definition of input services under Rule 2(1) of the Cenvat Credit Rules. In this regard, he relies on the following decisions:

• • Sarita Handa Exports P Ltd vs. CCE – 2016 (44) STR 654 (Tri. Chan.)
  • RMZ Infotech Pvt Ltd vs. Commr of Central Tax – 2022 (64) GSTL 599 (Tri. Bang.)

4.4.2 To rebut the finding of the learned Commissioner regarding health insurance of employees, the learned Consultant submits that the health insurance services are procured for group health policy of the employees because in the absence of employees due to poor health, it would be challenging to carry out the business functions; the appellant is responsible to take care of its employees against any discomforts. He further submits that if employees are not insured, attrition rate would be high and in the absence of employees, it would be difficult to carry out the manufacturing activities; therefore, this service is indirectly used in manufacture and falls within ‘means’ clause of definition of input services under Rule 2(1) of the Cenvat Credit Rules. In this regard, he relies on the following decisions:

• • CCE vs. Munjal Kiriu Industries Limited – 2016 (9) TMI 490 CESTAT Chandigarh
  • Zoloto Industries vs. CCE – 2023 (5) TMI 758 CESTAT Chandigarh

4.5 As regard the denial of Cenvat Credit on Air Travel Agent Services, the learned Consultant submits that the Cenvat Credit has been denied in the impugned order on the ground that the service provider has not paid tax on such services and such services were used for international travel of expats for visiting their home-country, which is personal use of employees and further, no evidence was produced for justification that Cenvat Credit relates to manufacture of finished goods and the invoices produced on record reveal that services are for international travel of expats to visit their home-country. To rebut this finding, he submits that Cenvat Credit is eligible on Air Travel Agent Service, as this service relates to official travel of expats to visit Japan office of the appellant for purchasing plants & machineries, tools & dies and attending technical training which are used in relation to manufacture of final product. He further submits that Rule 2(1) of the Cenvat Credit Rules explicitly covers input services used by the manufacturer directly or indirectly in relation to manufacture or clearance of final products as held in the following cases:

• Goldman Sachs India Securities Pvt Ltd vs. CST – (2024) 22 Centax 118 (Tri. Mumbai)
• Innovasynth Technologies Limited India Limited vs. CCE ­2015 (38) STR 1232 (Tri. Mumbai)
• Xilinx India Technology Services Pvt Ltd vs. CCE&ST ­2016 (44) STR 129 (Tri. Hyd.)

5. On the other hand, the learned Authorized Representative for the Revenue reiterates the findings of the impugned order and submits that demand has been confirmed by denying the Cenvat Credit on impugned services for the period February 2009 to November 2011. He further submits that some period is covered after the amendment in definition of ‘input services’ effected from 01.04.2011. He also submits that as regards the Outdoor Catering Services, the appellant has reversed the amount collected from employees but the appellant is liable to pay the interest on that amount also.

6. We have considered the submissions made by both the parties and perused the material on record as well as various judgments relied upon by the learned Consultant for the appellant in support of his contention.

7. At the outset, we may clarify that the appellant’s case is that though the period involved is from February 2009 to November 2011 but categorical stand of the appellant is that they have not availed any credit on the impugned services post 01.04.2011; it means that we have to examine whether the appellant is eligible to Cenvat Credit on these impugned services up to 31.03.2011 under the un-amended definition of ‘input services’ as provided in Rule 2(1) of Cenvat Credit Rules. We may take up the input services one by one.

8. The main service, on which the substantial Cenvat Credit has been denied, is of setting up of the factory building. Before we give a finding on this, it is appropriate for us to reproduce the definition of ‘input service’ during the relevant period, which is reproduced herein below:

“From 01.04.2008 to 31.03.2011
“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 setting up, 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 upto the place of removal”

Further, we find that Cenvat Credit on construction of the factory building has been denied only on account of lack of nexus between the construction services and the manufacturing of the goods. In this regard, it is to be noted that the construction relates to the setting up of the factory which in turn, is directly used for manufacturing and is directly covers under the inclusive part of the definition of ‘input service’. Moreover, during the relevant period, construction service was included in the definition of ‘input service’ and it is only after 01.04.2011 that it has been specifically excluded from it. These services are squarely covered under ‘input services’ by various decisions relied upon by the appellant cited supra. In this regard, we may refer to the decision of the Hon’ble Punjab & Haryana High Court in the case of CCE vs. Bellsonica Auto Components India P Ltd (supra), wherein the Hon’ble Punjab & Haryana High Court has held as under:

“13. We approve the findings of the Tribunal as well as the basis on which they have been arrived at. The Tribunal rightly did not agree with the Commissioner’s findings that the services in question had been used for brining into existence an immovable property and not for the manufacture of the final product. The said services cannot be said to be remotely connected to the final product as observed by the Commissioner.”

Similarly, in the case of Rico Auto Industries Ltd (supra), this Tribunal, after relying upon the aforesaid decision of Hon’ble Punjab & Haryana High Court, has allowed the Cenvat Credit on construction services for the period prior to 01.04.2011. In view of this, we hold that the appellant is entitled to Cenvat Credit on this input service.

9. As regards outdoor catering service for the employees is concerned, we find that this service is also covered under the definition of ‘input service’ prior to 01.04.2011 as held in the cases relied upon by the learned Consultant for the appellant (cited supra in para 4.3 above) because the outdoor catering service is an activity relating to appellant’s business and hence, is included in ‘means’ clause of Rule 2(1) and moreover, under the Factories Act, 1948 also, it is a statutory obligation. Further, we hold that as regards reversal of recovered amount by the appellant, the appellant is liable to pay interest on that portion, which will be calculated by the original authority and the appellant would be liable to pay the same.

10. As regards the Cenvat Credit on insurance services, we find that the learned Commissioner has allowed 50% of the Cenvat Credit availed in relation to insurance of the building, but has denied the Cenvat Credit on insurance of the employees amounting to Rs.1,21,261/-. We hold that insurance policies procured for group health insurance of the employees, are also included in ‘means’ clause of Rule 2(1) as the health insurance of the employees is an activity relating to business and it has been held in the cases relied upon by the learned Consultant for the appellant (cited supra in para 4.4.2 above) that this activity is an ‘input service’; therefore, we hold the same accordingly.

11. As regards the eligibility of Cenvat Credit on air travel agent service, we find that said service was used for international travel of expats for visiting their home country as well as for purchasing plants & machineries, tools & dies and attending technical training at Japan office of the appellant which is used in relation to manufacture of final product. We also find that during the relevant time, Rule 2(1) of the Cenvat Credit Rules explicitly covers input services used by the manufacturer directly or indirectly in relation to manufacture or clearance of final products as held in the cases relied upon by the learned Consultant for the appellant (cited supra in para 4.5 above).

12. In view of our discussion above and by following the ratios of the decisions cited supra, we set aside the impugned order and allow the appeals except to the extent that the appellant is liable to pay interest on the amount reversed by them in respect of outdoor catering service.

13. All three appeals are, accordingly, disposed of.

(Order pronounced in the open court on 12.02.2025)