Whether Cenvat Credit of Service Tax paid on Construction services used for construction of workers' quarters within the factory premises is available?

Rule 2(l) of Cenvat Credit Rules, 2004, defines the meaning of Input Services for a Service Provider and a Manufacturer. The definition of input services under rule 2(l) has been extended to include various services within its scope.

The extended meaning of Input Services under rule 2(l) is now became a central point of litigations, putting every assessee in trouble whether they are manufacture or service provider.

In the present matter, M/s VMT SPINNING COMPANY LIMITED (2008 -TMI - 31005 - AUTHORITY FOR ADVANCE RULINGS) has filed an application for advance ruling before the AAR. In this AAR (Mrs. Chitra Saha, honorable Member) held that:

"In the definition given in rule 2(1)(ii), 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, have been specifically included, though the use of these services in the setting up of the factory precedes manufacture and the activity is concluded prior to commencement of the manufacturing process. Again, auditing of accounts relating to a final product has been considered to be an 'input service' though this service is used after the completion of manufacture of final product and could not have been used directly or indirectly in the manufacturing process. Both the above services however, have a nexus with and are related to the final product: the setting up a factory provides the space and machinery for the manufacture; auditing ensures proper accounting of the inputs and disposal of the final products. A perusal of the other services in the inclusive part of the definition indicates that use of each of these services is linked to manufacture, storage, transport or sale of the final product. The services of market research, sales promotion and advertising, for example, may not be used in the actual process of manufacture which is necessary for their inclusion in the basic definition of input service, yet they find mention in the inclusive definition as their use does promote sale of the final product. Similar is the case with regard to services used in storage and transportation, accounting, auditing, financing etc. "

Mrs. Chitra Saha honorable member further held that:

"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 factories and its offices. A manufacturer may construct other types of buildings for its employees such as residential quarters, hospitals, recreation centres, 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 buildings would be covered as input service which are linked to manufacture, storage, sale, transportation etc. of the final product, Provision of buildings for housing, schooling, recreation 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. It is an accepted principle of interpretation that ".....one would not, unless forced, even when the definition is in the form "includes", carry the extension beyond borderline or doubtful cases'1 (1954 (1) QB at pages 81-82 and 1953 (1) QB 318).

Mrs. Chitra Saha honorable member further held that:

Even when an extended definition is used, it is necessary to draw a line to exclude categories obviously not intended to be included. A "service" not mentioned in the extended definition has to partake of the characteristics common to the other services specifically mentioned, in order to become an "input service" as per the extended definition. As mentioned above, the common thread running through all the services specifically included in the extended definition is that each of these is linked to the manufacture, storage or sale of the final product. 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 first question posed for advance ruling is therefore answered in the negative.

In this case, P.V. Reddi, J (Chairperson) held that:

Now, let us examine the anatomy of the definition of 'input service' contained in Rule 2(1)(ii). It is an inclusive definition, no doubt. But, the definition does not straightaway open up with an inclusive clause. In other words, the inclusive clause does not stand alone but it remains in the company of the substantive part of the definition, which has been referred to earlier. As already noticed, the first part of clause (ii) is widely worded and gives an expansive meaning to the expression 'input service'. This is followed by an 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 are set out.

P.V. Reddi, J (Chairperson) further held that:

Secondly, some services which could fall within the ambit of the main definition but in respect of which doubts may arise are also included in the second and inclusive part of the definition. For instance, services relating to storage upto the place of removal, procurement of inputs, inward transportation of inputs and outward transportation upto the place of removal may very well be brought within the main definition itself which is very wide. Yet, the Rule-making authority wanted to remove the cloud of doubt that might linger. Hence, they were specifically included.

P.V. Reddi, J (Chairperson) further held that:

As already observed, the first category of services specified in the inclusive clause are those which do not apparently fall within the scope of the first and main part of the definition. For instance, services relating to sales promotion and market research services, accounting and auditing, recruitment and training fall within this category because it is difficult to bring them within the purview of the first part of the definition, howsoever widely it is construed. Construction and allied services used in connection with setting up, modernization and renovation of a factory or an office attached to a factory stand in the mid-way category. That is the scheme of inclusive clause.

P.V. Reddi, J (Chairperson) further held that:

Unless the services in question (relating to construction of workman's quarters) could be reasonably brought within the scope of the main definition, I do not think, that much assistance can be drawn by the applicant from the inclusive clause of the definition. If at all, there is enough indication in the inclusive clause itself that the construction service in question is not meant to be covered by the definition, the reason being that only certain types of construction services which have closer connection with the manufacturing activity or final product are included. The construction of workers' quarter is not one of them, as the learned Member has said. It gives an indicia that the construction services relating to workers' quarters would not fit into the species or pattern of services brought within the sweep of Rule 2(1)(ii) and therefore the applicant cannot contend that the main part of the definition takes colour from the inclusive part. Ultimately, it comes to this. The case of the petitioner should stand or fall on the application of the opening and the main part of the definition. The inclusive clause far from supporting the applicant's stand goes against it.

TMI's Observation on the above rulings:

In the above ruling, we observe that, the applicant has failed to focus on the wordings "activities relating to business, such as".

Had the applicant emphasized the above term citing the reference from the Supreme Court's ruling in the matter of 'Good year India Ltd., - (2008 -TMI - 31006 - Supreme Court of India), the decision would have been different.

In this matter honorable Supreme Court has decided that "The words "such as stainless steel, nickel monel, incoloy, hastelloy" in sub-heading (2) are only illustrative of the various metals……."

(For full text of the ruling - visit 2008 -TMI - 31005 - AUTHORITY FOR ADVANCE RULINGS)

Also see an article by Mr. M. GOVINDARAJAN - WHETHER CANTEEN SERVICE PROVIDED WITHIN THE FACTORY PREMISES CAN BE REGARDED AS 'INPUT SERVICE'?