TMI Blog2022 (4) TMI 1357X X X X Extracts X X X X X X X X Extracts X X X X ..... ices which have a nexus with the manufacture of the final product (covered by the first limb in the definition), but also other input services , which do not have such a nexus but are covered by either of the other four limbs of the definition; d. Each limb of the definition is independent and benefit of CENVAT credit would be available even if any one of them is satisfied; e. So far as the first limb is concerned, the requirement of establishing a nexus between the input services and the process of manufacture would stand satisfied if the expenditure incurred for the input service forms part of the cost of production/value of the final product on which duty of the excise is levied; f. In this view of the matter, the appellant would be entitled to avail CENVAT credit on the service tax paid on insurance premium for employees who had opted for the Voluntary Separation Scheme ; and (ii) Cost Accounting Standard-4 would be applicable for determination of eligibility to CENVAT credit even if the goods are not captively consumed. The papers of this appeal may now be placed before the Division Bench for deciding the appeal on merits. - EXCISE APPEAL NO. 477 OF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses of its employees working at Vadodara. The appellant also takes a group health insurance for employees at the time of their retirement. 4. On March 06, 2007, the appellant also announced a VSS for certain category of employees working at its Vadodara Complex and the Introduction to the Scheme, as contained in the Circular, is as follows:- Benchmarking human capital productivity in the globalised competitive milieu is a major challenge. Ever changing business environment and processes lay more emphasis on meaningful employment at optimum cost. Besides building capabilities through continuous improvement of skills, it calls for adaptability to change as well as readiness to move with the business requirements both physically and mentally. Redeployments/transfers across locations and businesses, reorientation of mindsets, skills upgradation, and education enhancement are same of the options to optimise human productivity. While management has tremendous faith in human potentialities, it appreciates the fact that interplay of situational aspects may make it difficult for many to join the journey to the new era where only knowledge skills will sustain. Keeping such hu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cash equivalent to accumulated Privilege Leave. 2.3 Cash equivalent to accumulated Sick Leave subject to maximum of 100 days. 2.4 Encashment of unavailed Leave Travel Concession (up to the block year 2007-08) for Non-supervisory employees and their dependents. 2.5 Transfer benefits for self and dependents as admissible under the Travelling Allowance Rules on superannuation. 2.6 The balance in Provident Fund Account payable as per the PF Rules. 2.7 Payment of Gratuity as per the Gratuity Scheme. 2.8 One month Notice Pay (Basic pay plus IDA) in lieu of notice period. 6. In terms of the aforesaid Scheme, the appellant took insurance coverage in the month of March, 2008, for such employees who had opted for VSS under the Special Contingency Insurance Nivrutti Raksha Policy, Insurance policy issued by the Oriental Insurance Company Limited and availed CENVAT credit of the service tax paid on the insurance premium. 7. A show cause notice dated 25.06.2010 was, however, issued to the appellant inter alia alleging that: a. The premium paid by the appellant towards medi-claim policies for IPCL employees who had opted for VSS was paid on behalf of employees who w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Karnataka High Court in Commissioner of Central Excise, Bangalore-II v/s Millipore India Pvt. Ltd. 2012 (26) S.T.R. 514 (Kar.), which decisions were followed by a learned member of the Tribunal in Essel Propack Ltd. v/s Commissioner of CGST, Bhiwandi 2018 (362) E.L.T. 833 (Tri.Mumbai) 10. The Division Bench, while hearing the appeal, noted that the issue involved was not in respect of serving employees of the appellant but was in respect of employees who had opted to avail VSS. The Bench observed that the observation of the Commissioner that it was necessary to establish that the premium paid to the insurance companies for medical insurance of retired employees had some connection or nexus with the manufacturing activities was in line with the decisions of the Tribunal in Telco Construction Equipment Co. Ltd. v/s C.C.E. CUS., Belgaum 2013 (32) S.T.R. 482 (Tri.- Bang.) and Sundaram Brake Linings v/s Commissioner of Central Excise., Chennai-II 2014 (34) S.T.R. 583 (Tri.-Chennai). However, the Division Bench felt it necessary to also observe that credit would not be admissible for that part of service tax that was paid for insurance premium of the family members of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined under Rule 8. Such a theoretical application of the principles laid down in CAS-4, without even determining the applicability of the same to the appellant assessee may not be what has been stated by the Hon ble Karnataka High Court. In para 4.16 we have already stated that all such decisions need reconsideration. 14. The Division Bench also observed that the decision of the Tribunal in Essel Propack would also require reconsideration for following reason: 4.22 Though the above decision has been rendered by a coordinate bench, we are not in position to agree with the same. The settled position in law is that the services, which are considered as input services should qualify as per the test laid down by the Rule 2 (0) of the CENVAT Credit Rule, 2004. Even without any reference to the said definition and the test laid down th rein as held in various decisions referred earlier by us, the bench have 'proceeded to hold the admissibility to CENVAT Credit on the basis of beneficial aspects of the CSR activities Undertaken by the Companies as per the provisions of Companies Act. What was the nexus direct or indirect between the manufactured goods and the activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the appellant made the following submissions: (i) The issue has been settled in favour of the appellant in the two decisions of the Tribunal rendered in its own matter in Reliance Industries , following the decision of the Karnataka High Court in Millipore India ; (ii) The amount paid as premium is not a gratuitous payment made on behalf of the employees, but is towards the contractual obligations which the appellant was required to fulfil under the VSS announced by it, aimed at keeping the operations of the company viable and sustainable in the long run; (iii) There is otherwise also no justification for disallowing CENVAT credit on input services incurred for staff welfare, merely because they are incurred voluntarily; (iv) The premium paid to the insurance company towards medical insurance for the VSS optees was a single premium or one-time premium paid to the Oriental Insurance Company. The said fact is recorded in the Schedule of the policy; (v) All premiums were paid prior to the employees being relieved from service. In other words, premiums were paid at a time when the VSS optees were still in the employment of the appellant and had not been relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of IPCL (which had been taken over by the appellant) at the Vadodara Complex who had attained 40 years of age or had completed 10 years of service. It was realized that the changing business environment and processes laid more emphasis on meaningful employment at optimum cost which called for adaptability to change as well as readiness to move with the business requirement and though the management had faith in human potentialities, it appreciated that interplay of situational aspects makes it difficult for many employees to join the journey to the new era where only knowledge and skills will sustain. It is for this reason and keeping such human aspects in view that the management decided to provide opportunity for voluntary separation to the employees. As such, employees whose application for voluntary separation was accepted by the management would be entitled to certain compensation/ benefits enumerated in paragraph 2 to the Scheme. Basically, the said employees would be entitled to payment of two months salary for each completed year of service, subject to a minimum of ₹ 10 lakhs plus 2 months of salary for each year of service remaining before attaining the age of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsurance premium on which CENVAT credit was availed pertained to employees who would no longer be providing any service to the appellant on acceptance of the VSS application. 25. This precise issue had come up for consideration first before a learned Member of the Tribunal at Mumbai in a matter concerning the appellant and thereafter before a Division Bench of the Tribunal at Mumbai again in a matter pertaining to the appellant. 26. In the first decision rendered on 02.01.2015, which decision is reported in 2015 (38) STR 217 (Tri-Mum), the appellant had availed CENVAT credit of duty paid on inputs, capital goods and input services but this was sought to be disallowed on the ground that the premium paid by the appellant in respect of the group insurance/ insurance of employees, including retired employees/ medi-claim is not covered under the definition of input service as it had no direct nexus with the manufacture of the final products. The learned Member of the Tribunal did not accept this contention in view of the observations made by the Karnataka High Court in Millipore India and the observations are as follows:- 3. Having considered the rival submissions, I agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Mum) has held that such credit is available relying on the judgement of the Hon'ble High Court of Karnataka in the case of Millipore India Ltd. - 2012 (26) STR 514 (Kar.). On an identical issue for the earlier period, this Bench having taken a view that the appellant is eligible to avail CENVAT credit, following the same, we hold that the appellant is eligible to avail CENVAT credit of the service tax paid on the premium of the insurance cover extended to their employees who are retired. (emphasis supplied) 28. As the aforesaid decisions of the Tribunal place reliance upon the judgment of the Karnataka High Court in Millipore India , it would be useful to refer to this judgment. The appellant therein had availed credit on service tax paid on certain services. The Assessing Authority disallowed the credit and the Commissioner (Appeals) upheld the order of the Assessing Authority, except in respect of transportation charges. Feeling aggrieved by the said order of the Commissioner (Appeals), the appellant filed an appeal before the Tribunal. The Tribunal referred to CAS-4 and observed as follows: 6. Therefore, it is clear that those factors have to be taken int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel for the appellant has substance. As noticed above, VSS was for the existing employees and was not an option to be exercised by those employees who had retired. In fact, compensation/benefits under the VSS were to extend only up to the notional age of superannuation of the employees who had opted for VSS. It was in order to avoid continued losses and to bring about a situation that would enable the appellant to run its business and manufacturing activities that the Scheme was floated. Input service, as defined in rule 2(l) of the 2004 Rules, means any service used by the manufacturer directly or indirectly, in or in relation to the manufacture of final products and includes services used in relation to activities relating to business. The aforesaid service has been used by the appellant directly in relation to activities relating to business. The Scheme, therefore, certainly has a direct nexus to the manufacturing operations. 32. In this connection, it would be appropriate to refer to the decision of the Bombay High Court in Coca Cola India , wherein the definition of input service under rule 2(l) of the 2004 Rules, as stood prior to its amendment made on 01.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacture of final products (ii) Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal (iii) Services used in relation to setting up, modernization, renovation or repairs of a factory, or an office relating to such factory, (iv) Services used in relation to advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, (v) Services used in relation to activities relating to business and outward transportation upto the place of removal. Each limb of the definition of input service can be considered as an independent benefit or concession exemption. If an assessee can satisfy any one of the limbs of the above benefit, exemption or concession, then credit of the input service would be available. This would be so even if the assessee does not satisfy other limb/limbs of the above definition. To illustrate, input services used in relation to setting up, modernization, renovation or repairs of a factory will be allowed as credit, even if they are assumed as not an activity relating to business as long as they are associated directly or in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit relating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal. Thus, the definition of input service not only covers services, which fall in the substantial part, but also covers services, which are covered under the inclusive part of the definition. (emphasis supplied) 34. It needs be noted here that though the Bombay High Court in Ultratech Cement categorised input service into three categories, as against five categories by the Bombay High Court in Coca Cola India , there is actually no difference between the two judgments as the third category in Ultratech Cement covers the last three of the five categories mentioned in Coca Cola India . 35. The following two principles from the aforesaid two judgments of the Bombay High Court would be of relevance to the present dispute: a) The definition of input service is of wide import and covers not only input services which have a nexus with the manufacture of the final product (covered by the first limb), but also other in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices used in relation to the manufacture of final products, because the definition of input service is wider than the definition of input . 38. What, therefore, follows is that contrary views have not been expressed by any Court or Tribunal on the aforesaid two principles culled out from the decisions of the Supreme Court in Coca Cola India and Ultratech Cement. 39. It also needs to be noted that the one time amount paid by the appellant as premium towards the medical insurance policy is borne out of a contractual obligation in the regular course of its business and cannot be termed as a gratuitous payment, which would depend on the free will of a person. The premium amount paid by the appellant effectuates a Scheme of early retirement, a part of the golden handshake between the appellant and its employees who agree to take premature termination of the employment contract, aimed at keeping the business operations of the appellant cost effective and viable. 40. It would also be useful to refer to a decision of a learned Member of the Tribunal in Essel Propack. CENVAT credit had been denied to the appellant in regard to the service tax paid to a Charitable Tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was for this reason that it was held that the decisions which equated the said responsibility as charity alone would be of no avail. The Tribunal not only took note of the statutory definition of input service in rule 2 (l), but also gave reasons for holding that the nexus between the activities undertaken and the business of manufacture had been clearly established. The view taken by Division Bench referring the matter to the Larger Bench that Essel Propack did not refer to the definition of input service in rule 2 (l) and the test of nexus contemplated therein was not examined is, therefore, factually incorrect. 42. The Division Bench, while referring the matter for constitution of a Larger Bench also observed in paragraph 4.4 that the issue under consideration is not in respect of the serving employees of the appellant but is in respect of the insurance premium paid by the appellant towards medical insurance cover for the employee and spouse, who opt for the VSS . 43. As noticed above, VSS could be opted only by the serving employees of the appellant and the insurance cover was also only up to the notional age superannuation. 44. In regard to the finding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly or indirectly in relation to the manufacture and also to the decision of the Tribunal in Maruti Suzuki wherein though CENVAT credit on service tax paid on insurance covered for employees was found to be validly availed in terms of the contractual arrangements but it was denied for family members. The Division Bench also placed reliance upon the decision of the Tribunal in Mercedes Benz India , wherein the credit on service tax paid for insurance of family members of the employee was denied. 47. Except for the decision in Oudh Sugar Mills , four of the aforesaid five decisions do not even refer to or take note of the judgments of the Bombay High Court in Coca Cola India and Ultratech Cement. 48. Oudh Sugar Mills relies upon a judgment of the Bombay High Court in Manikgarh Cement. The view taken in Manikgarh Cement , is seemingly at odds with the view taken in Coca Cola India and Ultratech Cement . Even though the judgment in Coca Cola India was pronounced earlier in point of time, the same was not brought to the notice of the High Court in Manikgarh Cement . This apart, the reasoning and the arguments, which found acceptance of the Bombay High Court in C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant before the lower authorities as well as before us. (emphasis supplied) 50. This apart, the issue as to whether credit could also be availed in respect of that part of service tax paid on insurance premium relating to members of the family of the employee who had sought VSS was not an issue raised in the show cause notice and, therefore, was not required to be considered. What was actually required to be examined was whether credit of the service tax paid could be availed on the insurance premium paid in respect of existing employees who opted for and were granted voluntary separation under the contractual VSS. 51. The Division Bench also noticed that in Deloitte Support Services India , the Tribunal did not accept the contention of the department that group insurance premium did not directly or indirectly relate to output services. The Division Bench also considered the decision of a learned member of the Tribunal in Essel Propack wherein Corporate Social Responsibility was considered to be an input service since it was in connection with activities relating to business . Incidentally, the same learned Member who decided Essel Propack was also a Member of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid towards premium would form part of the cost of production in terms of CAS-4. 55. This issue was examined by the Commissioner who held that inclusion of cost of production was not a criteria for considering a service as input service. The Division Bench, after reproducing paragraphs 4.1 and 5.2 of CAS-4 issued by the Council of the Institute of Cost and Works Accountants of India as also to the judgment of the Karnataka High Court in Milipore India, observed as follows: 4.15 From the above also it is quite evident that the benefits as enumerated are with reference to the employees directly engaged in the manufacturing activity. The employees who opt for the VRS and are provided medical insurance benefit for themselves and the spouse cannot be said to be covered by the phrase employees directly engaged in the manufacturing activities. Further before any reference is made to CAS-4, it is quite relevant to note what was the purpose of CAS-4, and is it applicable to the case of determination of eligibility to CENVAT Credit. 56. The Division Bench thereafter referred to the Introduction to CAS-4 and observed as follows: 4.15 From the above it is quite evident th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is collected at the time of removal or clearance from the place of manufacture even if such removal does not amount to sale. Assessable value of goods used for captive consumption is based on cost of production. According to the Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000, the assessable value of goods used for captive consumption is 115% (110% w.e.f. 05-08-2003) of cost of production of such goods, and as may be prescribed by the Government from time to time. 2. Objective 2.1 The purpose of this standard is to bring uniformity in the principles and methods used for determining the cost of production of excisable goods used for captive consumption. 2.2 The cost statement prepared based on standard will be used for determination of assessable value of excisable goods used for captive consumption. 2.3 The standard and its disclosure requirement will provide better transparency in the valuation of excisable goods used for captive consumption. 3. Scope 3.1 The standard is to be followed for determining the cost of production to arrive at an assessable value of excisable goods used for captive consumption. 3.2 Cost of product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us/ ex-gratia payment to employees (iii) Provision for retirement benefits such as gratuity and superannuation (iv) Medical benefits (v) Subsidised food (vi) Leave with pay and holiday payment (vii) Leave encashment (viii) Other allowances such as children s education allowance, conveyance allowance which are payable to employees in the normal course of business etc. 59. According to the referring Division Bench, reference to CAS-4 for the purposes of determining eligibility to CENVAT credit on input services under rule 2(l) of the 2004 Rules is dependent upon whether the cost of the input services on which CENVAT credit is availed, actually forms part of the assessable value in terms of rule 8 of the Central Excise Valuation Rules, 2000. In other words, cost of production of finished goods is relevant for the purpose of valuation of the finished goods only under rule 8 and not otherwise. Thus, if duty on the finished goods is discharged with reference to transaction value under section 4 of the Central Excise Act, 1944 or under some other rule, then the concept of cost of production becomes irrelevant, not only for the purpose of valuation, but also for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said credit in discharging the excise duty/CENVAT payable on the cement manufactured by the assessee? 25. In the present case, the CESTAT following the Larger Bench decision of the Tribunal in the case of GTC Industries Ltd. (supra) held that the assessee is entitled to the credit of service tax paid on the outdoor catering services. According to the Revenue, the Tribunal was wrong in relying upon Larger Bench decision of the CESTAT in the case of GTC Industries Ltd. (supra) because in that case the CENVAT on the final product was payable on the assessable value, whereas in the present case the CENVAT on cement is payable on tonnage basis. We see no merit in the above contention because, if in law the assessee is entitled to take credit of service tax paid on outdoor catering services then the said credit cannot be denied merely because the duty on cement is levied on tonnage basis. Therefore, the fact that the CENVAT on cement is payable on tonnage basis cannot be a ground to deny the credit of service tax if in law the assessee is entitled to the credit of service tax paid on outdoor catering service. 62. The two decisions of the Tribunal in Reliance Industries in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the cost of production, there is no reason to take a contrary view. 66. The Referral Order in paragraph 4.15 made the following observations: 4.15 From the above also it is quite evident that the benefits as enumerated are with reference to the employees directly engaged in the manufacturing activity. The employees who opt for the VRS and are provided medical insurance benefit for themselves and the spouse cannot be said to be covered by the phrase employees directly engaged in the manufacturing activities. (emphasis original) 67. The above observations were made after referring to paragraph 5 of the judgment of the Karnataka High Court in Millipore India , wherein paragraphs 4.1 and 5.2 of CAS-4 were extracted. It is important to note that paragraph 5.2 is not the only provision in CAS-4, which deals with costs relating to employees. Paragraph 5.2 of CAS-4 deals only with the meaning of the expression, direct wages and salaries , which is only one of the many items that go into preparation of a CAS-4 Certificate, as is clear from direct wages and salaries appearing at Serial No. 2 of the Certificate. There are other components such as works overheads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al benefits pertaining to employees and dependents, even if they are in terms of VRS/retirement/separation schemes, are an integral part of the employee cost . 71. The two issues that have been referred to the Larger Bench of the Tribunal are, therefore, answered in following manner: (i) The answer to the first issue would be: a. The Bombay High Court in Coca Cola India and Ultratech Cement has settled the interpretation of input service in rule 2(l) of the 2004 Rules, as it stood prior to its amendment on 01.04.2011; b. The definition of input service can be effectively divided into the following five categories, in so far as a manufacturer is concerned: (i) Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products; (ii) Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal; (iii) Services used in relation to setting up, modernization, renovation or repairs of a factory, or an office relating to such factory; (iv) Services used in relation to advertisement or sales promotion, market research, storage ..... X X X X Extracts X X X X X X X X Extracts X X X X
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