2013 (4) TMI 103 - HC - Service Tax

Appellant entitled to CENVAT credit for input services in manufacturing dutiable goods

Oil and Natural Gas Corpn. Ltd. Versus CCE, Service Tax and Customs

The High Court held that the appellant (ONGC) was entitled to CENVAT credit on input services used in the manufacture of dutiable final products, contrary ... Cenvat credit denied on the basis of invoices issued by the Input Service Distributors (ISD) - It was alleged that the Cenvat credit distributed by the Input Service Distributors (ISD) pertains to input services availed of and used exclusively at the oil fields of Mumbai Offshore & since crude oil and natural gas are exempted from excise duty, it was alleged that Cenvat credit of services used at Mumbai Offshore was not admissible - Whether Tribunal was right in holding that the Appellants are not eligible to CENVAT Credit even on a prorata basis ? - Held that:- The expression 'input service' means any service used by the manufacture, whether directly or indirectly or in or in relation to the manufacture of final products. It is impossible to accept the hypothesis that would assert, that input services that are utilized by the Appellant in or in relation to the process of manufacture that takes place at Mumbai Offshore is not a service that is used by the manufacturer in or in relation to the manufacture of dutiable final products. The dutiable final products that are manufactured by the Appellant at its Uran plant are fundamentally premised upon the manufacturing process which commences at Mumbai Offshore. There can be no manner of doubt that the input services which go into the process of production at Mumbai Offshore meet the description of services that are utilised by the manufacturer directly or indirectly in or in relation to the manufacture of dutiable final products. The manufacture of the dutiable final products cannot take place without the process in question. To accept the contention of the Revenue would be to completely ignore the implication of the words 'used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products.' Such a construction as proposed by the Revenue is impermissible. These words used in the subordinate legislation fulfill the statutory object and purpose of presenting a cascading effect and burden of duty. They must be given their plain and natural meaning. At the same time, it would be necessary to clarify that Cenvat credit can be availed of only on that quantity of input service which is used in the manufacture of dutiable goods. See Escorts Ltd. v. Commissioner of Central Excise, Delhi (2004 (8) TMI 106 - SUPREME COURT OF INDIA) wherein test which was laid down by the Supreme Court was that so long as the final product was dutiable, the assessee would be entitled to the benefit of Modvat credit & Collector of Central Excise v. Solaris Chemtech Limited (2007 (7) TMI 2 - SUPREME COURT OF INDIA) wherein keeping in mind the expression 'used in relation to the manufacture' in Rule 57A the assessees were entitled to MODVAT credit on LSHS. Inputs used for generation of electricity will qualify for MODVAT credit only if they are used in or in relation to the manufacture of the final product, such as cement, caustic soda etc. Therefore, it is not correct to state that inputs used as fuel for generation of electricity captively consumed will not be covered as inputs under Rule 57A. Thus to conclude the Tribunal was in error in coming to the conclusion that the Appellant was dis-entitled to the benefit of Cenvat credit in respect of the input services used in or in relation to the manufacture of dutiable final products on the ground, as the Tribunal held, that crude oil which is subject to a further process of manufacture at the Uran plant for the production of dutiable final products is exempted from central excise duty - in favour of assessee. Issues Involved:1. Eligibility for CENVAT Credit on input services for dutiable final products.2. Admissibility of CENVAT credit for services received prior to registration as Input Service Distributor.3. Legitimacy of penalty imposed under Rule 15 of the CENVAT Credit Rules, 2004.Detailed Analysis:1. Eligibility for CENVAT Credit on Input Services for Dutiable Final Products:The core issue was whether the appellant (ONGC) was entitled to CENVAT Credit of service tax paid on input services received, even on a prorata basis, for payment of CENVAT duty on dutiable final products, given that crude oil and natural gas are exempted but saleable/marketable in themselves. The Tribunal had earlier ruled against ONGC, stating that input services were used entirely for crude oil/natural gas, which are exempted from duty, thus disallowing CENVAT credit under Rule 6(1) of the CENVAT Credit Rules, 2004.The High Court, however, found this interpretation incorrect. It emphasized that the definition of 'input service' under Rule 2(1) includes any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products. The Court noted that the manufacturing process at Mumbai Offshore was integral to the production of dutiable final products at the Uran plant. It concluded that ONGC was entitled to CENVAT credit on that quantity of input service used in the manufacture of dutiable goods, adhering to the provisions of Rule 6(1) and Rule 6(2).2. Admissibility of CENVAT Credit for Services Received Prior to Registration as Input Service Distributor:The Tribunal had not addressed this issue due to its conclusion on the first question. The High Court, upon answering the first question in favor of ONGC, restored the appeal to the Tribunal for consideration of this issue. The question was whether ONGC was entitled to CENVAT credit of service tax paid on input services received before registration as an Input Service Distributor but distributed post-registration.3. Legitimacy of Penalty Imposed under Rule 15 of the CENVAT Credit Rules, 2004:The Tribunal had sustained a penalty of Rs. 2,000 on ONGC under Rule 15. The High Court, considering its decision on the first issue and the facts of the case, answered this question in the negative, indicating that the penalty was not justified.Conclusion:The High Court concluded that the Tribunal had erred in denying CENVAT credit to ONGC for input services used in the manufacture of dutiable final products. It clarified that ONGC, as a manufacturer of both dutiable and exempted goods, must comply with Rule 6 and is entitled to credit only on the input service used for dutiable goods. The case was remanded to the Tribunal for further consideration on the second issue, and the penalty imposed was deemed unjustified. The appeal was disposed of accordingly, with no order as to costs.