Cenvat Credit on Input Services - Nexus between input services and business is must - repair, maintenance and Civil constructions used in the residential colony is not eligible for cenvat credit

CCE Versus MANIKGARH CEMENT [2010 -TMI - 78189 - BOMBAY HIGH COURT]

In the case of Manikgarh Cement, Bombay High court reversed the decision of Tribunal in which tribunal has allowed the credit on input services used in repair, maintenance and Civil constructions used in the residential colony is not eligible for cenvat credit.

While rejected the decision of tribunal in the matter of CCE, NAGPUR Versus MANIKGARH CEMENT [2009 -TMI - 33812 - CESTAT MUMBAI], high court has observed that:

      "In our opinion, establishing a residential colony for the employees and rendering taxable services in that residential colony may be a welfare activity undertaken while carrying on the business and such an expenditure may be allowable under the Income Tax Act. However, to qualify as an input service, the activity must have nexus with the business of the assessee. The expression 'relating to business' in rule 2(l) of CENVAT Credit Rules, 2004 refers to activities which are integrally related to the business activity of the assessee and not welfare activities undertaken by the assessee.

      Applying the ratio laid down by the Hon'ble Apex Court in the case of Maruti Suzuki Limited Vs. Commissioner of Central Excise, Delhi, we hold that unless the nexus is established between the services rendered and the business carried on by the assessee, the benefit ofCENVAT credit is not allowable. In the present case, in our opinion, rendering taxable services at the residential colony established by the assessee for the benefit of the employees, is not an activity integrally connected with the business of the assessee and therefore, the Tribunal was not justified in holding that the services such as repairs, maintenance and civil construction rendered at the residential colony constitutes 'input service' so as to claim credit of service tax paid on such services under Rule 2(l) of the CENVAT Credit Rules, 2004."

While pronouncing the ruling, HC has followed the decision of Supreme Court in the matter of M/s. Maruti Suzuki Ltd. Versus Commissioner of Central Excise, Delhi-III [2009 -TMI - 34348 - SUPREME COURT] in which Apex court has held that,

      "we hold that the definition of "input" brings within its fold, inputs used for generation of electricity or steam, provided such electricity or steam is used within the factory of production for manufacture of final products or for any other purpose. The important point to be noted is that, in the present case, excess electricity has been cleared by the assessee at the agreed rate from time to time in favour of its joint ventures, vendors etc. for a price and has also cleared such electricity in favour of the grid for distribution. To that extent, in our view, assessee was not entitled to CENVAT credit. In short, assessee is entitled to credit on the eligible inputs utilized in the generation of electricity to the extent to which they are using the produced electricity within their factory (for captive consumption). They are not entitled to CENVAT credit to the extent of the excess electricity cleared at the contractual rates in favour of joint ventures, vendors etc., which is sold at a price."

It is interesting to note that the above decision of the honorable Supreme Court was in context of Inputs and not Input Services.

It is more interest to note that whearas tribunal in the earlier decision has allowed the credit in favor of assessee but in the later decision had disallowed the credit and decided against the assessee following the same decision of honorable Supreme Court as above. [Commissioner of Central Excise, Nagpur Versus Manikgarh Cement Works - 2009 -TMI - 75925 - CESTAT, MUMBAI]