WHETHER SERVICES RECEIVED BY CORPORATE OFFICE ARE HAVING NEXUS WITH THE MANUFACTURING ACTIVITIES?

[Mr. M. GOVINDARAJAN]

A business has almost more than wing – say administration, manufacturing, marketing, sales, finance etc., The business may have all these wings in the same premises or separate premises in the same town or the same may be distributed in a district or state or even out of the state. In such a situation the corporate office may be situated in one place and the factory may be in another place. Generally service tax registration is taken at the place where the service is provided. For the purpose of corporate office the service tax provisions provide for the corporate office for taking credit on input services received by the corporate office and distribute the same to its units where service tax is paid. The issue to be discussed in this article is whether services received by Corporate Office are having nexus with the manufacturing activities with reference to the decided case law.

In ‘Thiru Arooran Sugars Limited V. Commissioner of Central Excise, Trichy’ – 2013 (9) TMI 96 - CESTAT CHENNAI the appellant is a manufacture of excisable goods and they avail benefit of CENVAT Credit Rules, 2004.   The corporate office of the appellant at Chennai in their capacity as ‘input service distributor’ as envisaged in the CENVAT Credit Rules, 2004 passed on to their factory at Papanasam, Thanjavur for utilization for payment of excise duty. The Revenue disputed the credit availed by the Corporate office in respect of rent-a-cab services, telephone services and Contract bus services for the period from 2006 – 07 to 2010-11.   The Adjudicating Authority held that the definition of ‘input service’ can extend only to services which have a proximate nexus to manufacturing activity, the definition cannot be extended to the services received at corporate office for officers and executives working in that office providing rent-a-cab services.   The Revenue was of the opinion that the said services are only a welfare activity and not activity relating to manufacture. The Adjudicating Authority further held that unless it is demonstrated that the manufactured product cannot emerge without the service in question the service cannot be considered as input service.

The appellant filed appeal before the Commissioner of Central Excise (Appeals).  The Commissioner (Appeals) held that rent-a-cab, telephone and contract bus services are used by the officers and executives at their corporate office.  The appellants did not produce any evidence either direct or corroborative to show that such service used by the officers and executives is in or in relation to manufacturing activity.  Therefore, it is clear that the claim made by appellants is not authentic as the impugned services for officers and executives was purely for personal reasons like comfort & is a welfare measure only as a part of the employment. The appellants further failed to prove that providing of such services resulted either in completion of the manufacturing activity at a faster pace or in enhancement of the manufacturing activity.   It is not the case of the appellants that these services have been utilized by the executives only in relation to procurement of raw materials, sale of finished goods and connected business activities.   Nor any official purpose like establishing nexus with business of manufacture is established. Thus the nexus of service with the claim made by them clearly falls short of any cogent reason. When the services of rent-a-cab and contract bus services, if provided to workers to reach the factory premises in time, then it could be said that the same is having a direct bearing on the manufacturing activity or at any rate activity relating to business. On the other hand provision of these services to executives of corporate office, by no stretch of imagination can be considered to have any bearing on the manufacturing activity. Rent-a-cab service used for bringing employees to work in the factory of manufacture of goods alone can be considered as an activity in relation to the manufacture of goods or as activity relating to business.   Consequently, the services claimed to be used by the appellants are not in relation to the manufacture of final products and hence such input service credit availed by the appellants, is ineligible read with the definition of input service under CENVAT Credit Rules, 2004.

The appellants filed appeal before the Tribunal. The appellants contended as below:

• An input service being intangible cannot be seen in the final product unlike in the case of the inputs;
• Their corporate office is managing their business but for which the manufacturing activity cannot go on;
• No business can run by just manufacturing goods;
• Therefore the services availed by corporate office cannot be considered as input runs contrary to the plain meaning of the definition.

The revenue reiterated the decisions taken by the Commissioner (Appeals).

The Tribunal heard both sides. The Tribunal observed that the argument of the Revenue is not apply to transportation from residence to factory and back will not apply to transportation of executives and employees from residence to corporate office and back. This argument is almost like the argument that a factory worker may take during wage negotiation that the entire business depends on them which is not correct. If there is no management by the corporate office, a manufacturing organization cannot survive – finance cannot be procured, raw materials cannot be purchased, manufactured goods cannot be sold and so on.   So the argument to separate the corporate office from manufacturing activity, for the purpose of deciding the eligibility to CENVAT credit on services received, is flawed especially having regard to the fact many services usually received by corporate office is listed specifically in the inclusive portion of the definition of input service. The concept of ‘input service distributor’ as defined in Rule 2(m) of the CENVAT Credit Rules, 2004 also implies allowing credit of services availed by an office which cannot utilize the credit in the case of a corporate office.

The Tribunal held that in the matter of extending CENVAT credit to these services the Tribunal did not see any distinction that can be made between the factory and corporate office going by the provisions in CENVAT credit Rules, 2004. Though the above findings are with reference to rent-a-cab service similar logic should apply to contract bus service and telephone service.   In the case of telephone case the clarification issued in the Circular No. 97/8/2007-ST, dated 23.8.2007 is very relevant. However the Commissioner (Appeals) recorded that the appellant has not produced evidence to show that there is nexus between the manufacturing activity and the services in question. The Tribunal asked what sort of nexus is being asked for. Is it necessary to show what was talked in each call through each of the telephone in respect of which CENVAT credit is claimed? Demand for such demonstration can only lead to meaningless harassment to the assessees. Where the expenditure is incurred by the company in its books of account there is a presumption in favor of the assessee that the service is availed in relation to business. So long as Revenue has not proved anything to the contrary the Tribunal saw no merit in the contentions of the Revenue.