2023 (5) TMI 754 - AT - Central Excise

Denial of CENVAT credit of tax - input services - construction service - security service - maintenance and repair service - works contract service - manpower recruitment and supply service - denial on the ground of lack of nexus - HELD THAT - It would be appropriate to hold that perception of nexus , with its unbounded connotations, is not an appropriate nomenclature for the touchstone intended by rule 3 of CENVAT Credit Rules, 2004; conformity must need be tested against the entirety of the definition of input service in rule 2(l) of CENVAT Credit Rules, 2004 including the principal and inclusive leg on every finding of denial. Our perusal of the order of the original authority supra reveals that the principal leg has been accorded but a cursory disposal. From a plain reading of the germane definitions in CENVAT Credit Rules, 2004, we also find 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 - 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. Accordingly, the appeals are allowed by way of remand.

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

Issue-wise Detailed Analysis:

1. Denial of CENVAT Credit on Services Deployed in Townships:
The appeals challenge the denial of CENVAT credit for tax paid on services such as 'construction service', 'security service', 'maintenance and repair service', 'works contract service', and 'manpower recruitment and supply service' used in townships. The central excise authorities argued that these services do not conform to the definition of 'input service' under rule 2(l) of CENVAT Credit Rules, 2004. The original authority disallowed the credit, stating that the services were used in residential quarters and other civil structures located away from the factory, which do not have a nexus with the manufacturing activity.

2. Conformity with the Definition of 'Input Service' under Rule 2(l) of CENVAT Credit Rules, 2004:
The original authority emphasized that the services in question are not covered under the main definition of 'input service' and are not included in the extended definition, which specifically includes services used for setting up buildings linked to manufacturing, storage, and sale of final products. Consequently, services for construction and maintenance of townships for employees were deemed welfare measures without a nexus to the manufacture, storage, or sale of final products.

3. Nexus Between Impugned Services and Manufacturing Activities:
The appellant cited the decision in Coca Cola India Pvt Ltd v. Commissioner of Central Excise, Pune-III, arguing that the principle of entitlement flows from the inclusion of costs in production. Conversely, the respondent relied on the decision in Commissioner of Central Excise v. Manikgarh Cement, which held that establishing a residential colony for employees is a welfare activity not integrally connected to the business of manufacturing and thus does not qualify as an 'input service'.

4. Applicability of Judicial Decisions to the Dispute:
The tribunal examined several judgments, including the Hon'ble High Court of Bombay's decisions in Coca Cola India Pvt Ltd and Manikgarh Cement. In Coca Cola India Pvt Ltd, the court allowed credit for advertisement services as they were deemed to have an effect on the manufacture of the final product. However, in Manikgarh Cement, the court held that services rendered in residential colonies do not qualify as 'input services' due to the lack of nexus with the business activity.

Conclusion and Remand:
The tribunal concluded that the perception of 'nexus' should not be the sole determinant for eligibility under rule 3 of CENVAT Credit Rules, 2004. Instead, conformity must be tested against the entire definition of 'input service' in rule 2(l). The original authority's order lacked a detailed examination of the principal leg of the definition and its relevance to the final output. Therefore, the tribunal set aside the impugned order and remanded the proceedings to the original authority to reassess the direct or indirect use of the impugned services and their nexus with the final output. The appeals were allowed by way of remand.

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