2012 (5) TMI 374 - AT - Service Tax

Tribunal grants CENVAT credit for services benefiting cigarette production, emphasizing direct nexus and eligibility criteria.

The tribunal allowed the appeal, setting aside the denial of CENVAT credit to the appellant for services provided by M/s. SDSS to farmers. It determined ... CENVAT credit - appellant has a scheme of having tobacco of good quality produced by a select group of farmers. Under this scheme, they supply tobacco seeds free of cost to the farmers and also arrange necessary advice to be given to them by experts - agreement between the appellant and M/s. Supreme Detective and Security Services. Under this agreement dated 18.04.2006 between the appellant and M/s. Supreme Detective and Security Services (SDSS for short), the latter was liable to provide certain services mentioned in an annexure to the agreement, to the farmers within the prescribed time – Held that:- appellant is the service-recipient as they paid for the services of M/s. SDSS and did not recover the same from the farmers and (b) that they have established a nexus between the services and the manufacture of their final product (cigarettes) by showing that the services were ultimately utilized for producing good quality tobacco which was required for the manufacture of good quality cigarettes and also by including the cost of services in the cost of production of cigarettes. The services thus fit in the definition of 'input service' under Rule 2(1) of the CENVAT Credit Rules, 2004. Hence the appellant rightly availed CENVAT credit of the service tax paid on the services. appeal is allowed Issues:1. Denial of CENVAT credit on services provided by M/s. SDSS to farmers.2. Allegations of lack of nexus between services and manufacture of cigarettes.Analysis:1. The appellant, engaged in cigarette manufacturing, had an agreement with M/s. SDSS for supervisory and advisory services to farmers for tobacco cultivation. The appellant took CENVAT credit on the service tax paid by M/s. SDSS and included the service cost in cigarette production. Dispute arose when the department sought to deny the credit, claiming the services were received by farmers, not the appellant, and lacked nexus with cigarette manufacture. The original authority denied the credit, leading to an appeal where the appellant argued that services were received by them through M/s. SDSS and were essential for cigarette production.2. The tribunal found that the services were indeed provided to the farmers on behalf of the appellant, who paid for and included the service cost in production. The crucial issue was establishing a nexus between the services and cigarette manufacture. The tribunal referred to the definition of 'input service' under CENVAT Credit Rules, stating that services used directly or indirectly in or in relation to final product manufacture qualify. It was evident that the services ensured good quality tobacco for cigarette production. Drawing parallel with a similar case involving plantation services, the tribunal concluded that the services had a clear nexus with cigarette manufacturing. Despite the cited case being under challenge, the tribunal independently determined that the appellant rightfully availed CENVAT credit as the services met the 'input service' definition.3. Ultimately, the tribunal set aside the impugned order, allowing the appeal. The decision emphasized the appellant's role as the service recipient, the established nexus between services and cigarette production, and the inclusion of service costs in the production process. By meeting the 'input service' criteria, the appellant was deemed eligible for the CENVAT credit on the services provided by M/s. SDSS.