CA LALIT MUNOYAT
A: OVERVIEW:
Service tax was introduced by Finance Act 1994 and since then it has been mired with so much controversy/litigation that the Apex Court, in the case of MARUTI SUZUKI LTD. 2009 (240) E.L.T. 641 (S.C.), observed that on account of repeated amendments in the CENVAT Credit Rules, huge litigation in the country stands generated and a large number of conflicting views have been expressed by various Tribunals/High Court, and in view thereof it refrained from levying any penalty where it was clearly imposable. At the core of all these litigation lies the definition of “Input Service” and its application.
Service tax like Cenvat is basically a value added tax which is operated through credit mechanism. It is a tax on value addition by rendition of services. The basic principle of a value added tax is that when a finished product or service is taxed, credit of duty paid on all input goods, capital goods and input services has to be allowed. The Finance Minister in his budget speech 2004-2005 announced the introduction of Cenvat Credit across goods and services and in order to neutralise the revenue effect of such extension and keeping in mind the mean Cenvat rate the rate of Service tax was increased from 8% to 10%.”
B. ANLYSIS OF THE DEFINITION OF INPUT SERVICE
As per clause (l) of Rule 2 of the CENVAT Credit Rules, 2004 input service has been defined as under:
(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 upto the place of removal and
INCLUDES
a) 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,
b) Advertisement or sales promotion, market research, storage upto the place of removal,
c) Procurement of inputs, activities relating to BUSINESS, SUCH AS
a. Accounting, auditing, financing, recruitment and quality control,
b. Coaching and training,
c. Computer networking,
d. Credit rating,
e. Share registry, Security,
f. Inward transportation of inputs or capital goods and
g. Outward transportation upto the place of removal.
Thus, the object of the Legislature for introducing Cenvat Credit Rules was to allow credit of service tax paid on taxable services that form part of the assessable value of the final product.
The definition of the term ‘Input service’ as defined above has two parts –
(i) the ‘MEANS ‘ part which is the main part of the definition and
(ii) the ‘INCLUSIVE’ part which is illustrative and certainly not exhaustive.
The ‘means’ part of the definition covers any service used directly or indirectly, in or in relation to manufacture of the final products and clearance of the final products from the place of removal. It covers within its ambit all services received by the manufacturer of final products, as long as they are related to the manufacturing business of the assessee.
A service would qualify as ‘input service’ even if not covered by the ‘means’ portion, if it satisfies the ‘includes’ portion of the definition. In other words, in order to qualify as an input service, a service has to fall either within the ‘means’ part or ‘includes’ part of the said definition.
It is well settled that every clause of the statute should be construed with reference to the context and other clauses of the Act, as far as possible to make a consistent enactment of the whole of the statute. To be literal in meaning is to see the skin and miss the soul. Words, phrases and rules occurring in a statute are to be read together and not in an isolated manner.
In Union of India v. Hansoli Devi – (2002) 7 SCC 273, the Hon’ble Supreme Court has observed that Ordinary and natural meaning of the words has to be given effect, as legislature is deemed to intend and mean what it says ; and if reasonably possible, the words of a statute must be construed, as they stand, without addition or amendment. The courts always presume that the legislature inserted every part thereof for a purpose and the legislature’s intention is that every part of a statute should have effect and that a construction which results in redundancy of some part of a statute, must not be accepted, except for compelling reasons.
In the case of Coca Cola, the Hon’ble Bombay High Court has discussed the issue in detail and with reference to the expression used in the input service definition. The references are as follows :-
1. “Means and includes”
2. “Such as”
3. “Business”
4. “Activity relating to business”
5. “Services”
Observations of the Hon’ble Bombay High Court on each of the above is as under –
1. “MEANS & INCLUDES ” – is generally used to enlarge the meaning of the preceding words and it is by way of extension and not with restriction. Considering the various judicial pronouncements, it is clear that the expression “means & includes” is exhaustive. By the word “includes” services which may otherwise have not come within the ambit of the definition clause are included and by the word “means” these are made exhaustive. In Regional Director v. High Land Coffee Works – (1991) 3 SCC 617, at page 619, the Hon’ble Apex Court held that the word “include” in the statutory definition is generally used to enlarge the meaning of the preceding words and it is by way of extension, and not with restriction. The word ‘include’ is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used, these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import but also those things which the interpretation clause declares that they shall include.
The Hon’ble Bombay High Court in the case of Bombay Woollen Mills Private Limited v. Union of India – 1988 (36) E.L.T. 35 (Bom.), held that under the well-known rules of interpretation of statutes, whenever legislature uses the words “means and ‘includes”, it necessarily means that what is included after the word “includes” does not normally form part of what is expressed by the word “means”. What is introduced by the second half of the definition clause by adding the word “includes” is normally not a part of the first part. So taking resort to the first part of the definition is wholly irrelevant. Maybe, the legal fiction it has been so. Maybe, this is what the legislature thought should also be included apart from the other items which are included in the earlier part of the definition.
2. “SUCH AS ” – The words “such as” are illustrative and not exhaustive. In the context of business, these are services, related to business. They may not be exhaustive, but are illustrative. It means” for example or of a kind that”. Therefore, the term “such as” establishes that whatever activities are enumerated in the Rule are only illustrations of service that relate to the business and are not of exhaustive of it. Hence, any activity relating to business of the assessee would be covered as an input service.
3.” BUSINESS” – The expression is an integrated/continuous activity and is not confined/restricted to mere manufacture of the product. Therefore, activities in relation to business can cover all the activities that are related to the functioning of a business. The terms ‘business’ therefore, cannot be given a restricted definition to say that business of manufacturer is to manufacture final products only.
Therefore business is an integrated activity comprising of manufacture of final products, advertisement of the final products, entering into sale agreements with the foreign purchasers, export of the said goods etc. It is some real, substantial and systematic or organised course of activity or conduct with a set purpose.”
The Hon’ble Supreme Court in State of Karnataka v. Shreyas Paper Pvt. Ltd. – (2006) 1 SCC 615 held that “Business comprises of the regular and systematic activity with an object of earning of profits. The machinery, plant, building and the land over which they have erected or constructed are only the tools of such business. Assets and liabilities including goodwill are the necessary ingredients to constitute a business, besides the stocks and other movable and immovable items connected with the said business.
4.”ACTIVITY RELATING TO BUSINESS” – The words “relating to” further widens the scope of expression “activities relating to business”. The expression “in relation to” (so also “pertaining to”) is very broad expression which pre-supposes another subject matter. Similarly, the use of the word “activities” in the phrase “activities relating to business” further signifies the wide import of the phrase “activities relating to business”. The Rule making authority has not employed any qualifying words before the word “activities”, like “main” activities or “essential” activities etc. Therefore, it must follow that all and any activity relating to business falls within the definition of “input service” provided there is relation between the manufacturer of concentrate and the activity. Moreover Supreme Court in Doypack Systems (P) Limited v. Union of India – 1988 (36) E.L.T. 201 (S.C.), interpreting the expression “in relation to” stated that these are words of comprehensiveness which might, both have a direct significance as well as an indirect significance depending on the context. The term “relate” is also defined as meaning “to bring into association or connection with”. It has been held to be equivalent to or synonymous with as to “concerning with” and “pertaining to”. The expression “pertaining to” is an expression of expansion and not of contraction. Expenses incurred on the ground of commercial expediency by the assessee are covered by the term activities relating to business, even if it benefits somebody else also.
In CIT v. Chandulal Keshavlal & Co. – (1960) 38 ITR 601 (SC), the Apex Court held that in the absence of fraud or an oblique motive and if a transaction is of a nature which is entered in the course of a business of the assessee and is commercially expedient that it does become a deductible allowance. If as a result of the transaction the assessee benefits is immaterial that a third party also benefits thereby.”
in Eastern Investments Limited v. CIT – 1951 (20) ITR 1, the Hon’ble Apex Court held that “Most commercial transactions are entered into for the mutual benefit of both sides, or at any rate each side hopes to gain something for itself. The test is not whether the other party benefited, nor indeed whether this was a prudent transaction which resulted in ultimate gain to the appellant, but whether it was properly entered into as a part of the appellants’ legitimate commercial undertakings in order to indirectly facilitate the carrying on of its business”
Even under Income Tax Act, where the requirement is that deduction for expenditure would be allowed only if it is incurred wholly and exclusively for the purpose of business, the aforesaid expenses are be allowed as deduction. Hence, the department cannot make artificial distinction between activity relating to business and activity relating to manufacturing activity. It is well settled that the Revenue cannot blow hot and cold at the same time. The law does not permit blowing bugle at both ends.
5.”SERVICES” – The word ‘services’ is given such a wide meaning for the purposes of value added tax that it is capable of embracing everything which a taxable person does in the course or furtherance of business carried on by him which is done for consideration.
Finally the Hon’ble High Court has held that –
i) Broadly, “services” fall into two categories, namely, property based services and performance based services. Property based services cover service providers such as architects, interior designers, real estate agents, construction services, mandapwalas etc.. Performance based services are services provided by service providers like stock¬brokers, practising chartered accountants, practising cost accountants, security agencies, tour operators, event managers, travel agents etc.
ii) Service tax is VAT which in turn is both a general tax as well as destination based consumption tax . It is on commercial activities and is not a charge on the business but on the consumer and it would logically be leviable only on services provided within the country.
iii) Credit of input service must be allowed on expenditure incurred by the assessee which form a part of the assessable value of the final product.
iv) The benefit of Cenvat credit on input stage goods and services must be ordinarily be allowed as long as a connection between the input stage goods and services is established. All and any activity “relating to business” falls within the definition of “input service” provided there is a relation between manufacture of a product and the said activity.
v) Therefore, it is clear that the burden of Service tax must be borne by the ultimate consumer and not by any intermediary i.e. manufacturer or service provider.
As per the Apex Court Conceptually, as well as a matter of policy , any input service that forms a part of the value of the final product should be eligible for the benefit of Cenvat credit.
Another way to analyze the definition of input service is to divided it into the following five categories, in so far as a manufacturer is concerned :
a) Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products
b) Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal
c) Services used in relation to setting up, modernization, renovation or repairs of a factory, or an office relating to such factory,
d) Services used in relation to advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs,
e) Services used in relation to activities relating to business and outward transportation upto the place of removal
Each of the above limbs of the definition of input service is an independent limb. If an assessee can satisfy any one of the limbs then credit of the input service would be available. This would be so even if the assessee does not satisfy other limb/limbs of the above definition. In other words, credit of input service must be allowed on any expenditure incurred by the assessee which form a part of the assessable value of the final product. To illustrate, input services used in relation to setting up, modernization, renovation or repairs of a factory will be allowed as credit, even if they are assumed as not an activity relating to business.
Thus in view of this Judgment of the Apex Court for an ‘Input Service’ to become eligible for credit the condition sine qua non is its use in or in relation to the manufacture of the final products. It is therefore abundantly clear that unless a link is established between the input service and its use in or in relation to the manufacture of the final product, the input service does not become eligible for Cenvat credit.
C. EVALUATION OF INPUT SERVICES: A PRACTICAL APPROACH
Credit of Service tax paid on Outdoor Catering service used in canteen for employees have a nexus or integral connection with manufacture of final product and therefore Credit of Service tax paid on Outdoor Catering service admissible . However Credit is not admissible to manufacturer on part of Service tax borne by worker. 2010 (20) S.T.R. 577 (Bom.)
Cenvat credit of Service tax on garden maintenance is not allowable garden maintenance is not necessary for manufacture of excisable goods or clearance and garden maintenance had no nexus with manufacture and clearance of excisable goods and was not covered under the definition of ‘input service’ given under Rule 2(l) of Cenvat Credit Rules, 2004.[Kirloskar Oil Engines Ltd. v. Commissioner – 2010 (20) S.T.R. J21 (Bom.)] (Matter in dispute)
Once the cost incurred by the service on advertisement is added to the cost, and is so assessed, it is a recognition by Revenue of the advertisement services having a connection with the manufacture of the final product.
D. CONCLUSION:
Those who are interested in applying the above discussion may evaluate the following services to find if these service can be called Input Services eligible for cenvat credit. The readers must the functional utility of these services in the manufacture or provision of output services.
Service tax paid on various input services like Air Travel Agent service, Advertising Agency service, Business Auxiliary service, Outdoor Catering service, Chartered Accountant service, Cleaning service, Clearing and Forwarding Agent service, Courier service, Custom House Agent service, Goods Transport Agency service, Maintenance or Repair service, Management Consultant service, Man Power Recruitment Agency service, Online Information and Data Base Access Retrieval service, Photography service, Rent-a-Cab service, Security Agency service, Steamer Agency service, Technical Testing and Analysis service, Telephone service.
Compiled by:
CA LALIT MUNOYAT
B.Com.(Hons.), CS, FCA, DISA
98201 93508
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