Central Excise Appeal No.15/2012 in case of COMMISSIONER OF CENTRAL EXCISE AND CUSTOMS, AURANGABAD Vs. ENDURANCE TECHNOLOGY PVT LTD the matter came before Mumbai high court by an appeal filed by Revenue. High court framed the following question of Law.
I] Whether the CESTAT is correct in holding that the assessee is entitled to avail the CESTAT credit on “management, maintenance or repair services” provided on services provided to Windmills installed and situated away from factory and factory premises?
II] Whether electricity generated at Supa and Satara, situated for away, could be said to have been used for manufacture of the final product of the assessee at Waluj, Aurangabad.
Brief facts of the case:
The assessee (Respondent) is engaged in the manufacture of motor vehicle parts falling under Chapter 87 of CETA, 1985 at their factory at Waluj, Aurangabad. The assessee availed CENVAT credit of Service Tax paid on repairs and maintenance service of their wind mills situated at Supa and Satara.
A show-cause notice was issued for recovery of CENVAT credit along with interest and imposition of penalty under Rule 15 of Cenvat Credit Rules, 2004 read with section 11AC of the Central Excise Act, 1944 stating that the above services cannot be treated as input services of the assessee as defined under Rule 2(l) of the CENVAT Credit Rules, 2004 as these services are utilized for repair and maintenance of wind mills installed at Supa and Satara which are far away from their factory at Waluj, Aurangabad.
Proceeding before lower Adjudicating Authority:
Lower Authority Contended that the Cenvat credit availed by assessee is inadmissible due to wind mills are situated far away from their factory located at Waluj, Aurangabad, proceedings were initiated for recovery of Cenvat credit availed by assessee. The lower adjudicating authority confirmed the demand along with interest and also imposed a penalty of Rs.6,66,856/-.
Proceeding Before Commissioner(Appeal):
The Commissioner (Appeals) upheld the lower adjudicating authority’s order to the extent of confirmation of demand and interest, however he has set aside the penalty imposed under rule 15 of the CENVAT Credit Rules, 2004 read with section 11AC of the Central Excise Act, 1944.
Proceeding Before CESTAT
The assessee appealed against Commissioner (Appeal) order for the confirmation of demand and interest and the department is challenging the setting aside of the penalty by Commissioner(Appeal) before the CESTAT.
Assessee Argument before CESTAT:
The contention of the assessee is that the services in connection with maintenance of wind mills are exclusively used in relation to manufacturing activity and, therefore, are squarely covered under the definition of input service. Input service covers not only services used directly or indirectly in or in relation to the business of manufacturing of the final product and in their case the repair and maintenance service has nexus with the upkeep of their wind mills which is used for generation of electricity which in turn is used in their factory and they are fully covered under the definition of input service’ under CENVAT Credit Rules, 2004. As regards the allegation of suppression of facts, the learned Counsel submits that they have been filing their Excise returns, Service Tax returns in time and the records have been audited by Excise officers and are having knowledge of their all activities. Under such circumstances, the allegation of suppression of facts is not sustainable and the extended period also cannot be invoked. In support of their contention he placed reliance on the decision of the Hon’ble Bombay High Court in the case of CCE vs. Ultratech Cement Ltd. 2010(260)ELT 369(Bom.).
Department Argument before CESTAT:
the learned JDR submitted that the service is not used in or in relation to the manufacture of final product. He further submitted that the input service should be used in the premises of the factory, like inputs. In the case of repair and maintenance service used in the wind mill which is situated far away from the manufacturing unit is not permissible. The assessee has availed this credit by suppressing the facts therefore penalty is rightly imposable against them.
Decision of CESTAT:
The CENVAT credit availed on Service Tax paid on input service used in maintenance of wind mill located at Supa and Satara, which was availed by their manufacturing unit situated at Waluj, Aurangabad on the ground that no services used by the manufacturer directly or indirectly or in relation to manufacture of their final products. Input service is defined under Rule 2(l)(ii) of Cenvat Credit Rules, 2004. The definition not only covers services which are used directly or indirectly in or in relation to manufacture of final products and also includes other services, which have direct nexus or which are integrally connected in business of manufacture of final products. CESTAT not find any reason to interfere with the order of the learned Commissioner (Appeals) so far as it relates to confirmation of demand and interest is concerned. CESTAT agree with the contention of the learned Counsel that once the demand is not sustainable, penalty is not warranted. In view of the above assessee’s appeal was allowed and the Revenue’s appeal was dismissed.
Finding of High Court for Question of Law & Statute:
The question No.[II] can be answered in affirmative because admittedly, the electricity generated at Supa and Satara which are situated for away from the manufacturing unit of the appellant can be said to have used for manufacture of final product at Waluj, Aurangabad. Mainly because admittedly such electricity generated at Supa and Satara is adjusted to the electricity used at Waluj. This adjustment is admitted by the revenue and in view of this adjustment, it can safely be stated that the electricity generated at Supa and Satara is the electricity used at Waluj.
Question no.[I] is main bone of contention between the parties. Even the law on this subject is very well settled by at least three prominent judgments of our High Court reported in 2010 (20) S.T.R. 589 (Bom.) in the case of Commissioner of Central Excise, Nagpur Versus Ultratech Cement 2010 (260) E.L.T. 369 (Bom.) in the case ofCommissioner of Central Excise, Nagpur Versus Ultratech Cement Ltd. And 2013 (32) S.T.R. 532 (Bom.) in the case of Deepak Fertilizers & Petrochemicals Corporation Ltd. Versus C.C.Ex.Belapur. The question between the parties is whether the respondent was entitled to credit on management, maintenance or repair services provided on windmills installed by the respondents.
The answer lies in interpretation of Rule 2(B)(k),(l) (m), 3 and 4 of CENVAT Credit Rules, 2004. The relevant Rule 2(B)(k),(l), 3 and 4 of CENVAT Credit Rules, 2004 read as under :
“2(B)(k) “input” means
(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known a petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production:
(ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service;
Explanation 1: The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.
Explanation 2: Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer;
2(B) (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 from 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 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, and security, inward transportation of inputs or capital goods and outward transportation up to the place of removal.
(m) “input service distributor” means an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be.
Rule 3. CENVAT Credit : (1) A manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit (hereinafter referred to as the CENVAT credit of –
[xi] the additional duty of excise leviable under [Section 85 of Finance Act, 2005 (18 of 2005)] paid on –
[i] any input or capital goods received in the factory of manufacture of final product or premises of the provider of output service on or after the 10th day of September 2004; and
[ii] any input service received by the manufacturer of final product or by the provider of output services on or after the 10 th day of September, 2004
Including the said duties, or tax, or cess paid on any input or input service, as the case may be, used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue) No.214/86 Central Excise, dated the 25 th March, 1986, published in the Gazette of India vide number G.S.R.547(E), dated the 25 th March, 1986, and received by the manufacturer for use in, or in relation to the manufacture of final product on or after the 10 th day of September, 2004.
Rule 4 : Conditions for allowing CENVAT credit – (1) The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service.
[Provided that in respect of final products, namely, articles of jewellery falling under heading 7113 of the First Schedule to the Excise Tariff Act, the CENVAT credit of duty paid on inputs may be taken immediately on receipt of such inputs in the registered premises of the person who get such final products manufactured on his behalf, on job work basis, subject to the condition that the inputs are used in the manufacture of such final product by the job worker.]
Rule 4(7) – The CENVAT credit in respect of input service shall be allowed, on or after the day which payment is made of the value of input service and the service tax paid or payable as is indicated in invoice, bill or, as the case may be, challan referred to in rule 9.”
5] On perusal of these Rules, it becomes clear that the management, maintenance and repair of windmills installed by the respondents is input service as defined by clause “l” of Rule 2. Rule 3 and 4 provide that any input or capital goods received in the factory or any input service received by manufacture of final product would be susceptible to CENVAT credit. Rule does not say that input service received by a manufacturer must be received at the factory premises. The judgments referred to above, also interpret the word “input” service in similar fashion.
Case Law Relied by High Court:
(i) Commissioner of Central Excise, Nagpur Versus Ultratech Cement in the case of – 2010-TIOL-686-HC-MUM-ST: In this case the Division Bench of this Court held that the definition of “input service”is very wide and covers not only services which are directly or indirectly used in or in relation to manufacture of final product but also includes various services used in relation to business of manufacture of final product. The expression “activities” in relation to business is also discussed in this judgment by referring to judgment of Apex Court.
(ii) Deepak Fertilizers & Petrochemicals Corporation Ltd. Versus C.C.Ex.Belapur – 2013-TIOL-212-HC-MUM-CX: In this case the Division Bench held as under:
“The definition of the expression ‘input service’ covers any services used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products. The words ‘directly or indirectly’ and ‘in or in relation to’ are words of width and amplitude. The subordinate legislation has advisedly used a broad and comprehensive expression while defining the expression ‘input service’. Rule 2(l) initially provides that input service means any services of the description falling in sub-clauses (i) and (ii). Rule 2(l) then provides an inclusive definition by enumerating certain specified services. Among those services are services pertaining to the procurement of inputs and inward transportation of inputs. The Tribunal, proceeded to interpret the inclusive part of the definition and held that the Legislature restricted the benefit of Cenvat credit for input services used in respect of inputs only to these two categories viz. for the procurement of inputs and for the inward transportation of inputs. This interpretation which has been placed by the Tribunal is ex-facie contrary to ‘the provisions contained in Rule 2 (l). The first part of Rule 2 (l) inter alia covers any services used by the manufacturer directly or indirectly, in or in relation to the manufacture of final products. The inclusive part of the definition enumerates certain specified categories of services. However, it would be farfetched to interpret Rule 2 (l) to mean that only two categories of services in relation to inputs viz. for the procurement of inputs and for the inward transportation of inputs were intended to be brought within the purview of Rule 2 (l). Rule 2 (l) must be read in its entirety. The Tribunal has placed an interpretation which runs contrary to the plain and literal meaning of the works used in Rule 2 (l). Moreover as we have noted earlier, whereas Rule 3(l) allows a manufacturer of final products to take credit of excise duty and Service Tax among others paid on any input or capital goods received in the factory of manufacturer of the final product, insofar as any input service is concerned, the only stipulation is that it should be received by the manufacturer of the final product. This must be read with the broad and comprehensive meaning of the expression ‘input service’ in Rule 2(l). The input services in the present case were used by the appellant whether directly or indirectly, in or in relation to the manufacture of final products. The appellant, it is undisputed, manufactures dutiable final products and the storage and use of ammonia is an intrinsic part of that process.”
Decision of High Court:
The High Court hold that the answer to question No.(I) is in affirmative. The Court further hold that Despite this settled position, learned counsel for the appellant tried to submit that the judgment cited at Sr.No. (2) is being challenged before Supreme Court. This submission does not really help us in deciding the appeals. Both appeals are dismissed.
This judgment of Hon’ble High court is big relief for assessee who are suffering from denial of Cenvat credit on Repairs & maintenance Service of wind mills situated away from factory. Across the country field formation officer and Audit party raised objection for taking Cenvat Credit on Repairs & maintenance Service of wind mills and large number of Litigation are pending before various authorities. Hon’ble High Court transparently held that the management, maintenance and repair of windmills installed by the assessee is input service as defined by clause “l” of Rule 2. Rule 3 and 4 provide that any input or capital goods received in the factory or any input service received by manufacture of final product would be susceptible to CENVAT credit. Rule does not say that input service received by a manufacturer must be received at the factory premises. It was already concluded by Hon’ble Supreme Court In case of Vikram Cement vs. Commissioner of Central Excise, Indore, 2006 (194) E.L.T. 3 (S.C.) that Explosives for blasting mines to produce limestone for use in manufacture of cement/clinkers in factory situated at some distance away from mines – Cenvat credit on explosives could not be denied on the ground that they were not used as inputs within factory. After this judgment of Hon’ble Mumbai High court there is big relief towards end of litigation because in some states this kind of matter is pending before larger bench of CESTAT due to divergent view of different CESTAT on similar issue.
(Shailendra Saxena, B.Com, CS, FCMA, FCA, DISA (ICAI) , OM P. Maheshwari & Associates, Chartered Accountants, Cell:09377410260, Email: email@example.com)