By TIOL News Service

MUMBAI, JULY 01, 2016: THE Appellant is rendering Transportation of Gas through pipeline services, for which it has laid cross-country pipelines from Kakinada in Andhra Pradesh to Bharuch in Gujarat, spanning around 1285 kms over which right of way has been granted to it by the respective State Governments.

The said pipeline was commissioned in March 2009. The dispute relates to the CENVAT Credit availed on input services and capital goods between March 2008 and March 2009 i.e. prior to the commissioning of the pipeline.

It is the case of the department that the said services were availed for creating an immovable property and that the Tribunal has in the case of Bharti Airtel vs CCE - 2012-TIOL-209-CESTAT-MUM held that credit on goods and services used in the erection of a telecom tower, which is a immoveable property, cannot be availed under the CCR. Insofar as the credit on other input services and capital goods is concerned, the respondent has denied the same only on the ground that appellant was under an obligation to provide the input services and the pipes, valves, compressor, etc. (capital goods) for the purpose of laying the pipeline, consequently credit on the same was not admissible in the hands of the appellant and would be an input/input service for the pipeline laying contractor, who could have taken credit.

It is pertinent to note that the credit on inputs, input services and capital goods availed after the commissioning of the pipe line, though disputed in the show cause notice, have been held by the respondent to be admissible, which finding has become final as the same was not reviewed nor appealed against by Revenue.

Against the order of denial of credit on Input services and capital goods availed prior to commissioning of the pipeline, the appellant is before the CESTAT.

The break up of this demand is as below–

Interestingly, the application for stay came to be decided by the CESTAT by a Majority and when it was held thus –

ST - Transportation of Gas through Pipeline - Services of CICS, ECIS, WCS rendered by pipeline laying contractors is  prima facie an Input Service and CENVAT credit is admissible - Pre-deposit of Rs.262.13 crores waived and stay granted: CESTAT by Majority

We reported this order as 2015-TIOL-1068-CESTAT-MUM.

The appeal was heard recently.

After considering the submissions, the Bench crystallised the issue and made the following observations -

i) Denial of the credit in respect of the tax paid by the pipeline laying contractors on the premise that the said services had been availed of for creation of an immoveable property

+ The main limb of the definition of input service qua a service provider stipulates that credit would be admissible in respect of any service used by a provider of output service for providing an output service. We are concerned here with credit of service that has been used for laying a pipeline, which by itself was used for providing the output service of transportation of gas through pipeline. There cannot be a more direct immediate nexus, between availing the input services and rendition of output service. It is beyond our comprehension as to how the Appellant could have rendered its output service without availing of the services of the pipeline laying contractors. The said services in our view are clearly eligible to credit by virtue of the main limb of the definition of input services.

+ To us it appears completely inconceivable that when the Central Government framed the definition of input service to cover therein services used for setting up a factory / premises of an output service provider, it intended to cover only such input services that were consumed in relation to setting up a factory/office that was mobile or could be moved from one place to other and not a factory or office that was attached to earth and immoveable. To our understanding it is only in exceptional situations that one can have factory / premises which are not immoveable, most factories and premises will be immoveable. In our view any service used in relation to setting up a premises of output service provider is eligible for credit and the concept of movability or immovability, is irrelevant for determining eligibility to input service credit.

ii) Denial of Credit in respect of the other service providers and in respect of capital goods on the ground that the same were not used by the Appellant for rendering its output service but were instead used by the pipe line laying contractors.

Other Service providers:

+ All these service providers [Consulting Engineer Services, GTA, Rent-a-cab, CHA, BAS] were engaged, contracted and paid for by the Appellant. It is the Appellant who has availed the services from the different service providers for ultimate rendition of its output services, being transportation of goods through pipeline.

+ The mere fact that some of these services could as well have been contracted for, by the pipeline laying contractors if the agreement between the Appellant and the pipeline laying contractor so envisaged, such a hypothetical possibility cannot lead to denial of credit in the hands of the Appellant, who has contracted for and availed of the services. In any service contract, it is the scope of the agreement between the service provider and the service recipient that is relevant and needs to be examined for determining the scope of service.

+ From the record it clearly comes out that the privity of contract in the instant case was between the Appellant and the service provider and that these service providers were under no obligation whatsoever to the pipeline laying contractor nor were the pipeline laying contractors under any obligation to pay for the said services or to compensate or otherwise for the deficiency in the services of the said service providers. This being the case the finding that services availed of from the other service providers as also the capital goods were used by the pipeline laying contractors is clearly untenable.

Capital goods:

+ It is not in dispute that pipes, valves and compressor on which credit had been availed are all specified capital goods on which credit is available as capital goods. There is also no dispute that these pipes, valves, compressors are all being used for rendition of the output service.

+ The High Court in the case of Bharti Airtel - 2014-TIOL-1452-HC-MUM-ST was concerned with the credit on steel items which are not specified capital goods. Even the Tower that was erected was classifiable under chapter 7308, is not specified capital goods. It is in this context that the High Court held that credit was not admissible as capital goods since the items on which credit was availed were not specified capital goods nor the items into which they were fabricated was a specified capital goods. The decision of the High Court has been rendered in the context of the specific facts of that case.

+ In the instant case the pipes, compressor, valves, etc. on which credit has been availed as capital goods are undisputedly all specified capital goods by themselves. The right to avail credit in respect of such capital goods accrues the minute they are received in the premises of the provider of output service provider. The same have also clearly been used for rendering the output service, as without the valves, pipes, compressors, etc. the service of transportation of goods through pipeline would not have been rendered. The right to avail credit in respect of the same is clearly indefeasible.

Limitation:

++ The demand raised against the Appellant is hopelessly barred by limitation inasmuch as the Appellant had made a clean breast of all the relevant facts under cover of its letter dated 28.7.2006 before availing credit. It appears that the Revenue had initially agreed to the Appellants entitlement to the eligibility to credit and as for this reason did not raise any objection from 2006 onwards, since then the Appellant has been availing credit. Even on the subsequent audit that were conducted by the anti-evasion team in the year 2010 and C&AG in the year 2012, no such objection seems to have been raised. If the revenue on a later date wants to take a different view in the matter, there is definitely no warrant alleging suppression of facts and invoking the extended period of limitation.

The appeal was allowed, both on merits as well as limitation.

(See 2016-TIOL-1593-CESTAT-MUM)