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TMI Blog2014 (1) TMI 610X X X X Extracts X X X X X X X X Extracts X X X X ..... h constitute activities related to business need not have a nexus with manufacture - issues involved are complex and do not lend themselves to one clear interpretation - Therefore, penalties are set aside - Other matter remitted back to Commissioner - Decided partly in favour of assessee. - ST/263/2009 - Final Order No. 25173/2013 - Dated:- 14-3-2013 - Shri P.G. Chacko, (J) P. Karthikeyan, M. Veeraiyan, and B.S.V. Murthy, Members (T) Shri Thomas Vellapally, Advocate, for the Appellant. Shri D.P. Nagendra Kumar, JCDR, for the Respondent. ORDER This is an appeal filed by M/s. Telco Construction Equipment Company Ltd. (TCECL for short), Dharwad impugning an order of the Commissioner of Central Excise Customs, Belgaum vide which he disallowed and demanded an amount of Rs. 2,22,35,165/- availed by the appellant as credit of Service Tax paid on various input services during the period October, 2006 to March, 2008 along with applicable interest and imposed penalties of Rs. 2,000/- for each credit entry in the CENVAT Account under Rule 15(3) of the CENVAT Credit Rules, 2004 (CCR) in respect of each of the two show-cause notices decided. 2. The facts of the case are th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arance of final products from place of removal ignoring the fact that the appellant was also a provider of output services. The appellant s unit was situated at Dharwad. The impugned credit was transferred to it by its Head Office located in Bangalore. The Headquarters Office operated as input service distributor under Rule 7 of CCR. Such credit could be disallowed only by the Service Tax authorities at Bangalore. The impugned order was passed by the Commissioner, Belgaum without jurisdiction. In denying the Service Tax paid under Air Travel Agent s services, the impugned order held that the same had been incurred in connection with sponsored holiday trips, etc. allowed to its employees by the assessee. This finding was without any evidence or allegation in the show-cause notice. The appellants had produced invoices in support of the claim that the Service Tax was paid for booking air tickets for sales promotion trips undertaken by its employees. As regards the mandatory services (Maintenance or repairs), it is submitted that the services were arranged to be provided free of cost to the customers. The transaction value for the machines included cost of such services. Assessee s dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts outside India like the KPMG Associates and Management consultancy services received in India from Watson Wyatt and India Life Capital Pvt. Ltd. etc. The management consultancy services received from Watson Wyatt were availed for the purposes of gratuity valuation, superannuation valuation, leave entitlement valuation of its employees and came within the scope of Auditing . When the definition of input services included services related to business such as auditing, financing etc., the appellant was entitled to this credit. They had received consultancy on various important policy matters relating to finance, accounting, taxation, capital investments, etc. from Shri Soumendu Mazumdar, a highly experienced Chartered Accountant. They had received consultancy services for process improvement of the organization from Shri John Vinward, a Consultant appointed by the assessee. The assessee had appointed KPMG and S.L Garrigues for due diligence for acquisition of foreign company. The said services were provided in connection with its business and the appellant was fully entitled to the credit of Service Tax. The claims made by the assessee were ignored by the Commissioner while pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... availed credit due to it. Similarly, penalty imposed for each credit entry under Rule 15(3) of CCR was illegal. The assessee had not taken any CENVAT credit wrongly in contravention of any of the relevant rules. 6. During hearing, the learned Counsel representing the appellants submitted that the mandatory service during warranty and services post-warranty were carried out by the dealers on behalf of the appellant. Free services were necessary in connection with the sale of the machine under contract between the appellant and the customer. The learned Counsel relied on the decision of the Tribunal in CCE, Vadodara-II v. Danke Products [2009 (16) S.T.R. 576 (Tri.-Ahmd.)] in support of the claim that the appellant was entitled to credit of Service Tax paid by the dealer who carried out free services on behalf of the appellant. The services undertaken post warranty by the dealer also were carried out under a comprehensive maintenance contract between the assessee and the customer. The dealer undertook the service on behalf of the appellant. As per the C.B.E. C. Circular No. 96/7/2007-S.T., dated 23-8-2007, it was clarified that services provided by the sub-contractors were in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gned order on the judgment of the Apex Court in Maruti Suzuki Ltd. reported in 2009-TIOL-94-SC-CX. = 2009 (240) E.L.T. 641 (S.C.). He has also relied on the decisions of the Tribunal in Vikram Ispat - 2010-TIOL-900-CESTAT-MUM = 2010 (19) S.T.R. 52 (Tri.-Mum.) = 2012 (277) E.L.T. 197 (Tri. - Mum.); Chemplast Sanmar Ltd. - 2010-TIOL-180-CESTAT-MAD = 2010 (17) S.T.R 253 (Tri.-Chennai) = 2010 (250) E.L.T. 46 (Tri.-Chennai); M/s. Manikgarh Cement Works - 2009-TIOL-2059-CESTAT-MUM = 2010 (18) S.T.R 275 (Tri.-Mum.) and Sundaram Brake Linings - 2010 (19) S.T.R. 172 (Tri.-Chennai). The main plank of the Revenue s case is that in order to qualify as input service , the same had to satisfy two ingredients; i.e. (i) such input service should be used by a provider of taxable service for providing an output service or used by the manufacturer of the final product for manufacture and clearance of final product upto the place of removal, (ii) Any services specified in the inclusive part of the definition of Rule 2(l) should also meet the essential requirements specified under the main part of the definition. Paragraph 39 of the High Court s judgment ran counter to the ruling of the Apex Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Suzuki Ltd. case (supra). Similar ground is raised for denying credit availed under warranty handling service. The services were provided after sale of the goods; the same could not be availed as input service tax credit. (f) As regards the service tax reimbursed to dealers, it is submitted that the reimbursement of Service Tax pertained to mandatory services provided by the dealer to the customer on the finished products after their sale from the factory. Therefore, the same could not be held as input service in terms of Rule 2(l) of CCR. (g) As regards Recovery Agent s service, the same were provided subsequent to sale and had no nexus either with the manufacture or clearance of excisable goods or were to activities specified in Rule 2(l) of CCR. (h) As for the insurance services involved, the same relating to branch office and transit insurance in respect of spares could not be treated as input service as such services were availed subsequent to sale of manufactured goods. It could not be said with certainty that entire spares in respect of which insurance had been taken at the branch office, warehouse as well as transit insurance were actually used for providi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner, Central Excise and Service Tax, Dharwad. We do not find this objection raised or answered in the impugned order. However, this being a legal question the Commissioner needs to give a finding in this regard in the remand proceedings we order. 9.1 The admissibility of credit raised on the various services is discussed below seriatum. (i) Air Travel Agent s Service : The assessee had claimed credit of Service Tax paid for booking Air tickets for travel by its employees. The claim before the Commissioner was that the personnel had undertaken travels in connection with promotion of sales of the finished products of TCECL. The Commissioner denied the credit on the ground that the assessee had not established with necessary evidence that the impugned service was availed for sales promotion as claimed by the assessee. To qualify for credit of the tax paid, it had to establish that the service was availed in relation to promotion of sales of the assessee s products namely excavators, etc. We find that in principle, the authorities are not averse to allow the disputed credit. We find that this matter has to be remanded to the Commissioner so that the appellants can est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices against charges paid by the customers as per the agreement between the assessee and its customers. As a condition of sale, the assessee is required to carry out a number of initial free services of the equipment during the warranty period. The consideration for these services is paid to the dealer by the assessee. The assessee bears the cost of these services and the same is included in the value of the equipment. The cost of the service and the tax are part of the assessable value of the equipment on which excise duty is paid. Beyond the warranty period, the customers of the assessee have the option to avail servicing of its vehicles by the designated dealers of the assessee at various locations. The customers pay for the services and the dealer pays the Service Tax. The Service Tax paid by the dealers is reimbursed by the assessee. In the proceedings before the Tribunal, the appellants relied on a decision of the Tribunal in the case of Danke Products (supra). We find that the taxable entry maintenance or repair service read as follows during the material period: Section 65(64) : management, maintenance or repair means any service provided by - (i) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to business which are input services of Rule 2(l) of CCR. (vii) Recovery Agent s service : The Commissioner has disallowed credit of tax paid under this head, as the impugned services were provided subsequent to sale and had no nexus either with the manufacture or clearance of excisable goods or were activities specified under Rule 2(l) of CCR. We note that this service is availed by the appellant for recovering amounts due from customers of the assessee. The appellants had claimed that these were Business Auxiliary Services availed in relation to business in connection with the manufacture and clearance of final products from the place of removal. After considering the arguments by both sides, we find that the tax paid under this head will qualify for credit provided the services can be brought under activities relating to business , which we discuss in the latter part of this order. (viii) Insurance and Courier service : Insurance service is provided for insuring branch offices, warehouses, stocks, medical insurance of employees, transit insurance for spares and car insurance. As per the impugned order, the assessee pays Service Tax on insurance of warehouse, branch office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not covered under inputs or capital goods and, therefore, services relating to AMC of office equipment were not covered under Rule 2(l) of CCR. The appellant has relied on a decision of the Tribunal in Parason Machinery (I) Pvt. Ltd. v. CCE [2009 (16) S.T.R. 20 (Tri.-Mumbai)]. We find that vide the order cited, the Tribunal had held that the tax paid on maintenance or repairs of photocopy machines used in assessee s office was input service. The Impugned services are availed on equipment placed in its various offices for use in connection with sale. We hold that this service is an input service and the appellant is eligible for the credit of tax paid. (xi) Club Association Service : As regards this service, the assessee had taken corporate membership in Bangalore Club and claimed credit on the ground that the membership was for official purpose and was related to business activities. We find that membership of any employee of the assessee in Bangalore Club is not an activity related to business. We uphold the decision of the Commissioner. (xii) Courier service : This service was availed for transportation of spares from central warehouse to feeder warehouses and branches for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The appellant has canvassed its case on the basis that these services are input for the assessee s output service of maintenance or repair. From the records, we are not clear whether the activity involved was undertaken at the depot or warehouse of the assessee or elsewhere. However, there is no serious doubt that the impugned activity was undertaken for facilitating transport of spares to be used for maintenance or repair or sale of the assessee s products. It would appear that the activity is one of the activities related to business. This aspect has to be examined by the Commissioner. 10. The Commissioner disallowed credit relating to most services on the ground that as per definition contained in Rule 2(l) of Cenvat Credit Rules, input service was service which was used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture and clearance of the final products upto the place of removal and included certain activities relating to business. An illustrative list of such activities was contained in the definition. Therefore, service tax paid on services which were not directly or indirectly used, in or in relation to the manufacture and clearan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. stood impliedly overruled by the Maruti Suzuki Ltd. judgment. However, he cited para 43 of the judgment in the Coca-Cola India Pvt. Ltd. case where the High Court had rendered the finding that the advertisement service which was the subject matter in that case was eligible input service. As long as the manufacturer could demonstrate that the service had an effect or impact on the manufacture of the final product and the manufacturer could establish the relationship between the input service and the manufacture of the final product the same was eligible input service. However, he was of the opinion that the observation of the Hon ble High Court contained in para 39 in which the High Court found the definition of input service to comprise five independent definitions ran counter to the ruling of the Apex Court in the Maruti Suzuki Ltd. case. 12. He has cited various decisions of the Tribunal in support of the Revenue s case. We discuss these decisions below seriatum. a. Vikram Ispat v. CCE, Aurangabad [2009-TIOL-997-CESTAT-MUM = 2009 (16) S.T.R. 195 (Tri. - Mum.) = 2012 (277) E.L.T. 218 (Tri. - Mum.)] In this case following the Maruti Suzuki Ltd. case, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame expression having been used for inputs and input services by the Legislature, the test laid down in Maruti Suzuki (supra) for interpreting the expression used in, or in relation to the manufacture of excisable goods would have to be followed in respect of input services also. The law permits credit of duty/tax in respect of inputs/input services only when the same are used in, or in relation to manufacture of excisable goods. The law does not provide any other basis. It does not provide for credit on the basis that the value of input/input service is included in the value of finished excisable goods. Hence, the tests laid down in Maruti Suzuki (supra) cannot be overlooked. Use of the input service must be integrally connected with the manufacture of the final product. The input service must have nexus with the process of manufacture. It has to be necessarily established that the input service is used in or in relation to the manufacture of the final product. One of the relevant test would be can the final product emerge without the use of the input service in question. When these tests are applied following the decision of the Hon ble Supreme Court in Maruti Suzuki (supra), o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal; Obviously, several items that figure in the inclusive part of the definition of input service do not conform to the substantive and specific part in the definition of input service. Activities such as credit rating, share registry do not have any impact whatsoever on the manufacturing and clearance of finished goods by a manufacturer. Therefore, as regards input service the items appearing in the inclusive list need not necessarily satisfy the requirement prescribed in the main part of the definition. Since the Apex Court did not consider input service of Rule 2(l) of Cenvat Credit Rules ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, activities in relation to business could cover all the activities that were related to the functioning of a business. The term business could not be given a restricted definition to say that business of a manufacturer was to manufacture final products only. The term business therefore, particularly in fiscal statutes, was of wide import. The definition of input service employed the phrase activities relating to business. The words relating to further widened the scope of the expression activities relating to business. Similarly, the use of the word activities in the phrase activities relating to business further signified the wide import of the phrase activities relating to business . The Rule making authority had not employed any qualifying words before the word activities, like main activities or essential activities etc. Therefore, it must follow that all and any activity relating to business fell within the definition of input service provided there was a relation between the manufacturer of concentrate and the activity. 16. What followed from the above discussion was that the credit could be availed on the tax paid on the input service, as long as the manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice Station Service) of para 9.1 inasmuch as, in the impugned order, the learned Commissioner denied CENVAT credit on these services to the assessee solely on the ground of lack of evidence to establish entitlement. 19. Insofar as the services discussed in sub-para (v) (Management Consultancy Service), sub-para (vi) (Maintenance or Repair Service), sub-para (vii) (Recovery Agent s Service), sub-para (viii) (Insurance and Courier Service) and sub-para (xii) (Courier Service) of para 9.1 are concerned, I note that the learned brother has allowed CENVAT credit on these services to the assessee by holding that these services qualify to be brought under activities relating to business within the meaning of this expression used in the definition of input service under Rule 2(l) of the CENVAT Credit Rules, 2004. He has obviously, relied on the decision of the Hon ble Bombay High Court in the case of Coca Cola India Pvt. Ltd. v. CCE [2009 (242) E.L.T. 168 (Bom.) = 2009 (15) S.T.R. 657 (Bom.)] discussed in paragraphs 14 and 15. Accordingly, it has been held that any activity relating to business would fall within the definition of input service provided there is a relation between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Hon ble High Court was not available. Nevertheless, the law as interpreted by the Hon ble High Court requires to be followed. Therefore, I am of the view that the issues discussed in sub-paragraphs (v) to (viii) and sub-para (xii) of para 9.1 also have to be remanded to the lower authority with a direction to decide afresh on the admissibility of CENVAT credit on the services to the assessee after giving them a reasonable opportunity to establish that the relevant services/activities were integrally connected with the business of manufacturing the final products. 20. As regards the issue discussed in sub-para (ix) (Professional Fee service) of para 9.1, I agree with the remand order for reason similar to the one stated in para 18. With regard to Annual Maintenance Contract in respect of photocopying machines [sub-para (x) of para 9.1], I observe that the learned JCDR failed to rebut the arguments which were made by the learned counsel on the strength of case law. Therefore, I am in agreement with the conclusion reached by learned brother. Further, I am in full agreement with him in respect of Club Association Service [sub-para (xi) of para 9.1]. There is no disagreement w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct. This is the reason why I have found it necessary to widen the scope of the remand order made by the learned brother. 22. Without prejudice to the views expressed by me hereinbefore, I observe that neither in the case of Coca Cola India Pvt. Ltd. nor in the case of Ultratech Cement Ltd. did anybody bring to the notice of the Hon ble High Court the relevant provisions of Section 37 of the Central Excise Act, which authorised the Central Government to make rules, inter alia, to provide for credit of service tax paid or payable on taxable service used in, or in relation to, the manufacture of excisable goods . The question whether the inclusive part of the definition of input service under Rule 2(l) of the CENVAT Credit Rules, 2004 is within the scope of the legislative authority delegated to the Central Government by Parliament under Section 37 and, if so, to what extent, was not debated before the Hon ble High Court. Sd/- (P.G. Chacko) Member (Judicial) POINTS OF DIFFERENCE (a) Whether, in respect of the services discussed in sub-para (v) (Management Consultancy Service), sub-para (vi) (Maintenance or Repair Service), sub-para (vii) (Recovery Agent s Service) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner before the Tribunal on various grounds. 25. While hearing the appeal there were differences of opinion which were formulated as follows : (a) Whether, in respect of the services discussed in sub-para (v) (Management Consultancy Service), sub-para (vi) (Maintenance of Repair Service) sub-para (vii) (Recovery Agent s Service), sub-para (viii) (Insurance and Courier Service) and sub-para (xii) (Courier Service) of para 9.1. The appeal should be allowed as held by the learned Member (Technical) OR The case should be remanded as held by the learned Member (Judicial). (b) Whether in the remanded matters, the appellant should be required to establish integral connection between the service and the manufacture of final product for the benefit of CENVAT credit on the service as held by the learned Member (Judicial) relying on the Hon ble High Court s judgment in the case of Ultratech Cement Ltd. (vide supra). OR The appellant should be required only to show that the service relates to their business as held by the learned Member (Technical) relying on the Hon ble High Court s judgment in the case of Coca Cola India Pvt. Ltd. (vide s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edit, inasmuch as the appellants are paying service tax on the entire amount towards AMC collected by the appellants from the customers. In this regard, the learned advocate relies on the decision of the Tribunal in the case of Commissioner of Central Excise, Vododara-II v. Danke Products [2009 (16) S.T.R. 576 (Tri.-Bang.)]. (c) Recovery Agency Services : The learned counsel submits that the appellants had utilised services of recovery agents for recovery of amounts due from the defaulting customers to whom the goods were sold and these services should be treated as coming under activities relating to business and, therefore, should be held to have nexus for the purpose of treating such services as input services in terms of Rule 2(l) of CENVAT Credit Rules, 2004. (d) Insurance Services : He submits that insuring the business premises like godown, branch office and stock held and the insurance against loss due to fire, machinery break-down, accident are activities related to business. He further submits that the insurance services includes medical insurance of their employees. In support of his claim, he relies on the decision of the Tribunal in the case of Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dit on service depends upon establishing integral connection between the service and the business of manufacture of final products. On this issue, he submits that the decision of the Hon ble Bombay High Court in Ultratech Cement case very clear which has been rendered after taking into account the decision in Coca Cola case as could be seen from paragraphs 37 38. There is no conflict between the two decisions. In the decision in case of Coca Cola one of the five limbs of the definition as service used in relation to activity relating to business has been identified. On the other hand, the decision in Ultratech Cement case explains the scope of activity relating to business . He further submits that the Hon ble High Court of Bombay in its decision dated 11-10-2010 in the case of Commissioner of C. Ex., Nagpur v. Manikgarh Cement [2010 (20) S.T.R. 456 (Bom.)] has also held that - 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 activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the definition of input service postulates activities which are integrally connected with the business of the assessee. If the activity is not integrally connected with the business of the manufacture of final product, the service would not qualify to be a input service under Rule 2(l) of the 2004 Rules. In view of the above judgment, he was of the opinion that a manufacturer claiming the benefit of CENVAT credit on any service under Rule 2(l) on the premise that the service is covered by the above expression should establish an integral connection between the activity/service and the business of manufacturing the final product. 31.1 I find that the decision in the case of Coca Cola analyses the definition of input services in 5 limbs and holds that each limb of the definition of input service can be considered as providing an independent benefit or concession or exemption. One of the limbs considered related to services used in relation to activities relating to business .... . However, the scope of the term activities relating to business was not spelt out in the said decision. 31.2 However, the latter decision of the Hon ble High Court of Bombay, Nagpur Bench i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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