2015 (3) TMI 736 - HC - Service Tax

Cenvat credit allowed on service tax for factory catering; retrospective exclusion not applicable

The Court held that assessees can avail Cenvat credit on service tax paid for outdoor catering services provided in a factory for employees as these ... Input service - Cenvat credit - nexus or integral connection with the business of manufacture - activities in relation to business - statutory obligation under the Factories Act - retrospective operation of amendment/notification - exclusion of services by notificationInput service - Cenvat credit - nexus or integral connection with the business of manufacture - statutory obligation under the Factories Act - Cenvat credit on service tax paid for outdoor catering services provided in the factory to employees is allowable as input service where the service has nexus or is integrally connected with the business of manufacture. - HELD THAT: - The Court applied the principle that the definition of 'input service' under the Cenvat Credit Rules covers services used directly or indirectly in or in relation to manufacture and also services integrally connected with the business of manufacture. Reliance was placed on the Bombay High Court decision and the ratio in Maruti Suzuki Ltd. to the extent applicable: while Maruti Suzuki emphasises nexus with manufacture, the definition of 'input service' is wider and includes activities relating to the business of manufacture. Where provision of canteen/outdoor catering is necessitated by a statutory obligation under the Factories Act and thus integrally connected with the manufacture of the final product, the service qualifies as an 'input service' and the manufacturer is entitled to Cenvat credit. The Court also endorsed the principle that any portion of service tax borne by the employee (consumer) must be reversed by the manufacturer. [Paras 31, 32, 34, 35, 40]Allowed Cenvat credit in respect of outdoor catering services provided in the factory to employees, subject to reversal of the portion of service tax borne by employees.Retrospective operation of amendment/notification - exclusion of services by notification - Notification No.3 of 2011 (amending definition of 'input service' to exclude certain services) does not operate retrospectively and takes effect from 1 April 2011 only. - HELD THAT: - The Court examined the amendment provision and Rule 1(b) of the CENVAT Credit (Amendment) Rules, 2011 which states that, 'save as otherwise provided', the amendments come into force on 1 April 2011. On that basis the Court rejected the Revenue's contention that the substitution in the definition had retrospective effect and held the exclusion introduced by the notification does not apply to periods prior to 1 April 2011. [Paras 6, 18, 19, 20, 21]Notification No.3 of 2011 is not retrospective; it is effective from 1 April 2011 and does not affect availment of credit prior to that date.Cenvat credit - nexus or integral connection with the business of manufacture - Direction to Excise Authorities to verify and pass appropriate order on the proportionate Cenvat credit reversed by the assessee where reversal was belated and not verified. - HELD THAT: - Although the Court held in favour of the assessees on entitlement, it noted that where the assessee had belatedly reversed the portion of credit embedded in amounts recovered from employees, such reversal had not been verified by Excise Authorities. The Court therefore directed the authorities to verify the reversal and pass orders accordingly to ensure correct quantification and compliance. [Paras 12, 40]Excise Authorities directed to verify the belated reversal of proportionate Cenvat credit and pass appropriate orders.Final Conclusion: Appeals by the Revenue dismissed and appeals by the assessee allowed as indicated: Cenvat credit on outdoor catering services provided in factory to employees is allowable where integrally connected with the business of manufacture; the 2011 amendment is prospective from 1 April 2011; Excise Authorities to verify any belated reversals of credit. Issues Involved:1. Whether Cenvat credit can be availed on service tax paid for outdoor catering services provided in a factory for its employees.2. The applicability of Notification No.3 of 2011 dated 01.03.2011 and its retrospective effect.Detailed Analysis:Issue 1: Availment of Cenvat Credit on Outdoor Catering Services:The primary issue is whether the assessees can utilize Cenvat credit for service tax paid on outdoor catering services provided in the factory for employees. The Department contended that outdoor catering services do not fall within the definition of 'input service' under Rule 2(l) of the Cenvat Credit Rules, 2004, as they are neither used in or in relation to the manufacture or clearance of final products nor related to business activities.The Adjudicating Authority allowed the Cenvat credit, stating that the employees who are provided food through outdoor catering services are directly or indirectly involved in the manufacturing process, making such services qualify as 'input service'. The Commissioner (Appeals) upheld this decision, but the Department challenged it before the Tribunal.The Tribunal, in most cases, followed the Larger Bench decision in Commissioner of Central Excise, Mumbai V. GTC Industries Ltd., which held that Cenvat credit is admissible on outdoor catering services as they are input services related to business. However, in some cases, the Tribunal denied the credit, relying on the Supreme Court's decision in Maruti Suzuki Ltd. V. CCE.The High Court examined the issue in light of the Bombay High Court's decision in CCE V. Ultratech Cement Ltd., which held that outdoor catering services fall within the ambit of 'input service'. The definition of 'input service' is broad, covering services used directly or indirectly in the manufacture of final products and those used in relation to the business of manufacturing final products. The Court emphasized that services integrally connected with the business of manufacturing, such as mandatory canteen services under the Factories Act, qualify as 'input service'.The Karnataka High Court in CCe V. Stanzen Toyetetsu India (P) Ltd. and other cases also supported this view, stating that canteen services provided due to statutory obligations are integrally connected with the business of manufacturing and thus qualify for Cenvat credit.Issue 2: Retrospective Effect of Notification No.3 of 2011:The Revenue argued that Notification No.3 of 2011, which excludes outdoor catering services from the definition of 'input service', should apply retrospectively. However, the Court rejected this argument, noting that the Notification explicitly states it comes into effect on 1st April 2011. The amendment to Rule 2(l) of the Cenvat Credit Rules, 2004, effective from 01.03.2011, cannot be applied to periods before this date.Conclusion:The Court concluded that the assessees are entitled to avail Cenvat credit on service tax paid for outdoor catering services provided in the factory for employees, as these services are integrally connected with the business of manufacturing. The Notification No.3 of 2011 does not have retrospective effect and applies only from 1st April 2011.Judgment:1. The appeals filed by the Revenue (C.M.A.Nos.2, 86, 158, 159, 356, 357, 359, 515, 730, 1014, 1468, 1647, 1648 of 2010 and 1482 of 2013) are dismissed, affirming the Tribunal's order allowing Cenvat credit.2. The appeals filed by the assessees (C.M.A.Nos.3199 and 3288 of 2010, 314 to 317 of 2011, 968 and 1006 of 2011) are allowed, setting aside the Tribunal's order denying Cenvat credit.3. No costs. Consequently, connected miscellaneous petitions are closed.