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 cost s. 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 definition can be considered to have been met. The Cenvat Credit Rules 2004 introduced with effect from 10.9.2004 are common to a manufacturer of dutiable goods as well as service provider providing taxable service.
Though the said rules talk not only about credit 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 credit, especially with regard to input services, are being questioned by department by construing the definition of “input service” rather narrowly. The courts have repeatedly held that the intention of cenvat credit rules is to avoid cascading effects and thus credit should be admissible on all the expenses which have been incurred in the business. The government could not accept this stand and had made certain amendments in the definition of input service w.e.f. 1.4.2011 to introduce certain restriction especially for those cases where the department had disputed the eligibility of credits but the courts had negated the stand of the revenue.
In this article, we shall look at the input services which are usually questioned especially in light of the revised definition of input services along with the decisions given by the courts most of which are invariably in favour of assessee. We have however not discussed the provision of Rule 6 of CCR 2004 as it would have to be discussed separately.
Definition of input service: The definition of input service w.e.f. 1.7.2012 is as below:
[(l) “input service” means any service, -
(i) used by a provider of output service for providing an output service; or
(ii) used by a 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 services used in relation to modernisation, 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, 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 upto the place of removal;
but excludes -
(A) service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act (hereinafter referred as specified services) in so far as they are used for -
(a) construction or execution of works contract of a building or a civil structure or a part thereof; or
(b) laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or
(B) services provided by way of renting of a motor vehicle, in so far as they relate to a motor vehicle which is not a capital goods; or
(BA) service of general insurance business, servicing, repair and maintenance, in so far as they relate to a motor vehicle which is not a capital goods, except when used by -
(a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by such person; or
(b) an insurance company in respect of a motor vehicle insured or reinsured by such person; or
(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee;
Above definition is in three parts: means part, inclusion part and exclusion part.
Important amendments in the definition viz a viz definition in existence prior to 1.4.2011:
Following important amendments had been carried out in the definition of input service in the revised definition.
Removal of word “set up” in the inclusion part of the definition: With omission of word “set-up” in the inclusive part of the definition, the credit will not be available on the expenditure incurred for set up of the factory of manufacturer or premise of output service provider.
Removal of word “such as” and “services used in relation to business”: These omission from the definition of input service was to counter the decision of Bombay High Court in case of Coca-Cola India Pvt Ltd, 2009 (242) ELT 168 and Ultra Tech Ultratech Cements, 2010 TIOL 745 HC Mumbai, in the aforesaid decision the honorable High court had expressed its view that "input service" is very wide and covers not only services, which are directly or indirectly used in or in relation to the manufacture of final products but also includes various services used in relation to the business Rule 3 has been amended to specify that the Cenvat credit would not be allowed on inputs on which duty has been paid under the benefit of notification no.1/2011. Keeping the principles of functionality alive as laid down in case of M/s Maruti Suzuki Ltd. - 2009-TIOL-94-SC.
Issues under Cenvat Credit and case laws:
Credit on outward transportation
Credit on outward transportation of goods has been an area of constant litigation between department and taxpayers since last few years. The department had been maintaining all the while that the question of claiming the credit would arise only in respect of service tax paid on transportation upto place of removal. The important question was what is the place of removal? As there was no definition of place of removal in the Cenvat Credit Rules, 2004 one had to look refer section 4 (3) (c) of the Central Excise Act, 1944. Also, circular number 87/8/2007 also spoke about concept of place of removal and had provided that place of removal could even be the buyer’s premise. The view was upheld by Punjab & Haryana High Court in Ambuja Cements v/s UOI {2009(236) ELT 431 (P&H)
Subsequently, the definition of place of removal has been inserted in the Cenvat Credit Rules vide Notification No. 21/2014-CE (NT) which is same as per Central Excise Act. It has also been clarified vide circular Circular No. 988/12/2014-CX, dated 20-10-2014 that payment of transport, inclusion of transport charges in value , payment of insurance or who bears the risk are not the relevant considerations to ascertain the place of removal. The place where sale has taken place or when the property in goods passes from the seller to the buyer is the relevant consideration to determine the place of removal. Hence, in light of the definition of place of removal being provided in the Cenvat Credit Rules, 2004 and the subsequent circular, each case needs to be independently examined to ascertain where property has transferred to buyer and if it at the buyer premise, credit would be eligible to manufacturer for service tax paid on transportation charges. It is suggested to explicitly mention in the agreement, purchase order, invoice etc. as to the place where property in the goods is transferred so that the claim to cenvat credit is not questioned by department for want of documentary evidence. Also, the charges towards transportation must be integral part of price of goods as held in case of Chhattisgarh HC in case of Lafarge India Ltd 2014 (307) E.L.T. 7 (Chhattisgarh).
Further, it has been clarified vide circular No. 999/6/2015-CX, dated 28-2-2015 that in case of export, the place of removal shall be Port/ICD/CFS from where export is made.
Credit on catering service
Credit on outdoor catering has always been subject matter of litigation. The point has been raised by department was whether these services had anything to do with manufacturing at all? Though there were certain contradicting decisions, but lately in the case of Stanzen Toyotetsu India (P) Ltd 2011 (23) S.T.R. 444 (Kar.) it has been held by HC that as the cost incurred in rendering such service is included in the cost of production, credit of the same is eligible.
Meanwhile, the definition of input service got amended w.e.f 1.4.2011 and excluded the services of outdoor catering from its definition when these services were primarily used for personal use or consumption of the employees. In light of the revised definition, it is likely that the department may not allow the credit on outdoor catering service. Also, in case of Bajaj Motors Ltd. 2015 (39) S.T.R. 85 (Tri. - Del.) credit has been rejected post 1.4.2011. But there is contrary view of Mumbai CESTAT in case of Hindustan Coca Cola Beverages Pvt. Ltd. 2015 (38) S.T.R. 129 (Tri. - Mumbai) it has been held that circular No. 943/4/2011-CX., dated 29-4-2011, specifically used words such as “used primarily for personal use or consumption of any employee”. Cost of outdoor catering service when borne by the company cannot be said to be primarily used by employees, these have been used in relation to business activities and form part of cost of final product. Hence, credit is admissible.
Credit on employee insurance:
Prior to 1.4.2011, these activities were considered to be in the nature of related to business and credit was allowed in case of Karnataka High Court in Commr. of C. Ex., Bangalore v. Stanzen Toyotetsu India (P) Ltd. - 2011 (23) S.T.R. 444 (Kar.) and in Commissioner of C. Ex., Bangalore v. Millipore India Pvt. Ltd. - 2012 (26) S.T.R. 514 (Kar.). However, after amendment of the definition, unless it falls in the means part of the definition, credit may not be admissible. There could be possibility to apply the ratio laid down in case of Hindustan Coca Cola Beverages Pvt. Ltd. that where cost borne by the company not by employee, credit is admissible.
Credit on works contract and construction service
These services have been excluded from the definition of input service when used for the specified purposes. This is again revenue biased approach of the government and has been resulting enhanced cost of business set up. Services of these natures could be discussed under following broad headings:
a. Set up of factory, warehouse, office, premise of SP: Credit not admissible after omission of word “set up” and specific exclusion of construction/works contract for civil structure.
b. Repair of existing premise: Credit could be admissible in the revised definition also as the repair has been specifically included in the inclusive part of the definition. Clarified by department vide Circular No. 943/4/2011-CX., dated 29-4-2011. Also held in case of Infosys Ltd. 2015 (37) S.T.R. 862 (Tri. - Bang.) that credit on repair admissible.
c. Works contract other than for civil work or foundation of CG: As the restriction is for works contract of civil work or for foundation of CG, if work contract service is received for other, credit of the same should be admissible.
Credit on mobile/landline phones:
Prior to 1.4.2011, the credit on mobile and landline phones installed outside factory premises was allowed. In case of Keltech Energies Limited, 2008 (10) S.T.R. 280 (Tri. - Bang.), credit of service tax paid on mobile phones and landline phones installed outside the factory in the residence of directors and company’s officials were held to be allowed. However, since omission of the word “activities related to business”, the credit could be questioned unless it can be established that these have been used directly or indirectly in the manufacture of final products or for providing output service. Connection should be taken in the name of company and certain percentage of total bill may be disallowed voluntarily attributing the same towards personal usages under intimation to department.
Credit on rent a cab service for transportation of employees
Credit on rent a cab service for picking up and dropping of employees has been upheld in case of Cable Corporation of India Limited v/s CCE, Nasik {2008 (12) STR598 (Tri- Mumbai) and many other judgments. However, the revised definition has specifically covered it in the exclusion part and hence the credit on the same may not be admissible.
Credit on CHA service and surveyor’s service
In case of export of goods, the place of removal is considered port/CFS/ICD from where the goods are shipped. Also clarified in circular No. 999/6/2015-CX. It has been held in the case of Rolex Rings P Ltd 2008 (230) E.L.T. 569 (Tri. - Ahmd.) and Fourrts (I) Laboratories Pvt. Ltd 2012 (277) E.L.T. 202 (Tri. - Chennai) that CHA and surveyor’s services relate to export business, hence credit of duty paid on such services is admissible to exporters as the place of removal is port. Important to note that Gujarat HC has admitted appeal of department against allowing credit on CHA service in case of Commissioner v. Encore Natural Polymers Pvt. Ltd. - 2015 (39) S.T.R. J34 (Guj). However, as per precedent decisions, credit on the same is available after revised definition also.
Credit of service tax charged on sales commission
Cenvat Credit Rules prior to 1.4.11 specifically allowed for marketing and sale promotion as eligible. Post April 2011 the activities relating to business was dropped however the specific activity of sales promotion was continued to be included in the definition. Several decisions including commissioner Of Central Excise, Ludhiana Versus Ambika Overseas [ 2011 (7) TMI 980 – P&H HC] affirmed this position. Further the CBEC Circular 943/4/2011 dt 29.4.11issued in Sl. No 5 clarifies that inspite of the “activities relating to business” being omitted as far as dutiable goods are concerned as the same is specifically set out and provisions to be read harmoniously, the eligibility remains clear.
The dispute got some support in the decision of commissioner of Central Excise, Ahmedabad–II vs M/S Cadila Healthcare Ltd. [ 2013 (1) TMI 304 – Guj HC] wherein this position was questioned. It unsettled to some extent the settled position of law that the sales commission was clearly eligible as an activity preceding sales.
The decision of ABB LTD. v/s Commissioner of C. Ex. & St., Bangalore [2009 (5) TMI 48 - CESTAT, BANGALORE] of the larger bench approved by the Karnataka High Court observes that the term including cannot be read restrictively, rather would expand. The latest decisions in Parars Motors manufacturing Co as well as Sekeria Busan Sugar Factory both of 2014 also confirm the eligibility of sales commission.
Conclusion
In this article, we have covered some of the input services which have been considerable litigation in the recent past. Many of the judgments which were rendered in the context of earlier definition may not be applicable after revised definition though principles laid down therein may be relevant now also.
By CA Madhukar N Hiregange
CA Ashish Chaudhary
Readers are requested to post their queries on madhukar@hiregange.com or ashish@hiregange.com
Tags Service Tax
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