2010 (10) TMI 10 - HC - Service Tax

Cenvat Credit - input services - services of repair, maintenance and Civil constructions used in the residential colony - in relation to manufacture - Held that - 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 - rendering taxable services at the residential colony established by the assessee for the benefit of the employees, is not an activity integrally connected with the business of the assessee and therefore, the Tribunal was not justified in holding that the services such as repairs, maintenance and civil construction rendered at the residential colony constitutes input service so as to claim credit of service tax paid on such services under Rule 2(l) of the CENVAT Credit Rules, 2004.

Summary

Issues:
Appeal against CESTAT order on admissibility of service tax credit for repair, maintenance, and civil constructions used in residential colony.

Analysis:
The appeal was filed by the Revenue against the CESTAT order, questioning the admissibility of service tax credit on services of repair, maintenance, and civil constructions used in a residential colony not directly related to manufacturing. The respondent-assessee, engaged in cement manufacturing, had claimed credit for service tax paid on such services. The Assessing Officer disallowed the credit, which was upheld by the Commissioner Central Excise (Appeals). However, the CESTAT allowed the appeal, stating the respondent-assessee was entitled to CENVAT credit for the services used in the residential colony.

The Revenue argued, citing a Supreme Court decision, that the services provided in the residential colony were not integrally connected with the business of manufacturing cement, hence not eligible for credit. On the other hand, the respondent-assessee contended that the residential colony was indirectly linked to the manufacturing process, justifying the credit for services provided there.

The High Court held that while establishing a residential colony could be a welfare activity related to the business, to qualify as an input service for CENVAT credit, the activity must have a direct nexus with the business operations. Referring to the Supreme Court decision, the Court emphasized that unless a clear connection is established between the services rendered and the business activities, the benefit of CENVAT credit cannot be allowed. In this case, the Court found that the services provided in the residential colony were not integrally connected with the manufacturing business, leading to the conclusion that the respondent-assessee was not entitled to claim credit for service tax paid on repairs, maintenance, and civil constructions in the residential colony.

Therefore, the High Court ruled in favor of the Revenue, overturning the CESTAT decision and denying the respondent-assessee the benefit of CENVAT credit for the services provided in the residential colony. The appeal was disposed of with no order as to costs.