NOVEMBER 08, 2010

By Joseph Prabakar, Advocate

IN one of the finest decisions in the recent past, the Bombay High Court in the case of CCE Nagpur Vs Ultratech Cement Ltd rendered on October 25, 2010 (2010-TIOL-745-HC-MUM-ST), had explained certain basic concepts of the term ‘Input Service’ under the CENVAT  Credit Rules, 2004 (hereinafter referred to as CCR 04).

The definition of ‘Input Service’ under Rule 2(l) of the CCR 04, with effect from April 1, 2008 is reproduced below.

‘(l) "input service" means any service,-

(i) used by a provider 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 up to the place of removal,and includes services used in relation to setting up, 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 rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation up to the place of removal.’

There have been controversies on the question of what would constitute ‘Input Service’ and whether a particular service would be eligible under the CCR 04. The main issue revolved around the question of whether ‘Input Service’ should have correlation with the manufacture of final product / providing taxable service or whether it is sufficient if the activity has nexus with the ‘business’. It is this question which has been answered in an authoritative manner by the Bombay High Court in the decision of Ultratech Cement.

Readers may recall that the Larger Bench of the Tribunal dated September 25, 2008, in the case GTC Industries Ltd (2008-TIOL-1634-CESTAT-MUM-LB) had held that Catering service is an ‘Input service’ relating to business and hence a manufacturer can avail CENVAT  credit on  Catering Services. The Larger Bench of the Tribunal in its detailed decision had observed as follows.

The context in which and the purpose for which the credit rules have been issued are clear from the press note dated August 12, 2004 issued by the Ministry of Finance, prior to introduction of the credit rules wherein the draft rules were circulated for inviting comments from trade and industry. This note clearly states that “In principle, credit of tax on those taxable services would be allowed that go to form a part of the assessable value of  which excise duty is charged”.

Thereafter,  the larger Bench of the Tribunal in the case of ABB Ltd, in its decision on May 18, 2009 (2009-TIOL-830-CESTAT-BANG-LB) in the context of eligibility of ‘Outward Transportation’ services once again reiterated the basic principle that the term ‘Input Service’ is much wider than the term ‘Input’ occurring in CCR 04. The Tribunal, in the case of ABB Ltd in a very well discussed decision, distinguished several decisions relied on by the revenue and had held as follows.

‘24.In the light of the discussion, we hold that the definition of “input service” has to be interpreted in the light of the requirements of business and it cannot be read restrictively so as to confine only upto the factory or upto the depot of manufacturers.’

As if these decisions which exhaustively explained the concept of ‘Input Service’  were not enough for the revenue, the Bombay High  Court  in the case of Coca Cola India Pvt Ltd examined the issue all over again and reiterated the principles in its decision dated August 26, 2009 (2009-TIOL-449-HC-MUM-ST). The Bombay High  Court in this case made the following pertinent observation. 

‘39.The definition of input service which has been reproduced earlier, 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 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 indirectly in relation to manufacture of final products and transportation of final products upto the place of removal.’

Thus, the Bombay High Court had held that an activity would be eligible as ‘Input Service’ if it relates to the business of the manufacturer notwithstanding the fact that the said activity may not have  any direct relation or nexus with the manufacture of the final product.

Thus, when the Trade and Industry thought that the issue had been finally settled, there arose the controversy on eligibility of several Input Services like Rent a cab services, Garden Maintenance etc.,. And to add to this uncertainty,  the Tribunal in  its recent decision rendered on June 18, 2010, in the case of Sundaram Brake Linings  Ltd (2010-TIOL-863-CESTAT-MAD) held that Catering Service is not an ‘Input Service’ within the meaning of CCR 04 on the contention that use of Input Service must be integrally connected with manufacture of final product for credit entitlement.

In this case, the Tribunal had distinguished the Larger Bench decision of the Tribunal in GTC Industries Ltd  by relying on the decision of the Supreme Court in the case of Maruti Suzuki Ltd. However, the crucial point is that the Supreme Court in the case of Maruti Suzuki Ltd only examined the term ‘Input’ and had laid down certain ratio with reference to Input. In other words, the Supreme Court had no occasion to examine the concept of ‘Input Service’ in the case of Maruti Suzuki Ltd. Also, it may be worthwhile to note that the Madras High Court had stayed the operation of the Order of the Tribunal.

In fact, in one of the  well reasoned decisions, the Bombay Tribunal examined the argument of the revenue on the basis of the decision of the Supreme Court in Maruti Suzuki Ltd. In the case of ISMT Ltd Vs Commissioner of Central Excise and Customs, Aurangabad (2010-TIOL-27-CESTAT-MUM), the Tribunal holding that Garden maintenance is eligible as an ‘Input Service’ observed as follows. 

‘13.I have gone through the definition of “input” and “input service” both. In the definition of “input” the definition is mainly emphasized for input and after the word includes the definition reads as lubricating oils, greases, cutting oils, coolants, accessories of for the final products cleared along with final product, goods used as paint, or as packing material, or as fuel or for generation of electricity or steam used in or in relation to the manufacture of final product or for other purpose within the factory of production.

14.Both the definitions are not at all comparable or para material (sic) pari materia and coverage of the “input service” is definitely wider……..

18.From the above, it is clear that the intention of the Legislature was that these activities should be relating to the business. But in the case of Maruti Suzuki, the Hon’ble Apex Court has considered the word “input” in Rule 2(k) of Cenvat Credit Rules, 2004 and there is no finding with regard to “input service”. Therefore, the reference of ld. DR in the case of Maruti Suzuki is no help to him.’

Also, the Bombay High Court in its decision rendered on September 27, 2010, in the case of the same manufacturer in CCE, Nagpur Vs  Ultratech Cement reported in (2010-TIOL-686-HC-MUM-ST) had held that CENVAT Credit on service tax paid on mobile phones would be eligible to a manufacturer.

Now coming back to the decision of the Bombay High Court in Ultratech Cement Ltd, rendered on October 25, 2010, it may be noted that the said decision assumes significance  for various reasons.

First and the foremost is that the revenue relied very heavily on the decision of the Supreme Court in the case of Maruti Suzuki Ltd and the Bombay High Court had discussed Maruti Suzuki Ltd case thoroughly and had distinguished the  said decision. The discussion of the Bombay Court is so exhaustive that the revenue can no longer refer to Maruti Suzuki Ltd case in a matter relating to ‘Input Service’.

In fact the Bombay High Court  not only distinguished the  decision in Maruti Suzuki Ltd  but had also relied on the ratio of the Supreme  Court to drive home the point that services which have nexus or integral connection with the business of manufacture of final product would be eligible as ‘Input Service’. This is evident from the following observation of the Bombay High Court 

31. In our opinion, the ratio laid down by the Apex Court in the  case of Maruti Suzuki Ltd. (supra) in the context of the definition of 'input' in Rule 2(k) of 2004 Rules would equally apply while interpreting the expression "activities relating to business" in Rule 2(l) of 2004 Rules. No doubt that the inclusive part of the definition of 'input' is restricted to the inputs used in or in relation to the manufacture of final products, whereas the inclusive part of the definition of input service extends to services used prior to/during the course of/after the manufacture of the final products. The fact that the definition of 'input service' is wider than the definition of 'input' would make no difference in applying the ratio laid down in the case of Maruti Suzuki Ltd. (supra) while interpreting the scope of 'input service'. Accordingly, in the light of the judgment of the Apex Court in the case of Maruti Suzuki Ltd. (supra), we hold that the 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.

33…………In other words, by applying the ratio laid down by the Apex Court in the case of Maruti Suzuki Ltd. (supra), it cannot be said that the definition of 'input service' is restricted to the services used in relation to the manufacture of final products, because the definition of 'input service' is wider than the definition of 'input'.

Secondly, the Bombay High Court had also confirmed the view of the same High Court in Coca Cola India Pvt Ltd and concurred with the principle laid down therein.

Thirdly, the Court traced the history of proforma credit and Modvat credit and had explained the concept integration of CENVAT credit through introduction of CCR 04 and laid down certain fundamental principles governing the eligibility  of ‘Input Service’. The relevant observation of the High Court is reproduced below.

’28………In other words, the definition of "input service" is very wide and covers not only services, which are directly or indirectly used in or in relation to the manufacture of final products but also includes various services used in relation to the business of manufacture of final products, be it prior to the manufacture of final products or after the manufacture of final products. To put it differently, the definition of input service is not restricted to services used in or in relation to manufacture of final products, but extends to all services used in relation to the business of manufacturing the final product.

Thus, in the light of the above emphatic observations of the High Court, it would only be natural that matters relating to ‘Input Services’ would have to be decided based on the ratio laid down in this decision. Incidentally, the Larger Bench decision in the case of ABB Ltd  on ‘Outward Transportation’ is presently before the Karnataka High Court pending final hearing. In view of this land mark decision in Ultratech Limited, the final decision in ABB Ltd  by Karnataka High Court  would be a mere formality since the ratio laid down in Ultratech Limited case with reference to catering services should apply with equal or more force to ‘Outward Transportation’ especially for the period prior to March 31, 2008. Similarly, in the recent past, there have been several well reasoned decisions of the Tribunal on the eligibility of CENVAT credit on Garden Maintenance and these decisions would  now get the authenticity  for the Tribunal to follow the Bombay High Court decision.

Lastly, it is important to note that the High Court had held that for a service to qualify as ‘Input Service’, the said service should be integrally connected with the business of the manufacture of final product. The observation of the High Court in this regard is reproduced below.

29. The expression "activities in relation to business" in the definition of "input service" postulates activities which are integrally connected with the business of the assessee. If the activity is not integrally connected with the business of the manufacture of final product, the service would not qualify to be a input service under Rule 2(l) of the 2004 Rules.’

While it may be interesting to note the positive aspect of Ultratech decision, it may be important to note that the Bombay High Court  in its recent decision rendered on October 11, 2010, in the case of CCE, Nagpur Vs Manikargh Cement reported in (2010-TIOL-720-HC-MUM-ST) held that Service Tax paid on services of repair, maintenance and Civil constructions used in the residential colony is not admissible. In this regard, the Court made the following observation.

‘8. In our opinion, establishing a residential colony for the employees and rendering taxable services in that residential colony may be a welfare activity undertaken while carrying on the business and such an expenditure may be allowable under the Income Tax Act. However, to qualify as an input service, the activity must have nexus with the business of the assessee. The expression 'relating to business' in rule 2(l) of CENVAT Credit Rules, 2004 refers to activities which are integrally related to the business activity of the assessee and not welfare activities undertaken by the assessee.’

Thus, the High Court had categorically held that merely because an expenditure is allowed under the Income Tax Act, 1961, that cannot automatically mean that the service should be considered as ‘Input Service’ under CCR 04. 

It is therefore high time that the Government came out with clear clarification on the eligibility of ‘Input Service’ in the light of the decision in Ultratech Cement.

(The Author is Chennai -based Advocate)