INPUTS SERVICES- JUDICIAL ANALYSIS

[Dr. Sanjiv Agarwal]

Under Cenvat Credit Rules, 2004, assessees (service providers and manufacturers) can avail cenvat credit of service tax paid on input services. Used or consumed for rendering output taxable services.

 What is Input Services

Input service in defined in rule 2(l) of Cenvat Credit Rules, 2004 as follows-

Input services means any service used by a provider of taxable for providing an output service; or used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products, upto the place of removal;

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

Thus, 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 Maruti Suzuki Ltd v. CCE [2009 -TMI - 34348 - SUPREME COURT] (Civil Appeal No 5554 of 2009, judgment dated 17.8.2009), Supreme Court has held that the definition of 'input' brings within its fold, inputs used for generation of electricity or steam, provided that such electricity or steam is used within the factory of production for manufacture of final products or for any other purpose.

Assessee is entitled to credit on the eligible inputs utilized in the generation of electricity to the extent to which they are using the produced electricity within their factory (for captive consumption). They are not entitled to cenvat credit to the extent of the excess electricity cleared at the contractual rates in favour of joint ventures, vendors etc., which is sold at a price.

In Coca Cola India Pvt Ltd v CCE [2009 -TMI - 34433 - BOMBAY HIGH COURT] (Central Excise Appeal No 118 of 2007, Order dated 26.8.2009-unreported), Bombay high court has held that service tax paid on expenditure incurred by assessee on advertisements, sales promotion, market research, etc are allowable as input tax credit, more particularly, if the same costs form part of the price of final product of assessee on which manufacture pays the excise duty. If such input credit is not allowed, it would defeat the very purpose and genesis of Cenvat, ie, value added tax. The issue before court was whether Coca cola, who are manufacturers of non-alcoholic beverage bases (concentrates) are eligible to avail credit of the service-tax paid on advertising services, sales promotion, market research and the like availed by them and utilize such credit towards payment of excise duty on the concentrate.

High court held that service tax is VAT which in turn is destination based consumption tax in a sense that it is on commercial activities and is not a charge on the business but on the consumer. Just as excise duty is a tax on value addition on goods. Service tax is on the value addition by rendition of service. (All India Federation of Tax Practitioners v Union of India (2007) 7 SCC 527).

It held that the definition of input services employs the phrase 'activity relating to business'. The words 'relating to' further widens the scope of the expression activities relating to business. Similarly, the use of the word activities in the phrase activities relating to business further signifies the wide import of the phrase "activities relating to business. The Rule making authority has not employed any qualifying words before the word activities, like main activities or essential activities etc. Therefore, it must follow that all and any activity relating to business falls within the definition of input service provided there is a relation between the manufacturer of concentrate and the activity. Therefore, the phrase "activities relating to business are words of wide import.

The definition of input service which has been reproduced earlier, can be effectively divided into the following five categories, in so far as a manufacturer is concerned:

(i) Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products .

(ii) Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal.

(iii) Services used in relation to setting up, modernization, renovation or repairs of a factory, or an office relating to such factory.

(iv)Services used in relation to advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs,

(v) Services used in relation to activities relating to business and outward transportation upto the place of removal;

Each limb of the definition of input service canbe considered as an independent benefit or concession or exemption. If an assessee can satisfy any one of the limbs of the above benefit, exemption or concession, then credit of the input service would be available. This would be so even if the assessee does not satisfy other limb/limbs of the definition. The court concluded that the credit is availed on the tax paid on the input service, which is advertisement and not on the contents of the advertisement. Thus it is not necessary that the contents of the advertisement must be that of the final product manufactured by the person advertising, as long as the manufacturer can demonstrate that the advertisement services availed have an effect of or impact on the manufacture of the final product and establish the relationship between the input service and the manufacture of the final product. The manufacturer thereby can avail the credit of the service tax paid by him. Once the cost incurred by the service has to be added to the cost, and is so assessed, it is a recognition by Revenue of the advertisement services having a connection with the manufacture of the final product. This test will also apply in the case of sales promotion.

In CST, Delhi v Convergys India Pvt. Ltd. [2009 -TMI - 34223 - CESTAT, NEW DELHI], it was held that the definition of the term 'input services' is an inclusive definition. When service used in connection with setting up the premises and also services used in connection with repair of the premises are considered as 'input services', it would be appropriate to consider services used for in between activities, namely, day-today maintenance as also part of the inputs services.

The Tribunal in the case of CCE v Deloitte Tax services India (P) Ltd. [2008 -TMI - 3715 - CESTAT, BANGALORE] has held that services such as equipment hiring, professional consultation service, recruitment service, security service, telephone service, transport service, training service, facility operation service, courier service, cafeteria service and advertisement service are to be considered as input services in relation to rendering of business auxiliary services.

In CCE, Vapi v Alidhara Textool Enginers Pvt Ltd [2009 -TMI - 33376 - CESTAT AHMEDABAD], it was held that the incidental process of erection and commissioning being incident to manufacture, has to be treated as continuation of the earlier process which started in the manufacture's premises. In the case of service tax, what is required to be examined is whether the service has been used in or in relation to manufacture directly or indirectly. 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.

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 rule 2(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, [2008 -TMI - 31579 - HIGH COURT GUJARAT], 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 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 Rohit Surfactants Pvt. Ltd v CCE, Bhopal (2009) 15 STR 169 (Cestat, New Delhi), it was held that in the definition of input service, the words 'directly or indirectly in or in relation to manufacture' should be given very vide meaning. Also, the list of services is not exhaustive since words, 'such as' are used after 'services used in relation to activities relating to business. Telephone services, insurance services, banking services and courier services would also be covered by the expression 'services used directly or indirectly is or in relation to the manufacture of finished goods'. The use of words 'such as' indicates that the list of services in this category is it not exhaustive . [Also see Keltech Energies Ltd v CCE, Mangalore [2008 -TMI - 4051 - CESTAT BANGALORE].

Some other pronouncements are as follows-

- Cement credit of service tax paid on security agency service used in residential area, insurance service relating to mediclaim polices of employees and telephone used in guest house held to be an eligible input service (Ambuja Cement Ltd v CC, Raipur [2009 -TMI - 33804 - CESTAT, NEW DELHI].

- Use of hired taxies, repair of car and other motor vehicles owned by company and photography services held to be input service in relation to manufacturing activity or business activities and covered under input service for cenvat credit [CCE, Jaipur v J.K. Cement Works [2009 -TMI - 33571 - CESTAT NEW DELHI].

- Benefit of Cenvat credit on services of supply of manpower and operation and maintenance of power plant is admissible [Sanghi Industries Ltd v. CCE, Rajkot [2009 -TMI - 32152 - CESTAT AHEMDABAD].

- Insurance of plant and machinery is an expense which goes into costing and cenvat credit in admissible (Finolax Cables Ltd v CCE, Pune-I [2009 -TMI - 33375 - CESTAT MUMBAI].

- Credit of tax paid on merger charges, charges for issuance of NOC by bank, annual custody charges and maintenance of fax machine at residence of company executive was held to be eligible (Aditya Birla Novo Ltd v CCE, Bhavnagar 2009 -TMI - 33120 - CESTAT AHMEDABAD).

- Assessee is entitled to avail credit of tax paid on banking services [JSW Steel Ltd v CCE, Salem [2008 -TMI - 31726 - CESTAT, CHENNAI].

- Canteen services, transpiration changes paid for transpiration of employees and group insurance health policy are in relation to manufacture and credit allowable [Stanzen Toyoteso India Pvt Ltd v CCE, Banglore -II (2009) 14 STR 316 (Cestat, Bangalore)

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 HEG Ltd. v. CCE, Raipur, [2009 -TMI - 32856 - 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 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.

Maintenance and repair service for wind energy plant situated 200 kms away from factory which is not a captive power plant for factory does not provide any direct nexus between service received in power plant and items manufactured is factory an as such cenvat credit was not admissible [Ellora Times Ltd v CCE, Rajkot [2009 -TMI - 32159 - CESTAT AHEMDABAD]

Club house fees meant for recreation of workers and not used for providing output service is not eligible for cenvat credit [ Mundra Port & Special Economic Zone Ltd v. CCE, Rajkot [2009 -TMI - 32130 - CESTAT AHEMDABAD].

In CCE, Mumbai-V v GTC Industries Ltd, [2008 -TMI - 31592 - CESTAT MUMBAI] larger bench of Tribunal, Mumbai held that canteen service provided by a caterer in the factory of assessee which was a mandatory requirement under the faculties Act, 1948 would be treated as input service and in such case, cost of catering was an expenditure incurred having bearing on cost of production and as such credit could not be denied.

In First Securities Pvt. Ltd v CST [2007 -TMI - 1848 - CESTAT, BANGALORE], handling charges charged by the stock broker were considered as expenses incurred for handling shares and securities and were held to be out of taxable services. Relying on this judgment, similar view was taken in Steel City Securities Ltd. v. Commissioner of Central Excise & Customs, Hyderabad-II [2009 -TMI - 33122 - CESTAT BANGLORE].

Going by the above analysis, 'input' has to be interpreted in broader context and not just restricted to narrow interpretation.