SERVICES PROVIDED FOR A PURPOSE UNCONNECTED WITH THE BUSINESS ACTIVITIES WOULD NOT QUALIFY TO BE AN 'INPUT SERVICE'

[Mr. M. GOVINDARAJAN]

            CENVAT Credit Rules, 2004 ('Rules' for short) allows to take credit on service tax paid for input services against the payment of excise duty or service tax. Rule 2(l) defines 'input services' as 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 up to the place of removal, procurement of inputs, activities relating to business such as accounting, auditing, financing, recruitment and qualify control, coaching and training, computer networking, credit rating, share registry and security inward transportation of inputs or capital goods and outward transportation up to the place of removal.

            Thus the definition of 'input service' has an inclusive clause. According to the inclusive part of the definition, certain services used in relation to setting up, modernization, renovation or repairs of a factory or an office relating to such factory etc., will be eligible for CENVAT credit. Further activities relating to business such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer net working, credit rating, share registry and security are also eligible for CENVAT credit according to the inclusive part of the definition.

            The High Court in 'Bombay Woollen Mills Pvt. Ltd.,' held that the inclusive part of a definition is not normally a part of main part and, therefore, resorting to the main part of the definition in a case to which the inclusive part is applicable is wholly irrelevant. But in 'Ponds India Limited' case the Supreme Court, in the context of dealing with the definition of 'cosmetic' under Sec. 39 of the Drugs and Cosmetics Act, 1940 and the definition of 'drug' under another provision of the same Act, held that, when a definition clause employed the word 'means and includes' it would afford an exhaustive explanation to the meaning which, for the purposes of the Act, must invariability attached to the word or expression. In such a definition the word 'includes' is extensive or explanatory.

            In 'Lucknow Development Authority' case it was held that the word 'includes' was very generally used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. Their Lordships were examining the definition of 'consumer' which had a main part of the following the word 'means' and an inclusive part following the word 'includes'. It appears that the only view which could be taken in the light of the judgments of the Supreme Court is that the services mentioned in the inclusive part of the definition of 'input service' have also to satisfy the parameters laid down in the main part of the definition. The two parts are not independent of each other. Thus the ruling of the High Court is overruled by the Supreme Court.

            The CENVAT credit may be availed on the service tax paid on input services if the input services are in relation to manufacture or providing output service or in relation to the business. If the input service is not related to the business then CENVAT credit cannot be availed.'

            In 'Atul Auto Ltd., V. Commissioner of Central Excise, Rajkot' - [2009 -TMI - 33507 - CESTAT AHMEDABAD] the electricity generated at the wind mill was not being supplied directly to the assessee, but was transferred to an independent State Government company, namely, PGVCL, which was further supplying the same to the assessee. It was not necessary that the electricity generated at the wind mill was totally being transferred to the assessee. Their consumption could be less or more than the requisite units of electricity. As such, the electricity generated at the wind mill was being supplied to PGVCL was being consumed by it for manufacture of its goods. It could not said that the said wind mill was a part of the assessee's factory premises so as to allow credit of service tax paid in respect of services utilized at the wind mill.

            In 'Commissioner of Central Excise V. Ultra Tech Cement Ltd.,' (Appeal Nos. E/473 & 479/08, dated 11.6.2009 - Mum-CESTAT), the respondent is a manufacture of excisable goods. In so far as they are concerned, any service used by them, whether directly or indirectly, or in relation to the manufacture of final products and clearance of final products from the factory is an 'input service' for the purposes of CENVAT Credit. The lower authority allowed to the assessee CENVAT credit of the service tax paid on security service received in the off-factory residential colony belonging to the assessee. The present appeal has been filed by the Revenue.

            The contention of the Revenue is that the word 'security' appears in the company of activities relating to business and therefore it needs to be construed ejusdem generis with the expressions immediately preceding thereto. Provision of security at the residential colony does not appear to be one of the activities relating to business. The assessee has not been able to establish any nexus between such security and their business of manufacturing and clearing excisable products.

            The Revenue further contended that even otherwise, on application of the rule of ejusdem generis, security, where it is provided in a place and for a purpose unconnected with the business activities of the manufacturer, would not qualify to be an 'input service' within the horizons of the inclusive part of the definition even without reference to its main part. The Revenue claimed support from the Draft Credit Rules dated 12.8.2004 and relieved on the following paragraph-

"In principle, credit of tax on those taxable services would be allowed that go to form a part of the assessable value on which excise duty is charged. This would include certain servicds which are received prior to commencement of manufacture but the value of which gets absorbed in the value of goods. As regards services received after the clearance of the goods from the factory, the credit would be extended on services received up to the stage of place of removal (as per Section 4 of Central Excise Act). In addition to this services like advertising, market research etc., which are not directly related to manufacture but are related to the sale of manufactured goods would also be permitted for credit".

            The tribunal, taken into consideration of the principle of allowing CENVAT credit on taxable services from the above para, the tribunal noted that it covered three cases-

> Services which are received prior to commencement of manufacture but the value of which gets absorbed in the value of goods;

> Services received after the clearance of the goods from the factory where such services are received up to the stage of place of removal;

> Services like advertising, market research etc., which are not directly related to the manufacture but related to sale of manufactured goods.

The tribunal observed that the respondent's case does not fall in any of these categories. The tribunal held that the orders of the lower appellate authority granting CNVAT credit to the assessee in respect of security services arranged by the company in the off-factory residential colony cannot be sustained and the same are set aside to the extent above benefit was given.