By TIOL News Service

MUMBAI, NOV 08, 2010: ON scrutiny of the CENVAT register, it was noticed by the Excise Authorities that, during the period 2004-08, the assessee had availed credit of service tax paid on outdoor catering services under the provisions of CENVAT Credit Rules, 2004.

The Assistant Commissioner, Central Excise, Chandrapur was of the opinion that outdoor catering services was not a "Input service" under Rule 2 (l) of the Rules and therefore, the assessee was not entitled to take credit of service tax paid on outdoor catering services.

On issuance of show-cause notices, the assessee contended that, under the Factories Act, 1948, it was mandatory for the assessee to provide canteen facilities to the employees working in the plant and the administrative Offices of the assessee/Company. It was contended that, in order to comply with the aforesaid statutory requirement, the assessee had engaged the services of M/s. Shrikrishna Catering Services. Since the cost of food including service tax paid thereon by the Caterer was reimbursed by the assessee, it was contended that the assessee was entitled to take credit of the said service tax and utilize the same in paying the excise duty on the cement manufactured by the assessee.

Rejecting the contention 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 Rules. Accordingly, the Assessing Officer confirmed dis-allowance of the CENVAT credit.

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-TIOL-1634-CESTAT-MUM-LB. The larger Bench in this case 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.

Being aggrieved by the afore-said order passed by the Commissioner of Central Excise (A), the Revenue filed appeals before the CESTAT. By the impugned order, the CESTAT upheld the order of the Commissioner of Central Excise (A) by following the larger Bench decision of the Tribunal in the case of GTC Industries Ltd.

Challenging the said order of the Tribunal, the Revenue has filed the present appeal before the High Court. The High Court was informed that the appeal filed by the Revenue against the larger Bench decision of the Tribunal in the case of GTC Industries Ltd is pending before the Principal Bench of the High Court at Mumbai.

The question, therefore, to be considered is, whether the service of an outdoor caterer used by the assessee is an 'input service' used in the manufacture of cement?

The High Court observed, “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 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.”

The High Court further observed, “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.”

The High Court opined that the ratio laid down by the Apex Court in the case of Maruti Suzuki Ltd. - 2009-TIOL-94-SC-CX 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 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, the High Court held 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.

It was 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 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.

The High Court held that 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 indirectly in or in relation to manufacture of final products, but also includes services used in relation to the business of manufacturing the final products. Therefore, while interpreting the words used in the definition of 'input service', the ratio laid down by the Apex Court in the context of the definition of 'input' alone would apply and not the judgment in its entirety. In other words, by applying the ratio laid down by the Apex Court in the case of Maruti Suzuki Ltd, 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'.

Therefore, the High Court held, “the definition of input service read as a whole makes it clear that the said definition not only covers services, which are used directly or indirectly in or in relation to the manufacture of final product, but also includes other services, which have direct nexus or which are integrally connected with the business of manufacturing the final product. In the facts of the present case, use of the outdoor catering services is integrally connected with the business of manufacturing cement and therefore, credit of service tax paid on outdoor catering services would be allowable”.

The High Court held that the argument of the Revenue, that the expression "such as" in the definition of input service is exhaustive and is restricted to the services named therein, is also devoid of any merit, because, the substantive part of the definition of 'input service' as well as the inclusive part of the definition of 'input service' purport to cover not only services used prior to the manufacture of final products, subsequent to the manufacture of final products but also services relating to the business such as accounting, auditing ..... etc. Thus the definition of input service seeks to cover every conceivable service used in the business of manufacturing the final products. Moreover, the categories of services enumerated after the expression 'such as' in the definition of 'input service' do not relate to any particular class or category of services, but refer to variety of services used in the business of manufacturing the final products. There is nothing in the definition of 'input service' to suggest that the Legislature intended 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, the High Court held 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.

The High Court further observed that 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 service or used in or in relation to manufacture of finished goods. Mobile phone service is neither used in the manufacture of final product nor it is specifically included in the definition of input service. Even then, the C.B.E.C. has construed the definition of input service widely so as to cover not only the services specifically enumerated in the definition of 'input service' but also cover all services which are used in relation to the business of manufacturing the final products. Therefore, the argument of the revenue which runs counter to stand taken by the C.B.E.C. cannot be accepted.

The High Court also noted the decision of the Division Bench of the same High Court in the case of Coca Cola India Pvt. Ltd.- 2009-TIOL-449-HC-MUM-ST. In that case, the question for consideration was, whether a manufacturer of non alcoholic beverage bases (concentrates) is eligible to avail credit of service tax paid on advertisement, sales promotion, market research etc. The argument of the revenue in that case was that the advertisements are not relatable to the concentrate manufactured by Coco Cola India Pvt. Ltd and hence, the credit in respect thereof cannot be allowed. Considering the Finance Minister's Budget Speech for 2004-05, press note issued by the Ministry of Finance along with the Draft 2004 Rules and various decisions of the Apex Court, this Court held that the expression 'activities in relation to business' in the inclusive part of the definition of 'input service' further widens the scope of input service so as to cover all services used in the business of manufacturing the final products and that the said definition is not restricted to the services enumerated in the definition of input service itself. The Court rejected the contention of the revenue that a service to qualify as an input service must be used in or in relation to the manufacture of the final products and held that any service used in relation to the business of manufacturing the final product would be an eligible input service.

This Bench concurred with the above decision of this Court in the case of Coco Cola India Pvt. Ltd. However, in that case, this Court has also held that the cost of any input service that forms part of value of final products would be eligible for CENVAT credit. That observation of the 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. 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.

The High Court however observed that the Larger Bench of CESTAT in the case of GTC Industries Ltd. 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. 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.

So the question of law framed by the revenue is answered in the affirmative, i.e. in favour of the assessee and against the revenue.

Please see our Guest Column - CENVAT on Input Services – Will the controversy end with Ultratech decision?

(See 2010-TIOL-745-HC-MUM-ST in 'Service Tax')