Cenvat Credit in Service Tax : Some Issues - Part II

[Dr. Sanjiv Agarwal]

        Cenvat credit, though a benefiting provision, provides credit for the central taxes paid but only after going through a tough drill of procedures, claim and availment, besides overcoming lot of confusions.

        Here is an attempt to elaborate upon input services and output services in service tax in relation to Cenvat credit rules duly supported by judicial pronouncements.

        Inputs Service

        Input service would mean any service which is received and consumed by service provider in relation to providing an output service, or which is used by manufacturer, directly or indirectly in relation to manufacture of final products and clearance of final products upto the place of removal. Thus, input services could be used by an output service provider or a manufacturer in relation to providing service or manufacturing a final product. Input service will also include services used in relation to any one or more of the following -

(a)   setting up of a factory

(b)   setting up of a premises of output service provider

(c)   setting up of a office relating to any factory or premises

(d)   advertisement or sales promotion

(e)   procurement of inputs

(f)    activities relating to management of business (say, business auxiliary services) such as —

(i)    accounting

(ii)   auditing

(iii)  financing

(iv)  recruitment

(v)   quality control

(vi)  coaching and training

(vii) computer networking

(viii)  credit rating

(ix)  share registry

(x)   security

(xi)  inward transportation of inputs or capital goods

(xii) outward transportation upto the place of removal

        The definition of input service has been amended w.e.f. 11.4.2008 so as to provide that 'clearance of final products up the place of removal' will only be considered as input service. This amendment will avoid disputes in future relating to credit on outward freight on GTA service. The amended definition substitutes the words 'from the place of removal' by 'upto the place of removal'.

        In Re. DCM Shriram Consolidated Ltd. 2007 -TMI - 819 - COMMISSIONER (APPEALS-I), JAIPUR, it was held that the distinction between services used in manufacture and services used in relation to manufacture is too thin. The definition of input service under rule 2(l) not only includes service used in manufacture of final products but also services used in post-manufacturing activities or activities which are necessary to run day-to-day business. Credit was allowed for security services used by the assessee for security of its assets like building, plant, machinery, tool, equipments etc. as safeguard of such items was necessary and integral to manufacture and clearance of final products. It was also held that photographs taken on various occasions and activities are also part of manufacturing activities and these photography services were also to be considered as input services in relation to manufacture and clearance of final products.

        Please note that any service which is an input service in terms of rule2(l) of CENVAT Credit Rules, 2004 can be an input service and CENVAT credit claimed as per rules. The services should qualify the test of being an input service. In Universal Cables Ltd. v. CCE, Bhopal 2007 -TMI - 1737 - CESTAT,NEW DELHI, it was held that courier service used by appellant for dispatch of final products was to be allowed as input service under CENVAT Credit Rules, 2004. In view of this, CENVAT credit can be taken in respect of input courier services.

        In Excel Crop Care Ltd. v. CCE Ahmedabad, 2007 -TMI - 1456 - CESTAT, Ahmedabad,where appellant exported some portion of their goods and availed services of Custom House Agents, it was held that CHA services were engaged in relation to activity after removal from factory and in port area and as services availed in respect of export did not have any nexus with manufacture and clearance of products from factory. Hence, input service cannot include services rendered in port area and credit cannot be allowed. In the same case, credit was also disallowed for construction service availed for circles/gardens and putting up advertising signboards thereon as the same were away from factory and could not be considered as relating to activity of advertisement and advertising service and construction service were two different services.

        In HEG Ltd. v. CCE, Raipur, (2008) 223 ELT 212; (2008) 12 STT 96 (Cestat, New Delhi), it was held that service tax paid on personal accident insurance, garden maintenance, canteen building and repairing of street lights do not fall under the definition of input service.

        In Coca Cola India Pvt. Ltd. v. CCE, Pune 2007 -TMI - 1633 - CESTAT, MUMBAI, where assessee was manufacturing concentrates to be used by the bottlers in production of aerated water and advertisements were undertaken for promotion of aerated water, it was held that to be an input service, advertisement must be undertaken for sale and promotion of final products of assessee and not of others and as such, cenvat credit on advertisement charges was inadmissible.

        In Manikgarh Cement v CCE & C, Nagpur 2008 -TMI - 3506 - CESTAT, MUMBAI, where repair and maintenance service were used for residential colony situated in factory premises in remote area and presense of workmen on the spot was required to maintain continuity in manufacture, it was held that repair and maintenance and civil construction of residential colony was input service and credit admissible.

In Colgate Palmolive (I) Ltd. v. CCE 2007 -TMI - 1853 - CESTAT, MUMBAI, it was held that input service has been defined as being used in a relation to manufacture of final product. Words 'input service' wherever they occur will mean 'service used in or in relation to manufacture of final product' and not otherwise. The inclusive definition only suggests that some services which may seemingly not appear to be used in relation to manufacture of final product would nevertheless be deemed to be so used as an input service.

Output service

        Output service has been defined to mean any taxable service (excluding goods transport agency services under clause zzp of section 65(105) w.e.f. 1-3-2008) rendered by service provider. Such service should be a taxable service (not an exempted service) and must be provided to
any —

  (i)  customer,

(ii)  client,

(iii)  subscriber,

(iv)  policy holder, or

(v)  any other person

        The explanation to the definition under rule 2(p) has since been omitted vide Notification No. 8/2006-CE(NT), dated 19-4-2006.

        In MMS Steels Ltd. & 26 Others v. CCE, Trichy, Madurai, Salem (2007) TIOL 1317 (Cestat, Madras), for the periodprior to 19.4.2006, it was held that in view of explanation to rule 2(p), as the service on which tax is paid by the appellant is deemed to be output service, service tax can be paid by way of Cenvat credit in terms of Rule 3(4). It may be noted that the said explanation was omitted w.e.f. 19.4.2006.

Rule 2(p) has been amended w.e.f. 1.3.2008 to exclude the taxable service namely goods transport agency service. The amendment implies that goods transport agency service is not an output service and therefore, Cenvat credit account cannot be utilised for the payment of service tax towards the said service tax payable as a consignor or a consignee, as the case may be.

(To be continued)

= = = = =