2025 (7) TMI 1 - AT - Central Excise

Admissibility of input credit - security services deployed at the residential colony situated outside/adjacent to the factory under Rule 2(l) of the CENVAT Credit Rules 2004 - HELD THAT - The dispute in the present appeal is no more res integra and is covered by the various decisions of the Tribunal. In the case of Northern Coal Fields Ltd. V/s Commissioner of GST Customs Central Excise 2020 (2) TMI 1004 - CESTAT NEW DELHI where it was held that services crucial for maintaining staff colonies are considered input services under Rule 2(l) of the Cenvat Rules 2004. It is found that the facts of the present case are squarely covered by the abovementioned decision of the Tribunal. Further it is an admitted fact that the residential colony/township is located at a remote place where no municipal services are available. Further it is an admitted fact that an industrial township is set up by the Appellant/Assessee so that trained manpower is available to run their plant for production of dutiable output. Accordingly the security services qualify as input service under Rule 2(l) of CENVAT Credit Rules 2004 being the service utilized by the manufacturer in relation to manufacture of dutiable final products. Accordingly there is no impropriety in the claim of the Appellant. Further there is a mistake of fact in the order of the Lower Authority in observing that the colony is located away from the manufacturing area. In this view of the matter the Appellant/Assessee requires the residential colony for workers for manufacturing dutiable goods. Security service is essential in order to maintain the residential/industrial colony of the Appellant. The Appellant is entitled to CENVAT credit under dispute - the impugned order is set aside - appeal allowed.

Summary

The primary legal issue considered by the Tribunal is the admissibility of Cenvat credit on security services provided at a residential colony established for workers and employees adjacent to a manufacturing factory, under Rule 2(l) of the CENVAT Credit Rules, 2004. The core questions addressed include whether the security services rendered for safeguarding the residential colony qualify as an input service directly or indirectly related to the manufacturing activity, and whether the appellant was justified in availing credit on such services.

Another related issue examined is the application of limitation and penalty provisions concerning alleged wrongful availment of credit, including whether the appellant acted mala fide and whether extended period of limitation and penalties were warranted.

The Tribunal also considered the relevance and applicability of precedents, particularly contrasting decisions from various High Courts and the Tribunal itself, to determine the nexus between the security services and manufacturing activity.

Regarding the admissibility of Cenvat credit on security services at the residential colony, the Tribunal analyzed the legal framework under Rule 2(l) of the CENVAT Credit Rules, which defines "input service" as any service used in or in relation to manufacture of final products. The appellant's contention was that the security services were essential to maintain the residential colony located in a remote area, which was indispensable for ensuring availability and safety of workers and employees, thus having a direct nexus with manufacturing operations.

The Tribunal examined the precedents cited by both parties. The appellant relied on the decision in Northern Coal Fields Ltd. v. Commissioner of GST, Customs & Central Excise, where the Tribunal upheld credit on security services for a residential colony situated in a remote location, emphasizing the necessity of such colony for smooth manufacturing operations. The Tribunal noted that the Andhra Pradesh High Court in that case recognized that when a factory is located far from urban centers, maintaining a residential colony with necessary services is integral to manufacturing and therefore the services related thereto qualify as input services.

Conversely, the lower authority and the appellant's opponents relied on decisions such as CCE v. Manikgarh Cement and Commissioner of Central Excise & Customs v. Gujarat Heavy Chemicals Ltd., where the courts held that security services for residential colonies constituted voluntary welfare activities without a direct nexus to manufacturing, thus disallowing credit. However, the Tribunal distinguished these decisions on facts, noting that in those cases the factories were not located in remote areas necessitating such residential colonies, and thus the services were not intrinsic to manufacturing.

The Tribunal further considered the appellant's factual matrix: the factory's isolated location, continuous operation, and the necessity of providing residential accommodation and security for employees. It found that the residential colony was established and maintained by the appellant within its premises, and the security services were essential to safeguard both the factory and the adjoining colony. The Tribunal rejected the lower authority's observation that the colony was located away from the manufacturing area, holding that the colony's proximity and purpose were closely linked to manufacturing activity.

On the question of whether the appellant acted mala fide or wrongly availed credit, the Tribunal noted that the appellant had disclosed the credit availed in statutory returns and had acted under bona fide belief of entitlement. The Tribunal also distinguished a prior decision involving the appellant where credit was reversed voluntarily before show cause notice issuance, clarifying that such prior conduct does not preclude claiming credit for subsequent periods where facts and circumstances differ.

Applying the law to the facts, the Tribunal concluded that the security services provided at the residential colony are input services within the meaning of Rule 2(l) of the CENVAT Credit Rules, 2004, as they are used in relation to manufacture of dutiable goods. The necessity of maintaining the residential colony and ensuring security for continuous operation of the factory established a direct nexus between the services and manufacturing activity.

Competing arguments that such services are voluntary welfare measures without nexus to manufacturing were rejected based on the factual context of the remote factory location and the indispensability of the colony and its security for manufacturing operations. The Tribunal emphasized the importance of factual distinctions in applying precedents.

Consequently, the Tribunal set aside the impugned order to the extent it disallowed credit on security services and allowed the appeal, holding that the appellant was entitled to the Cenvat credit claimed. The Tribunal also implicitly negated the extended limitation and penalty invocation by allowing the credit claim.

Significant holdings include the following verbatim excerpt capturing the Tribunal's core reasoning:

"The residential colony has been built by the Appellant for the benefit of its employees/workers and has been maintained by the Appellant. It is necessary for the Appellant to maintain the residential colony close to the mines area for better business results. Therefore, the services, so provided, do have a nexus with the business undertaken by the Appellant."

This principle affirms that in cases where a manufacturing unit is located in a remote area, the maintenance of a residential colony and associated essential services such as security are integrally linked to manufacturing and qualify as input services eligible for credit.

Another important conclusion is the Tribunal's rejection of the lower authority's broad interpretation that welfare or benevolent acts cannot qualify as input services, clarifying that the factual context and necessity for manufacturing operations are decisive factors.

In summary, the Tribunal established that security services provided at a residential colony maintained by the manufacturer in a remote location are input services under Rule 2(l) of the CENVAT Credit Rules, 2004, and credit on such services is admissible. The appellant's claim for credit was justified and the demand confirmed by the lower authority was set aside with consequential relief.