Rule 2(l) of CENVAT Credit Rules, 2004 ('Rules' for short) defines the term 'input service'. Rule 3(1) permits a manufacturer to take credit of the service tax paid on an 'input service' and to utilize the same for payment of duty on the final products. There is much litigation before tribunals for putting the services under the definition of 'input services' for availing credit. One such litigation arised in the matter whether construction of residential quarters for workers inside the factory premises is to be considered as input service which is answered by the Authority for Advanced Rulings.
In Re 'VMT Spinning Co. Ltd.,' - 2008 (12) STR 388 (AAR) the applicant engaging in the manufacture of different types of yarn proposed to construct within its factory premises, additional sheds for manufacturing and storing of yarn, as also residential quarters for its workers and staff, as a part of its programme to augment the production capacity. Advance Ruling has been sought by the applicant under Sec. 96C of the Finance Act, 1994 in this regard.
The applicant contended that-
The manufacture of yarn is a continuous operation which is carried out each day in three shifts, each shifting being of eight hours duration. In order to ensure availability of workers round the clock and ensure efficient production of yarn, the applicant proposed to house the workers in a colony within the factory itself;
Continuous availability of workers residing in a colony within the factory ensures efficient production of yarn. The construction service required for building a residential colony for the workers is, therefore, indirectly connected with the manufacture and clearance of yarn and such service has to be regarded as 'input service';
The second part of the definition of input service in Rule 2(l)(ii) mentions services relating to business activities such as accounting, auditing, financing, coaching and training etc., included in the ambit of input services which are eligible for cenvat credit. The coverage of such diverse services within the ambit of input service by insertion of the inclusive definition implies that this term has to be given a very broad coverage. The phrase 'in relation to' used in the definition has a very broad connotation and cannot be given a narrow meaning, as held in 'Doypack system Pvt. Ltd., V. UOI 1988 (36) ELT 201 (SC);
Input service should therefore encompass the construction services utilized for building the residential colony and Cenvat Credit of the service tax paid on such service should be available.
The contention of the Revenue is as follows:
The Rule 2(l)(ii) of Cenvat Rules in the inclusive part of the definition of input service allows only those services which are used in relation to setting up, modernization, renovation or repair of a factory or its office premises. It does not include services used in relation to construction of residences of workers and staff, as such a service has no bearing on manufacturing, storage or clearance of the final product;
Making available residential houses to workers, can at best, be construed as a welfare service for employees that has no linkage with the manufacture of yarn. Cenvat credit is therefore not available for service tax paid on the construction service.
The Authority (Smt. Chitra Saha- Member) analyzed the provisions of Rule 2(l). The definition is in two parts; the first part gives basic definition of 'input service' while the second is an inclusive one that specifically mentions certain services to be included within the ambit of 'input service'. The basic definition limits the scope of input services to those whose use has a nexus directly or indirectly, in or in relation to, manufacture and clearance of final products. In the case 'Doypack systems' (supra) the phrase 'in relation to' has been held to be equivalent to or synonymous with 'pertaining to' and 'concerned with'. The use of the service for construction of workers' residences cannot be said to pertain to or be concerned, directly or indirectly with manufacture and clearance.
The second leg of the definition is an inclusive one. The inclusive definition is a well recognized device to enlarge the meaning of the word defined. The word 'includes' is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. When it is so used, these words and phrases must be construed and comprehending not only such thing as they signify according to their nature and import, but also those things which the interpretation clauses declare that they shall include as in held in 'CIT V. Taj Mahal Hotel, 1971 (82) ITR 44 (SC).
The member further analyzed as follows:
The inclusive part of the definition expands the scope of 'input service' as given in the basic definition by bringing within its ambit, services which would not normally get covered by the main definition;
Construction and other allied services used for setting up of a factory, for example, has been specifically, included, though the use of these services in the setting up of a factory precedes manufacture and the activity is concluded prior to commencement of manufacturing process;
Auditing of accounting relates to a final product has been considered to be an 'input service' though the service is used after the completion of manufacture of final product and could not have been used directly or indirectly in the manufacturing process;
A perusal of the other services in the inclusive part of the definition indicates that the use of each of these services is linked to manufacture, storage, transport or sale of final product;
The services of market research, sales promotion and advertising, for example, may not be used in the actual process of service, yet they find mention in the inclusive definition as their use does promote sale of the final products;
Similar is the case with regard to services used in storage and transportation, accounting, auditing, financing etc.,;
It is relevant to note here that when the extended definition specifically included services used for setting up certain buildings, such buildings were restricted to buildings used to house its factories and offices. A manufacturer may construct other types of buildings for its employees such as residential quarters, hospitals, recreation centers, schools etc.,;
From the nature of the buildings specifically included in the extended definition and the kinds of services included in it, it has to be inferred that construction of only such building would be covered as input service which are linked to manufacture, storage, sale, transportation of the final product;
Provision of buildings for housing, schooling etc., of workers improves their quality of life and is a welfare measure but they have no nexus with the manufacture, storage or sale of the final product;
Even when an extended definition is used, it is necessary to draw a line to exclude categories obviously not intended to be included
The Authority held that services used for constructing buildings for housing workers and staff, do not have a nexus with the manufacture, sale or storage of the final product and therefore such services cannot be considered to be 'input service' even as per the extended definition.
The Chairperson Justice P.V. Reddi was in agreement with the views expressed by the member and wanted to supplement her reasoning he expressed is opinion. He framed two questions in this case that are as follows:
Whether it is to be considered the services to be availed of for construction of workers' quarters in the factory premises would fall within the first and main part of the definition of Rule 2(l)(ii)?
If the service relating to construction of staff quarters cannot be brought within the ambit of main definition would the inclusive part of the definition come to the aid of the applicant?
For the first question the Chairperson analyzed the first and main part of the definition as follows:
It defines input of service to be '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, up to the place of removal';
By using the two phrases - 'directly or indirectly' and 'in relation to', the sweep and ambit of the definition is undoubtedly widened;
It is not merely the services which are indirectly utilized in the actual manufacturing process but also those fall within the scope of the definition;
Even then, these expressions cannot be extended too far - so far as to extend them to the construction of staff quarters, hospitals, recreation centers and so on;
Taking a reasonable view, it cannot be used in relation to the manufacture of finished products;
What is contemplated by the definition is a proximate connection though not a direct connection with though wide, is not meant to cover services that remotely or in a round about way contribute to the manufacture of finished goods;
Any and every connection, however remote and indirect it may be, is not what is contemplated by the definition;
A line has to be drawn somewhere to avoid undue extension of the terms 'directly or indirectly' or 'in relation to' by adopting a common sense approach.
Thus the Chairperson answered the first question against the applicant.
To find an answer to the second question the Chairperson wanted an analysis of the inclusive of the definition and understanding its nuances is required.
In term 'includes' is generally employed in a definition clause to extend the natural meaning or ordinary connotation of a word or phrase defined;
There is no flexible rule that the word 'include' should always be read as a word of extension irrespective of the context in which it occurs;
The Supreme Court in 'Tiles Manufacturers V. State of Gujarat' - AIR SC pg. 90 at 93, held that though 'include' is generally used in interpretation clauses as a word of enlargement, in some cases, the context might suggest a contrary intention. In that case, the word 'include' was read as a word of limitation but not extension. It was read as equivalent to 'mean and include';
In the inclusive clause wherein certain specific services are enumerated;
If we see the broad pattern of such enumeration, we find firstly that the services which do not otherwise fall within the sweep of the main part of the definition but in respect of which doubts may arise are included in the second and inclusive part of the definition;
The Rule making authority wanted to remove the cloud of doubt that might linger and hence the services were specifically included;
An inclusive clause following a wide and extensive definition may not have any bearing on the connotation and scope of substantive definition. It may not further enlarge the ambit of main definition;
The construction of the workers' quarters construction services would not fit into the species or pattern of services brought within the sweep of Rule 2(l)(ii) and therefore the applicant cannot contend that the main part of the definition takes colour from the inclusive part.
The third Member Shri A. Sinha agreed with both the findings of the Chairperson and another member.
By: Mr. M. GOVINDARAJAN -
October 26, 2009
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