2008 (9) TMI 34 - AAR - Central Excise

Construction services for workers' quarters not considered 'input services' for Cenvat Credit

The construction services for workers' quarters within the factory premises were held not to qualify as 'input services' under the Cenvat Credit Rules, ... Input service - Cenvat credit - in relation to the manufacture - inclusive definition - drawback - first proviso to Rule 3(1) of the Drawback Rules - All Industry Drawback RatesInput service - in relation to the manufacture - inclusive definition - Cenvat credit - Construction services for building workers' residential quarters within the factory premises are not 'input service' under Rule 2(1)(ii) of the Cenvat Credit Rules, 2004 and Cenvat credit on such construction services is not available. - HELD THAT: - The definition of 'input service' in Rule 2(1)(ii) comprises a substantive wide part - services used, whether directly or indirectly, 'in or in relation to the manufacture and clearance of final products' - followed by an inclusive clause listing specific services. The inclusive clause enlarges scope only to services that bear a proximate nexus to manufacture, storage, transport or sale of the final product (for example, construction of factories/offices, marketing, storage, transportation, accounting). Services such as construction of residential quarters for workers are welfare measures that lack the necessary nexus with manufacture, storage or sale and therefore fall outside both the main definition and the inclusive enumerations. The decision draws a line to avoid an undue extension of 'directly or indirectly' or 'in relation to' and treats the inclusive list as indicating the species of construction services intended to be covered. Accordingly, construction of workers' residences does not qualify as an 'input service' and Cenvat credit for such construction is not allowable. [Paras 8]Answered in the negative.Drawback - first proviso to Rule 3(1) of the Drawback Rules - All Industry Drawback Rates - Cenvat credit - input service - Full (higher) All Industry Drawback rate under Notification No.68/2007-Cus(NT) is not admissible where Cenvat credit of service tax on input services used in manufacture (e.g., construction of factory sheds/storage) has been availed; consequence follows from the first proviso to Rule 3(1) of the Drawback Rules. - HELD THAT: - Drawback rules define drawback to reimburse duties/tax on imported/excisable materials and taxable services used as input services. The first proviso to Rule 3(1) mandates reduction of drawback where credit (Cenvat) has been availed of the relevant duty/tax. Notification No.68/2007 distinguishes higher rates 'when cenvat facility is not availed' (reimbursing Customs, Central Excise and Service Tax) and lower rates 'when cenvat facility has been availed' (reimbursing only Customs duty), and Condition 5 clarifies that the difference represents Central Excise and Service Tax components. Therefore, where Cenvat credit of service tax on input services used in manufacture (such as construction of factory sheds/storage) is availed, the higher rate in Column 4 cannot be claimed; the proviso to Rule 3(1) of the Drawback Rules prevails over any omission in a condition of the notification. The Authority also notes that Rule 3(2)(ea) requires consideration of average tax paid on taxable services when fixing rates, and no evidence was produced to show service-tax incidence was excluded from rate calculations. [Paras 11, 12, 17]Answered in the negative.Final Conclusion: Advance ruling: (1) Cenvat credit is not available for service tax on construction of workers' residential quarters within factory premises because such construction does not qualify as an 'input service' under Rule 2(1)(ii); (2) the higher All Industry Drawback rate under Notification No.68/2007-Cus(NT) is not admissible where Cenvat credit of service tax on input services used in manufacture (for example, construction of factory sheds/storage) has been availed; both questions are answered in the negative. Issues Involved:1. Whether the construction services for workers' quarters within the factory premises fall within the ambit of 'input services' under the Cenvat Credit Rules, 2004.2. Whether the applicant can claim the higher rate of drawback on export of yarn while availing Cenvat credit on construction services used for factory sheds, storage rooms, and workers' residential quarters.Issue-wise Detailed Analysis:1. Construction Services as 'Input Services':The applicant, engaged in yarn manufacturing, seeks to determine if the construction services for workers' quarters within the factory premises qualify as 'input services' under Rule 2(1) of the Cenvat Credit Rules, 2004. The applicant argues that continuous availability of workers is essential for efficient production, and thus, the construction of residential quarters indirectly relates to the manufacture and clearance of yarn. The inclusive definition of 'input service' under Rule 2(1)(ii) is cited, which covers services indirectly connected to manufacturing, such as accounting and auditing. The applicant references the broad interpretation of 'in relation to' from past judgments (Doypack System Pvt. Ltd vs. UOI and Collector of Central Excise vs. Rajasthan State Chemical Works).However, the Commissioner of Central Excise, Chandigarh, contests this claim, stating that the inclusive part of the definition does not cover services for constructing residences for workers, as these do not pertain to manufacturing. The ruling concludes that the construction of workers' quarters does not fall within the scope of 'input services' as per Rule 2(1)(ii), emphasizing that such services do not have a direct or indirect nexus with the manufacture or clearance of final products. The judgment refers to the necessity of drawing a line to avoid undue extension of the terms 'directly or indirectly' or 'in relation to,' and concludes that the construction of workers' quarters is a welfare measure without a nexus to manufacturing.2. Higher Rate of Drawback on Yarn Exports:The applicant seeks confirmation that it can claim the higher rate of drawback on yarn exports while availing Cenvat credit on construction services for factory sheds, storage rooms, and residential quarters. The applicant argues that Condition 12(i) of Notification No. 68/2007-Cus (NT) only prohibits Cenvat credit on inputs, not input services, and that the service tax on construction services is not factored into the drawback rates. The applicant also claims that buildings should be considered capital goods, and thus, availment of Cenvat credit on them should not bar the higher drawback rate.The Commissioner refutes these claims, stating that the higher rate of drawback cannot be claimed if Cenvat credit on construction services has been availed, as tax on input services is factored into the drawback rate. The ruling supports this view, stating that the first proviso to Rule 3(1) of the Drawback Rules mandates a reduction in drawback if Cenvat credit is availed. The judgment emphasizes that the inclusive part of the definition does not extend to services for constructing residential quarters, and the higher rate of drawback is not applicable when Cenvat credit on input services is taken.Separate Opinion by the Chairperson:The Chairperson supplements the reasoning on the first issue, emphasizing that the definition of 'input service' in Rule 2(1)(ii) is broad but not meant to cover services remotely connected to manufacturing. The Chairperson references the Supreme Court's decision in Collector of Central Excise v. Solaris Chemtech Limited, which clarifies the scope of 'used in relation to the manufacture of final products.' The Chairperson concludes that construction of workers' quarters does not fall within the ambit of 'input services' and that the inclusive definition does not support the applicant's claim.Conclusion:Both issues are answered in the negative. Construction services for workers' quarters within the factory premises do not qualify as 'input services' under the Cenvat Credit Rules, 2004. Consequently, the applicant cannot claim the higher rate of drawback on yarn exports while availing Cenvat credit on such construction services.