2016 (1) TMI 1053 - AAR - Service Tax

Repair activities not manufacturing under Central Excise Act. CENVAT credit allowed for input services.

The Authority for Advance Rulings (AAR) held that the repair and maintenance activities proposed by M/s Indus Towers Limited do not amount to manufacture ... Manufacture within the meaning of Section 2(f) of the Central Excise Act, 1944 - repair and maintenance not amounting to manufacture - eligibility of provider of output service to avail CENVAT credit - CENVAT credit on input services (certification, inspection and engineering services) - CENVAT credit on capital goods, components, spares and accessories used for repair - scope and applicability of Departmental Instruction dated 08.07.2010Manufacture within the meaning of Section 2(f) of the Central Excise Act, 1944 - repair and maintenance not amounting to manufacture - The applicant's proposed repair and maintenance activities do not amount to manufacture under Section 2(f) of the Central Excise Act, 1944. - HELD THAT: - Applying the established tests for 'manufacture' (change of identity, emergence of a new commercial commodity or loss of original identity), the Authority accepted the uncontroverted position that the applicant's activities consist of repairing and restoring existing equipment to their original functionality without creating a new product or changing the identity of the goods. The Authority noted Revenue's limited responses and that some Commissionerates agreed repair activities do not amount to manufacture. On the material before it, the Authority concluded the processes described (inspection, extraction of usable parts, replacement of defective parts, testing and re-deployment) merely restore the equipments for reuse and do not satisfy the legal tests of manufacture under Section 2(f). [Paras 10]Repair and maintenance proposed by the applicant will not amount to manufacture under Section 2(f) of the Central Excise Act, 1944.CENVAT credit on input services (certification, inspection and engineering services) - eligibility of provider of output service to avail CENVAT credit - The applicant is eligible to avail CENVAT credit of Service Tax paid on input services such as certification, inspection and engineering services used for repair and maintenance. - HELD THAT: - Rule 3(1) read with the definition of 'input service' in Rule 2(l) of the Cenvat Credit Rules, 2004 permits a provider of output service to take credit of Service Tax paid on input services used for providing the output service. The Revenue accepted this contention and the Authority held that certification, inspection and engineering services obtained from third parties for repair of capital goods used in rendering the applicant's taxable output service fall within the ambit of 'input service' and qualify for CENVAT credit and utilisation against output service tax liability. [Paras 16]CENVAT credit is admissible on Service Tax paid for certification, inspection and engineering services used in repair and maintenance of equipments employed in provision of the applicant's output service.CENVAT credit on capital goods, components, spares and accessories used for repair - eligibility of provider of output service to avail CENVAT credit - scope and applicability of Departmental Instruction dated 08.07.2010 - The applicant is eligible to avail CENVAT credit of Excise Duty / additional duty paid on parts and spares used for replacement in repair of capital goods (e.g. DG sets, air conditioners) and may utilize such credit against its output service liability. - HELD THAT: - Rule 2(a)(A)(iii) of the Cenvat Credit Rules, 2004 includes components, spares and accessories of goods falling under specified chapters (including Chapter 85) within the definition of 'capital goods'. Rule 3 permits a provider of output service to take credit of duty paid on capital goods received by the provider of output service. The Authority therefore found that parts and spares used in repair of DG sets and air conditioners qualify as capital goods and their duty-paid acquisition entitles the applicant to CENVAT credit. The Authority rejected the contention that the Departmental Instruction dated 08.07.2010 (which addresses manufacturers' factory-use issues and denial of credit on inputs used for repair of capital goods in a manufacturing context) precludes credit to a provider of output service in the present facts, observing that the instruction does not govern the availability of credit to providers of output services under the cited Rules. [Paras 22, 25]CENVAT credit is admissible on duty paid parts and spares used for replacement in repair of capital goods employed in the applicant's output service; the Departmental Instruction dated 08.07.2010 does not deny such credit to the provider of output service in these facts.Final Conclusion: The Authority held that the applicant's repair and maintenance activities do not constitute manufacture under Section 2(f) of the Central Excise Act, 1944; the valuation issue consequently fell away; and the applicant is entitled to avail CENVAT credit of Service Tax on input services (certification, inspection and engineering) and of Excise/Additional Duty on parts and spares (as capital goods/components) used in such repairs, to be set off against its output service tax liability. Issues Involved:1. Whether the activities of repair and maintenance proposed to be undertaken by the applicant amount to manufacture within the meaning of Section 2(f) of the Central Excise Act, 1944.2. The basis for arriving at value for the purpose of Excise Duty under the Central Excise Act, 1944 and Rules made thereunder, if the activities amount to manufacture.3. Eligibility to avail CENVAT credit of Excise Duty and Service Tax on parts, spares, and services used in repair and maintenance activities.Issue 1: Whether the activities of repair and maintenance proposed to be undertaken by the applicant amount to manufacture within the meaning of Section 2(f) of the Central Excise Act, 1944.The applicant, M/s Indus Towers Limited, is engaged in providing telecommunication infrastructure support services and proposes to undertake repair and maintenance of its equipment. The applicant argued that the activities involving mere repair of goods, where there is no change in the identity of products, do not amount to manufacture. The applicant cited judicial precedents stating that for an activity to be considered as manufacture, it must result in a new commercial product with a distinct name, character, or use, and there should be a loss of the original identity of the product.The Revenue agreed with the applicant's position that mere repair of goods does not amount to manufacture. The Authority for Advance Rulings (AAR) noted that the Commissioners of Central Excise, Hyderabad-I, and Jaipur-I, also opined that the activities involving mere repair do not amount to manufacture. Consequently, the AAR held that the repair and maintenance activities proposed by the applicant do not amount to manufacture within the meaning of Section 2(f) of the Central Excise Act, 1944.Issue 2: The basis for arriving at value for the purpose of Excise Duty under the Central Excise Act, 1944 and Rules made thereunder, if the activities amount to manufacture.Since the activities of repair and maintenance were held not to amount to manufacture, this issue became infructuous and was not further deliberated.Issue 3: Eligibility to avail CENVAT credit of Excise Duty and Service Tax on parts, spares, and services used in repair and maintenance activities.The applicant sought to determine whether they are eligible to avail CENVAT credit on:a) Service Tax paid on input services such as certification, inspection, and engineering services provided by third-party vendors for the repair of capital goods.b) Excise Duty paid on parts and spares used in repairing capital goods.Sub-issue (a): Eligibility to avail CENVAT credit on Service Tax paid on input services.The applicant argued that as per Rule 3(1) of the CENVAT Credit Rules, 2004, a provider of output service is allowed to take credit of Service Tax paid on any input service received. The Revenue accepted this contention, agreeing that the applicant is eligible to avail CENVAT credit on Service Tax paid on certification, inspection, and engineering services used for repair and maintenance activities. The AAR concurred, holding that the applicant is eligible to avail CENVAT credit on Service Tax paid on these input services.Sub-issue (b): Eligibility to avail CENVAT credit on duty paid on parts and spares.The applicant contended that parts and spares procured from third-party vendors and used for replacing defective parts of equipment should be considered as capital goods under Rule 2(a)(A)(iii) of the CENVAT Credit Rules, 2004, and thus eligible for CENVAT credit. The Revenue had mixed responses; while the Central Excise Commissionerate, Jaipur, agreed with the applicant, the Commissionerates of Hyderabad and Kolkata opposed the application based on different grounds.The AAR observed that DG sets, Air Conditioners, etc., fall under Chapter 85 and are considered capital goods. Therefore, parts of these items are also capital goods, and the applicant, as a provider of output service, is allowed to take credit of duty paid on these parts under Rule 3 of the CENVAT Credit Rules, 2004. The AAR dismissed the objections raised by the Revenue, noting that the Departmental Instruction dated 08.07.2010 pertains to manufacturers and not to service providers like the applicant.Conclusion:The AAR ruled that:1. The activities of repair and maintenance proposed by the applicant do not amount to manufacture within the meaning of Section 2(f) of the Central Excise Act, 1944.2. The second issue regarding the basis for arriving at value for the purpose of Excise Duty became infructuous.3. The applicant is eligible to avail CENVAT credit of Excise Duty and Service Tax on parts, spares, and services used in repair and maintenance activities and can claim set off against the output service tax paid for rendering passive infrastructure services.