2013 (1) TMI 304 - HC - Central Excise

Technical testing, courier, repair, and inspection services qualify for CENVAT credit; foreign agent commission disallowed under Rule 2(l)

COMMISSIONER OF CENTRAL EXCISE, AHMEDABAD – II Versus M/s CADILA HEALTH CARE LTD.

The HC held that technical testing and analysis services for clinical samples prior to commercial production qualify as input services, entitling the ... Technical Testing and Analysis Services - definition of ‘sales promotion' - Whether the services of technical testing and analysis availed by the assessee for clinical samples, which had not yet reached commercial production, could be considered as 'input services' under Rule 2(l)? Held that:- As decided in ITC Ltd. v. Collector of Central Excise, Patna [1993 (10) TMI 85 - SUPREME COURT] definition of manufacture under section 2(f) very clearly includes process which is incidental or ancillary to the completion of the manufactured product. Manufacture of cigarette is completed when the same emerges in the form of sticks of cigarettes which are sent to the laboratory for quality control test. Therefore, the sticks of cigarettes which are removed for the purpose of test in the quality control laboratory within the factory premises of the appellant Company are liable to excise duty. The assessee in our case is engaged in the manufacture of medicaments & by their very nature, the drugs manufactured prior to final production thereof are required to be subjected to technical testing and analysis before entering into commercial production being sent for testing and analysis purpose. Under these circumstances, the services availed in respect of technical testing and analysis services are directly related to the manufacture of the final product . Undisputedly, when the goods are removed for testing and analysis, excise duty has been paid thereon, the respondents cannot be heard to contend that CENVAT credit is not admissible on the service tax paid in respect of such service - the assessee was entitled to avail of CENVAT credit in relation to service tax paid in relation to technical testing and analysis services availed by it - in favour of assessee. CENVAT credit on commission paid to the foreign agents - according to the assessee the services of a commission agent would fall within the ambit of sales promotion as envisaged in clause (i) of section 65(19) of the Finance Act, 1994 - Held that:- The words 'activities relating to business' are followed by the words 'such as'. Therefore, the words 'such as' must be given some meaning. In Royal Hatcheries (P) Ltd. v. State of A.P. [1993 (10) TMI 85 - SUPREME COURT] it is held that the words 'such as' indicate that what are mentioned thereafter are only illustrative and not exhaustive. For an activity related to the business, it has to be an activity which is analogous to the activities mentioned after the words 'such as'. What follows the words 'such as' is 'accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security'. In the opinion of this court, none of the illustrative activities, viz., 'accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security' is in any manner similar to the services rendered by commission agents nor are the same in any manner related to such services. Under the circumstances, though the business activities mentioned in the definition are not exhaustive, the service rendered by the commission agents not being analogous to the activities mentioned in the definition, would not fall within the ambit of the expression 'activities relating to business'. Consequently, CENVAT credit would not be admissible - against assessee. Courier service - Held that:- Examining the facts of the present case in the light Commissioner of Central Excise & Customs v. Parth Poly Wooven Pvt. Ltd. [2011 (4) TMI 975 - GUJARAT HIGH COURT] the period is from 01.02.2007 to 30.09.2007, that is before the definition of the term ‘input service' came to be amended with effect from 1.4.2008 and instead of the words ‘clearance of final products from the place of removal' the words 'clearance of final products upto the place of removal came to be substituted. Under the circumstances, this case would be squarely covered by the above decision and the courier services availed by the assessee whereby the courier collects the parcel from the factory gate for further transportation would fall within the ambit of the term ‘input service' as defined under rule 2(l) of the Rules - in favour of the assessee. Clearing and Forwarding services - Held that:- The clearing and forwarding agent is an agent of the principal. The goods stored by him after clearance from the factory would therefore, be stored on behalf of the principal, and as such the place where such goods are stored by the C & F agent would fall within the purview of sub-clause (iii) of clause (c) of section 4(3) and as such would be the place of removal. Viewed from that light the services rendered by the C & F agent of clearing the goods from the factory premises, storing the same and delivering the same to the customer would fall within the ambit of rule 2(l) of the Rules as it stood prior to its amendment with effect from 1.4.2008, namely clearance of final products from the place of removal. However, this court is not in agreement with the view adopted by the Tribunal that such services would amount to sales promotion and is, therefore, an input service. For the reasons stated while discussing the issue as regards service commission paid to foreign agent, the services rendered by the C & F agents cannot be said to be in the nature of sales promotion. This issue stands answered in favour of the assessee. Miscellaneous Services - Repair and Maintenance of copier machine, air conditioner, water cooler, Management Consultancy, Interior Decorator, Commercial or Industrial Construction Service - Held that:- The inclusive part of the definition of ‘input service' specifically includes services used in relation to renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, activities relating to business, such as accounting, computer networking etc. Thus, the services rendered by interior decorator, commercial and industrial construction services would squarely fall within the inclusive definition of ‘input service'. Such services would, therefore, fall within the ambit of ‘input service' as defined under rule 2(l) of the Rules - As regards services availed by the assessee towards repair and maintenance of copier machine, air conditioner, water cooler, etc. it cannot be gainsaid that such equipment are necessary for factory buildings as well as for activities relating to business and are, therefore, integrally connected with the business of the assessee. Under the circumstances, no infirmity can be found in the view taken by the Tribunal that such services are eligible services for the purpose of taking CENVAT credit on the service tax paid thereon. Technical Inspection and Certification - Held that:- These services have been availed of by the assessee in respect of inspection and checking of instruments which are used for the purpose of measuring size i.e. gauges and vernier calipers, measuring weight, scales, and measuring temperature, temperature indicators, and thermo hygrometers for measuring humidity and temperature, etc. which are all in the nature of precision instruments which measure various factors with precision, thus the service of technical inspection and certification agencies availed by the assessee would clearly fall within the ambit of input service. The contention that such certification has no nexus with the manufacture of final product is evidently fallacious as it would not be permissible for the assessee to use the necessary instruments without certification. Another aspect of the matter is that services rendered by a technical inspection and certification agency fall under sub-clause (zzi) of clause (105) of section 65 of the Finance Act which is one of the clauses specified under sub-rule (5) of rule 6 of the Rules - in favour of the assessee Issues Involved:1. Technical Testing and Analysis services2. Commission paid to foreign agents3. Courier service4. Clearing and Forwarding services5. Miscellaneous Services (Repair and Maintenance, Management Consultancy, Interior Decorator, Commercial or Industrial Construction Service)6. Technical Inspection and Certification servicesDetailed Analysis:1. Technical Testing and Analysis Services:The primary issue was whether the services of technical testing and analysis availed by the assessee for clinical samples, which had not yet reached commercial production, could be considered as 'input services' under Rule 2(l) of the CENVAT Credit Rules, 2004. The court noted that the definition of 'input service' is extensive and includes services used directly or indirectly in or in relation to the manufacture of final products. It was argued that such services are essential for the approval of new drugs by regulatory authorities, which is a prerequisite for commercial production. The court concluded that these services are integral to the manufacturing process and allowed the CENVAT credit.2. Commission Paid to Foreign Agents:The court examined whether the commission paid to foreign agents for sales could be classified as 'input service.' The adjudicating authority had denied the credit on the grounds that the commission agent is directly concerned with sales rather than sales promotion. The court upheld this view, stating that the activities of a commission agent do not fall within the ambit of sales promotion or any other activities specified in the inclusive part of the definition of input service. Therefore, CENVAT credit on commission paid to foreign agents was not admissible.3. Courier Service:The assessee claimed CENVAT credit for courier services used for exporting goods. The adjudicating authority had denied the credit, but the court referenced a prior decision which held that outward transportation services are covered under the definition of 'input service' as it stood before its amendment on 1.4.2008. The court concluded that courier services used for the clearance of goods from the place of removal fell within the definition of input service, thus allowing the credit.4. Clearing and Forwarding Services:The court addressed whether services rendered by C&F agents could be considered as 'input services.' The adjudicating authority had denied the credit, arguing that such services are post-clearance activities and not related to the manufacture of final products. However, the court found that C&F agents play a crucial role in the clearance of goods from the place of removal, which is an activity covered under the definition of input service. Therefore, the court allowed the credit for C&F services.5. Miscellaneous Services:The assessee had availed CENVAT credit for various services like repair and maintenance of equipment, management consultancy, interior decorator, and commercial or industrial construction services. The adjudicating authority had denied the credit, arguing that these services were not related to the manufacture of final products. The court, however, noted that these services are specifically mentioned in sub-rule (5) of rule 6 of the Rules, which allows credit for such services unless used exclusively for exempted goods. The court ruled that these services are integral to the business activities and allowed the credit.6. Technical Inspection and Certification Services:The issue was whether technical inspection and certification services used for checking and calibrating instruments could be considered as 'input services.' The adjudicating authority had denied the credit, but the court noted that these services are essential for maintaining the standards and accuracy of instruments used in the manufacturing process. The court concluded that such services are necessary for compliance with statutory requirements and fall within the definition of input service, thus allowing the credit.Conclusion:The court partly allowed the appeal, quashing the Tribunal's order to the extent it was decided in favor of the revenue and sustaining the rest of the order. The court allowed CENVAT credit for technical testing and analysis services, courier services, clearing and forwarding services, miscellaneous services, and technical inspection and certification services but denied credit for commission paid to foreign agents.