CENVAT CREDIT RULES DOES NOT REQUIRE THAT THE SERVICE HAS TO BE RECEIVED IN THE MANUFACTURER'S PREMISES TO BE ELIGIBLE FOR CENVAT CREDIT OF THE SERVICE TAX PAID

[Mr. M. GOVINDARAJAN]

            There are many litigations arised out in the availing of CENVAT credit. Rule 2(l) has been interpreted in many a time by the tribunals, High Courts, Supreme Court for arriving at certain decision. One interesting question raised here is whether CENVAT credit Rules requires that the service has to be received in the manufacturer's premises to be eligible for CENVAT credit of the service tax paid. The Ahamedabad tribunal answered this question in the case 'Commissioner of Central Excise, Vapi V. Alidhara Textool Engineers Private Limited' [2009 -TMI - 33376 - CESTAT AHMEDABAD].

            In this case the assessee had availed CENVAT credit of service tax paid on erection and commissioning services received by them from a service provider on account of erection, commissioning of the machines at the premises of the buyers of the said machines. The Commissioner (Appeals) held in this case that no penalty is imposable since the issue involved is primarily the interpretation of statutory provisions. The Revenue also filed appeal against the order of Commissioner (Appeals) on the contention that the Commissioner should have imposed penalty under Section 11AC to the extent to100% of the CENVAT credit demanded and confirmed by the Commissioner (Appeals).

            The assessee submitted that the credit has been disallowed by the department merely on three grounds by the lower authorities as follows:

The service was received at the customer's premises;

The duty was paid on the value of including expenses involved on the erection and commissioning charges, in terms of purchase order does not seem to be correct and even if it is correct, credit will be available to the buyer of the machine;

The activity of erection and commissioning if a post manufacturing and post removal activity and therefore it does not fall under the category of input service.

It was further contended that:

Part of service was provided by the service providers in the premises of the assessee wherein the workers of the service provider assembled sub components into parts and thereafter at the buyer's premises these parts were erected has been simply rejected;

They have documentary evidence to show that the service providers had provided both in the manufacturer's premises  as well as in the buyer's premises;

A detailed statement showing the details of machines sold and actual price etc., has been submitted in support of their contention that the value of the machines includes cost of erection and commissioning;

CENVAT credit rules does not require that the service has to be received in the manufacturer's premises to be eligible for CENVAT credit of the service tax paid;

It is not correct to say that the activities of erection and commissioning undertaken at the buyer's premises is post manufacturing or post removal operations in view of the fact that the assessable value includes the cost of erection and commissioning;

Goods are cleared in SKD condition and only at the buyer's premises they are assembled into machine;

The Department submitted the following:

The service is provided to the buyer and not to the assessee;

The manufacture was completed in the premises of the manufacturer and duty has been discharged at the time of removal of the goods;

Therefore subsequent activities are only post manufacture and postal removal activities and therefore credit has been rightly denied;

No manufacturing activity takes place in the premises of the buyer and whatever activities that take place in the buyer's premises, appellants cannot take credit;

Just because duty has been paid including the value, it does not mean that CENVAT credit of service tax is admissible.

The tribunal after hearing both sides the tribunal found that erection and commissioning charges have been included in the cost of the machines sold. The assessee has selected the agency to do this work and once the purchases enters into an agreement for supply of the machine including the erection and commissioning charges, the responsibility for erection and commissioning is of the manufacturer.  The activities are incidental to manufacturing activity undertaken in the manufacturer's premises. The incidental process of erection and commissioning being incidental to manufacture, has to be treated as continuation of earlier process which started in the manufacturer's premises. The process is complete only after the erection and commissioning takes place. The Tribunal accepted the vies of the assessee that Rule 2(l) of CENVAT Credit Rules does not require that service has to be rendered at the factory of the manufacturer for the purpose of eligibility of service tax credit. Therefore the stand of Revenue that since the service was provided at the buyer's premises credit is not admissible cannot be accepted.

            The tribunal further advised what has to be examined is whether the service provided is in or in relation to manufacture. While the eligibility for service tax credit on outward transport services is to be examined in connection with place of removal, there is no such requirement as regards other services. In respect of other services what is to be examined is whether they can be held to be rendered in or in relation to manufacture directly or indirectly. Once the whole transaction of manufacture of the machine, erection and commissioning and supply is treated as one transaction and excise duty is charged on the whole transaction value, services rendered for the purpose of completion of this whole transaction has to be treated  to have been rendered in or in relation to the manufacture.

            The tribunal further held that it is not correct to say that the assessee is not the service provider. As per the contract the responsibility for providing erection and commissioning is with the assessee even if it is treated erection and commissioning activity as a separate service activity, the service provider would be the assessee and the receiver would be the buyer. The sub contractor is actually working under the manufacturer and therefore he is a service provider of service to the assessee. The tribunal held that the assessee is eligible for CENVAT credit availed by him and accordingly succeeds on merit.