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2015 (11) TMI 100

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..... lower authorities have directed for special audit of the records of the appellant as provided under Section 14AA of the Central Excise Act, 1944. Expenses which were incurred by the appellant for setting up of the township/colony for their employees is expenses which is in relation to the business activity of the appellant which is manufacturing final products i.e. petroleum products. It is also noted that while arriving at the price of the finished goods manufactured in these factory premises appellant had considered the expenses and included the same while arriving at the cost of production of the final products manufactured in those factory premises. It would mean that setting up of residential colony/township is in 'relation to the business activity of the appellant which is manufacturing of petroleum products and clearing the same on payment of excise duty. The Central Excise duty paid by the appellant on their finished goods is on advalorem which has been arrived at after considering all the expenses that had gone into manufacturing of the finished goods which included the cost of setting up of township and the residential colony. Intention of the legislature is to prov .....

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..... levant facts that arise for consideration are during the period July 2006 to December 2009, various factories of the appellant had availed CENVAT credit in respect of services like construction service, repairs and maintenance service, security service, manpower recruitment and supply service, works contract service etc. It was noticed by the lower authorities that these services on which credit was availed of service tax paid were received in their residential township constructed for the employees. Coming into such a conclusion that the appellant had availed ineligible CENVAT credit, various show-cause notices were issued proposing to recover the ineligible credit along with interest and for imposing penalties. Appellant contested the show-cause notices on merits and also on limitation. Adjudicating authority did not agree with the contentions raised and confirmed the demands raised along with the interest and also imposed penalties. Aggrieved by such an order an appeal was preferred. The first appellate authority after following due process of law, rejected the same. 3. Learned Counsel appearing on behalf of the appellant would take us through the entire case records and both .....

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..... residential colony is not eligible to be availed as CENVAT credit. He would submit that the Hon'ble High Court in that case has not recorded any finding of fact which would indicate that the cost of the construction and maintenance of residential colony was debited as expense and forms a part of cost or price of the finished goods. He would submit that the ratio of the judgment in the case of Manikgarh Cement (supra) would apply in particular fact of that case and cannot be applied or relied upon in support of a proposition that it did not decide. He would also submit that the Hon'ble Supreme Court in the case of Ispat Industries - 2006 (202) ELT 561 (SC) has held so. He also relied upon the judgement of the Apex Court in the case of Mittal Engineering Works (P) Ltd. - 1996 (88) ELT 622 (SC) for the same proposition. 4. Learned D.R. after taking us through the order-in-appeal would submit that appellant is not denying that the CENVAT credit availed is in respect of the services which were rendered at the residential colony/township attached to the factories. He would submit that the Hon'ble Bombay High Court in the case of Manikgarh Cement (supra) was specifically l .....

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..... directed for special audit of the records of the appellant as provided under Section 14AA of the Central Excise Act, 1944. 7.1 On such background we find that the expenses which were incurred by the appellant for setting up of the township/colony for their employees is expenses which is in relation to the business activity of the appellant which is manufacturing final products i.e. petroleum products. It is also noted that while arriving at the price of the finished goods manufactured in these factory premises appellant had considered the expenses and included the same while arriving at the cost of production of the final products manufactured in those factory premises. It would mean that setting up of residential colony/township is in 'relation to the business activity of the appellant which is manufacturing of petroleum products and clearing the same on payment of excise duty. The Central Excise duty paid by the appellant on their finished goods is on advalorem which has been arrived at after considering all the expenses that had gone into manufacturing of the finished goods which included the cost of setting up of township and the residential colony. 7.2 At this junctu .....

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..... ty is paid, in other words credit on input must be allowed on the expenditure incurred by the assessee which form a part of the assessable value of the final product. In coming to this conclusion the Hon'ble High Court not only took cognizance of press note dated 12.8.2004 issued by the Ministry of Finance but also CBEC Circular No.80/10/2004-ST dated 17.9.2004 and circular no. 56/5/2003-ST dated 25.4.2003 wherein it was clarified that service tax like Cenvat is basically a value added tax which is operated through a credit mechanism. The Hon'ble Court also took cognizance of the findings of the Apex Court in the case of All India Federation of Tax Practitioners, wherein it was held that excise duty is a tax on value addition on goods. The Court also took cognizance of the guidelines issued by the OECD as per which Value added taxes or taxes on consumption, was paid ultimately by the final consumer and that the same functions on the principle that the business should not bear the burden of taxes and that since there are mechanism and place that allow for a refund of tax levied on the intermediary transaction between firms. The system is based on tax collection in a stage pr .....

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..... (in this Constitution referred to as the Union List. xxx Article 265. Taxes not to be imposed save by authority of law. No tax shall be levied or collected except by authority of law. xxx Article 268A. Service tax levied by Union and collected and appropriated by the Union and the States.- (1) Taxes on services shall be levied by the Government of India and such tax shall be collected and appropriated by the Government of India and the States in the manner provided in clause (2). (2) The proceeds in any financial year of any such tax levied in accordance with the provisions of clause (1) shall be (a) collected by the Government of India and the States; (b) appropriated by the Government of India and the States, in accordance with such principles of collection and appropriation as may be formulated by Parliament by law. Article 269. Taxes levied and collected by the Union but assigned to the States. (1) Taxes on the sales or purchase of goods and taxes on the consignment of goods shall be levied and collected by the Government of India but shall be assigned and shall be deemed to have been assigned to the States on or after the 1st day of Apr .....

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..... and 62 of List II of the Seventh Schedule to the Constitution are as follows: 53. Taxes on the consumption or sale of electricity. xxx 60. Taxes on professions, trades, callings and employments. xxx 62. Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling. Entry 38 of List III of the Seventh Schedule to the Constitution is as follows: 38. Electricity. Arguments: 15. . 16. . 17 .. 18. . 19. . 20. . 21. . 22. . 23. . 24. . 25. . 26. . 27. . 28. . 29. . 30. . 31. Learned counsel for the appellants in support of his argument that the words professions and services are synonymous for the purposes of deciding the question of legislative competence of the State Legislature under Entry 60 List II, placed heavy reliance on Article 276, which has been quoted hereinabove. 32. Article 276 corresponds to Section 142A of the GOI Act, 1935. However, under a large number of laws enacted before the 1935 Act came into force, power was conferred on local Governments and local authorities to impose taxes on certain activities .....

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..... tutes his income though it might be for past services from an employment. 33. As stated above, every Entry in the Lists has to be given a schematic interpretation. As stated above, Constitutional law is about concepts and principles. Some of these principles have evolved out of judicial decisions. The said test is also applicable to taxation laws. That is the reason why the Entries in the Lists have been divided into two Groups, one dealing with general subjects and other dealing with taxation. The entries dealing with taxation are distinct entries vis-a-vis the general entries. It is for this reason that the doctrine of pith and substance has an important role to play while deciding the scope of each of the entries in the three Lists in the Seventh Schedule to the Constitution. This doctrine of pith and substance flows from the words in Article 246(1), quoted above, namely, with respect to any of the matters enumerated in List I. The bottom line of the said doctrine is to look at the legislation as a whole and if it has a substantial connection with the Entry, the matter may be taken to be legislation on the topic. That is why due weight age should be given to the words with .....

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..... id U.P. Tax on Luxuries Act, 1995, Andhra Pradesh Tax on Luxuries Act, 1987 and West Bengal Luxury Tax Act, 1994 were beyond the legislative competence of the State Legislature. In this connection, it was observed, vide para 57, by the Constitution Bench of this Court that a tax on a thing or goods can only be with reference to a taxable event but there is a distinction between such a tax and a tax on the taxable event. In the first case, the subject-matter of tax is the goods and the taxable event is within the incidence of the tax on the goods. In the second case, the taxable event is the subject-matter of tax itself. In our view, para 57 supports the reasoning given by us here-in-above. As stated above, service tax is a value added tax. Value addition is on account of the activity like planning, consultation, advising etc.. It is an activity, which provides value addition as in the case of manufacturer of goods, which attracts service tax. In the present case, tax falls on the activity which is the subject-matter of service tax. In other words, we are substituting the word service in place of goods by applying the principle of equivalence. Under the Act, the Taxable Event i .....

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..... refore, tax on services do not fall under Entry 60 List II. That, service tax would fall under Entry 92C/Entry 97 of List I. 36. In the case of Sodan Singh and ors. v. New Delhi Municipal Committee and ors. reported in (1989) 4 SCC 155 the appellants claimed a right to engage in trading business on the pavements of Delhi city. In that context, it was held by the Constitution bench of this Court that, the guarantee under Article 19(1)(g) extends to practise any profession, or to carry on any occupation, trade or business. In that case, the word profession had been defined to mean an occupation carried on by virtue of specialized qualifications, personal qualifications, training or skill. We do not find any relevance of this judgment to the present case. As stated above, we are concerned with interpretation of legislative heads under the three Lists in the Seventh Schedule to the Constitution. As stated above, we have to go by the schematic interpretation of those entries. Moreover, we are concerned with a distinct taxing entries and not general entries. Hence, the judgment in the case of Sodan Singh (supra) has no application to the present case. 37. In the case of Tamil N .....

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..... ich arose for determination before this Court was whether a telephone service (mobile or fixed) would attract liability to service tax. It was held that in order to attract the liability under the service tax there has to exist what is called as goods. Since goods in question consisted of electromagnetic waves or radio frequencies, which carries voice, messages or other data, a telephone service was nothing but a service. We are not concerned with such a controversy in the present case. In the present case, we are concerned with the legislative competence of Parliament to legislate in respect of service tax under Entry 97/92C of List I. In the present case, we are concerned with the period covered by the Finance Acts of 1994 and 1998. However, learned counsel for the appellants has relied upon para 82 of the said judgment in the case of Bharat Sanchar Nigam Ltd. (supra) in which it is observed that the residuary powers of Parliament under Entry 97 of List I cannot swamp away the legislative Entries in the State List. Entry 54, List II read with Article 366(29-A), therefore, cannot be whittle down by referring to the residuary provision. As stated above, we are concerned with the ap .....

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..... of goods is also recognized by the principle of costing. As per Costing Standards-4, all non-monetary benefits extended to factory employees are regarded either as direct wages and salaries or else work overheads/production overheads or administrative overheads relating to production activity and form part of the cost of manufacture of final products. This contention of the Appellant had not been rebutted nor disputed by the Revenue either during the course of adjudication or at the appellate stage. There being no dispute that the factory township expenses incurred form a part of the cost of production and consequently applying the ratio laid down by the Hon'ble Bombay High Court in the case of Coca Cola and that of the Karnataka High Court in the case of Milipore India Pvt Ltd., credit of the service tax paid on such services is admissible as the said services used by the manufacturer indirectly, in relation to manufacture of the final products. It is relevant to note here that factories are generally set up at remote locations which are several 100 kilometers away from big town and cities. Given this fact most companies are compelled to create an integrated township with .....

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..... above discussion is that the credit is availed on the tax paid on the input service, which is advertisement and not on the contents of the advertisement. Thus it is not necessary that the contents of the advertisement must be that of the final product manufactured by the person advertising, as long as the manufacturer can demonstrate that the advertisement services availed have an effect of or impact on the manufacture of the final product and establish the relationship between the input service and the manufacture of the final product. The manufacturer thereby can avail the credit of the service tax paid by him. Once the cost incurred by the service has to be added to the cost, and is so assessed, it is a recognition by Revenue of the advertisement services having a connection with the manufacture of the final product. This test will also apply in the case of sales promotion. 8.1 It can be seen from the above reproduced relevant paragraphs from the judgement of the Hon'ble High Court the ratio is very clear in as much the CENVAT credit has to be allowed in respect of the service tax which has been paid and which forms a part of the value of the finished goods on which exc .....

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