2023 (1) TMI 1135 - AT - Central Excise

Denial of CENVAT Credit - input services - construction service - security service - maintenance and repair service - works contract service - manpower recruitment and supply service - it was contended by central excise authorities that such availment was not permissible under rule 3 of CENVAT Credit Rules, 2004 owing to non-conformity with the definition of input service in rule 2(l) of CENVAT Credit Rules, 2004 - HELD THAT - From a plain reading of the germane definitions in CENVAT Credit Rules, 2004, it is found that the distinction drawn between input and input service for deploying the expression whether directly or indirectly also appears to have been overlooked by central excise authorities. The relevance of the expression in the latter, by reason of intangibility and solely for manufacturing entities, is crucial enough to be the essence of the test for conformity to the definition. Most services will not be amenable to direct use, and absorption, in the manufacture of goods; neither would these be clearly discernable in the product that emerges. The principle of nexus of service should not, therefore, restrict itself to direct use but should encompass indirect deployment and, hence, should be examined also in relation to the main leg of the definition. The lack of finding in the impugned order on the applicability of the main leg of the definition and its nexus with the final output hinders the exercise of appellate determination. It would be appropriate to have that undertaken to enable which we set aside the impugned order and restore the proceedings before the original authority to take note of the submissions of the appellant herein on the direct/indirect use of the impugned services procured by the appellant and determine nexus or lack thereof. Appeal allowed by way of remand.

Issues Involved:
1. Denial of CENVAT credit on services used in townships.
2. Interpretation of the definition of 'input service' under rule 2(l) of CENVAT Credit Rules, 2004.
3. Nexus between services availed and manufacturing activity.
4. Applicability of judicial decisions to the dispute.

Detailed Analysis:

1. Denial of CENVAT Credit on Services Used in Townships:
The appeals challenge the denial of CENVAT credit on services such as 'construction service,' 'security service,' 'maintenance and repair service,' 'works contract service,' and 'manpower recruitment and supply service' used in townships between July 2009 and July 2010. The central excise authorities contended that such availment was not permissible under rule 3 of CENVAT Credit Rules, 2004 due to non-conformity with the definition of 'input service' in rule 2(l) of CENVAT Credit Rules, 2004.

2. Interpretation of the Definition of 'Input Service' Under Rule 2(l) of CENVAT Credit Rules, 2004:
The core issue revolves around whether the services used in the residential townships qualify as 'input services' under rule 2(l). The original authority observed that:
"Since these services are provided at their residential township located away from the factory, I am examining its relation to manufacturing activity...construction service does not include the construction of townships and its repair and maintenance by the assessee for their employees. It may improve their quality of life and is a welfare measure but it has no nexus with the manufacture, storage or sale of the final products."

3. Nexus Between Services Availed and Manufacturing Activity:
The appellant argued that the services in question should be considered 'input services' as they are included in the cost of production, citing the decision of the Hon'ble High Court of Bombay in Coca Cola India Pvt Ltd v. Commissioner of Central Excise, Pune-III. Conversely, the respondent relied on the decision in Commissioner of Central Excise v. Manikgarh Cement, which emphasized the necessity of a direct nexus between the service and the manufacturing activity. The Hon'ble High Court of Bombay in Manikgarh Cement held:
"Establishing a residential colony for the employees and rendering taxable services in that residential colony may be a welfare activity... However, to qualify as an input service, the activity must have nexus with the business of the assessee."

4. Applicability of Judicial Decisions to the Dispute:
The Tribunal examined various judgments, including the decisions in Coca Cola India Pvt Ltd and Manikgarh Cement. In Coca Cola India Pvt Ltd, the court allowed credit on 'advertisement services' as they were considered to have a nexus with the manufacturing activity:
"The manufacturer can avail the credit of the service tax paid by him... It is a recognition by Revenue of the advertisement services having a connection with the manufacture of the final product."
However, in Manikgarh Cement, the court denied credit for services used in residential colonies, emphasizing the lack of direct nexus with manufacturing.

Conclusion:
The Tribunal concluded that the perception of 'nexus' should not be the sole criterion for determining eligibility for CENVAT credit. Instead, conformity with the entirety of the definition of 'input service' in rule 2(l) should be considered. The Tribunal noted that the original authority had only cursorily addressed the principal leg of the definition and overlooked the distinction between 'input' and 'input service' concerning direct and indirect use in manufacturing.

Remand for Further Examination:
The Tribunal set aside the impugned order and remanded the proceedings to the original authority to examine the submissions of the appellant regarding the direct/indirect use of the services and determine the nexus or lack thereof with the final output. The appeals were allowed by way of remand for a comprehensive re-evaluation of the issues.

Order Pronounced:
(Order pronounced in the open court on 20/01/2023)

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