ANALYSIS OF RULE 2(l) of CENVAT CREDIT RULES, 2004 - Input Service

[Mr. M. GOVINDARAJAN]

INTRODUCTION:

Service tax like Cenvat is basically a value added tax which is operated through credit mechanism.  In ‘All India Federation of Tax Practitioners V. Union of India’ – [2007 -TMI - 1556 - Supreme Court], the Supreme Court held that service tax is a value added tax which in turn is a destination based consumption tax in the sense that it is on commercial activities and is not a charge on the business but on the consumer and it would legally be leviable only on services provided within the country.  Just as excise duty is a tax on value addition on goods, service tax is on value addition by rendition of services.   Therefore for our understanding, 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, practicing Chartered Accountants, practicing Company Secretaries, security agencies, tour operators, event managers, travel agents etc.,   The burden of service tax must be borne by the consumer and not by any intermediary i.e., manufacturer or service provider.   In order to avoid the cascading effect, the benefit of CENVAT credit on all input stage goods and services is allowed.  Consequently refund is allowed in case of export of goods/services.

CENVAT CREDIT:

Prior to 2004-05 excise duty paid on input and capital goods was available as credit towards payment of excise duties on final products.  Similarly service tax paid on input service was allowed as credit to be utilized against payment of service tax on output service.  There was no provision for utilizing credit of excise duty towards payment of service tax liability or vice versa.   The CENVAT Credit Rules, 2004 gives the introduction of CENVAT credit across goods and services.  Rule 2(k) defines the term ‘input’ and Rule 2(l) defines the terms ‘input service’   In this article the provisions contained in Rule 2(l) meant for ‘input service’ is analyzed since many a case had arisen, is arising and will arise in interpretation of the said Rule.

INPUT SERVICE:

Rule 2(l) of CENVAT Credit Rules, 2004 defines the term ‘input service’ as any service-

1. used by a provider of taxable service for providing an output service; or
2. 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,

and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or 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 and security, inward transportation of inputs or capital goods and outward transportation up to the place of removal.

TWO PARTS OF THE DEFINITION HAVE TO BE CONSTRUED HARMONIOUSLY?

The definition of the term ‘input service’ has two parts-

• the ‘means’ part which is the main part of the definition; and
• ‘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 the manufacture of final products and clearance of the final products from the place of removal. The definition is one of very wide connotation.   It covers within its ambit all services received by the manufacturer of final products as long as they related to the manufacturing business of the assessee.

A service would qualify as ‘input service’ even if it is not covered by the ‘means’ portion, if it satisfies the ‘includes’ portion of the definition.    Therefore in order to qualify as an input service, a service has to fall either within the first part of the definition or the second part of the definition.

The Mumbai Tribunal in ‘SEMCO Electrical Private Limited V. Commissioner of Central Excise, Pune’ – [2009 -TMI - 76184 - CESTAT, MUMBAI] held that it is well settled that every clause of 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.   A bare mechanical representation of words and application of a legislative intent is devoid of concept and purpose will reduce the most of the remedial and beneficent legislation to futility.  To be literal in the meaning is to see the skin and miss the soul.   Words and phrases and rules occurring in a statute are to be read together and not in an isolated manner.  Thus the two parts of the definition are to be construed harmoniously.

In ‘Bombay Woollen Mills Private Limited V. Union of India’ – [1988 -TMI - 42217 - HIGH COURT OF JUDICATURE AT BOMBAY] it was held – “under the well known rules of interpretation of statutes, whenever legislative uses the words ‘means and includes’, it necessarily means that what is included after the word ‘includes’ does not normally from 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.  May be, the legal fiction it has been so.  May be, 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”.

VARIOUS LIMBS OF DEFINITION:

The definition of ‘input service’ can be effectively divided into the following five categories, in so far as a manufacturer is concerned:

• Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products;
• Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal;
• Services used in relation to setting up, modernization, renovation or repairs of a factory, or an office relating such factory;
• Services used in relation to advertisement or sales promotion, market research, storage up to the place of removal, procurement of inputs;
• Services used in relation to activities relating to business and outward transportation up to the place of removal.

Each of the above limbs of the definition of input service is an independent benefit/concession/exemption. If an assessee can satisfy any one of the limbs of the above benefit/exemption/concession, 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.   For example, 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.

Analysis of the terms ‘directly or indirectly in or in relation to manufacture’:

As already discussed in the previous para the definition of ‘input service’ in respect of the manufacturer includes the following:

• Any service used by the manufacturer whether directly or indirectly, in or in relation to the manufacture of final products;
• Any service used by the manufacturer whether directly or indirectly, in or in relation to the clearance of final products from the place of removal.

A manufacturer can prove easily the services utilized directly for the manufacturing of final products or in clearance of final products from the place of removal.  But it is difficult to prove all the services indirectly used for the same resulting in many litigations in this regard.  Here some of the decisions of the Tribunals which decided by giving interpretation based on the facts and circumstances of each case.

In ‘Commissioner of Central Excise, Pune-II V. Raymond Zamaiti Private Limited’ – [2010 -TMI - 77471 - CESTAT, MUMBAI] The respondents have constructed the compound wall around their factory any goods lying within the area of the compound wall would be considered as laying the factory as per the site plan filed with the Department for registration.  The construction of compound wall is necessary to run the factory or not depends on the activity taken over by the manufacturer or as per their requirement for manufacturing activity.   In this case from the facts it emerges that the compound wall is an integral part of the factory.  Hence the credit taken over the input service by the respondent on the construction of the compound is eligible to respondent.

In ‘Commissioner of Central Excise, Nagpur V. Manikargh Cement Works’ – [2009 -TMI - 75925 - CESTAT, MUMBAI] it was held that construction service, repairs and maintenance service, manpower recruitment service and clearing service all of which provided by respective service providers at the residential colony outside the assessee’s factory.   Assessee failed to establish nexus between any of four services and the manufacture or clearance of excisable goods, the benefit of CENVAT credit in respect of such service cannot be allowed.   The Tribunal further held that any service which is apparently covered by parameters of inclusive part of definition of input service should also satisfy the quintessential requirements of main part of the definition.

In ‘Nelsun Paper Mills Ltd., V. Commissioner of Central Excise, Trichy’ – [2010 -TMI - 76575 - CESTAT, CHENNAI] it was held that CHA service is used for clearance of imported inputs.   It is used for manufacture of dutiable finished goods. CENVAT credit is admissible.

In ‘ISMT Ltd., V. Commissioner of Central Excise’ – [2009 -TMI - 76050 - CESTAT, MUMBAI] the Tribunal held that a garden creates a better atmosphere and environment which increases the working efficiency of the factory.   In that event credit is entitled to the appellant.

In ‘Bal krishna Industries Limited V. Commissioner of Central Excise, Aurangabad’ – [2010 -TMI - 77322 - CESTAT, MUMBAI] it was held that providing the facilities of toiler and water are the basic requirement to run the factory and non providing these facilities may affect the production, hence maintenance of house keeping service is essential and are related to the manufacturing activity.

In ‘Commissioner of Central Excise & Customs, Guntur V. Hindustan Coca-cola Beverages Private Limited’ – [2010 -TMI - 77155 - CESTAT, BANGALORE], the Department contended that security agency service availed for godowns are not related to manufacture directly or indirectly.   The Tribunal held that the security agency service is used for ensuring safety of goods stored in godown.   Pest Control service is availed is to ensure clean and healthy environment in factory premises by prevailing pests credit is admissible.

Analysis of the term ‘includes’:

The definition of input services uses the term ‘includes’ which enhances the scope of the definition as it is inclusive in nature.  Therefore, the definition cannot be taken one of restrictive approach.  The Supreme Court explained the scope of the term ‘includes’ in ‘Regional Director V. High Land Coffee Works’ – (1991) 3 SCC 617.   In this case the Supreme Court held that the word ‘include’ in the statutory definition is generally used to enlarge the meaning of the preceeding words and it is by way of extension, and not with restriction.   The word ‘include’ is very generally used in interpretation clause.   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 considered as comprehending, not only such things as they signify according to their natural import but also these things which the interpretation clause declares that they shall include.

Analysis of the term ‘such as’:

The definition of input service uses the term ‘such as’ which is purely illustrative but not exhaustive.  The meaning of the term ‘such as’ in Concise Oxford Dictionary is for example or of a kind that and Chambers dictionary it means for example.

In ‘Good Year India Ltd., V. Collector of Customs’ – [1997 (9) TMI 100 - Supreme Court of India] the Supreme Court held that the words ‘such as stainless steel, nickel monel, incoloy, hastelloy’ in sub heading (2) are only illustrative of the various metals from which valves can be made but the said description is not exhaustive of the materials.

In ‘Force Motors Limited V. Commissioner of Central Excise, Pune’ – [2008 -TMI - 30665 - CESTAT MUMBAI] it was held that activities specified after the phrase ‘such as’ are only illustrations and examples and not exhaustive.   Therefore an activity other than those illustrated but related to a business will also cover under the definition of ‘input services’.

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 the business of the assessee would be covered as input service.

Analysis of the term ‘activity’:

The word ‘activities’ in the phrase ‘activities relating to business’ signifies the wide import of the phrase.   The Rule making authority has not employed any qualifying words before the word ‘activities’ like ‘main’ activities or essential activities etc.,   Therefore all and any activity relating to business fall within the definition of ‘input service.  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.

Analysis of the term ‘relating to’:

The definition of input service employs the purchase ‘activities relating to business’.  The words ‘relating to’ further widen the scope of the expression ‘activities relating to business’.  This is substantiated by the judgments of the courts.

In ‘Doypack System (P) Limited V. Union of India’ – [1988 -TMI - 35449 - SUPREME COURT OF INDIA] the Supreme Court held that the expression ‘in relation to’ is a very broad expression which pre-supposes another subject matter.   These are words of comprehensiveness which might, both have a direct significance as well as indirect significance depending on the context.

In ‘Shyam Lal V. M. Shayamlal’ –AIR 1933 ALL. 649 the Court held that the term ‘relate’ is 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 for contraction.

Analysis of the term ‘business’:

Business is an integrated/continuous activity and is not confined restricted to mere manufacture of the product.   Therefore, activities in relation to business cover all the activities that are related to the functioning of a business.   Therefore, the term ‘business’ cannot be given a restricted definition to say that business of a manufacturer is to manufacture final products.   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.,

The Karnataka High Court in the case reported at 2001 (121) STC 783 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.   Asset 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.

The Supreme Court in ‘Mazgaon Dock Limited V. Commissioner of Income Tax and Excess Profits Tax’ – AIR 1958 SC 861 held that the word ‘business’ is, as has often been said, one of the wide import and in fiscal statutes, it must be construed in a broad rather a restricted sense. 

In ‘Narrain Swadesh Weaving Mills V. Commissioner of Excess Profits Tax’ – 1955 1 SCR 952 the Supreme Court held that the word ‘business’ connotes  some real, substantial and systematic or organized course of activity or conduct with a set purpose.

Analysis of the terms ‘activities relating to business’:

The terms ‘activity’, ’relating to’ and ‘business’ are analyzed in the above said paras. Much litigation is being floated in interpretation of the term ‘activities relating to businesses. For availing CENVAT credit for input service the service provider is to prove that the said service is falling under the definition of ‘input service’ or it will fall under the meaning of the terms ‘activities relating to business’.  Otherwise there will be the possibility reversal of CENVAT credit and payment of interest and penalty.  The Revenue also interpreted the activities much in disallowing the CENVAT credit. The said terms is being analyzed with reference to the following case laws:

In ‘Victor Gaskets India Limited V. Commissioner of Central Excise’ – [2008 -TMI - 4237 - CESTAT MUMBAI], it was held that the credit of service tax paid on ‘outdoor catering service’ received at the canteen of the manufacture would be available in as much as the definition of ‘input service’ is very wide and although ‘outdoor catering service’ has not been specifically stated in the list of ‘activities relating to business’ under the inclusive part, yet it would qualify as input service.   But on the other hand the Tribunal in ‘Commissioner of Central Excise V. Mahindra Sona Limited’ – [2008 -TMI - 4012 - CESTAT MUMBAI] held that the ‘outdoor catering service’ received in the canteen at the factory is not used in or in relation to the manufacture of the final product nor can it be said to be an activity relating to business.  Noting the divergent views, the Larger Bench in ‘Commissioner of Central Excise V. GTC Industries Limited’ – [2008 -TMI - 31592 - CESTAT MUMBAI], approved the view taken in Victor Gasket India Limited case. 

In ‘Force Motors Ltd., V. Commissioner of Central Excise, Pune’ – [2009 -TMI - 75797 - CESTAT, MUMBAI] the aircraft, which is stationed at airport is used by the appellant for the business activities and this stand is taken by the appellant before the lower authorities which was not declined by lower authorities.   Therefore the Tribunal held that the services rendered by Airport of India and the service tax charged by them would cover under the definition of ‘input service’.       

In ‘Hindustan Zinc Ltd., V. Commissioner of Central Excise, Jaipur – II’ – [2009 -TMI - 76921 - CESTAT, NEW DELHI] it was held that the assessee has to establish that the service was rendered relating to business activity. The contention of the appellant that any expenses incurred relating to business activities would be treated as ‘input service’ cannot be accepted unless it is established by evidence that the service was rendered for the purpose of business include advertisement or sales promotion as claimed by the appellant.  It is noted that ‘Event Management’ service is provided in relation to planning, promotion, organizing or presentation of any art, entertainment, business, sports or any other event. It appears that in the present case ‘Event Management’ service was provided for entertainment of employees for expansion of Chanderia Plant. The appellant failed to produce any profile to substantiate that the even was organized in order to sales promotion/advertisement and upheld the adjudication order.

In ‘Sidel India Private Limited V. Commissioner of Central Excise, Pune – I’ – [2009 -TMI - 76444 - CESTAT, MUMBAI] the CENVAT credit on mobile phone services was denied by adjudicating authority after verifying the mobile phone bills and after verification the Adjudicating Authority has arrived at that these mobile phones have been used for business as well for person purposes by the officials of the appellant company.  The appellant company does not have any control over the use of mobile phone when given to the employees.   On examination of the phone bills filed by the appellant the Tribunal found that from face of the bills it cannot be determined that for what purposes the mobile phones are being used and there is no finding by adjudicating authority except from the bills that these mobile phones are not used by the employee for business purpose only.  No statement of any employee is on record with reference to the use of the phones.   Moreover appellant company has given the mobile phones to their employees for the use of business purposes only, which was never controverted by adjudicating authority through any evidence.The Tribunal found that the appellant has proved that mobile phones are being given to the employees for the use of business purpose and not for any other purpose. The Tribunal allowed the CENVAT credit and set aside the impugned order.

In ‘Commissioner of Customs & Central Excise, Raipur V. HEG Limited’ – [2009 -TMI - 75926 - CESTAT, NEW DELHI] it was held that the commission on sale is clearly expenses relatable to sales promotion and is covered under the definition of ‘input service’ which specifically includes ‘sales promotion’ and therefore the same are to be allowed. Credit on courier services has been allowed by the Commissioner (Appeals) holding the same has been used in connection with the business activity of the company.   Similar is the finding in respect of the other three services viz., mobile services, rent-a-cab service and the services for which commission on sale was paid.   These services are clearly connected with the business activities of the company.   Therefore the findings of the Commissioner (Appeals) in this regard are legal, proper and reasonable.

In ‘Nav Bharat Tubes Limited V. Commissioner of Central Excise, Jaipur – I’ – [2009 -TMI - 77108 - CESTAT, NEW DELHI], it was held that the service of procuring sales articles and collecting payments from customers is to be treated as service in relation to business and hence covered by definition of input service.

In ‘Commissioner of Central Excise V. GTC Industries Ltd.,’ – [2008 -TMI - 31592 - CESTAT MUMBAI] it was held that the expenditure on all services which have a bearing on the cost of production would have to be treated as input service relating to a business.

CONCLUSION:

Either the manufacturer or the output service provider is benefited in availing CENVAT credit.  The definition of the term ‘input service’ plays a vital role in availing CENVAT credit.  Interpretation of the various terms in the definition floated many a case as discussed above.   These are only examples but not exhaustive.   However the definition of ‘input service’ has been changed by the budget notification.   It will take some time to analyze the new definition with reference to decided case laws.