CENVAT CREDIT: INPUT SERVICES

[Dr. Sanjiv Agarwal]

Statutory Provisions

            Rule 2(l) of Cenvat Credit Rules, 2004  reads as follows -

"Input service" means any service -

1.       used by a provider of taxable service for providing an output service; or

2.       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final products and clearance of final products, upto the place of removal; (The words 'from the place of removal' have been replaced by ', upto the place of removal' w.e.f. 1-4-2008).

and includes services used in relation to setting up, 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 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.

Analysis of Definition

     (a)  The definition of 'input service' is broadly in two parts - first i.e. main part and second i.e. inclusive part. First part of the definition is restrictive in scope as it covers input services directly or indirectly used for providing output service or used in relation to manufacture or clearance of final product. However, second i.e. inclusive part of the definition expands the scope much beyond the coverage of first part.

     (b)    The inclusive part itself is of two sub-parts. The first sub-part gives some illustrations of input services while second part covers all services used in relation to 'activities relating to business, such as - -'. Some illustrations are given in second sub-part of the definition, but these are preceded by the term 'such as'. It means these are only illustrations. Any service in relation to business would be 'input service'.

     (c) Meaning of 'includes' and 'in relation to'- It is well settled that inclusive part expands the scope of main definition. The inclusive part can cover items which are not getting covered in main part of definition. It is also well settled that 'in relation to' widens the scope of definition. It is not restrictive.  Any service in relation to business is input service Input services which have only remote or no nexus with output services or manufacture of goods will get covered so long as these are related to activities of business

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 indirec1ly, 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 up to the place of removal.

Each limb of the definition of input service can be considered as an independent benefit or concession or exemption. If an assessee can satisfy anyone 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 ~ recognition by Revenue of the advertisement services having a connection with manufacture of the final product. This test will also apply in the case of sales promotion

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 anyone 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, a

     (viii) credit rating,

     (viii) credit rating,

     (ix) share registry,

     (x) security,

     (xi) inward transportation of inputs or capital goods,

     (xii) outward transportation u

Judicial Interpretation

In Coca Cola India Pvt Ltd v. CCE Pune-III  (Central Excise Appeal No. 118 of 2007, Order dated 26.8.2009-2009-VIL-06-HC-BOM-ST) [2009 -TMI - 34433 - BOMBAY HIGH COURT], 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, i.e., 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 -TMI - 1556 - Supreme Court).

It has been held that in the definition of 'input service' in Cenvat Credit Rules, the scope of phrase 'activity relating to business' has been widened  by words, 'relating to' which widens  the scope of definition. The word 'activities' signifies vide import of phrase 'activities relating to business' and that the words such as 'main activities' or essential activities' have not been employed in the rule.

All and any activity relating to business is covered under 'input service' subject to there being a relation between manufacture of final product (output service) and the activity. The high court further held that the expression 'business' is an integrated continuous activity and not confined or restricted to mere manufacture of products. The activities in relation to business can cover all activities related to functioning or a business. The term 'business' can not be given restricted definition to say that business of manufacture is to manufacture final product only. Any input service     that forms part of value of final product (taxable service) should be eligible for cenvat credit.

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's are words of wide import.

           

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