By TIOL News Service

NEW DELHI, SEPT 30, 2013: THE appellants are owners of shopping malls which consist of various shops. As the said shops are being given on rent by them, they are registered with the Service Tax department as a service provider falling under the category of "renting of immovable property services", along with 'maintenance and repair services' and 'sale of space or time for advertisement services'.

The dispute in the present appeals relates to the CENVAT credit availed by the appellants and utilised for providing output services of 'renting of immovable property services'.

The appellants have availed the credit of service tax paid in respect of various services such as Works Contract Services, security services, consultancy, housekeeping, repair, maintenance and Chartered Accountant etc. as also CENVAT credit in respect of cement, glass and steel used for construction of building under the Works Contract Services.

Revenue has entertained a view that CENVAT credit availed on various inputs like cement glass steel and iron used for construction of building and various input services are not eligible CENVATable services. Proceedings were initiated and demands were confirmed along with penalties and interest.

The appellants are before the CESTAT with Stay applications.

Submission by appellant: The said buildings were constructed by the builders under the "Works contract services' placed upon them and the said inputs, which has been used for the construction of the building are ultimately used for providing the services of renting of immovable property and as such, are eligible CENVATable inputs. AP High Court decision in Commissioner of Central Excise Visakhapatanam II vs. SaiSamhita Storages (P) Ltd. [2011-TIOL-863-HC-AP-CX] upholding the Tribunal's decision [ 2010-TIOL-1751-CESTAT-BANG ] holding that inputs used for construction of warehousing, for providing services of "storage and warehousing", are eligible CENVATable inputs and  Navaratna S.G. Highway Prop. Pvt. Ltd. vs. CST, Ahmedabad (2012-TIOL-1245-CESTAT-AHM) allowingCENVAT credit of Service Tax paid on various inputs services used for providing the output services of renting of immovable propertyare relied upon.

Revenue submission: Use of cement, glass and steel is for the purpose of construction of building and said inputs can be used for providing the output services falling under the 'work contract services'. Similarly, various inputs services utilised by the appellants on which the appellants have availed the credit cannot be held to be input services for providing said output services. The contention of the Revenue is that there has to be nexus between the inputs, input services and output services for availing credit.

View taken by Member(Judicial):

Eligibility of credit on “inputs” -

+ There is no dispute about the fact that cement, steel and glass stand used by the person who has provided the Works Contract Services for the construction of mall. These inputs do not stand utilised by the appellants. The person who has used the same for construction of the building is also required to pay Service Tax under the category of 'Works Contract Services'. Undisputedly, the Service Tax paid under the category of 'Works Contract Services' provided by the person who has constructed the mall is available as credit to the appellants.

+ When the 'Works Contract Services provider has opted for payment of Service Tax at a lesser rate on the condition of non-availment of credit of duty paid on the inputs used for construction of building, whether the same very credit can travel to the appellants who are the recipient of 'Works Contract Services'. It is well settled law that what cannot be done directly cannot be allowed to be done indirectly . In the present situation, the work contract service provider has already foregone the CENVAT credit paid on the raw materials so as to avail the credit of concessional rate of Service Tax; that foregone credit cannot travel to the appellant by jumping the 'Works Contract Service provider' .

+ We really fail to understand as to how and in which manner the appellants are claiming the CENVAT credit of duty paid on the raw materials, which are infact inputs for 'Works Contract” Service provider and on which he has already decided not to avail the credit as a condition of availment of lower payment of Service Tax.

+ We prima facie agree with the revenue that the input credit availed by the appellants is not in accordance with the law.

+ Case laws cited by the appellant were distinguished and the decision in Mundra Port and Special Economic Zone Ltd. vs. CCE, Rajkot (2008-TIOL-1691-CESTAT-AHM)   upheld by Gujarat High Court is referred to -while considering an identical situation the Bench had held that the credit of excise duty paid on the construction material i.e. cement, steel used for construction of jetty is not available to the provider of Port services, inasmuch as the same are used for output services of construction of building and not for providing port services.

+ appellants claim of CENVAT credit in respect of inputs used for the construction of malls does not have prima facie merits and the appellants are required to put to some terms of deposit on this count.

Eligibility of credit on “input services” -

+ appellant has availed the input service credit in respect of architecture services, security services, consultancy, housekeeping, repair and maintenance, Chartered Accountant services etc.

+ whereas some of the services stand utilised by the 'Works Contract” Service provider for the purpose of construction of building, the other services stand utilised directly by the appellant for the purpose of maintenance and repair of building etc. which stand rented to the third parties.

+ whereas some of the disputed services, which stand utilised by the appellant directly, may, prima facie , be admissible input services, the other which were availed by the Works Contract Service Provider cannot be held as admissible modvatable input services for the appellant.

Order of Pre-deposit:

+ We deem it fit to direct all the applicant-appellants to deposit 35% of the demand confirmed against them.

View taken by Member (Technical)

Eligibility of credit on “input services” -

+ I am not able to understand how any of these services cannot be considered to be availed by the appellant himself but by any person other than the appellant. The doubt appears to be about Architect's Service whether it is availed by the owner of the property (Appellant) or the contractor constructing the service. But in the normal course the owner of the property engages the architect and finalizes the design of the building then only the work is given to the contractor. Doubt if any in the case of services of consulting engineer is also prima facie misplaced because it is for the owner to take the service of the designer engineer to ensure the safety of the design conceived by the architect. The job of the contractor is to execute the work under supervision of the architect and consulting engineer. These credits cannot be denied without giving any cogent reason….To sum up I do not see any reason to call for any pre-deposit on amounts relating to credit on input services .

Eligibility of credit on “inputs” -

+ The eligibility to credit on inputs used in construction can be a disputable issue basically because there can be an argument that the construction contractor has availed benefit of Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 subject to the condition that he would not take credit of duty paid on inputs used in the construction activity so the appellant cannot now claim CENVAT credit.

+ Judicial Member has made an observation that what cannot be achieved directly cannot be achieved indirectly. This argument appears to be not correct in as much as Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 is an optional notification which an assessee need not avail and the contractor-assessee is entitled to avail credit of inputs used in construction and pay service tax utilizing such credit. So it is not as if something which is not permitted in law is being achieved by the appellant supplying the material to the contractor . If at all there is such an issue it is about eligibility for the contractor for the exemption under works contract scheme on account of free material being supplied by the appellant, which issue is under dispute before the Delhi High Court.

+ the Andhra Pradesh High Court in the case of  CCE, Visakhaptanam Vs. SaiSahmita Storages (P) Ltd. had allowed credit of inputs used in construction of warehouse used for providing warehousing services. The difference made out by Member Judicial between the facts of that case and the facts of this case that there is an intermediary of a contractor in between the assesse who takes credit and the person who uses the material in construction, though for the assesse, is also very thin and is arguable, considering the fact that CENVAT chain is not intended to be broken for such reason. I also note that in a situation where a job-worker manufactures goods CENVAT credit is not denied when there is an intermediary in between.

Order of Pre-deposit:

+ there is no justification for calling for any pre-deposit exceeding 35% of the credit involved on inputs and capital goods in each of the appeals for admission of each of the appeals.

Accordingly, the following point of difference in opinion was referred to the Third Member –

Whether pre-deposit of 35% of the total CENVAT Credit denied by the impugned order is to be called for admitting these appeals as directed by the Judicial Member?

Or

Whether pre-deposit of only 35% of the CENVAT Credit denied by the impugned order and attributable to inputs and capital goods alone is to be called for admitting these appeals as directed by the Technical Member?

The Third Member on reference observed that t here is no difference between two Members on the point that 35% of CENVAT credit availed on inputs and capital goods is required to be pre-deposited by the appellant.

On the question of pre-deposit requirement or otherwise in respect of Input Services, the third Member held –

“34. Member (Judicial) in para-14 of the order has observed that some of input services stand utilised by the Work Contract Service provider in construction of building and other services were utilised by the appellant. I also note that Member (Judicial) is para-7 has taken a view that service tax paid under category of Work Contract service provided by the contractor is available to the appellant. Therefore out of 13 services mentioned in para 21 of the order, according to Member (Judicial) also credit of service tax paid on majority of services including Work Contract Service is available to the appellants.

35. Difference between the Members therefore now narrows down to some services which are utilised by provider of Work Contract Service in construction of Mall. These services are like Architect Service, Design Service and Consulting Engineering Service etc. I find the Tribunal in case of Navaratana.S.G. Highway Prop. Pvt. Ltd. (supra) has allowed the CENVAT credit of service tax in respect of such input services to the owner of property. I also find that it is owner of the property who engages architect for preparing design of the building, he takes services of design engineer for preparation of design and contractor is required to execute the work as per design of Architect, Design engineer and consulting engineer. Moreover, under CENVAT Credit Rules, credit can be taken by service recipient on the basis of invoices issued by the service provider. If invoices issued in respect of Architect Services, design service, consulting engineers' service are in name of owner of property, prima facie there is no reason to deny the credit to the appellant.”

In fine, he agreed with the view taken by Member (Technical) holding that 35% of CENVAT credit availed on input services is not required to be made as pre-deposit.

So, by a Majority order the appellants were directed to pre-deposit 35% of the CENVAT credit denied by the adjudicating authority and attributable to inputs and capital goods alone and report compliance.

In passing : Also see Oberoi Mall Ltd. 2013-TIOL-604-CESTAT-MUM.

(See 2013-TIOL-1442-CESTAT-DEL)