WHETHER CANTEEN SERVICE PROVIDED WITHIN THE FACTORY PREMISES CAN BE REGARDED AS 'INPUT SERVICE'?

[DR.MARIAPPAN GOVINDARAJAN]

     The Factories Act, 1948 takes care of the safety, health and welfare measures of the employees working in the factory.   Sec. 46 of the Factories Act, 1948 every employer having more than 250 workers has to provide canteen facility for workers.  The Factories Rules of the states also mandate such a requirement of provision of canteen.  Non provision of canteen facility would lead to penal action by the State Government.  The question comes before us whether canteen service provided within the factory premises can be regarded as 'Input service' and service tax paid on such services could be availed as credit.

     In this article for this purpose three orders of the tribunal are cited which are as follows:

Commissioner of Central Excise, Nasik V. Mahindra Sona Ltd., 2008 -TMI - 4012 - CESTAT MUMBAI;

Victor Gaskets India Ltd., V. Commissioner of Central Excise, Pune - I, 2008 -TMI - 4237 - CESTAT MUMBAI;

Indian Card clothing Co., Ltd., V. Commissioner of Central Excise, Pune - I, 2008 -TMI - 30078 - CESTAT, MUMBAI

In 'Commissioner of Central Excise, Nasik V. Mahindra Sona Ltd., (supra) the Revenue filed appeal aggrieved by the finding of the Commissioner (Appeals) that output catering services provided in the factory of the respondents is an input service and that the respondents are eligible to take credit thereof.  After hearing both parties the tribunal held that the catering/canteen services are neither used in or in relation to the manufacture or clearance of final products nor can it be said to be an activity relating to business.   The illustrations of activities relating to business contained in Rule 2(l) of Cenvat Credit Rules, 2004, viz., accounting, auditing, financing etc., are all connected with the business of manufacture.  Catering service cannot be treated as an activity relating to business and even if it is obligatory on the part of the assessees/respondents as per the requirement of the Factories Act, 1948, to provide a canteen, this does not automatically lead to the conclusion that a catering service relates to business activity.  It is in the nature of the welfare activity and not an activity relating to business.   The tribunal therefore set aside the finding of the Commissioner (Appeals) and allowed the appeal.   The tribunal pronounced this decision on 18.01.2008.  But the same tribunal in the other two cases held positively.

     In 'Victor Gaskets India Ltd., V. Commissioner of Central Excise, Pune - I' (supra) the appellants have provided a canteen facility in their factory for their employees.   This is claimed to be a statutory requirement under Sec. 46 of the Factory Act.   The service provider issued the invoices to the appellants for the said Outdoor catering services and the appellants had availed the Cenvat credit on the strength of such invoices.  The tribunal analyzed the provisions of Rule 2(l) of Cenvat Credit Rules, 2004.

Input service means any service-

(i) used by a provider of taxable service for providing an output service, or

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

and includes services in relating 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 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 an inputs or capital goods and outward transportation up to the place of removal.

     The meaning assigned to 'input service' is divided in two parts, first part giving the specific meaning and the second part gives the inclusive meaning of the same.  In the second part, an inclusive meaning is given to 'input service' which otherwise would not have been covered in the main first part.  From this, it is evident that manufacturer/output service provider can take credit of the service tax paid on business related activities, which are specified in the expanded inclusive definition of 'input service'. 

     The expression used in the said Rule 2(l) 'such as' which means that the stipulated activities that follow the said expression in the definition are only illustrations and not limitations.   This get support from the Hon'ble Supreme Court in 'Good year India Ltd., - (2008 -TMI - 31006 - Supreme Court of India) wherein it has been held that the expression 'such as' is only illustrative and not exhaustive.    In other words the expanded part of the definition is inclusive one and not an exhaustive list of activities on which the input service credit can be taken by the appellants. 

     The tribunal observed that the credit of service tax paid on activities like coaching and training, credit rating, although not directly or indirectly related to manufacture of goods, is admissible as input service credit to a manufacturer of final products as well as to output service provider treating the same as activities in relation to business.  In the light of the above the tribunal held that the canteen service provided within the factory premises of the appellants exclusively for the factory workers is an activity in relation to the business of the appellants and hence can be regarded as 'input service' within the ambit of Rule 2(l) of the Cenvat Credit Rules, 2004.  The canteen facility is beneficial for the workers as they are served with food stuff etc., at concessional rates and it is they who are engaged in the business of the appellants, which is nothing but the manufacture of goods, in any case, the canteen facility provided can also be said to be used by the manufacturer indirectly as the canteen facility is only for the benefit of appellants' employees who play a significant role in the activity of manufacture.

     The appellants have contended that they pay fringe benefit tax on canteen related expenses under Income Tax Act and as the said tax is a levy on business related expenses, the Appellants' payment of the same on the canteen related expenses would be considered as business related expenses and hence, the same would get covered under the 'activities relating to business' stipulated in the inclusive definition of input service, which is acceptable one.

     In the light of the above the tribunal held that the credit of the service tax paid on the canteen service is admissible as input service under Rule 2(l) of Cenvat Credit Rules, 2004.

     In 'Indian Card Clothing Co. Ltd., V. Commissioner of Central Excise, Pune- I' (supra) the appellants have availed Cenvat credit on the basis of canteen bill on which service tax has been charged.   Making provision for canteen services is a statutory requirement and therefore it is their contention that these services have to be considered as the input services and the credit of the same has to be allowed.  The tribunal held that the appellants cannot be denied the credit of service tax paid on the canteen bills as it has to be considered as input service and accordingly set aside the order of the Commissioner (Appeals) and allow the appeal with consequential relief.