THE SOCIAL FUNCTIONS TO ENTERTAIN THE EMPLOYEES CANNOT BE BROUGHT WITHIN THE AMBIT OF ACTIVITIES RELATING TO BUSINESS FOR AVAILING SERVICE TAX CREDIT

[Mr. M. GOVINDARAJAN]

Rule 3 of CENVAT Credit Rules, 2004 ('Rules' for short) allows a manufacturer or producer of final products or a provider of taxable service to take CENVAT credit and utilize the credit for payment of duty, service tax etc., CENVAT credit may be availed on the duty or tax paid on capital goods, inputs and input service paid by a manufacturer or producer of final products or a provider of taxable service.   The rules define the terms 'capital goods', 'inputs' and 'input service' for the purpose of availing the credit.  So many cases are flooded in interpretation of the above terms.   The input service is not an exemption to this.   There are so many cases analyzed by the tribunals in interpreting the term 'input service'.  In this article the problem taken is whether the social functions to entertain the employees can be brought within the ambit of activities relating to business for availing credit as defined in Rule 2(l) with reference to case law.

     In 'Toyota Kirloskar Motor Pvt. Ltd., V. Commissioner of Central Excise, (LTU), Bangalore' - TMI - 31587 (Tri. Bangalore) the appellants have availed input service tax credit among other things for the function arranged for the Kannada Rajyotsava Day and color photography expenses in respect of inaugural function of Kengeri Police Station.   The Commissioner has accepted to grant input service tax credit in respect of catering service and medicalim insurance availed by the appellants.   The Commissioner has rejected to grant input service tax credit on Shamiyana services for Kannada Rajyostava Day and photography services for inaugural function of Kengeri Police station.  The demand for of Rs.54,216 was confirmed by invoking larger period.

     Against the order of the Commissioner the appellants filed the present appeal.  

    The contentions of the appellants are-

-     It is not only the input services which goes directly into the manufacturing activity that would qualify for input tax credit in terms of Rule 2(l) of CENVAT Credit Rules, 2004, but any input service used indirectly or in relation to manufacturing activity is eligible for input service tax credit;

-     The term 'activities relating to business' has been amplified with the words 'such as' by bringing in terms like accounting, auditing, financing, recruitment and quality control, coaching and training, computer net working, credit rating agency, share registry and security etc;

-     The expenses for shamiyana, furniture etc., arranged for the Kannada Rajyostava and also for spending money for colour photography expenses for inaugural function of Kengeri Police station would come within the activities relating to business and there they were eligible to avail the input tax credit for these two items;

-     They held a bonafide belief in terms of several judgments under Income Tax Act holding such expenses to come within the business expenses;

-     There was no intention to evade payment;

-     The 'intention to evade duty' has not been invoked and stated in the show cause notice.

The Department contends that-

-     The activities relating to business has been amplified with the words 'such as' and that the principle ejusdem generis will apply to the facts of the case;

-     The fact they had not declared these items for utilizing input service tax credit itself would be sufficient to invoke larger period;

-     The appellants had not declared the inputs in the ER-1 and hence larger period was invocable;

-     Rules 14 and 15 of Cenvat Credit Rules have been invoked for recovery of wrongly availed Cenvat Credit;

-     When there is an obligation to pay service tax, the Revenue need not establish grounds for the purpose of confirming the duty as held by the Apex Court in the case of 'Gujarat Travancore Agency V. Commissioner of Income Tax' -1989 (42) ELT 350 (SC).

The tribunal considered the submissions made by both sides.  The tribunal agrees with the submission of the Department that the expenses for holding Kannada Rajyostava function and for inaugural function of Kengeri Police Station cannot be considered as input service in terms of activities relating to business.   The term 'activities relating to business' has been amplified with the words 'such as'.  The term 'Such as' has been explained as accounting, auditing and financing etc.,   The  tribunal held that social functions to entertain the employees for Rajyostava function and inauguration of police station cannot be brought within the ambit of activities relating to business, as it does not keep company with the terms used therein and amplified.   The tribunal rejected the arguments advanced by the appellants on this plea. 

     The tribunal further held that-

-     The appellants are large tax payers of central excise and service tax.  They held bonafide belief that the expenses would also come within the term 'activities relating to business' as they were holding a bona fide belief that such expenses are covered under the Income Tax Act and large number of judgments cited before the tribunal where such expenses have been considered to come within the business expenses;

-     The definition of 'input service' and Income Tax Act and the CENVAT Credit Rules is different.  However the bona fide belief held by them can be taken as a valid ground;

-     The allegation of 'intention to evade duty and willful suppression of facts' have to be explicitly brought out in show cause notice as held in the case of 'CCE V. HMM Ltd.,' - 1995 (76) ELT 497 (SC).