Cenvat credit on services used in Residential Colony

[JAMES PG]

HONOURABLE High Court of AP recently delivered a crucial judgement dismissing the Appeal filed by Dept in the case of CCE, Hyderabad Vs M/s.ITC Ltd (2011 (11) TMI 516 (HC))

According to the Hon'ble High Court, staff colony being directly and intrinsically linked to its manufacturing activity could not therefore be excluded from consideration. Consequently, the services which were crucial for maintaining the staff colony, such as lawn mowing, garbage cleaning, maintenance of swimming pool, collection of household garbage, harvest cutting, weeding etc., necessarily had to be considered as ‘input services' falling within the ambit of Rule 2(l) of the CENVAT Rules, 2004.

The credit on services used in Residential colonies was held to be eligible in the following cases too:

Ultratech Cement Ltd Vs CCE, Bhavnagar (2012 (4) TMI 425 (Tri))

The Lakshmi Vilas Bank Ltd Vs CCE,Trichy (2010 (4) TMI 370 (Tri))

Gujarat Maritime Board Vs.CCE, Rajkot (2010 (4) TMI 189 (Tri))

GHCL Ltd Vs CCE, Bhavnagar (2009 (7) TMI 139 (Tri))

CCE, Nagpur Vs. Manikgarh Cement (2009 (1) TMI 168 (Tri))

CCE, Vizag Vs Hindustan Zinc Ltd (2009 (4) TMI 129 (Tri))

None can deny the fact that the efficiency of the employees of an organization would be dependent on various factors, one such being the provision of a housing colony. Accommodation facilities provided adjacent to the work place would contribute to the enhancement of the productivity of the organization. In many cases, it is not feasible to carry out manufacturing operations if accommodation facility is not provided to workforce. Provision of accommodation facilities at far flung places where industries tend to localize due to the synergies of proximity to raw materials, logistics, climate etc cannot be reckoned as an extension welfare measure. It is essential for a manufacturing facility to attract and retain skilled and professional staff and housing provided by the employer is a key determinant in this regard especially when an industry is experiencing dearth of sound workforce at remote areas.

Most of the steel plants and cement factories, as for instance, are located at remote locations and hence the provision of residential colony is sine qua non for the manufacturing set up. Hence the services incurred for maintenance of such a facility would be in relation to the manufacture and definitely fall under sub clause (ii) of Rule 2(l) of Cenvat Credit Rules, 2004:

"2(l) "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, upto the place of removal

and includes services used in relation to modernization, renovation or repairs of a factory……."

The expression ‘ in or in relation to the manufacture of final product' has a very wide amplitude and encompasses every activity which facilitates the manufacture of the final product. Since the activity of maintenance of a residential colony is an activity integrally connected with ensuring a smooth and seamless functioning of the manufacturing set up, services received in relation to such activity are to be considered as services received in relation to the manufacturing process. The Hon'ble Supreme Court in the case of CCE vs Solaris Chemtech Ltd, (2007 (7) TMI 2 (SC)) held that the expression "in relation to" must be given a wide connotation.

The expression "in relation to" has been explained by the Hon'ble Supreme Court in the case of Doypack Systems (P) Ltd., Vs. UOI (1988 (2) TMI 61 (SC)) also to mean:

"48. The expression "in relation to" (so also "pertaining 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 an indirect significance depending on the context, see State Wakf Board v. Abdul Aziz (A.I.R. 1968 Madras 79, 81 paragraphs 8 and 10, following and approving Nitai Charan Bagchi v. Suresh Chandra Paul (66 C.W.N. 767), Shyam Lal v. M. Shayamlal (A.I.R. 1933 All. 649) and 76 Corpus Juris Secundum 621. Assuming that the investments in shares and in lands do not form part of the undertakings but are different subject matters, even then these would be brought within the purview of the vesting by reason of the above expressions. In this connection reference may be made to 76 Corpus Juris Secundum at pages 620 and 621 where it is stated that the term "relate"' is also defined as meaning to bring into association or connection with. It has been clearly mentioned that "relating to" 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 of contraction.

The second limb containing the inclusive part of the definition is only illustrative and cannot be interpreted in a restrictive angle even though the expressions "activities relating to business", "such as" etc had been removed from the definition in Cenvat Credit Rules vide Notification No 3/2011 dated 1.03.11

The word ‘includes' has been analysed in detail in the case of Regional Director, ESIC Vs. Highland Coffee Works [1992 AIR 129] wherein the Hon'ble Supreme Court has held:

The word "include" in the statutory definition is generally used to enlarge the meaning of the preceding words and it is by way of extension, and not with restriction, The word 'include' is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases occur- ring in the body of the statute; and when it is so used, these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import but also those things which the interpretation clause declares that they shall include.

Further, in the case of C.I.T. Vs. TTK Health Care Ltd (2007 (4) TMI 354 (SC)), Hon Apex Court held that:

"When the word 'includes' is used in the definition, the legislature does not intend to restrict the definition"

Upholding the above views, Hon Larger Bench of Mumbai CESTAT in the case of CCE Vs GTC Industries Ltd (2008 (9) TMI 56 (Tri)) commended that:

"A bare mechanical interpretation of words and application of legislative intent is devoid of concept and purpose will reduce most of the remedial and beneficial legislations to futility.  To be literal in meaning is to see the skin and miss the soul.  The legislature never wastes its words or says anything in vain and a construction which attributes redundancy to legislation will not be accepted"

Productivity is a measure of efficiency with which factors of production, both men and materials are converted into goods and services. The productivity of human resources being an important input besides land and capital plays a pivotal role in determining the overall

productivity of an organization and residential colonies provided by an employer is nothing but a means to boost up productivity and to sustain quality.

Further, housing is a basic human need and a valuable tool to promote sociological, biological and economic well being of the society. The National Housing Policy formulated by Govt of India declares that housing forms an important part of the strategy of Govt for the alleviation of poverty and employment generation and is to be treated as an integral part of overall improvement of human settlement and economic development. By extending tax reliefs, employers will be induced to promote housing facilities within the vicinity of their manufacturing sites.

Kautilya advises that taxation should not be raised to such a high degree that it destroys people's economic incentives to engage in productive undertakings thereby lowering the level of economic activity and material wealth.

During the Budget speech of 2010-11, it was told by Hon Finance Minister, Mr. Pranab Mukherjee that he has been guided by the principles of sound tax administration as embodied in the following words of Kautilya:

"Thus, a wise Collector General shall conduct the work of revenue collection.... in a manner that production and consumption should not be injuriously affected.... financial prosperity depends on public prosperity, abundance of harvest and prosperity of commerce among other things".

Similarly, the former FM, Mr. P Chidambaram in his Budget Speech of 2008-09 turned to his muse Saint Tiruvalluvar who set the benchmark for good governance in the following immortal words:

"Kodai Ali Sengol Kudi Ombal Nangum Udaiyanam Vendharkku Oli"

[Generous grants, compassion, righteous rule and succour to the downtrodden are the hallmarks of good governance]

But to our utter dismay, the real spirit of the glorified quotes are seldom reflected in the policies and rules formulated in the so called Budgets. This is very evident from the amendments carried out in Cenvat Credit Rules itself since 2008 that in one way or other, either restrictions are enforced or exclusions are imposed so as to curtail the flow of Cenvat credit which was launched with the noble objective of avoiding cascading effect of taxes…