TMI Blog2010 (10) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... l product. Services having nexus or integral connection with the manufacture of final products as well as the business of manufacture of final product would qualify to be input service under Rule 2(l) of 2004 Rules. - all services used in relation to the business of manufacturing the final product are covered under the definition of `input service' and in the present case, the outdoor catering services being integrally connected with the business of the manufacture of cement, credit of service tax paid out on catering services has been rightly allowed by the Tribunal. - However, once the service tax is borne by the ultimate consumer of the service, namely the worker, the manufacturer cannot take credit of that part of the service tax which is borne by the consumer. - proportionate credit to the extent embedded in the cost of food recovered from the employee/worker not allowed - 7 OF 2010 - - - Dated:- 25-10-2010 - CORAM : J.P. DEVADHAR AND A.B. CHAUDHARI, JJ. Mr. S. K. Mishra, Assistant Solicitor General for appellant. Mr. V. Shridharan, Advocate for respondent no.1. JUDGMENT (Per J. P. Devadhar, J) : 1. The substantial question of law raised by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the assessee, the Assessing Officer held that the service tax paid by the outdoor caterer would not qualify as Input Service under Rule 2(l) of the 2004 Rules. Accordingly, the Assessing Officer confirmed disallowance of the CENVAT credit as well as the credit of education cess/Secondary and Higher Secondary Education Cess taken by the assessee on outdoor catering services and demanded the same with interest and penalty under Rules 14 and 15 of the 2004 Rules r/w. Section 11(A)(B) of the Central Excise Act, 1944 and Section 75 of the Finance Act, 1994. 7. Being aggrieved by the orders passed by the Assessing Officer, the assessee filed appeals before the Commissioner of Central Excise (A) who, by a common order dt. 24.2.2009, allowed the said appeals by following the larger Bench decision of CESTAT in the case of Commissioner of Central Excise vs. GTC Industries Ltd. reported in 2008 (12) STR 468 (T-LB). The larger Bench in the case of GTC Industries Ltd. (supra) had held that the cost of food borne by the factory would form part of the cost of production and hence, credit of duty paid thereon was allowable. 8. Being aggrieved by the afore-said order passed by the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NVAT Scheme introduced under the 2004 Rules envisages integration of tax on goods and services used in relation to the manufacturing business and therefore, credit of service tax paid on any taxable service that forms part of the assessable value of the final product has to be allowed under the 2004 Rules. He submitted that the expression Input Service as per Rule 2 (l) of the 2004 Rules cannot be restricted to the services used in or in relation to the manufacture of the final products, but is liable to be extended to all services that are used in relation to the business of the manufacturer. In the present case, the assessee, carrying on the business of manufacturing cement, is mandatorily required under the Factories Act, 1948, to supply food to the employees. He submitted that, to comply with the above statutory provisions, outdoor catering services were engaged. Such an activity mandatorily required to be complied with would be an activity relating to the business of the assessee covered under the definition 'Input service' under Rule 2 (l) of the 2004 Rules. 11. Counsel for the assessee further submitted that the inclusive part of the definition of Input servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. Relying on the decision of the Apex Court in the case of CIT vs. Chandulal Keshavlal and Co. reported in 1960 (38) ITR 601 (SC) and Eastern Investments Ltd. vs. CIT reported in 1951 (20) ITR-I (SC), Counsel for the assessee submitted that the expenses incurred as a result of commercial expediency are covered by the term activities relating to business . Relying on the decision of the House of Lords in the case of Customs and Excise Commissioner .vs. Redrow Group PLC reported in 1999 SIMON Tax Cases 161, Counsel for the assessee submitted that where t-he services used have direct and immediate link with the business of the assessee, then credit of service tax paid on those services would be allowable. 15. Counsel for the assessee further submitted that the Service Tax is a Value Added Tax which, in turn, is a destination based consumption tax i.e. a tax on commercial activities and it is not a charge on the business, but a charge on the consumer. In support of this contention, he relied on the CBEC Circular No.56, dt. 25.4.2003, the Circular No.80, dt.17.9.2004, the decision of the Apex Court in the case of All India Federation of Tax Practitioners .vs. Union of India repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilize the said credit in paying the excise duty on the final products. 19. With the introduction of service tax in the year 1994-95, persons rendering specified services became liable to pay service tax on services rendered. `Service Tax', as held by the Apex Court in the case of All India Federation of Tax Practitioners (supra) is a value added tax, which in turn is a general tax, which applies to all commercial activities involving production of goods and provision of services. Thus, levy of excise duty was on manufacture of goods whereas, levy of service tax was on rendering specified services. 20. Since the excise duty as well as the service tax are ultimately borne by the consumer, the Government decided to integrate the tax on goods and services under the Value Added Tax System ('VAT System' for short). Under the VAT System, tax is levied on the value added to any goods manufactured or services rendered each time when there is change of hand. In implementation of the VAT System, Section 3 of the 1944 Act was amended thereby renaming the levy of excise duty as Central Value Added Tax ('CENVAT' for short) with effect from 12-5-2000. Thereafte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 upto the place of removal,) and includes services used in relation to settingup, 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 upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit relating, share registry, andsecurity, inward transportation of inputs or capital goods and outward transportation uptothe place of removal: 24. In the present case, the dispute is, whether the assessee is entitled to take credit of service tax reimbursed by the assessee to the outdoor caterer (whose services were engaged for providing canteen facilities to the employees of the assessee) and utilize the said credit in discharging the excise duty/CENVAT payable on the cement manufactured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the substantial part, but also covers services, which are covered under the inclusive part of the definition. 28. In the present case, the question is, whether outdoor catering services are covered under the inclusive part of the definition of input service . The services covered under the inclusive part of the definition of input service are services which are rendered prior to the commencement of manufacturing activity (such as services for setting up, modernization, renovation or repairs of a factory) as well as services rendered after the manufacture of final products (such as advertisement, sales promotion, market research etc.) and includes services rendered in relation to business such as auditing, financing ..... etc. Thus, the substantive part of the definition input service covers services used directly or indirectly in or in relation to the manufacture of final products, whereas the inclusive part of the definition of input service covers various services used in relation to the business of manufacturing the final products. In other words, the definition of input service is very wide and covers not only services, which are directly or indirectly used in or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of the use of the expression used in or in relation to the manufacture of final product . Similarly, we are of the view that consideration such as input being used as packing material, input used as fuel, input used for generation of electricity or steam, input used as an accessory and input used as paint are per se also not relevant. All these considerations become relevant only when they are read with the expression used in or in relation to the manufacture of final product in the substantive/specific part of the definition. In each case it has to be established that inputs mentioned in the inclusive part is used in or in relation to the manufacture of final product . It is the functional utility of the said item which would constitute the relevant consideration. Unless and until the said input is used in or in relation to the manufacture of final product within the factory of production, the said item would not become an eligible input. The said expression used in or in relation to the manufacture' have many shades and would cover various situations based on the purpose for which the input is used. However, the specified input would become eligible for credit only w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces under the Factories Act, 1948. To comply with the above statutory provision, the assessee had engaged the services of a outdoor caterer. Thus, in the facts of the present case, use of the services of an outdoor caterer has nexus or integral connection with the business of manufacturing the final product namely, cement. Hence, in our opinion, the Tribunal was justified in following the Larger Bench decision of the Tribunal in the case of GTC Industries Ltd. (supra) and holding that the assessee is entitled to the credit of service tax paid on outdoor catering service. 33. It is argued on behalf of the Revenue that not only the ratio but the decision of the Apex Court in the case of Maruti Suzuki Ltd. (supra) must be applied ipso facto to hold that the credit of service tax paid on outdoor catering services is allowable only if the said services are used in relation to the manufacture of final products. That argument cannot be accepted because unlike the definition of input, which is restricted to the inputs used directly or indirectly in or in relation to the manufacture of final products, the definition of `input service' not only means services used directly or indir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to define that expression restrictively. Therefore, in the absence of any intention of the Legislature to restrict the definition of 'input service' to any particular class or category of services used in the business, it would be reasonable to construe that the expression 'such as' in the inclusive part of the definition of input service is only illustrative and not exhaustive. Accordingly, we hold that all services used in relation to the business of manufacturing the final product are covered under the definition of `input service' and in the present case, the outdoor catering services being integrally connected with the business of the manufacture of cement, credit of service tax paid out on catering services has been rightly allowed by the Tribunal. 36. The argument of the Revenue that the expression such as in Rule 2(l) of 2004 Rules is restricted to the categories specified therein, runs counter to the C.B.E.C. Circular No.97, dated 23rd August, 2007. In that Circular the C.B.E.C. (vide para 8.3) has held that the credit of service tax paid in respect of mobile phone service is admissible provided the mobile phone is used for providing output se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Division Bench is made in the context of a service which is held to be integrally connected with the business of manufacturing the final product. Therefore, the observation of the Division Bench in the case of Coca Cola India Pvt. Ltd. (supra) has to be construed to mean that where the input service used is integrally connected with the business of manufacturing the final product and the cost of that input service forms part of the cost of the final product, then credit of service tax paid on such input service would be allowable. 39. The Larger Bench of CESTAT in the case of GTC Industries Ltd. (supra) has also observed that the credit of service tax would be allowable to a manufacturer even in cases where the cost of the food is borne by the worker (see last para). That part of the observation made by the Larger Bench cannot be upheld, because, once the service tax is borne by the ultimate consumer of the service, namely the worker, the manufacturer cannot take credit of that part of the service tax which is borne by the consumer. Shri Shridharan, learned Counsel for the assessee fairly conceded to the above position in law and in fact filed an affidavit affirmed by a respo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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