CA Bimal Jain
KML Molding (the Respondent) is a manufacturer of motor vehicle parts. The Respondent constructed factory shed in their factory premises and availed Cenvat credit of Service tax paid on civil construction services (impugned service). The Revenue alleged that the Respondent is not entitled to avail the Cenvat credit on impugned service as the same has been taken for immovable property and thus have no nexus with the manufacturing activity of the Respondent.
Therefore, the Revenue issued a SCN alleging denial of the Cenvat credit availed on the impugned service, which was further upheld by the Adjudication
Authority along with imposition of interest and penalty. However, on appeal being filed to the Ld. Commissioner (Appeals), Cenvat credit on impugned service was allowed to the Respondent.
Being aggrieved, the Revenue preferred an appeal before the Hon’ble CESTAT, Delhi.
The Hon’ble CESTAT, New Delhi held that in terms of the definition of Input service under Rule 2(l) of the Credit Rules as was prevalent during the period of dispute, setting up, modernization, renovation or repair of the factory falls under the inclusive part of the definition and thus Cenvat credit is allowed to the Appellant on the impugned service availed for construction of factory shed which is not other than setting up of factory premises.
Here, it would not be out of place to mention that post facto April 1, 2011, definition of the term ‘Input service’ given under Rule 2(l) of the Credit Rules was substituted vide Notification No. 3/2011-CE(NT) dated March 1, 2011, inter alia, deleting the phrase ‘setting up’. Thus, limiting the wide scope of the term ‘Input services’. In other words, effective from April 1, 2011, one has to be very careful while determining eligibility of any Input service under Rule 2(l) of the Credit Rules.
Further, effective from April 1, 2011, scope of wide interpretation of the term ‘Input service’ has been further curtailed/ limited by inserting exclusion-clause in the stated definition. These services would not be eligible even if they are eligible as per the inclusive part of the definition of ‘Input services’:
Construction related services specifically excluded under Clause (A):
Clause (A) under Rule 2(l) of the Credit Rules specifically excludes service portion in the execution of Works contract and construction services including service listed under Section 66E(b) of the Finance Act in so far as they are used for the following activities:
However, these services will be eligible as ‘Input services’ if used for the provision of one or more of the specified services i.e. Construction/ Works contract of a building/ civil structure/ part thereof or laying of foundation or making of structures for support of Capital goods.
Thus, service portion in the execution of Works contract and construction services (specified services) will be eligible for Cenvat credit only if used for service portion in the execution of a Works contract and construction services.
Hence, effective from April 1, 2011, Cenvat credit would be allowed only if the activity undertaken in the factory is in relation to modernization, renovation, or repairs only but not setting up.
(Bimal Jain, FCA, FCS, LLB, B.Com (Hons), Mobile: +91 9810604563, Email: firstname.lastname@example.org)