INPUTS VS. INPUT SERVICE

[Mr. M. GOVINDARAJAN]

CENVAT Credit Rules, 2004 ('Rules' for short) provides for taking CENVAT credit on the excise duty, service tax paid on inputs and input service by the manufacturer of final products/output service provider against the payment of excise duty/service tax.

The term 'inputs' is defined under Rule 2(k). Input means-

(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production;

(ii) all goods, except light diesel oil, high speed oil, motor spirit, commonly known as petrol and motor vehicles used for providing any output service.

Explanation: 1 - The light diesel oil, high speed oil or motor spirit commonly known as petrol, shall not be treated as input for any purpose whatsoever.

Explanation: 2 - Input includes used in manufacture of capital goods which are further used in the factory of the manufacture.

The term 'input service' is under Rule 2(l). Input service means any service,-

(i) used by a provider of taxable service for providing an output service; or

(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products up to the place of removal

and includes services used in relation to setting up, modernize, 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 up to 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 up to the place of removal.

In 'SEMCO Electrical Private Limited V. Commissioner of Central Excise' 2010 -TMI - 76184 - CESTAT, MUMBAI, the Tribunal held that 'input' means goods i.e, tangible property. It can be handled, stored, processed, transferred, transported, accounted for etc., On the other hand, service is being intangible in nature is incapable of being stored, possessed and transferred. It is consumed as soon as provided/rendered. Further 'input' is received at given place, say, factory of manufacturer. Therefore, it is easier to track movement of inputs used in or in relation to manufacture of the final product within the factory of production. However, services may not be necessarily received at the factory of the manufacturer but may be received at various places. This fundamental distinction has to be kept in mind while deciding a case.

In 'Maruti Suzuki Limited V. Commissioner of Central Excise' - 2009 (8) TMI 14 - SUPREME COURT the Hon'ble Supreme Court held that an item would fall under the category of 'input' only if it satisfied all the three parts of the definition clause. In other words, even inputs used for generation of electricity or steam must satisfy the condition of 'used within the factory of production for manufacture of final products or any other purpose. It is the functional utility of the said item which would constitute the relevant consideration. Unless and until the said input is used in or in relation to the manufacture of final product within the factory of production, the said item would not become an eligible input. The said expression 'used in or in relation to the manufacturer' has many shades and would cover various situations based on the purpose for which the input is used.

In the definition of 'input' the definition is mainly emphasized for input and after the word includes the definition reads as lubricating oils, greases, cutting oils, coolants, accessories of for the final products cleared along with final product, goods used as paint, or as packing material, or as fuel or for generation of electricity or stream used in or in relation to the manufacture of final product or for other purpose within the factory of the products.

The definition of the term 'input service' has two parts - (i) the 'means' part which is the main part of the definition and (ii) 'inclusive' part which is illustrative and certainly not exhaustive.

The definition of 'input service' can be effectively divided into the following 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 up to the place of removal, procurement of inputs;

(v) Service used in relation to activities relating to business and outward transportation up to the place of removal.

CENVAT Credit in all the limbs of the above on satisfying any one of the limbs is available and they are all independent.

A service would qualify as 'input service' even if not covered by the 'means' portion, if it satisfies the 'includes' portion of the definition. In other words, in order to qualify as an input service, a service has to fall either within the 'means' part or 'includes' part of the definition.

The definitions of 'input' and 'input service' are not comparable or para material and coverage of the 'input service' is definitely wider. The definition of input is exhaustive and is restrictive in scope. It treats all goods used in or in relation to manufacture of final products or for any other purpose within the factory of production. But certain goods which would be eligible as per definition have been excluded and certain goods which could interpreted as not includable have been specifically included i.e., packing material, lubricating oil, accessories etc., Therefore, all goods other than specified as includable have to be shown to be used in or in relation to manufacture of final product or for any other purpose within the factory of production.

But in the definition of 'input service' the word after includes the definition read - "Services used in relation to setting up, modernization, renovation or repairs of a factory or premises, advertisement or sales promotion, market research storage up to the place of removal, procurement of inputs, activities relating to business such as accounting, auditing, financing, recruitment and quality control etc.," The legislature has not used the word in the 'include' part that it is to be used in or in relation to the final product. It is, thus, clear that the intention of the Legislature was that these activities should be relating to the business.