INPUT SERVICE – NEW DEFINITION – AN ANALYSIS

[Mr. M. GOVINDARAJAN]

DEFINITION: 

                        The definition of ‘input service’ under Rule 2(l) of CENVAT Credit Rules, 2004 has been substituted by the new definition vide Notification No.3/2011-CE (NT), dated 01.03.2011 which came into effect from 01.04.2011.   According to the new definition- 

‘Input service’ means any service- 

(i)                  used by a provider of taxable service for providing an output service; or

(ii)                used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products up to the place of removal, 

and includes services used in relation to modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage up to the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation up to the place of removal; 

but excludes services,- 

(A)    specified in sub clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of Section 65 of the Finance Act (hereinafter referred as special services), in so far as they  are used for- 

(a)    construction of a building of a civil structure or a port thereof; or

(b)   laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or

(B)    specified in sub clauses (d), (o), (zo) and (zzzj) of clause (105) of Section 65 of the Finance Act , in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods; or

(C)    such as  those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance  and travel benefits extended to employees on vacation and such as  leave or home travel concession, when such services are used primarily for personal use or consumption of any employee. 

The definition of the term ‘input service’ has three parts- 

• main part;
• inclusive clause; and
• exclusive clause. 

MAIN PART: 

                        There is no change in the definition of ‘main part’.  The main part contains the ‘means’ part.   The ‘means’ part of the definition covers any service used directly or indirectly, in or in relation to the manufacture of final products and clearance of the final products from the place of removal.   The definition is one of very wide connotation.   It covers within its ambit all services received by the manufacturer of final products.  A service would qualify as ‘input service’ even if it is not covered by the ‘means’ portion, if it satisfies the ‘includes’ portion of the definition.   Therefore in order to qualify as an input service, a service has to fall either within the first part of the definition or the second part of the definition.  But this has been negativated by the Supreme Court which would be discussed in the coming para. 

                        The definition of ‘input service’ in respect of the manufacturer includes the following: 

• Any service used by the manufacturer whether directly or indirectly, in or in relation to the manufacture of final products;
• Any service used by the manufacturer whether directly or indirectly, in or in relation to the clearance of final products from the place of removal. 

A manufacturer can prove easily the services utilized directly for the manufacturing of final products or in clearance of final products from the place of removal.   But it is difficult to prove all the services indirectly used for the same resulting in many litigations in this regard. 

                        To avail the CENVAT credit for the service tax paid on the services mentioned in the inclusive clause the Supreme Court in ‘Maruti Udyog Limited’ case – 2009-TIOL-94-SC held that any service which is apparently covered by parameters of the inclusive part of the definition  of ‘input service’ should also satisfy the quintessential requirements of the main part of the definition and accordingly any person claiming the benefit of  CENVAT credit on input service  in terms of inclusive part of the definition ‘input service’ should establish that such was used, directly or indirectly, in or in relation to the manufacture of his final products or the clearance of products from his factory.   The same ratio is applicable to the eligibility of service tax credit in respect of an input service received by an output service provider. 

INCLUSIVE PART: 

                        The definition of this part has got a sea change.   The words ‘activities relating to business, such as’ have been deleted in the new definition.   The said words have created a number of litigation in its interpretation.   By these words, the judicial authorities came to the conclusion that the services mentioned in the inclusive clause are only illustrative but not exhaustive and decided many a service eligible for taking credit.   Some of the services are as follows: 

• Courier services;
• House keeping services;
• Management, maintenance and repair services;
• Professional services;
• Rent-a-cab services;
• Technical Inspection and Certification Services;
• Clearance services;
• Outdoor catering services;
• Air Travel Agent’s services;
• Telecommunications services;
• Customs House Agent;
• Cargo handling services;
• Vehicle maintenance. 

Two new services viz., business exhibition and legal services are introduced in the inclusive clause.  The following are the services indicated in the inclusive clause eligible for taking CENVAT credit: 

• Services used in relation to modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises;
• Advertisement or sales promotion;
• Market research;
• Storage up to the place of removal;
• Procurement of inputs;
• Accounting;
• Auditing;
• Financing;
• Recruitment and quality control;
• Coaching and training;
• Computer networking;
• Credit rating;
• Share registry;
• Security;
• Business exhibition;
• Legal services;
• Inward transportation of inputs or capital goods and outward transportation up to the place of removal. 

The Department may take the stand as the services mentioned in the inclusive clause are exhaustive.   The definition of input services uses the term ‘includes’ which enhances the scope of the definition as it is inclusive in nature.  Therefore, the definition cannot be taken one of restrictive approach.   The Supreme Court explained the scope of the term ‘includes’ in ‘Regional Director V. High Land Coffee works’ – (1991) 3 SCC 617.  In this case the Supreme Court held that the word ‘include’ in the statutory definition is generally used to enlarge the meaning of the preceeding words and it is by way of extension and not with restriction.   The word ‘include’ is very generally used in interpretation clause.   In order to enlarge the meaning of words or phrases occurring in the body of the statute and when it is so used, these words or phrases must be considered as comprehending, not only such things as they signify according to their natural import but also these things which the interpretation clause declares that they shall include. 

EXCLUSIVE PART: 

                        This part contains three parts.  The ‘A’ part describes specified services from availing CENVAT credit as detailed below: 

• Section 65(105)(p) -  Architectural service;
• Section 65(105)(zn) – Port Services;
• Section 65 (105)(zzl) – Other port services;
• Section 65(105)(zzm) – Airport Services;
• Section 65(105)(zzq) – Commercial or industrial construction service;
• Section 65(105)(zzzh) – Construction of complex;
• Section 65(105)(zzzza) – execution of works contract. 

The above said specified services are excluded in so far as they are used for- 

• Construction of a building or a civil structure or a port thereof; or
• Laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services. 

Part B contains specified services as detailed below: 

• Section 65(105)(d) – Insurance Services;
• Section 65(105)(o) – Rent-a-cab scheme;
• Section 65(105)(zo) – Authorized service stations;
• Section 65(105)(zzzzj) – Supply of tangible goods 

The above said specified services are excluded in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods. 

                        Part C excludes the services from availing CENVAT credit when such services are used primarily for personal use or consumption of any employee.   This part gives services which are to excluded such as-

• in relation to outdoor catering;
• beauty treatment;
• health services;
• cosmetic and plastic surgery;
• membership of a club;
• health and fitness centre;
• life insurance;
• health insurance;
• travel benefits extended to employees on vacation such as leave or home travel concession 

The definition of input service uses the term ‘such as’ which is purely illustrative but not exhaustive.   The service providers or manufacturers of final products may contest that the services mentioned in the said list are exhaustive.  The meaning of the term ‘such as’ in Concise Oxford Dictionary is ‘for example’ or ‘of a kind that’ and Chambers dictionary it means ‘for example’.  

                        In a nutshell the output service provider or manufacturer of final products and clearance of final products up to the place of removal shall consider the following while availing CENVAT credit on input services: 

• Whether the service is coming within the inclusive clause – then there is no bar in availing the CENVAT credit;
• At the same time it is to substantiate as per Supreme Court judgment that the service for which CENVAT credit is availed in directly or indirectly or in relation to the manufacture of final products and clearance of final products up to the place of removal or for providing an output service;
• The services mentioned in Excluding clause are not eligible for availing CENVAT credit;
• It is also burden on the part of the assessee that the services are not for personal use or consumption of any employee