Meaning & scope of Input service

[Dinesh Kumar Agrawal]

Presently, ninety seven services are subject to levy of service tax and new services are added in the tax net every year. In the Finance Budget 2006-07, six new services have been brought within the tax net. Service tax is born by every person, whether he is a manufacturer or dealer or service provider or a consumer. In case of service tax paid/born by the manufacturer or a service provider, a facility of setoff of service tax paid is available. This article attempts to demystify the setoff facility.

As per Rule 3(1) of the Cenvat credit Rules, 2004 ('the Credit Rules') a manufacturer or producer of final products or a provider of taxable service is allowed to take credit ('Cenvat credit') of the service tax leviable under section 66 of the Finance Act, 1994 paid on any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, 2004. Further, as per Rule 3(4) of the Credit Rules, Cenvat credit may be utilized for payment of any duty of excise on any final product or payment of service tax on output service.

As per Rule 2(l) of the Credit Rules, "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 from 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 an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto 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 upto the place of removal.

The first leg of the definition could be dissected as under:

In the case of service provider used by a provider of taxable service for providing an output service; and

In the case of manufacturer

(i)   used whether directly or indirectly, in or in relation to the manufacture of final products and

(ii)   used whether directly or indirectly, in or in relation to the clearance of final products from the place of removal.

The second leg of the definition which is commonly called 'includes' portion could be dissected as under:

Services used in relation to

(i)   setting up, modernisation, renovation or repairs of a factory, premises of provider of output service or an Office relating to such factory or premises,

(ii)  advertisement or sales promotion,

(iii)  market research

(iv)   storage up to the place of removal,

(v)  procurement of inputs,

(vi)  activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security,

(vii)  inward transportation of inputs or capital goods and outward transportation up to place of removal.

The first leg of the definition uses phrases 'directly or indirectly, in or in relation to'. Distinction between the services used in manufacture and service used in relation to manufacture is too thin. In the case of Tamilnadu Kalyan Mandapam Association vs Union of India 2004 -TMI - 135 - (SUPREME COURT OF INDIA), the Hon'ble Supreme Court in Para 46 of the judgment has observed that

"the phrase "in relation to" has been construed by the Apex Court to be of the widest amplitude. In M/s. Doypack Systems Pvt. Ltd. v. Union of India and Others - 1988 2010 -TMI - 35449 - SUPREME COURT OF INDIA, this Court observed as under:

"The expressions 'pertaining to', 'in relation to' and 'arising out of', used in the deeming provision, are used in the expansive sense. The expression 'arising out of' has been used in the sense that it comprises purchase of shares and lands from income arising out of the Kanpur Undertaking. The words "pertaining to" and "in relation to" have the same wide meaning and have been used interchangeably for among other reasons, which may include avoidance of repetition of the same phrase in the same clause or sentence, a method followed in good drafting. The word 'pertain' is synonymous with the word 'relate'. The term 'relate' is also defined as meaning to bring into association or connection with. The expression 'in relation to' (so also 'pertaining to') is a very broad expression which presupposes another subject matter. These are words of comprehensiveness which might have both a direct significance as well as an indirect significance depending on the context."

47. In Renusagar Power Co. Ltd. v. General Electric Company and Another (1984) 4 SCC 679, this Court observed as under:

"Expressions such as "arising out of" or "in respect of" or "in connection with" or "in relation to" or "in consequence of" or "concerning" or "relating to" the contract are of the widest amplitude and content and include even questions as to the existence validity and effect (scope) of the arbitration agreement."

48.  In Thyssen Stahlunion GMBH v. Steel Authority of India Ltd. (1999) 9 SCC 334, this Court observed as under:

"The phrase "in relation to arbitral proceedings" cannot be given a narrow meaning to mean only pendancy of the arbitration proceedings before the arbitrator. It would cover not only proceedings pending before the arbitrator but would also cover the proceedings before the court and any proceedings which are required to be taken under the old Act for the award becoming a decree under Section 17 thereof and also appeal arising thereunder. The contention that if it is accepted that the expression "in relation to arbitral proceedings" would include proceedings for the enforcement of the award as well, the second limb of Section 85(2)(a) would become superfluous and cannot be accepted."

In view of the above, it transpires that 'in or in relation to the manufacture' means, the input or input services has been used during a process while manufacturing the product. The input need not form part of final product. More ever input service consumed in manufacture can never be part of the final goods. Thus the term 'in or in relation to manufacture' is a very wide term and covers all service inputs which have direct or indirect nexus with the manufacturing process.

The second part of the first leg of the definition pertains to services availed for clearance of goods from the place of clearance. As per section 4(3) (c) of the Excise Act, place of removal means:

i. a factory or any other place or premises of production or manufacture of the excisable goods;

ii.  a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty;

iii.  a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after there clearance from the factory; from where such goods are removed.

The salient features of the above definition is

(i)    it can be a factory, a warehouse, a depot, premises of a consignment agent or any other place or premises

(ii) goods are to be sold by the manufacturer, and

(iii) sold goods are removed.

In other words, any premise from where the final goods are sold by the manufacturer is deemed as 'place of removal'. Re-sale of goods by the dealers either by wholesalers or retailers is beyond the scope of place of removal.

As per section 2(h) of the Excise Act, 'sale' with their grammatical variations and cognate expressions, mean any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration. In the case M/s. Escorts (JCB) Ltd. vs Commissioner of Central Excise 1999 -TMI - 77984 - (CEGAT, NEW DELHI), which was subsequently confirmed by five member bench of the Tribunal in the case of Commissioner of Central Excise vs Prabhat Zarda Factory Ltd. 2008 -TMI - 48811 - CEGAT, COURT NO. I, NEW DELHI, Hon'ble CESTAT has held that place where the goods are sold can be place of removal where the property in the goods sold passes from seller to the buyer. The Central Board of Excise and Customs vide Circular No. 533/29/2000-CX dated 24 May 2000 has also instructed field officers to follow said CESTAT order.

As per section 19 of the Sale of goods Act, 1930, property of the goods passes when intended to pass as ascertained from the terms of the contract, the conduct of the parties and the circumstances of the case.

In view of the above, it transpires that even a factory outlet or showroom of the manufacturer from where final goods are sold for the first time by him is also deemed as a place of removal.

The second leg of the definition starts with 'and includes' which mens that the services specified thereunder are only indicative and not exhaustive. Further, from the above, it transpires that services which are specifically enumerated and other similar activities which qualify as 'activities relating to business' would fall within the purview of the definition of 'input service' provided it is received by the manufacturer of final products.

The term 'activities relating to business' has been used in the Rule giving illustrations, preceded with the words 'such as' which further widens the scope of the term. The use of the words 'such as' in the definition of 'input service' has been defined in a wide manner and includes in its periphery not only the illustrations given and is in no way restrictive in nature. The words 'such as' are used only to illustrate the scope. It is not restrictive. Hon'ble CESTAT in the case of Gramophone Co. of India Ltd. vs. Commissioner of Central Excise [1991(52) E.L.T. 247(T)] has held that if the words used are 'such as', it means it is illustrative only, and that they are not exhaustive.

There are services such as accounting, auditing, coaching and training, computer networking, credit rating, share registry etc which are not at all used either directly or indirectly in or in relation to manufacture of final products or clearance of final products from the place of removal. These services are in the nature of post manufacturing activities or activities in relation to other aspects of the business. Therefore, the term 'directly or indirectly' and 'in or in relation to' and 'include' connotes widest meaning to the definition of input service.

There is tendency on the part of revenue to restrict the scope of 'input service' on pretext or other. Most often, Cenvat credit of service tax paid on taxable service paid by the manufacturer is denied on the ground that said service is not used in the manufacture of final goods. Rule 4(1) of the Credit Rules states that Cenvat credit in respect of inputs may be taken on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service. But no such stipulation regarding receipt of input service, which is separately defined under the Credit Rules, is provided. Sub-Rule (7) of Rule 4 of the Credit Rules merely provides that Cenvat credit in respect of inputs service shall be allowed on or after the date on which payment is made for the value of input service and the service tax paid or payable is indicated in the invoices, bills or challans. One cannot arbitrarily bring a condition which is not prescribed in the statue.

In the case of Grasim Industries Limited vs Collector of Customs 2008 -TMI - 46155 - SUPREME COURT OF INDIA, the Hon'ble Apex Court has held that the elementary principle of interpreting any word while considering statute is to gather the means or sentential legis of the Legislature. Where the words are clear and there is no obscurity and the intention of the Legislature is clearly conveyed, there is no scope of amending or altering the statutory provisions while interpreting the scope of 'input service'. Further, no words or expressions used in any statute can be said to be redundant or superfluous and therefore, the provisions of law has to be interpreted in such way as not to render even a single word redundant or superfluous.

In the case of Raja Jagdambika Pratap Narain Singh v. CBDT - 2008 -TMI - 6448 - SUPREME Court, wherein Hon'ble Supreme Court held that "equity and Income-tax have been described as strangers". The Act, in the very nature of things, cannot be absolutely case upon logic. It is to be read and understood according to its language. If a plain reading of the language compels the court may have to adopt it [H. H. Prince Azam Jha Bahadur v. Expenditure-tax Officer 2008 -TMI - 39959 - SUPREME Court].

As per the law of interpretation, a construction which requires for its support addition or substitution of words has to be avoided. Inthe case of State of Bombay v. Automobile & Agricultural Industries Corporation [(1961) 12 STC 122], the Apex Court held that:

"But the courts in interpreting a taxing statute will not be justified in adding words thereto so as to make out some presumed object of the Legislature. If the Legislature has failed to clarify its meaning by the use of appropriate language, the benefit thereof must go to the taxpayer. It is settled law that in case of doubt, that interpretation of a taxing statute which is beneficial to the tax-payer must be adopted." 

Thus, the definition of 'input service' is very wide. It not only includes the services used directly or indirectly in the manufacture of final products but also services used in post manufacturing activities or activities which are necessary to run the day to day business The scope of input service requires to be constructed widely in widest possible manner. The manufacturer can avail Cenvat credit of service tax paid on almost all services and utilize the same in payment of excise duty payable on the final goods. Similarly, a service provider can also avail Cenvat credit of service tax paid on almost all services and utilize the same in payment of service tax payable on the output service.