There is old litigation between assessees and department whether Cenvat Credit of service paid on various services received viz. installation/repairing & Maintenance of Wind Mill, situated out of factory gate, is available or not , in terms of definition of “input service” given in Rule 2(l) of the Cenvat Credit Rules’2004? Further, there are various contradictory judgments, some in favour of department and some in favour of the assessee which enhanced confusion.
2. Stand of Hon’ble Gujarat High Court: While admitting such appeal in case of Ajanta Transistors Clock Mfg. Co. v. Commissioner [ 2013 (29) S.T.R. J21 (Guj.)], the Hon’ble Gujarat High Court observed as under.
“Cenvat credit of Service Tax — Input service — Maintenance and Repair services received in wind energy plant situated 200 kms from factory, producing electricity
The Appellate Tribunal in its impugned order had held that input services have been received in the power plant belonging to the applicants but the power had been delivered to the Electricity Board. The transactions of delivery of power to the Electricity Board and sale of power by Electricity board with assessee are two independent transactions. The Electricity Board is only giving credit for the power received in the grid and it does not mean that there is a direct nexus between the services received in power plant and the items manufactured in the factory belonging to the appellants. In view of totally independent transactions unrelated to each other and in view of fact that power produced at the wind milt and power requirement of factory also need not have to be matched or tallied, appellants are not eligible for benefit of Service Tax credit.”
3. However, in case of Commissioner of Central Excise and Customs, Aurangabad Vs. Endurance Technology Pvt. Ltd. [2015 (6) TMI 82 – BOM.], the Hon’ble High Court of Bombay held that Rule 3 and 4 of the Credit Rules provide that any Input or Capital goods received in the factory or any Input service received by manufacturer of final product would be susceptible to Cenvat credit. The Credit Rules do not say that Input service received by a manufacturer must be received at the factory premises. Also, taken note that the electricity generated out side factory is adjusted to electricity used in the factory, so it can be stated that the electricity generated out side factory is the electricity used in the factory. Thus, the Impugned Input services received on windmills installed by the Respondents outside factory is Input service as defined by Rule 2(l) of the Credit Rules and Cenvat credit would be available on impugned Input services.
3.1 In the said judgment given following judgments of (i) Commissioner of Central Excise, Nagpur Versus Ultratech Cement [2010 (20) S.T.R. 589 (Bom.)], Commissioner of Central Excise, Nagpur Versus Ultratech Cement Ltd. [2010 (260) E.L.T. 369 (Bom.)], Deepak Fertilizers & Petrochemicals Corporation Ltd. Versus C.C.Ex.Belapur.[2013 (32) S.T.R. 532 (Bom.)] and also considering Rule-3 & 4 of the CCR’2004.
3.2. This judgments is in contrary to the observation of the Hon’ble Gujarat High Court and will enhance confusion regarding availability of Cenvat Credit on service Tax paid on installation/Repairing & Maintenance Services for Windmill situated far away from factory premises. In absence of proper understanding of judgments, it is possible that the assessees will be tempted to take and utilize such Cenvat credit or departmental officer may be misguided resulting in loss of revenue and litigations.
4. ANALYSIS of definition of “Input Service” & Judgment: Hence, here is humble attempt to understand legal provisions and the aspects of the judgments and to check whether the same are applicable today or not? Before analizing the facts, let it be cleared that that judicial authority considers the facts on the basis of submission made, evidence produced by the advocates/counsels during the proceedings and don’t go beyond the submission made, evidence produced and generally don’t apply their knowledge suo-moto.
4.1 Understanding Definition of “Input Service”: The said Definition given in Rule 2(l) of the Cenvat Credit Rules’2004 is reproduced below.
“Input Service” means any service,-
(i) used by a provider of output 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, up to the place of removal, (Main part)
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 up to 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, #(business exhibition, legal services)#, inward transportation of inputs or capital goods and outward transportation up to the place of removal; (Inclusive part)
# but excludes services….(Excluding part)
[ * deleted since 01.04.2011, # added since 01.04.2011]
Understanding the definition of “input service”: Law is to be interpret strictly considering significance of all the words, signs, coma, brackets etc. to ascertain the exact meaning of the law. Eligible input services are covered and bifurcated two parts- main & inclusive parts.
(i) Main part of definition covers any service used by the 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.
(ii) Whereas inclusive part covers various services, which are not are covered in main part and not required to be used in factory up to place of removal (except storage/outward transportation) and also don’t require “direct or indirect nexus” with manufacturing in factory. This part covers relevant services viz. installation/repair of windmill situated outside the factory. [The phrase “activities relating to business, such as” has been removed since 01.04.2011. ]
Thus, main part, the phrase “directly or indirectly” expand the scope of services and also covers services having indirect nexus but used in factory up to place of removal and not cover services out of factory premises. Whereas, inclusive part is not limited to factory but covers specific service used outside factory also.
Hence the phrases “direct or indirect nexus” and “up to place of removal” is very crucial to decide whether the service falls in Main or Inclusive part of definition. In other words, the service not having direct nexus but having only indirect nexus and used out side factory can’t be covered in main part.
If the said phrases have no importance, otherwise there is no meaning of bifurcation of definition in two part i.e. main & inclusive, and all services can be covered in main part itself.
4.2. Analysis of Endurance Technology Judgment :
(A) Study the judgments followed in the subject judgment in case of Endurance Technology(supra).
(i) Commissioner of Central Excise, Nagpur Versus Ultratech Cement [2010 (20) S.T.R. 589 (Bom.)]& [2010 (260) E.L.T. 369 (Bom.)]: Judgments pertains to Cenvat Credit availed on Service Tax paid on (i) Mobile Phone for the period year 2006-2007 and (ii) Outdoor Catering Service for the period year 2004-2008 respectively. Wherein it is held that Cenvat Credit is available (i) on any input service used by a manufacturer directly or indirectly, in or in relation to the manufacture of the final products and includes services used in activities relating to business and (ii) as definition contains “activities relating to business such as..” and “such as” not relating to particular class or category of services but to variety of services used in business of manufacturing final products and hence both the cases decided in favour of the assessee. ( the phrase “activities relating to business such as..” has been removed since 01.04.2011 hence thereafter not applicable)
(ii) Deepak Fertilizers & Petrochemicals Corporation Ltd. Versus C.C.Ex. Belapur.[2013 (32) S.T.R. 532 (Bom.)]: Judgments pertains to Cenvat Credit of service tax paid on services used for storage tanks installed outside factory for storage of their input/raw material intended for use in manufacturer of final product. In the said judgments giving weightage to Rule 3(1) of CCR’2004 which 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. Hence, the case decided in decided in favour of the assessee.
However, it is overlooked that the said Rule 3(1) mention “input service” but without defining it and hence “input service” means as defined in Rule 2(l) of CCR’2004. However, the said storage tanks was meant for storage of their input/raw material intended for use in manufacturer of final product and as inclusive part of definition of “input service” cover service “procurement of inputs” but don’t restrict it up to factory gate, the said service can be considered as “input service”
(B) Reference of Rule 3 & 4 of CCR’2004 (as referred in case of Endurance Technology:
Rule 3 & 4 of CCR’2004 are taken as base, but the said Rules refer “input Service” but don’t discuss/describe which are “input services” so the said “input services” are as defined in Rule 2(l) of the CCR’2004. For the service not covered in Rule 2(l) of CCR, Rule 3 & 4 of CCR’2004 has no relevance.
(C) The electricity generated out side factory is adjusted to electricity used in the factory, so it can be stated that the electricity generated out side factory is the electricity used in the factory :
Let us understand the situation. Here, the electricity generated outside the factory is not brought directly to factory for use but sold to Electricity Board. On the other hand, the factory use electricity supplied by the electricity Board. In case, Factory sold 1500 units to Electricity Board and used 500 units supplied by the Electricity Board, in that situation , factory has to receive money for 1500 units and simultaneously to pay amount for 500 units. In the situation, only difference of both amount is given to factory to avoid multiple transaction and just settlement of financial account called popular as set-off. (May be vice versa). This can not establish electricity produce outside factory and sold is the same which is used in the factory.
It is well understood that Cenvat Credit can be availed in terms of CCR’2004 and there should be record based transaction. The situation can be clarified by following examples.
(i) Suppose, some friends in the group used to take loan from friends. Ashish take Rs.100/- from Bharat, Bharat take Rs.100/- from Chandu. Ashish take Rs.100/- from his father to give it to Bharat to clear loan of Rs. 100/- and give it to Bharat. Bharat give it to Chandu and Chandu give it to Ashish and thus, all transactions of loan are being settled. Now, the same note of Rs.100/- is with Ashish and he spent it in eatables. In this situation can it be said that Ashish has not given Rs.100/- to Bharat and spent for himself?
Here, the answer is “NO”. Though, the note of Rs.100/- is the same it’s reference source is different.
(ii) In case factory produce two final product- A & B. “B” is produced adding some material to “A” and some process thereon. When there is stock og “A” -100 unit and “B”-0, they sell “A”-100 unit to Customer. But next day, receives order for 50 unit of “B” for immediate delivery. So, they re-purchased 50 unit of “A” from Customer and manufactured 50 unit “B” and sold it.
Now, think what should be on their records (a) For “A” & “B” Both- manufacturer & sale of 50 unit (b) For “A”-Manufacture 100 unit, sale of 50 unit & captive consumption 50 unit, for “B” – manufacturing & sale of 50 unit or (c) For “A”-Manufacture 100 unit, sale of 100 unit, Purchase & issue of raw material “A” 50 unit, for “B” – manufacturing & sale of 50 unit.
Here, it can be seen from records, that correct answer is (c) and for the product “A”, the assessee has to pay duty for 100 unit, take credit of duty on 50 unit purchased. But it cannot be said that “A” is used captively when once sold and brought back for further use in factory.
CRUX: From the definition of “Gross amount charged” as given in Section 67 of the Finance Act’1994, any amount credited or debited , adjusted by way of Credit Note, Debit Note, Book-Adjustment in the books of account are nothing but value of the service on which service tax to be paid. Thus, mere adjustment in financial account can’t establish electricity produce outside factory and sold is the same which is used in the factory. Accordingly, the transactions of delivery of power to the Electricity Board and sale of power by Electricity board with assessee are two independent transactions and there is no direct nexus between the services received for windmill beyond factory and the items manufactured in the factory.
5. Rule 6 of CCR’2004: The only intention behind Cenvat Credit is to avoid the cascading effect of double taxation and as electricity itself being non-dutiable manufactured product, Cenvat Credit for Electricity sold to Electricity Board is not allowed in terms of Rule 6(1) of Cenvat Credit Rules’2004. In case, if credit availed but as separate account for dutiable/exempted manufactured product is not maintained, amount in terms of Rule 6(3) or 6(3A) of CCR’2004 is required to be paid by the assessee.
6. Conclusion: As discussed in para 4.2 , it appears that judgment of Hon’ble Mumbai High Court in case of Endurance Technology(supra), based on (i) old definition of “input service” (ii) Rule 3 & 4 of CCR( But without considering that “input service” refereed therein is as defined in Rule 2(k) of CCR) and (iii) considering mere adjustment in financial account for Electricity sold and purchased as captive consumption and possibly department would appeal against the Apex Court.
Whereas, it appears that, Hon’ble Gujarat High Court has rightly observed that delivery of power to the Electricity Board and sale of power by Electricity board to assessee are two independent transactions Mere giving credit for the power received in the grid, doesn’t establish direct nexus between the services received in power plant and the items manufactured in the factory hence, appellants are not eligible for benefit of Service Tax credit.”
Note: This is my personal views expressed based on available information/Act/Rule/Judgments etc. and shared to mitigate litigation and for smooth tax administration between trade and department. The same can not be final views. Learned Experts is requested to offer their Valuable guidance/views/ comment in the matter.