Order passed without examining main part of input service definition is non-speaking

CSCI Steel Corporation India Pvt Ltd Vs C.C.E (CESTAT Ahmedabad)

CESTAT Ahmedabad held that as the order is passed without examining the admissibility of input services credit under the main part of the definition of input service, the same is vague and non-speaking order.

Facts- This appeal has been filed by M/s. CSCI Steel Corporation India Pvt. Ltd. against denial of Cenvat Credit. The short issue involved in the present dispute is regarding availability of Cenvat Credit on various services viz. Management Consultancy services, Legal and Professional services of / and services used mainly in erection and commissioning, laying of foundation and making structure in support of capital goods/ machinery and also other services such as rent-a-cab, hotel services, insurance services, architectural services etc., and whether they are valid input services within the meaning of Rule 2(l) of the Cenvat Credit Rules, 2004 during the period 2012-14.

Conclusion- It is seen that the order of Commissioner examines the omission of words in initial “setting up” in the inclusive part of the definition of input service, but fails to examine the admissibility of input services credit of these services under the main part of the definition of input service.

Held that the impugned order does not examine the admissibility of Cenvat Credit of these services in the main part of the definition, but relies solely on the changes made in the inclusive part of definition. It is seen that the impugned order does not examine which service would fall under which exclusion clause. The order in this regard is vague and not a speaking order.

FULL TEXT OF THE CESTAT AHMEDABAD ORDER

This appeal has been filed by M/s. CSCI Steel Corporation India Pvt. Ltd. against denial of Cenvat Credit.

2. Learned Counsel argued that the short issue involved in the present dispute is regarding availability of Cenvat Credit on various services viz. Management Consultancy services, Legal and Professional services of / and services used mainly in erection and commissioning, laying of foundation and making structure in support of capital goods/ machinery and also other services such as rent-a-cab, hotel services, insurance services, architectural services etc., and whether they are valid input services within the meaning of Rule 2(l) of the Cenvat Credit Rules, 2004 during the period 2012-14.

2.1 Learned Counsel argued that pursuant to audit conducted for the material period, certain audit observations were made, interalia, to the effect that the Appellant had wrongly availed Cenvat Credit and vide letter dated. 20.10.14, the Appellant inferred that they reversed the entire alleged wrongly availed Credit. Further, he claimed that the Appellant had reversed the entire Credit on account of insistence by the Audit Party along with amount of penalty of Rs. 1,28,38,089/- under protest. That the Appellant had neither agreed, nor voluntarily paid any such amount during the course of Audit at all as evident from their letter dated 02.04.2015.

2.2 Learned Counsel argued that the Appellant had not sought closure of the issue, since penalty was also imposed on them by audit party, and their request to close the issue under Section 11A(2B) / Section 73(3) was not adhered to by audit party. In fact, vide letter dt.7.4.15, the Audit Commissioner categorically stated that the Appellant is free to litigate the matter. Pursuant to this, SCN dt.27.7.15 was issued to the Appellant, seeking to recover and appropriate the credit and penalty amounts paid under protest.

2.3 Learned Counsel argued that Cenvat Credit has been sought to be denied becasuse during the material period, though registered under Central Excise laws, the Appellant had not yet started commercial production and hence, all the services availed by them was deemed to be towards “setting up” of the factory and as such, assumed to be excluded from the scope of the term “input service” under Rule 2(l) of CCR, 04.

2.4 Learned Counsel argued that the issue on hand is no more Res Integra, inasmuch as the CESTAT in the following cases, has categorically held that after 1.4.11, even if the words “setting up” are removed from the “inclusive” part of the definition of the term “input service” does not mean it is omitted from the first limb of the said definition, which covers services used in or in relation to, directly or indirectly, for manufacture of finished goods. The judicial view as it exists states that without setting up, manufacture is not possible and hence, the first limb of the definition of the term “input service” includes setting up of factory as well. He relied upon the following decisions:

• Pepsico India Holdings (P) Ltd. 2022(56) GSTL 22(Tri-Hyd.)
• Kellogs India Pvt. Ltd.2020(7) TMI 414- CESTAT Hyd
• Supreme Industries Ltd.2020(373) ELT 97(Tri-Ahm)

2.5 Learned Counsel argued that substantial part of services were used for Erection, Commissioning and Installation services, whereas small portion was also towards making foundation and support structures for Plant and Machinery, which should be considered as part and parcel of Erection / Commissioning work itself. The tax paid, even if under Works Contract Service, still partakes the character of being towards Erection/ Commissioning and Installation service and hence, credit must be allowed thereon. The Appellant did not avail any Credit pertaining to construction of factory shed or other civil construction, except for foundation and support structure of capital goods as such. In any case, majority of credit was concerning Erection / Commissioning and Installation work itself.

2.6 He argued that credit on Erection/ Commissioning/ Installation Service is eligible as per the decisions in the case of Reliance Industries Ltd. 2022(4) TMI 729- CESTAT AHMEDABAD as well as in the case of Thermax Ltd. 2020(35) GSTL 118 (Tri-Ahmd).

2.7 He argued that the impugned order seeks to deny Cenvat Credit on the following nature of Services, on the ground of that it has no nexus with production activity within factory and it is a part of setting up of plant and machinery. He pointed out that the actual list of services as mentioned at Para 37.4 of the impugned order is at Sr. Nos.1 to 12 below, but since impugned order also discusses general service heads as part of findings, the same too are explained and discussed, as hereunder from Sr. Nos.13 and 14.

2.7 He argued that given the interpretational issue involved, especially when the matter is well covered vide catena of decisions available on the issue, neither extended period of limitation be invoked nor any penalty can be imposed on the Appellant. He further argued that the whole of demand is time-barred, given the fact that there are plethora of decisions covering the issue in the favour of the Appellant. That the bonafide belief entertained by the Appellant cannot be doubted in the circumstances.

3. Learned AR relied on the impugned order.

4. We have considered the rival submissions, we find that the appellants are engaged in manufacture of steel, coils. The appellants were setting up their new plants and while setting up their new plant, the appellant availed various services. The revenue has sought to deny input credit of various services used by the appellant on the ground that the definition of input service was amended with effect from 01.04.2011 to exclude the services used for setting up of factory premises of output service provider or office relating to such factory or premises. It is seen that the definition of input service was amended with effect from 01.04.2011. Definition Prior to 01.04.2011, 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 manufacturer of final products and [clearance of final products and clearance of final product up to the place of removal],

and includes services used in relation to setting up, 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, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating share registry, security, , inward transportation of inputs or capital goods and outward transportation upto the place of removal.

Definition after 01.04.2011, 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 manufacturer of final products and clearance of final products up to the place of removal, and includes services used in relation to 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 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]

(B) [services provided by way of renting of a motor vehicle), in so far as they relate to a motor vehicle which is not a capital goods, or

[(BA) service of general insurance business, servicing, repair and maintenance, in so far as they relate to a motor vehicle which is not a capital goods, except when used by-

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

(b) an insurance company in respect of a motor vehicle insured or reinsured by such person; 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 consumption of any employee.]

4.1 The Commissioner in the impugned order has observed as follows:

“37.5 Further I find that as per the change in the definition of input service after 01.04.2011, the initial ‘setting up’ word has been omitted and only modernization /renovation/repairs of such premises /office already existing is covered in the definition of input service after 01.04.2011. With effect from 01.07.2012 sub clause (A) to Rule 2(1) supra, has been substituted vide notification no. 28/2012-C.E. (N.T.) dated 20.06.2012. Sub clause (B), (BA) to Rule 2(1) of CCR Rules 2004, substituted vide notification No. 18/2012-CE (N.T.) dated 17.03.2012 w.e.f. 01.04.2012 as amended. Clauses A, B, BA, & C exclude certain services from the definition of input service. I find that the service portion used in Construction, works contract services/ erection commissioning, laying of foundation, making structure for support of capital goods etc. and other services viz. rent-a-cab, Hotel services insurance, Architecture services etc. are not covered under the ambit of definition of “input service” under the Rule 2) (as amended) of the Cenvat Credit Rules, 2004. The erection commissioning, construction etc. services in the instant case have been used for setting up of Plant and Machinery, factory and office premises and fall under the exclusion clause(s) of the definition of input service Supra.

37.6 I find that the exclusion clauses provide that service portion in execution of works contract and construction service used for building, civil structure or part thereof or laying of foundation or making of structures for support of capital goods are excluded from definition of input service. These services will be eligible as input service’ if used for the provision of one or more of the ‘specified service ‘i.e. construction/ works contract of building or structure or lying of foundation etc. In the instant case the assessee is a registered manufacturer and registered as a service recipient. They are not engaged in providing of any such services. It therefore I find that the services falling under the exclusion clause of the input service definition as discussed in foregoing para, used by them for setting up of their plant and Machinery at Dahej cannot be termed as ‘Input service’ for them.

37.7 Further I find that the services viz. “Management Consultancy services, Legal Consultancy Services and other like services received from legal consultant, advocate and other service providers as discussed above to be used in drafting of Agreements/ Contracts, for hiring of office premises/ hotel. Car rental (Rent-a-cab), share subscription & share holders, General Corporate and Commercial purpose, lease of Hotel Room, EC compliance report, agreement of the proposed new building at Dahej unit. Also the services received from M/s. Sanguine Management are Land related services which had been received in relation to the land that was already identified for setting up of New Plant and Machinery at Dahej. Therefore, I find that all these services have no relevance / nexus directly/ indirectly with the manufacturing activities and they are used for and during the setting up of their new plant and machinery/ factory, office premises. The case laws relied upon by the assessee are not applicable to the present case.

37.8 I find that these services received by the assessee were not in the nature of input services in terms of Section 37 (2) (xviaa) of Central Excise Act, 1944 which provide for credit of Service Tax leviable under Chapter V of the Finance Act 1994 (32 of 1994) paid or payable on taxable services used in, or in relation to, the manufacture of Excisable goods to the extent that the services appeared to fall under specific exclusion clause of 2) (A), 21) B. 21) (BA), and 2(1) C) of the Cenvat Credit Rules 2004. The same were used in setting up of their New Plant and factory and office premises etc. at Dahej. Renting of motor vehicle also specifically excluded under clause 2(1)(B), services of general insurance and other services excluded under 20h (BA), services for personal use or consumption of employees specifically excluded under clause 207) (C). Also in some of the cases the invoices were also not in the name of the assesee with different address. Therefore, the service tax credit does not covered under the purview of definition of “input service” under Rule 2) of the CENVAT Credit Rules, 2004 as these services were specifically excluded from the definition of input services.

37.9 In view of the discussion in the aforesaid paras, the assessee have availed service tax credit wrongly in contravention of Rule 2() and 2) (A), 2(1) 8, 2() (BA), and 2(1) (C) read with Rule 3 and Rule 9 of Cenvat Credit Rules 2004 and therefore the cenvat credit of service tax amounting to Rs.7,55,44,027/- availed on input services, which are not covered under the definition of input service as provided under the Rule 2(7) of the Cenvat Credit Rules, 2004 and hence, it is not admissible and it is recoverable under Rule 14 of CENVAT Credit Rules, 2004 read with provisions of section 73 of Finance Act, 1994 and section 11A of the Central Excise Act, 1994.”

It is seen that the order of Commissioner examines the omission of words in initial “setting up” in the inclusive part of the definition of input service, but fails to examine the admissibility of input services credit of these services under the main part of the definition of input service.

4.2 It is seen that the issue has been examined by various Courts. Tribunal in the case of Pepsico India Holdings (Pvt.) Ltd.- 2022 (56) GSTL 22 (Tri.- Hyd.)has held as follows:

“16. We find that the definition of ‘input service’ prior to 1-4­2011 had two parts – a main part of the definition and an inclusive part of the definition. This inclusive part specifically included the services availed for setting up the factory. After 1-4-2011, it has three parts – a main part, an inclusive part and an exclusive part. The services used for setting up the factory are neither in the inclusive part of the definition nor the exclusive part of the definition. Therefore, such services. were neither specifically included nor were specifically excluded.

17. It takes us to the main part of the definition which must be examined. If it is wide enough to cover the services in question, Cenvat credit will be available, otherwise it will not be available. The main part includes “services 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 term manufacture is not defined in the Rules.

18. The definitions as per Rule 2 of CCR, 2004 reads as follows:

RULE 2. Definitions. (1) In these rules, unless the context otherwise requires,

(a) XX XX          XX

(b) XX XX              XX

(c) XX XX              XX

(2) The words and expressions used in these rules and not defined but defined in the Excise Act shall have the meanings respectively assigned to them in the Excise Act.

19. Since the term ‘manufacture’ is not defined in the Rules, the definition under the Central Excise Act, 1944 must be considered. Section 2(f) of the Central Excise Act defines ‘manufacture’ as follows:

2(f) “manufacture” includes any process

(1) incidental or ancillary to the completion of a manufactured product.

(i) which is specified in relation to any goods in the Section or Chapter notes of the Fourth Schedule as amounting to manufacture; or

(ii) which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer,

the word “manufacturer” shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.

20. Thus, the term ‘manufacture’ itself is very wide and includes anything incidental or ancillary to manufacture.

21. For a service to qualify as ‘input service’ under Cenvat Credit Rules, 2004 post 2011, the service in question need not be covered even by the very wide definition of manufacture under Section 2(f) of the Central Excise Act. Any service which is used not only in manufacture but also in relation to’ manufacture will also qualify as input service. The scope of input service is further enlarged with the expression whether directly or indirectly used in the definition of input service. Thus, there are:

(a) Actual manufacture;

(b) Processes incidental or ancillary to manufacture which are also manufacture;

(c) Activities directly in relation to manufacture (i.e., in relation to ‘a’ and ‘b’ above);

(d) Activities indirectly in relation to manufacture (i.e., in relation to ‘a’ and ‘b’ above);

22. All four of the above qualify as input service as per Rule 2(1)(ii) as applicable post 1-4-2011. Although setting up the factory is not manufacture in itself, it is an activity directly in relation to manufacture. Without setting up the factory, there cannot be any manufacture. Services used in setting up the factory are, therefore, unambiguously covered as ‘input services’ under Rule 2(1)(ii) of the Cenvat Credit Rules, 2004 as they stood during the relevant period (post 1-4-2011). The mere fact that it is again not mentioned in the inclusive part of the definition makes no difference. Once it is covered in the main part of the definition of input service, unless it is specifically excluded under the exclusion part of the definition, the appellant is entitled to Cenvat credit on the input services used. This Bench has already taken this view in Kellogs. Similar views have been taken by the other Benches in the other cases mentioned above.

23. In view of the above, the impugned orders denying Cenvat credit and ordering its recovery along with interest and imposing penalties cannot be sustained. The impugned orders are set aside and the appeals are allowed with consequential reliefs, if any.”

The impugned order does not examine the admissibility of Cenvat Credit of these services in the main part of the definition, but relies solely on the changes made in the inclusive part of definition. In terms of the decision in the case of Pepsico India Holdings (Pvt.) Ltd (supra), it is apparent that if the services provided in relation to setting up in unit would be covered under the main part of the definition. Unless specifically excluded by exclusion clause.

4.3 The impugned order also examines the specific exclusions made in the definition of input service. Para 37.9 of the impugned order deals with this specific exclusion made in the definition of input service. The said para reads as follows:

“37.9 In view of the discussion in the aforesaid paras, the assessee have availed service tax credit wrongly in contravention of Rule 2() and 2) (A), 2(1) 8, 2() (BA), and 2(1) (C) read with Rule 3 and Rule 9 of Cenvat Credit Rules 2004 and therefore the cenvat credit of service tax amounting to Rs.7,55,44,027/- availed on input services, which are not covered under the definition of input service as provided under the Rule 2(7) of the Cenvat Credit Rules, 2004 and hence, it is not admissible and it is recoverable under Rule 14 of CENVAT Credit Rules, 2004 read with provisions of section 73 of Finance Act, 1994 and section 11A of the Central Excise Act, 1994.”

It is seen that the impugned order does not examine which service would fall under which exclusion clause. The order in this regard is vague and not a speaking order.

The Tribunal in the case of Reliance Industries Ltd.- 2022 (4) TMI 729 – (Cestat- Ahmd). Examined the exclusion clause of the definition of input services. In para 4.1 & 4.2 following has been observed:

“4.1 The contention of the adjudicating authority is that the services of ECIS were used for construction of building or a civil structure therefore, the services of ECIS falls under the exclusion clause provided under Clause A of Rule 2 (l) of Cenvat Credit Rules, 2004. In this regard it is necessary to first understand the nature of the capital goods/ structure for which service of ECIS was received to arrive at conclusion that whether these services were provided in execution of Works Contract Service or construction of building or civil structure. The appellant has submitted a pictorial presentation, submitted to the department on 23.04.2019 which is scanned below:

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4.2 On carefully going through the above pictorial presentation we find that the capital goods/ structure for which ECIS service was received is clearly in respect of the plant and machinery which are itself capital goods. Therefore, it is not coming out from the fact as reproduced above that the ECIS services were received for execution of Works contract and/or construction of building or civil structure. The Adjudicating Authority in his finding has contended that the works contract and /or construction of building does not mean only a building which is made of cement, steel etc but building of any nature falls under the category of construction in general. We do not agree with this contention of Adjudicating Authority for the reason that if this contention is accepted then ECIS used for any purpose will amount to construction which will be very absurd contention. In the present case ECIS is in respect of plant and machinery which does not amount to construction of building and which by any stretch of imagination cannot be amount to construction of a building or a civil structure. Therefore, the ECIS in the facts of the present case do not fall under exclusion category. We agree with the submission of the appellant in as much as the construction of the building or civil structure which is in the nature of building. However, in the present case ECIS was used not for constructing any building or civil structure whereas the ECIS /WCS was used only for plant and machinery which are the capital goods.”

In this background, we are left with no option but set aside the impugned order and remand the matter back to the original Adjudicating Authority to pass fresh order in the light of the Tribunal decisions in the case of Pepsico India Holdings (Pvt.) Ltd and Reliance Industries Ltd. Moreover, the Commissioner has expected to identify the specific exclusion clause of definition of input service under which he seeks to deny the credit of or of the service listed in para 2.7 above. He will also examine the cases relied by the appellant in support of its claim and listed in para 2.7 above.

The impugned order is therefore set aside and matter remanded to the original Adjudicating Authority for fresh adjudication.

(Pronounced in the open Court on 11.01.2023)