Case Law Details
Kellogs India Pvt Ltd Vs Commissioner of Central Tax (CESTAT Hyderabad)
The appeal challenged Order-in-Appeal No. TTD-EXCUS-000-APP-131-18-19 dated 17.01.2019, which had upheld the adjudication order denying CENVAT credit to the appellant.
The appellant manufactures prepared foods by swelling or roasting cereal or cereal products and is registered under central excise and service tax. Based on intelligence gathered by the anti-evasion officers, the department investigated the appellant’s availment of CENVAT credit on certain input services. The investigation revealed that the appellant had entered into a development agreement and a lease deed with M/s Sri City (P) Ltd., the developer and manager of the industrial estate where the appellant established its factory. Under these agreements, the appellant paid charges, along with service tax, under the category of “Renting of Immovable Property Service.” The disputed CENVAT credit related to service tax paid on infrastructure development charges and the lease arrangements with M/s Sri City (P) Ltd.
The department’s case was that these services were used for setting up the manufacturing plant. According to the department, the expression “setting up” had been deleted from the definition of “input service” under Rule 2(l) of the CENVAT Credit Rules, 2004 with effect from 01.04.2011 by Notification No. 3/2011-CE(NT) dated 01.03.2011. On this basis, a show cause notice was issued, culminating in an adjudication order disallowing CENVAT credit of Rs. 1,39,52,380/-, ordering its recovery under Rule 14 of the CENVAT Credit Rules, 2004 read with Section 11A, and imposing penalty under Rule 15(2) of the CENVAT Credit Rules, 2004 read with Section 11AC of the Central Excise Act, 1944. The first appellate authority upheld the adjudication order, leading to the present appeal.
The appellant submitted that the disputed services were not construction services but were availed for leasing the industrial plot on which the factory was to be established. Besides lease charges, M/s Sri City also collected infrastructure development charges relating to roads, electricity, water supply, sewerage and similar facilities. The appellant contended that both the lease charges and infrastructure development charges were directly connected with manufacturing because, without obtaining the leased land and related infrastructure, the factory could neither be established nor manufacturing undertaken.
The appellant also addressed the amendment to Rule 2(l) effective from 01.04.2011. It accepted that the words “setting up” had been deleted from the inclusive portion of the definition. However, it argued that Rule 2(l) contains three components: the principal definition covering services used directly or indirectly in or in relation to manufacture and clearance of final products; an inclusive portion enlarging the scope of eligible services; and an exclusion clause specifying services excluded from credit. According to the appellant, deletion of “setting up” merely removed it from the inclusive portion and did not specifically exclude such services. Therefore, services used for setting up a factory would continue to qualify if they satisfied the principal definition of services used directly or indirectly in or in relation to manufacture. Since leasing the land and paying related infrastructure charges were indispensable for establishing the factory, the services had a direct nexus with manufacture and qualified for CENVAT credit.
The departmental representative reiterated the findings of the lower authorities and argued that the legislative intent behind deleting “setting up” from Rule 2(l) was to deny CENVAT credit on services relating to establishment of a plant after 01.04.2011.
The Tribunal identified the issue as whether the appellant was entitled to CENVAT credit on the service tax paid under the infrastructure development agreement, lease deed and subsequent maintenance, all classified by the service provider under “Renting of Immovable Property Service.” It observed that there was no dispute that the services had been received, payments had been made, and the service provider had classified them under the said taxable service.
The Tribunal examined the structure of Rule 2(l) of the CENVAT Credit Rules, 2004. It observed that the principal part of the definition covers any service used by a manufacturer directly or indirectly in or in relation to manufacture of final products. The inclusive portion had earlier expanded the definition to cover services relating to “setting up,” but that expression stood deleted with effect from 01.04.2011. The exclusion clause, however, did not expressly exclude services used for setting up a plant.
The Tribunal held that, during the relevant period, services relating to setting up of a plant were neither specifically included nor specifically excluded. Consequently, eligibility had to be examined under the principal definition. It found that the principal definition was sufficiently broad to cover services used for setting up the plant, particularly where the services related to obtaining land on lease. The Tribunal observed that without such leased land, the factory could not be established and manufacturing could not take place. It therefore found a direct nexus between the manufacture of the final products and the services used for setting up the plant through leasing of land.
On this basis, the Tribunal held that the appellant was entitled to CENVAT credit on the disputed services. It set aside the impugned order and allowed the appeal with consequential relief, if any.
FULL TEXT OF THE CESTAT HYDERABAD ORDER
This appeal is filed against order-in-appeal No. TTD-EXCUS-000-APP-131-18-19 dated 17.01.2019.
2. The appellant manufactures prepared foods by swelling or roasting cereal or cereal products and has obtained central excise registration as well as service tax registration from the department. Intelligence gathered by the officers of anti-evasion indicated that the appellants have availed CENVAT credit on some ineligible input services. Investigations revealed that they had entered into a development agreement and lease deed with M/s Sri City (P) Ltd who managed the industrial estate in which the appellant was setting up their factory. They paid amounts as per the agreements along with service tax under the head Renting of Immovable Property Service as per the invoices raised by M/s Sri City. It is the CENVAT credit which is availed on infrastructure development agreement and lease deed with M/s Sri city Pvt Ltd which is in dispute. The case of the department is that these services were used by the appellant for setting up the plant and the term ‘setting up’ has been specifically excluded from the definition of input service with effect from 01.04.2011 by Notification No. 3/2011-CE(NT) dated 01.03.2011. Accordingly the Revenue issued a show-cause notice which culminated in the adjudication order disallowing the CENVAT credit of Rs 1,39,52,380/- taken by the appellant on these services and ordering its recovery under Rule 14 of CENVAT Credit Rules 2004 read with Section 11A. A penalty was also imposed under Rule 15(2) of CENVAT Credit Rules 2004 read with Section 11AC of the Central Excise Act 1944.
3. Aggrieved, the appellant appealed to the first appellate authority who rejected the appeal and upheld the order of lower authority. Hence this appeal.
4. Learned counsel would take us to the agreement with M/s Sri City (Pvt) Ltd., and copies of invoices and would submit that the services were indeed availed by them not for any construction but they were availed for renting the plot in the Sri City on which they would build their factory. In addition to charging for the plot itself, the developer M/s Sri City also charged for infrastructure development i.e. development of roads, electricity, water supply sewerage etc. Both these payments are directly linked to the manufacture of the products as without paying either of these amounts they cannot set up the factory for manufacture of goods. He would therefore argue that these services have a direct nexus to their manufacture and hence CENVAT credit must be allowed.
5. As far as the definition of input service under Rule 2(l) of CENVAT Credit Rules 2004 is concerned he fairly concedes that there was a change in the rule position with effect from 01.04.2011. After the amendment it reads 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 upto 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 upto 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”
Prior to the amendment the third para read “and includes setting up, modernisation ……… ” The words “setting up” were deleted with effect from 01.04.2011. He would submit that the above definition has three components. First, it states that input service means any service 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. The second part of the definition further enlarges the scope of these services and says that it 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. Thereafter it excludes certain services from the definition. He would therefore submit that as can be seen from the definition whatever is covered in the first part of the definition is definitely covered as an input service unless it get excluded by the third part. In addition to the inclusions in the first part, the second part further enlarges the scope of certain services. Prior to 01.04.2011, this enlarged component of the definition included the services used in relation to “setting up” of a factory. After 01.04.2011, the words “setting up” has been deleted. Thus as far as the enlargement definition of Rule 2(l) is concerned, ‘setting up’ has been deleted. However, services used in relation to setting up have not been specifically excluded from the definition. Thus the services which are used post 01.04.2011 in setting up of a factory are neither specifically included by the enlarged definition nor specifically excluded by
the exclusion part of the definition. Therefore, credit on such services is
available if it falls in the main definition i.e., services used by a manufacturer whether directly or indirectly in or in relation to manufacture of final products and clearance of final products up to the place of removal. If it does not fall within this definition, no credit is admissible. In their case, the services were used for renting of immovable property namely, the plot and other related charges without which the factory can neither be set up nor can any products be manufactured. Therefore, they are squarely covered by the definition of Rule 2(l) and hence CENVAT credit is admissible to them. Therefore, the impugned order needs to be set aside and appeal may be allowed.
6. Learned A.R. reiterates the findings of the lower authorities. He submits that the intention of the legislature is quite clear. With effect from 01.04.2011, the services which relate to setting up of the plant have been specifically deleted from the definition and therefore by implication, no CENVAT credit is admissible on such amounts.
7. We have considered the arguments on both sides and perused the records. The short point for consideration is whether the appellant is entitled to CENVAT credit on the service tax paid under the deeds for infrastructure development agreement, lease deed and subsequent maintenance on which service tax was paid by the input service provider under the head of “renting of immovable property service”. It is not in dispute that these services have been availed by the appellant and payments have been made. It is also not in dispute that the service provider had classified these services under the head of renting of immovable property service. The department is of the opinion that no CENVAT credit is admissible on these services because they are used in connection with setting up of the plant which has been deleted from the inclusion part of Rule 2(l) of CENVAT Credit Rules 2004.
8. As can be seen from the three components of the definition of input service under Rule 2(l) of CENVAT Credit Rules 2004, the initial part says that any service used by a service provider in connection with provision of output service or by a manufacturer in or in relation to manufacture of the final products whether directly or indirectly is covered under the definition of input service.
9. This definition has been further enlarged by adding several other input services such as those services used in relation to setting up, modernisation renovation etc. The terms “setting up” has been deleted with effect from 01.04.2011 and hence was not on the Statute during the relevant period.
10. The third part of the definition excludes certain types of services and this exclusion part of the definition also does not have in it, the services used in setting up of the plant.
11. Therefore, we find that the services used in relation to setting up of a plant are neither specifically included nor specifically excluded during the relevant period. That takes us to the main part of the definition which, with respect to manufacturer allows CENVAT credit of services used in or in relation to manufacture whether directly or indirectly. This definition, in our considered view, is wide enough to cover in its compass any services used for setting up a Plant especially when the services are used for obtaining the land on lease. Without such land no factory can be set up nor can any manufacture take place. We find a direct nexus between the manufacture of the final products and the services used for setting up of plant by leasing the land.
12. In view of the above, we find that the appellant is entitled to CENVAT credit of the disputed amounts and the impugned order needs to be set aside and we do so.
13. The impugned order is set aside and the appeal is allowed with consequential relief, if any.
(Operative portion of the order pronounced in open court on conclusion of the hearing)
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