By TIOL News Service

MUMBAI, DEC 06, 2013: THE appellants are engaged in the manufacture of motor vehicles and motor vehicle parts under Chapter 87 of the CETA, 1985. They are having an Engineering Research Centre (ERC) situated in their premises where R&D activities are being undertaken. The ERC is also been recognized as a Technical Institute by the Department of Scientific and Industrial Research, New Delhi vide letter dated 29/04/2008. The appellants are availing CENVAT credit on input services utilized and consumed in the R&D activities in ERC. In respect of Prototypes manufactured in ERC the appellants are claiming exemption from payment of duty under Notification no. 167/71-CE dated 11.09.1971.

Two show-cause notices were issued for denying credit of input services i.e Consulting Engineering Services for the period 01.04.2006 to 30.06.2010 on the ground that the same is used in or in relation to manufacture of prototypes and the same are exempted under Notification no.167/71-CE. Incidentally, the Consulting Engineering Services are availed from foreign consultants and the service tax is paid by the appellants under reverse charge method.

The CCE, Pune-I confirmed the demand of Rs.156.88 Crores with interest and penalty. He did this after accepting the claim of the appellant that an amount of Rs.36,15,04,785/- does not pertain to input service credit and are not attributable to services used in the manufacture of prototypes at EC and, therefore, demand to this extent is incorrect.

Both, the appellant and the Revenue filed appeals before the CESTAT.

In the matter of the Stay application filed by the appellant, the Bench while granting Stay had observed thus -

"8. We find that during the period in dispute, the applicants are manufacturing prototype for use in their R&D division. The applicants are also clearing the same on appropriate duty for export. As per rule 6(1) credit is not available in respect of input services which are exclusively used for exempted goods. However, this rule is not applicable in respect of the services such as consulting engineer's services as provided under sec. 65(105)(g) of the Finance Act if the same is used in or in relation of the manufacture of dutiable as well as exempted goods. As the applicants are clearing the goods during the period in dispute on payment of duty, therefore, prima facie the applicants have made out a case in their favour. We, therefore, waive pre-deposit of the dues and stay recovery of the same during the pendency of the appeal."

We reported this Stay order as - 2013-TIOL-40-CESTAT-MUM.

The appeal was heard recently along with the appeal filed by the Revenue.

Following were the submissions of the appellant –

++ They had entered into a technical assistance agreement with Tata Motors European Technical Centre, UK and a few others and as per the said agreement, the foreign service provider would provide the services of concept design, material engineering development of prototypes, testing, release of final engineering design including material specifications, process design and program management in respect of various motor vehicles to be produced by the appellant.

++ They had discharged service tax liability by classifying the services under the category “Consulting Engineer's Service” and paid service tax on reverse charge basis in respect of services received from abroad and had borne the incidence of service tax in respect of services received indigenously.

++ These services received by the appellant were used at the ERC for development of prototypes. The purpose of developing the prototypes are for undertaking commercial production of vehicles and therefore, the “Consulting Engineers Service” received by the appellant is in relation to the manufacture of commercial vehicles on which the appellant has been discharging excise duty liability. Therefore, the consulting engineers' service received by the appellant qualifies to be input services as defined in Rule 2(l) of the CCR, 2004 and, therefore, the appellant is rightly eligible for the CENVAT credit of service tax paid on such services.

++ Even assuming that the appellant has used these services initially in the development of prototypes, the prototypes manufactured by the appellant are not completely exempt from payment of excise duty. Inasmuch as the issue of exemption from excise duty of prototypes manufactured by the appellant was a subject matter of consideration by the Central Board of Excise and Customs as early as 1973 and the Board vide Order NO.194/53/72-CX.V (a) dated 29/11/73 had held that the benefit of Notification No.167/71-CE would be available to the appellants only when the prototype developed are destroyed in the course of testing by the appellant.

++ On occasions where the prototypes were cleared otherwise, the appellant is liable to pay excise duty. The appellant has been discharging excise duty liability on such prototypes as and when they are cleared from the factory. They have also been filing annual statements wherein they have declared the quantity of prototypes manufactured, the duty forgone in respect of prototypes which were destroyed during testing, etc. and the department was fully aware that the appellants were availing exemption under the aforesaid notification only when the prototypes were destroyed during the course of testing.

++ Therefore, since the prototypes are not unconditionally exempt and the appellant has been discharging excise duty liability on the prototypes, they are eligible for the benefit of Rule 6(5) of the CCR, 2004, which provides for availment of service tax paid on consulting engineers service when such services are used in the manufacture of both dutiable as well as exempted goods.

++ Reliance is placed on the decisions in Cadilla Healthcare Ltd., Vs. CCE, Ahmedabad – 2010-TIOL-59-CESTAT-AHM & Deepak Fertilizers and Petrochemicals Corporation Ltd., Vs. CCE, Belapur in Central Excise Appeal No. 11/2013 [2013-TIOL-212-HC-MUM-CX] in support of their claim.

The Revenue had appointed a Special Consultant for arguing their 156 crore case. He submitted that the goods manufactured in technical institute are unconditionally exempt from payment of excise duty under Notification No. 167/71-CE and, therefore, in view of the provisions of Section 5A(1A) of the CEA, 1944, the appellant has no option to pay any duty and consequently the payment of duty on prototypes is not sanctioned by law and hence, the claim of the appellant that they have utilised the services both in respect of dutiable goods as well as exempted goods is not sustainable in law. It is further submitted that, as regards the inputs and capital goods, the appellant has not availed any CENVAT credit of the excise duty/CVD paid which shows that the prototypes are not liable to excise duty and therefore, the appellant cannot take a different stand in respect of input services and hence it has to be held that the inputs service has been availed both in respect of dutiable as well as exempted goods.

As regards the dropping of demand to the extent of Rs.36.15crores by the Commissioner, the Revenue's case is that the Commissioner has merely accepted the appellant's contention that these do not relate to services used in the ERC, without examining whether the appellant is eligible to take CENVAT credit of service tax paid on input services in respect of the vehicles manufactured by them and, therefore, the matter should be remitted back to the Commissioner for fresh consideration.

The Bench after considering the submissions and extracting the definition of “Input Service” given in Rule 2(l) of the CCR, 2004 observed –

“7.1 From a reading of the above Rule, it is seen that any service used by the manufacturer whether directly or indirectly, in or in relation to the manufacture of final products would be eligible for CENVAT Credit. When a manufacturer receives “Consulting Engineer's Service” for the design of the vehicle and utilised those services in the manufacture of prototypes, the usage is in relation to the manufacture of vehicles. “Prototype” by definition is only a preliminary sample. As per Shorter Oxford English Dictionary 5th Edition “prototype” means “The first or primary type of something; the original of which a copy, imitation, representation, derivative, or improved form exists or is made; a pattern, a model, an archetype or primary version of a vehicle, machine, etc. Thus, as per the ordinary meaning of term, “prototype” which is only a primary version and is a necessary step before commercial production is undertaken. In the present case, the appellant has obtained technical assistance which has been used in the development of prototypes and the consultancy fees amounting thousands of crores of rupees has been paid. The service tax credit taken is about Rs. 137 crores and even assuming 10% rate, the consideration for the service paid would be ofRs.1370 crores. It is absurd and irrational to suggest that such a huge sum is paid to the consulting engineers for developing only prototypes and these services are not “in relation to” the manufacture of commercial vehicles….”

After adverting to the Bombay High Court decision in Deepak Fertilizers & Petrochemicals Corporation Ltd. and the Supreme Court decision in M/s. Doypack Systems Pvt.Ltd. vs. Union of India and Others 2002-TIOL-389-SC-MISC & Renusagar Power Co. Ltd. v. General Electric Company and Another (1984) 4 SCC 679,the Bench held –

“7.3 …, the scope of the expression “input service” is very wide to cover not only services used directly in the manufacture of commercial vehicles but also services which are used indirectly or in relation to the manufacture of commercial vehicles. Therefore, in the present case, we accept the contention of the appellant that the consulting engineers service which they received from the foreign as well as domestic service provider are in relation to the manufacture of commercial vehicles by the appellant and therefore, the appellant is eligible for the benefit of service tax paid thereon. As regards the Revenue's contention that Notification No.167/71 unconditionally exempts goods manufactured in educational institution, technical or research institutes, this argument of the Revenue is not acceptable for a variety of reasons. In the appellant's own case, the CBE&C vide order dated 29/11/1973 held that the appellant would be eligible for the benefit of the said notification only when the prototypes manufactured by them get destroyed in the process of testing of the goods or it is scrapped after testing and experimentation is over. It is also on record that the appellant had cleared the prototype goods on payment of duty either for export or for other purposes. If that be so, the prototypes cannot be construed as exempted goods. In such scenario, provisions of Rule 6 (5) of the CENVAT Credit Rule come into play. As per the said Rule, when input services are used both in the manufacture of dutiable goods as also in exempted goods, then the appellant is eligible to avail CENVAT credit of service tax paid on certain specified services manufactured by the said rule. “Consulting Engineers Service” is one of the specified services under sub-rule (5) of the said Rule 6. Viewed from this perspective, the appellant is not required to reverse any credit of the service tax paid on consulting engineers service and we hold accordingly.”

In the matter of the dropping of the demand of Rs.36.15 crores, the Bench agreed with the submission made by the Special Consultant.

In fine, the appeal filed by the appellant assessee was allowed and that by the Revenue was also allowed by way of remand.

(See 2013-TIOL-1815-CESTAT-MUM)