The admissibility of CENVAT credit of Input Services used during setting up stage after amendment in definition of “input services" w.e.f. 01.04.2011

[dipsang vadhel]

Rule 2(l) of Cenvat Credit Rules (as effective from 1-4-2011), defines “input service” as follows –

 “Input service” means any service, -

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

(ii) used by a 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, 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, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal;

but excludes services, -

(A) specified in sub-clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act (hereinafter referred as specified services), in so far as they are used for- (a) construction of a building or a civil structure or a part thereof; or (b) laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or

(B) specified in sub-clauses (d), (o), (zo) and (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods; or

(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee.

Since the word "setting up" has been removed from inclusive part of definition of the term "input service”, the tax department has started disputing admissibility of CENVAT credits on all input services used in setting up of units  in view of changes made in definition of "Input services” w.e.f. 01/04/2011.

In this regards, it is to be noted that the definition of input service as amended w.e.f. 01.04.2011 contain three limbs namely Main limb, inclusion limbs, exclusion limb. The main limb which has remain unaltered and reads as under:

“Input service” means any service, -

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

(ii) used by a 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,

In this regard, you may refer to Commissioner of Central Excise, Commissionerate - III - Appellant(s) Versus M/s ADF Foods Ltd., - Opponent(s) [2013 (1) TMI 607 - GUJARAT HIGH COURT] where in high court after referring to various judicial pronouncements on interpretations of definitions held that

“(Relevant extrct of Para 18)

Portion of the definition which goes with the expression means, is any service 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. This definition itself is wide in its expression and includes large number of services used by the manufacturer. Such service may have been used either directly or even indirectly. To qualify for input service, such service should have been used for the manufacture of the final products or in relation to manufacture of final produce or even in clearance of the final product from the place of removal. The expression ‘in relation to manufacture’ is wider than ‘for the purpose of manufacture’. The words ‘and clearance of the final products from the place of removal’ are also significant. Means part of the definition has not limited the services only upto the place of removal, but covers services used by the manufacturer for the clearance of the final products even from the place of removal. It can thus be seen that main body of the definition of term 'input service' is wide and expansive and covers variety of services utilized by the manufacture.

(Relevant extrct of Para 19)

When we hold that outward transportation would be an input service as covered in the expression 'means' part of the definition, it would be difficult to exclude such service on the basis of any interpretation that may be offered of the later portion of the definition which is couched in the expression ‘includes’. As already observed, it is held in several decisions that the expression ‘includes’ cannot be used to oust any activity from the main body of the definition if it is otherwise covered by the expression ‘means’. In other words, the expression ‘includes’ followed by ‘means’ in any definition is generally understood to be expanding the definition of the term to make it exhaustive, but in no manner can the expression ‘includes’ be utilized to limit the scope of definition provided in the main body of the definition.”

Applying the same ratio, CENVAT credit of Service Tax paid on input services is admissible so far as input services have been used directly or indirectly in or in relation to the manufacture of final product even if the term “setting up” has been deleted from the inclusive limb of definition.

It is legally accepted fact that both inclusive limb & exclusive limb of any definition should be mutually exclusive. Since Exclusion limb of definition covers architectural services, airport services, Commercial or industrial construction service, Execution of works contract used for construction or building or a civil structure or a part thereof etc., the word “setting up “has been deleted from inclusive portion so as to avoid confusion or litigation over specific exclusion. If the term” setting up” was not removed then, the said exclusion items would be covered by the term “setting up”. Thus, the specific exclusion limb would become inoperative.  Accordingly, CENVAT credits on all input services used during the setting up stage are allowed except specific exclusion.

The above understanding is also supported by TRU’s letter explaining the changes in definition of input service which read to the effect that the definition of input service has been rationalized to impart clarity and achieve convergence between goods & service. It will be appreciated that CENVAT credit on Capital goods used during the setting up stage is being allowed. Accordingly, CENVAT credit on input services in relation to such capital goods is admissible as the said input services have been used directly or indirectly in or in relation to the manufacture of final product. Further, if the legislator were not to allow CENVAT credits during the setting up stage, even CENVAT credit of capital goods would have also been restricted. Since the CENVAT credits of capital goods have been rightly allowed & the term “setting up” has been removed only to safeguard the specific exclusion clause, the deletion of the term “setting up” should not be interpreted to mean that CENVAT credit should not be admissible for any input services particularly when the main limb of definition allows the CENVAT credit in so far as input services have been used directly or indirectly in or in relation to the manufacture of final product.

Further, the interpretation as sought to be applied by Department will lead to absurdities and anomalies such as-

• Discouragement to investment in new plants or factories being set up. This can never be intention of the legislation as the Government encourages investment through various incentive schemes. These will indirectly work against investment encouragement.
• Promotion to older technology. As per the interpretation, CENVAT credit will be eligible when similar services in relation to modernization repair or renovation of existing unit will be allowed. Whereas the same services being used for setting up a new unit with advanced or cost economic technology will not be allowed. These will indirectly result in to promotion of older technology.
• Different taxation of same goods being produced by an established player vis-à-vis a new player that is setting up a new plant. This will hinder the freedom of Trade, commerce & intercourse guaranteed by constitution.
• Different treatment to Goods & Service so as to defeat the very purpose of CENVAT regime.
• Defeating the very purpose of amending the definition of input service, input & capital goods to eliminate distortions and areas of tax avoidance arising out from differential treatment of goods and services used for the same purpose.