2019 (1) TMI 167 - AT - Central Excise

CENVAT Credit - input service - construction service - period from April 2005 to October, 2006 - denial on account of nexus - whether the construction of staff colony in the present case is a welfare activity of the appellant or is an activity in relation to its business? - Held that - It is very much apparent from the reply of the appellant as was given to the show cause notice that the impugned construction has been made within the factory premises of the assessee/ appellant and the very object of the construction of these buildings for staff and labour in factory compound itself is to ensure the availability of the labour at the spot of manufacture for maintaining continuous manufacturing process of the plant. Thus, the said construction is opined to be an activity intended to seek enhancement of the productivity of the plant. Commissioner (Appeals) has failed to appreciate the fact on record creating nexus between the impugned input service and the business activity of the appellant and has wrongly held the same to be a welfare activity - The construction of houses since has been raised with the main objective of enhancement of the business, the same is held as the input service were upon the appellant is entitled to avail the Cenvat Credit. Appeal allowed - decided in favor of appellant.

Summary

Issues: Challenge to Service Tax credit on construction service availed by the appellant.

Issue 1: Admissibility of Service Tax credit on construction service:
The appellant, engaged in manufacturing 100% cotton yarn, availed Service Tax credit on construction service. The Department contended that the credit was not related to the manufacturing activity/input services, leading to a show cause notice for recovery. The original adjudicating authority confirmed the demand, upheld by the Commissioner (Appeals). The appellant challenged this before the Tribunal.

Issue 2: Nexus between construction activity and business:
The appellant argued that the construction of staff quarters within the factory premises aimed to ensure staff availability for the manufacturing process. Citing various case laws, the appellant claimed that such construction and maintenance of residential colonies were considered input services eligible for Cenvat credit. However, the Department contended that the construction was a welfare activity without a nexus to the business, citing a Supreme Court decision.

Issue 3: Interpretation of input service definition:
The Tribunal analyzed the definition of input service under Cenvat Credit Rules, noting an amendment excluding construction activities post-2011. As the disputed period was April 2005 to October 2006, the exclusion clause did not apply. The crucial issue was whether the construction of staff colonies was a welfare activity or related to the business of the appellant.

Analysis:
The Tribunal found that the construction within the factory premises aimed to enhance productivity by ensuring continuous manufacturing processes. Emphasizing the nexus between the construction and manufacturing activity, the Tribunal referred to precedents highlighting the broader scope of input services compared to inputs alone. Notably, a High Court decision emphasized the importance of housing colonies for employee efficiency and productivity. The Tribunal disagreed with the Commissioner (Appeals), holding that the construction was an input service linked to the business activity, entitling the appellant to avail Cenvat credit. The appeal was allowed, granting the appellant the benefit of the credit.

Conclusion:
The Tribunal's decision favored the appellant, recognizing the construction of staff quarters as an input service crucial for business activities. By establishing a reasonable nexus between the construction and manufacturing processes, the Tribunal overturned the Commissioner (Appeals) ruling, allowing the appellant to avail the Cenvat credit.