2025 (2) TMI 515 - AT - Central Excise

CENVAT Credit on the input service - banking charges/commission paid in relation to obtaining bank guarantee related to VAT refund in respect of purchase of raw material being set off of the sales tax on account of such final products being exported abroad - extended period of limitation - penalty - HELD THAT - It is an undisputed fact of the case that applicable service tax has been paid on the input services and the Department had no objection for the payment of such service tax by the input service provider i.e. Bank. There is also no dispute that the appellants are eligible to avail CENVAT Credit of such service tax. The dispute therefore remains to be examined is for consideration of the fact that whether the disputed services are used in or in relation to the manufacture of final products as provided under clause (ii) of the definition of input service under Rule 2(l) ibid. The services which are in dispute are banking commission/charges. Prima facie when the service tax has been duly paid on the input services which are in relation to the VAT setoff on raw materials used for manufacture of final products then taking of CENVAT Credit cannot be objected to inasmuch as Rule 3 of CENVAT Credit Rules 2004 specifically state that a provider of output service to avail such credit of tax paid on input service. The setoff of VAT arising on account of final products being exported does not nullify that the raw materials have been used in manufacture of final products. When these raw materials have been used as inputs the attendant services of obtaining bank guarantee for claiming VAT refund eligible on account of raw materials having been used for manufacture of final products had arisen and this does not bring any new ground for making the input service tax as ineligible for taking CENVAT credit. The bank charges/commission paid for obtaining bank guarantee is in connection with raw materials purchased which are used for manufacture of final products. Thus to this extent such input services availed by the appellants satisfies the first means part of the definition of input service as per Rule 2(l) ibid. Further the second inclusion part of the definition also specifically provide for services used in relation to procurement of inputs legal services financing accounting sales promotion outward transportation upto the place of removal etc. for being covered in the inclusion part of the definition - Inasmuch as the disputed input services as above are covered under the means and inclusion part of the definition of input service under Rule 2(l) ibid and are not covered by exclusion part of the definition it is found that there is no legal basis for denial of CENVAT Credit on these services. The grounds for rejection of CENVAT Credit on input services in the order of the adjudicating authority which was upheld by the learned Commissioner (Appeals) is that the input services have not been specifically used by the appellants in or in relation to the manufacture of final products. From the facts of the present case it clearly transpires that all services that are having a relation with raw materials have been used either directly or indirectly in manufacture of final products and only upon such final products having been exported the VAT setoff was given and therefore the bank commission/charges for obtaining bank guarantee is with respect to such usage of raw materials in the final products and not per se directly relating to its exports - the grounds on which the input service credit was disallowed in the original order which was upheld by the impugned order have no legal basis and accordingly the impugned order is liable to be dismissed as being not legally sustainable. Extended period of limitation - penalty - HELD THAT - There are no recording of any findings on other submissions made by both sides in respect of invocation of extended period and imposition of penalty. Further as rightly held in a number of decisions by the higher judicial forum in respect of issues concerning interpretation of law extended period of limitation cannot be invoked and penalty for evasion or for violation of law cannot be imposed. Therefore in the present case the adjudged demands having been held as not sustainable on merits the imposition of penalty against the appellants by invoking extended period of demand is also not legally sustainable. Conclusion - The services indirectly related to the manufacturing process such as those facilitating VAT refunds on raw materials qualify as input services under the CENVAT Credit Rules. The impugned order dated 03.12.2020 is set aside - Appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issue in this appeal was the eligibility of M/s Bajaj Auto Limited to avail CENVAT Credit on banking charges/commission paid for obtaining a bank guarantee related to VAT refunds on raw materials used in the manufacture of final products. The core legal question was whether these banking services could be classified as 'input services' under Rule 2(l) of the CENVAT Credit Rules, 2004, thereby qualifying for CENVAT Credit.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

The legal framework hinges on the definition of 'input service' under Rule 2(l) of the CENVAT Credit Rules, 2004. This rule defines 'input service' as any service used by a manufacturer, directly or indirectly, in or in relation to the manufacture of final products. It includes services related to financing, procurement of inputs, and other specified activities. The exclusion clause lists services not eligible for credit, such as those for personal use or certain specified services.

Precedents considered include the Tribunal's decision in Aditya Birla Nuvo Ltd., which allowed credit for services not directly related to manufacturing but included under the expanded definition of 'input service'.

Court's interpretation and reasoning:

The Tribunal interpreted the definition of 'input service' to include banking charges for obtaining a bank guarantee as these services were related to the procurement of raw materials used in manufacturing. The Tribunal emphasized that the services were indirectly connected to the manufacturing process because they facilitated VAT refunds on raw materials, which were essential for manufacturing the final products.

Key evidence and findings:

The Tribunal noted that the appellants had paid service tax on the disputed banking services and had availed the CENVAT Credit accordingly. There was no dispute regarding the payment of service tax or the eligibility of the appellants to claim credit for such tax. The pivotal finding was that the banking charges were necessary for obtaining VAT refunds on raw materials, which were integral to manufacturing the final products.

Application of law to facts:

The Tribunal applied the definition of 'input service' to conclude that the banking charges were indeed used in relation to the manufacture of final products. It emphasized that the services were related to the procurement of inputs, which is explicitly included in the definition of 'input service'. The Tribunal also noted that these services did not fall under the exclusion clause of Rule 2(l).

Treatment of competing arguments:

The appellants argued that the banking services were essential for obtaining VAT refunds, which were directly related to the manufacturing process. They cited a previous order where similar credit was allowed, and the department had not contested that decision. The department, however, contended that the services were not related to manufacturing operations and should not qualify for credit. The Tribunal favored the appellants' argument, noting the consistency with previous decisions and the lack of departmental challenge to the earlier favorable order.

Conclusions:

The Tribunal concluded that the banking charges were eligible for CENVAT Credit as they were related to the procurement of inputs used in manufacturing. It found no legal basis for denying the credit and deemed the impugned order unsustainable.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

The Tribunal stated, "Inasmuch as the disputed input services as above are covered under the 'means' and 'inclusion' part of the definition of 'input service' under Rule 2(l) ibid and are not covered by 'exclusion' part of the definition, I find that there is no legal basis for denial of CENVAT Credit on these services."

Core principles established:

The Tribunal reinforced the principle that services indirectly related to the manufacturing process, such as those facilitating VAT refunds on raw materials, qualify as 'input services' under the CENVAT Credit Rules. It also established that consistency in departmental decisions is crucial to avoid arbitrary tax administration.

Final determinations on each issue:

The Tribunal set aside the impugned order, allowing CENVAT Credit on the banking charges amounting to Rs.28,83,253/-. It also annulled the penalty imposed, citing the lack of legal basis for the demand and the consistency with previous decisions in similar matters.