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)

The HC held that technical testing and analysis services for clinical samples prior to commercial production qualify as input services, entitling the ... Definition of 'input service' under Rule 2(l) of the CENVAT Credit Rules, 2004 - CENVAT credit admissibility - services 'used' 'in or in relation to' manufacture of final products - inclusive/'includes' portion of the definition and 'activities relating to business' - distinction between sales promotion and direct sale (role of commission/agents) - outward transportation / courier services as input service - sub rule (5) of Rule 6 as indicative of intended input servicesDefinition of 'input service' under Rule 2(l) of the CENVAT Credit Rules, 2004 - services 'used' 'in or in relation to' manufacture of final products - CENVAT credit admissibility - Admissibility of CENVAT credit on Technical Testing and Analysis services used for trial manufacture/clinical testing - HELD THAT: - The Court held that technical testing and analysis of trial batches for drugs are integrally connected with the manufacture of final medicinal products because approval from licensing authorities (after testing) is a precondition to commercial manufacture. The expansive 'means' part of the definition of input service covers services used directly or indirectly in or in relation to manufacture of final products; hence testing services necessary to develop, validate and obtain approval for a drug fall within that definition. The fact that some products had not reached commercial production at the time of the show cause notice did not negate the connection between the testing service and the manufacture of the final product, particularly where excise duty had been paid on the trial removals. The Tribunal was therefore justified in allowing CENVAT credit on such services. [Paras 5]CENVAT credit allowed in respect of Technical Testing and Analysis services (decision for the assessee).Inclusive/'includes' portion of the definition and 'activities relating to business' - distinction between sales promotion and direct sale (role of commission/agents) - CENVAT credit admissibility - Admissibility of CENVAT credit on commission paid to foreign agents (claimed as Business Auxiliary / sales promotion service) - HELD THAT: - The Court examined whether services of commission agents fall within 'sales promotion' or within activities analogous to the illustrative 'activities relating to business' in the inclusive part of Rule 2(l). Definitions and dictionary meanings show that 'sales promotion' targets the consumer population broadly (campaigns, samples, exhibitions etc.), whereas a commission agent acts as principal's agent to effect specific sales. There was no material to show that the foreign commission agents performed sales promotion activities. Further, although the inclusive list after 'such as' is illustrative and not exhaustive, an activity must be analogous to the listed business activities; commission agent services do not bear such analogy. Consequently, commission paid to foreign agents was not an input service and CENVAT credit was not admissible. [Paras 5]CENVAT credit denied in respect of commission paid to foreign agents (decision for the revenue).Outward transportation / courier services as input service - definition of 'input service' under Rule 2(l) of the CENVAT Credit Rules, 2004 - CENVAT credit admissibility - Admissibility of CENVAT credit on courier services used for dispatch/clearance of goods - HELD THAT: - Applying the then existing wording of Rule 2(l) (which referred to clearance of final products 'from the place of removal'), the Court held that courier services which collect parcels from the factory gate for further transportation fall within the main ('means') part of the definition as services used in relation to clearance of final products. The decision in Parth Poly Wooven was followed to conclude that outward transportation/courier services are covered and CENVAT credit is admissible for the period before the subsequent amendment to the rule. [Paras 5]CENVAT credit allowed in respect of courier services (decision for the assessee).Definition of 'input service' under Rule 2(l) of the CENVAT Credit Rules, 2004 - 'place of removal' and consignment/consignment agent - CENVAT credit admissibility - Admissibility of CENVAT credit on services provided by Clearing and Forwarding (C&F) agents - HELD THAT: - The Court recognized that C&F agents perform services including clearing, storing and dispatching goods on behalf of the principal, and that premises where goods are stored by a C&F agent can qualify as the 'place of removal' under section 4(3)(c)(iii) of the Act. Therefore, such services can fall within the 'means' part of the input service definition insofar as they concern clearance from the place of removal. The Court, however, rejected the characterization of C&F services as 'sales promotion'; nonetheless, viewed as services connected with clearance and storage at the place of removal, they qualify as input services for the period under consideration and CENVAT credit was allowable. [Paras 5]CENVAT credit allowed in respect of Clearing and Forwarding services (decision for the assessee).Sub rule (5) of Rule 6 as indicative of intended input services - inclusive/'includes' portion of the definition and 'activities relating to business' - CENVAT credit admissibility - Admissibility of CENVAT credit on miscellaneous services (repair & maintenance of office/factory equipment, management consultancy, interior decorator, commercial/industrial construction) - HELD THAT: - Rule 6(5) specifically enumerates certain taxable services on which full credit is allowable unless used exclusively for exempted goods/services. The Court applied the canon that subordinate provisions must be read together and that rule 6(5) evidences the rule making body's intention that the listed services are input services. The inclusive language of Rule 2(l) (services used in relation to renovation/repairs of factory or office and activities relating to business) covers interior decoration, commercial/industrial construction, management consultancy and repair/maintenance of equipment integral to factory/business operations. Given that the services fall within the categories specified in rule 6(5) and are connected to the business/manufacture, CENVAT credit was held admissible. [Paras 5]CENVAT credit allowed in respect of the miscellaneous services claimed (decision for the assessee).Definition of 'input service' under Rule 2(l) of the CENVAT Credit Rules, 2004 - services 'used' 'in or in relation to' manufacture of final products - CENVAT credit admissibility - Admissibility of CENVAT credit on Technical Inspection and Certification services (calibration/certification of precision instruments) - HELD THAT: - The Court found that precision instruments and equipment used in drug manufacture must be of appropriate accuracy under statutory Good Manufacturing Practices; calibration, inspection and certification services ensure instruments meet required standards. Such services are therefore used in or in relation to manufacture of final products and fall within the expansive 'means' part of Rule 2(l). Additionally, the service category appears in sub rule (5) of Rule 6. The Tribunal was accordingly correct to allow CENVAT credit on these services. [Paras 5]CENVAT credit allowed in respect of Technical Inspection and Certification services (decision for the assessee).Final Conclusion: The appeals partly succeed. The High Court affirmed entitlement to CENVAT credit for Technical Testing and Analysis, courier services, Clearing & Forwarding services, Technical Inspection and Certification, and the miscellaneous services specified under rule 6(5) (decision for the assessee), but rejected the claim for credit on commission paid to foreign agents (decision for the revenue). The Tribunal's findings adverse to the revenue are set aside to the extent indicated; the remainder of the impugned order is sustained. 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.