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By CA Madhukar N Hiregange
& CA Srikantha Rao T
The concept of set off where an assessee adding value is able to set off the taxes on his purchases, is an important one which enables one to avoid the cascading effect of taxes and thereby control costs. Under Central Excise, the concept of set off as provided for by Cenvat Credit Rules 2004 allows a manufacturer of dutiable goods to avail cenvat credit of the duties of excise incurred on his inputs and capital goods as well as of service tax paid on input services. The Rules have specifically laid down as to what would fall under the definition of “input”, “input service” and “capital goods”. The question of claiming credit would arise only where the aforesaid definitions can be considered to have been met. The Cenvat Credit Rules 2004 introduced with effect from 10.09.2004 are common to a manufacturer of dutiable goods as well as a service provider providing taxable service. Though the said Rules talk not only about credits of duties of excise on inputs and capital goods but also of service tax paid on input services, and intend to be beneficial in nature, what is really happening is that the credits, especially with regard to input services, are being questioned by the department by construing the definition of “input service” rather narrowly. In this article, we shall look at the input services which are usually questioned along with the decisions given by the Tribunal most of which are invariably in favour of the assessee. We have however not discussed the provisions of Rule 6 of CCR 2004 as it would have to be discussed separately.
Definition of the term “input service”
As per Rule 2(l) of Cenvat Credit Rules 2004, “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, up to place of removal.
It includes services used in relation to –
a)      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,
c)      market research,
d)      storage up to the place of removal,
e)      procurement of inputs,
f)        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;
A reading of the aforesaid definition would reveal that while various clauses are self explanatory, one clause which merits attention is clause (f) dealing with “activities relating to business”. In the recent past there have been numerous instances where the assessees and departmental officers have differed in their views as to the services which could fall under this clause and the services which do not. Consequently, most of the litigation with regard to input services and cenvat credits of service tax paid on input services pertains to services which would normally fall under this category.
Before we proceed further, it would be pertinent to discuss certain concepts used in the definition of “input service” which would be necessary to understand the exact nature of the definition and its impact. A proper understanding of these concepts would enable the assessee to maximise the benefits of cenvat credits while at the same time, complying with the law.
Concept of “in relation to”
In order to understand this phrase and the manner in which it is to be construed, one would have to go through the decisions given by the Courts. In Doypack Systems (P) Ltd vs UOI (1988 (36) ELT 201 SC), the phrase “in relation to” was held to be a very broad expression which pre-supposed another subject matter and was held to have been used in an expansive sense.
Meaning of the term “include”
In Regional Director Vs High Land Coffee Works (1991 (3) SCC 617) which was also referred to in GTC Industries Ltd Vs CCE Mumbai (2008 (12) STR 468 (Tri-LB)), the word “include” was discussed and held to be generally used to enlarge the meaning of the preceding words and it was by way of extension, and not with restriction. The word ‘include’ was held to be 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 was so used, these words or phrases had to be construed as comprehending, not only such things as they signified according to their natural import but also those things which the interpretation clause declared that they would include.
Concept of “such as”
As per Random House Webster’s Unabridged Dictionary, the term “such as” means of the kind specified. In Jalal Plastic Industries Vs UOI (1981 (8) ELT 653 (Guj)) which has also been referred to in GTC Industries Ltd Vs CCE Mumbai (2008 (12) STR 468 (Tri-LB)), the Gujarat High Court has held that the products which follow the expression “such as” are illustrative and not exhaustive. Thus as far as the definition of the term “input service” was concerned, the term “such as” could not limit the scope of the definition once it was used after the usage of the word “include” in the said definition.
A reading of the various case laws decided at Tribunal or in Courts, have revealed that the departmental officers invariably ignore these finer nuances while questioning the manufacturer’s eligibility to cenvat credits on input services. We shall look at some of the input services questioned from the point of view of cenvat credit availment.
Cenvat Credits and case laws
Credit on outward transportation – an activity relating to business
One of the aspects which has seen considerable litigation in the recent past is that of cenvat credit of service tax paid on outward transportation of goods. The department had been maintaining all the while that the question of claiming credit would arise only in respect of service tax paid on transportation up to place of removal. The question now was what was place of removal. One had to refer Section 4(3)(c) of Central Excise Act 1944 for this. Circular 97/8/2007 ST dated 23.08.07 also spoke about the concept of place of removal and this had to be ascertained depending on the sale contract. As per this Circular, place of removal could even be the buyer’s premises where ownership till delivery at his place was retained by the seller and the risk of loss during transit was that of seller and the freight charges were an integral part of the price of the goods. This view was also upheld by the Punjab and Haryana High Court in Ambuja Cements Ltd Vs UOI (2009 (236) ELT 431 (P&H)). The Larger Bench of Bangalore Tribunal in ABB Ltd and India Cements Ltd Vs CCE & ST (2009-TIOL-830-CESTAT-Bang-LB) has however sought to put the matter to rest by dismissing the contention of the department and holding that transportation of goods up to customers’ place was activity relating to business and hence credit could not be denied by relying on specific coverage of outward transportation in the said definition. 
Apart from outward transportation, there were various other input services which were questioned by the department as it felt there was no nexus between those services and manufacturing activity in particular though the services were very much a requirement for the assessee’s business. What is to be noted here is that the definition does not require direct nexus of the services received with the manufacturing process. Many a time services may be required for running one’s business effectively and efficiently which would enable the manufacturer to also carry on his operations smoothly. These services would also be covered within the meaning of the definition of “input service”. This reluctance on the part of the departmental officers to acknowledge certain services as being very much a part and parcel of assessee’s business has in fact led to a substantial increase in litigation over a period of time especially in relation to cenvat credits. Moreover, the department had ignored the usage of the phrases and words like “in relation to”, “such as” and “includes” used in the definition of input service which led to a requirement to read the definition comprehensively or expansively rather than as one which sought to restrict credits. We shall now look at other services which have been subject matter of litigation over the years.
Credits on canteen service, group health insurance and rent a cab services
The department had also been questioning all the time, credits in respect of service tax paid on services of outdoor catering required for providing canteen facility to employees, group health insurance as well as rent a cab service for picking up employees from their residences and dropping them off thereat. The point here raised by the department was whether these services had anything to do with manufacturing at all? These input services have been subject matter of contradicting decisions over a period of time though of late things seem to be moving in favour of the assessee/manufacturer. In Stanzen Toyotetsu India (P) Ltd Vs CCE Bangalore (2009 (14) STR 316 (Tri-Bang)), credit was held to be available on service tax paid on these input services as these services were held to have facilitated manufacturing indirectly and their cost factored into the cost of the product. Credit on rent a cab service for pick up and dropping of employees had also been upheld earlier in Cable Corporation of India Ltd Vs CCE Nasik (2008 (12) STR 598 (Tri-Mumbai)) on similar grounds.
In GTC Industries Ltd Vs CCE Mumbai (2008 (12) STR 468 (Tri-LB)), credit on outdoor caterer’s service for providing canteen facility to employees was allowed by holding such facility to be requirement as per statute and also due to the fact that the cost of such service is generally part of the cost of production. Another important aspect which was discussed was the consideration of the context and the purpose for which Cenvat Credit Rules 2004 were formulated, in deciding on the issue as to credit admissibility.  
Credit on mobile phones and landlines outside factory
In Keltech Energies Ltd Vs CCE Mangalore (2008 (10) STR 280 (Tri-Bang)), the credit of service tax paid on mobile phones and landlines installed outside the factory in the residence of Directors and Company’s officials were held to be available. The contention of the department regarding installation outside factory was discarded by the Tribunal and credits allowed even in Conzerv Systems (P) Ltd Vs CCE Bangalore (2009 (13) STR 638 (Tri-Bang)) where a reference was made to Circular 97/8/2007 ST dated 23.08.07 where credit was allowed as long as usage was for providing output services or for use in or in relation to manufacture of finished goods, as there was no restriction on usage of phones outside factory in the definition of input service.
Credit on transportation of returnable packages
In Kerala Minerals and Metals Ltd Vs CCE Thiruvanathapuram (2009 (13) STR 390 (Tri-Bang)), stay was granted by the Tribunal on recovery of cenvat credit availed by the manufacturer on service tax paid on transportation of empty titanium dioxide cylinders back to the factory. The said service was held to be an input service as gas could not be transported without the cylinders. In our view, even service of transportation of goods by road in relation to return of packaging materials to the factory for further use would have to qualify as input service.
Credits in respect of functions which are social in nature
In Toyota Kirloskar Motors (P) Ltd vs CCE (LTU) Bangalore (2008 (12) STR 498 (Tri-Bang)), the Tribunal disallowed cenvat credit of service tax paid by the manufacturer on pandla and shamiana service as well as on photography services used during Kannada Rajyotsava celebrations and inauguration of Kengeri police station. These functions were held to be social functions andthe Tribunal was of the view that the same could not be construed as activities relating to business. The authors are however of the view that this decision can do with a review. While the inauguration of the police station can be construed as an exercise which could result in goodwill for the company, the Rajyotsava celebrations could be regarded as one which could boost employee morale and consequently result in better employee productivity.
Credits on CHA services and surveyors’ services on export
In Rolex Rings (P) Ltd Vs CCE Rajkot (2008 (230) ELT 569 (Tri-Ahmd)), the Tribunal allowed cenvat credit of the service tax paid on services of CHA and surveyor used by the manufacturer for export of goods. The Tribunal not only regarded the said services as activities relating to business but also relied on the Circular 97/8/2007 ST dated 23.08.07 in regarding the port area as place of removal of goods for export. Thus services received up to the port area were capable of being regarded as input services.
In Metro Shoes (P) Ltd Vs CCE Mumbai (2008 (10) STR 382 (Tri-Mumbai)), the showroom from where the goods were sold in retail was held to be place of removal and consequently services of commission agent, GTA, C&F, courier, telephone services were held to be input services on which credit was available.
Credits on merger charges, charges for issuance of NOC, annual custody fees and maintenance of fax machine at residence of company’s executive etc
In Aditya Birla Nuvo Ltd Vs CCE Bhavnagar (2009 (14) STR 304 (Tri-Ahmd)), the credit of service tax paid on aforesaid services was allowed as the said services were held to fall under the categories mentioned in the definition namely, financing and share registry as well as relying on the usage of the words “and includes” in the definition which made it expansive. As far as fax machine maintenance was concerned, the arguement adopted was that when credit of service tax on telephones could be allowed, the same could not be denied in case of fax machines.   
Credits on insurance on aircrafts and vehicles and captive power plant
In Reliance Industries Ltd Vs CCE Rajkot (2009 (14) STR 287 (Tri-Ahmd)), stay was granted on recovery of cenvat credit availed on service tax paid on insurance cover on aircrafts and vehicles. The said service was held to be included within the purview of activities relating to business.
Cenvat credit on cleaning services and repairs and maintenance of residential colonies
In Manikgarh Cements Vs CCE Nagpur (2009 (13) STR 293 (Tri-Mumbai)), the services of repairs and maintenance, cleaning, manpower recruitment, civil construction etc used in/provided for the residential colony of manufacturer were held to be input services and credits admissible. The tribunal had relied on an earlier ruling pertaining to the said assessee and though the matter had been taken up by the Department in Appeal at High Court, the decision was also followed in Ultra Tech Cement Ltd Vs CCE Nagpur (2009 (13) STR 694 (Tri-Mumbai)) where security agency service in residential colony was held to be input service on which credits would be admissible.
Credit on advertising service relating to final product when the manufacturer supplies intermediate product
In Coca Cola India (P) Ltd Vs CCE Pune (2008 (223) ELT 69 (Tri-Mumbai)), credit of service tax paid on advertising services in relation to aerated water was denied as the manufacturer who availed the credit happened to be manufacturing concentrates and not aerated water. What was cleared on payment of duty to bottlers was concentrate and the bottlers came up with aerated water for sale. This in our view is a decision which can be reviewed considering the facts and circumstances of each case (especially the business model in place) as advertising indirectly facilitates sale of concentrates. 
Credits on services in relation to power generation facility outside the factory premises
In L.G. Balakrishnan & Brothers Ltd Vs CCE Coimbatore (2009 (13) STR 619 (Tri-Chennai)), the Tribunal granted a stay with regard to recovery of cenvat alleged to have been wrongly availed by the manufacturer on input services in relation to setting up and maintenance of windmills for generating power which was transferred to the factory through the Tamil Nadu Electricity Board grid. Input services included activities relating to business and there was no stipulation as to input services having to be received in factory premises.
In this article we have covered some of the input services which have seen considerable litigation in the recent past. The decisions given by the Tribunal and Courts would go a long way in making it easier for the manufacturer to form an idea as to the input services where he would be entitled to claim cenvat credits.
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Published by

Madhukar N Hiregange
(Chartered Accountant)
Category Excise   Report

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