2019 (3) TMI 236 - AT - Central Excise

Tribunal allows Cenvat credit on services received outside factory

The tribunal held that the appellant rightly availed Cenvat credit on the services received and quashed the denial of credit by the adjudicating ... CENVAT Credit - input services - Development of vendor network - Development of dealer network - Support for quality management - Marketing and promotion support - Assistance in statutory compliance - Assistance in collection of funds - Market information service - Business support service - Held that:- The Adjudicating Authority erred in determining the nature of services concerned herein. The Appellant in its appeal has discussed the nature of services received from HMSI in great detail. The Appellant has also enclosed evidences in form of photographs and e-mail correspondences which duly evidence the nature of services received. These services do not tantamount to sales commission agency. The Adjudicating Authority has merely relied upon the manner of determining consideration, i.e. percentage of sales, to arrive at the decision - the nature of a service depends on the activity undertaken and its intended object. The parties to contract are free to determine the consideration. If the revenue’s contention is accepted, the nature of services will be sales commission wherever consideration is determined basis the sales percentage regardless of the activity undertaken. The contention flies in face of logic. The definition of input service is contained in Credit Rules, whose overall objective is to eliminate cascading effect. The cascading effect has degenerative effect on the economy and burdens the ultimate consumer. The beneficent intent of Credit Rules calls for a liberal approach to interpretation of provisions contained therein. The Means clause is not merely restricted to processing and clearing of goods. The activity of manufacture is not possible without use of inputs, capital goods and input services. Thus, services received for procurement of inputs and capital goods will also fall within the sweep of Means clause - The Inclusive clause further extends the scope of input service to cover services used in relation to broad heads mentioned therein. These broad heads cover, legal, accounting, credit rating, share register, financing. These broad heads cover a range of services which are not theoretically essential for undertaking manufacturing activity but are important for infusing commercial feasibilities and practicalities in the business of manufacture. Development of vendor network - Held that:- HMSI identifies potential vendors and undertakes scrutiny by inspecting their premises, raw materials, quality and processes employed. The activity of manufacture is not possible without vendors supplying raw materials. Thus, the above service qualifies under Means clause and ‘procurement of inputs’ under Inclusive clause - Credit allowed. Development of dealer network - Held that:- HMSI inspects two-wheelers upon receiving a complaint. In case defect is found in any of the parts, HMSI issues an alert to Appellant for undertaking necessary measures. The Appellant may on such alert identify the stocks kept, cease procurements from certain vendors and hold dispatches. The above services form advance alert mechanism helping the Appellant ensure quality of manufactured final products supplied - these services squarely qualify under ‘quality control’ specifically mentioned under Inclusive clause - credit allowed. Support for quality management - Held that:- HMSI inspects two-wheelers upon receiving a complaint. In case defect is found in any of the parts, HMSI issues an alert to Appellant for undertaking necessary measures - The above services form advance alert mechanism helping the Appellant ensure quality of manufactured final products supplied. Thus, these services squarely qualify under ‘quality control’ specifically mentioned under Inclusive clause - credit allowed. Marketing and promotion support - Held that:- Evidently, Appellant forms the only supplier of Honda genuine parts and accessories. The above services help the Appellant in securing the sales of its final products. Accordingly, these services qualify under ‘sales promotion’ specifically mentioned under Inclusive clause - credit allowed. Assistance in statutory compliance - Held that:- HMSI assists the Appellant by following up with dealers for From-C and intimating the Appellant about status of such dealers. The above services are safely covered as services received in relation to ‘legal’ and ‘accounting’ under Inclusive clause - credit allowed. Assistance in collection of funds - Held that:- The Appellant takes recourse to field staff of HMSI for undertaking follow-ups with dealers for settlement of accounts and balance reconciliations. HMSI also intimates Appellant with respect to impending termination of dealer to ensure timely recovery of sale proceeds. It is trite that sales proceeds form a major source of internal finances - the services are squarely covered under ‘financing’ in Inclusive clause - credit allowed. Market information service - Held that:- The sustenance of a strong vendor and dealer network is vital for continuous manufacturing activity. The Appellant through such interactions can ensure that the concerns highlighted by vendors and dealers can be rectified in timely manner without having an adverse impact on manufacturing activity. The above services are part and parcel of business of manufacturing activity covered under Means clause - The above services are also covered under ‘procurement of inputs’, ‘sales promotion’ and ‘quality control’ specifically mentioned under Inclusive clause - credit allowed. Also, there is no merit in the revenue’s contention that services must be received within the factory in order to qualify as ‘input service’. Services of sales commission agent - Held that:- Since, it s already held that impugned services do not qualify as ‘sales commission agent’ and further observed that impugned services fall within the sweep of definition of ‘input services’, there is no need to examine the admissibility of credit on services of sales commission agent. Penalty - extended period of limitation - Held that:- Since the Appellant has rightly availed credit on impugned services, there is no question of imposition of penalty in the present case - Also, there is no positive activity on the part of Appellant to avail inadmissible credit or defraud the revenue. For this reason, neither any penalty is imposable nor extended period is invokable. Appeal allowed - decided in favor of appellant. Issues Involved:1. Denial of Cenvat credit on various services received by the appellant.2. Determination of whether the services qualify as 'input service' under Rule 2(l) of the Cenvat Credit Rules, 2004.3. The relevance of the manner of determining consideration for services.4. Examination of the definition and scope of 'input service.'5. Evaluation of the nature of services received by the appellant.6. The admissibility of Cenvat credit on services received outside the factory.7. Imposition of penalty and invocation of the extended period.Issue-wise Detailed Analysis:1. Denial of Cenvat Credit:The adjudicating authority denied the benefit of Cenvat credit on various services received by the appellant from HMSI, asserting that these services do not qualify as 'input service.'2. Determination of 'Input Service':The tribunal examined whether the impugned services qualify as 'input service' under Rule 2(l) of the Cenvat Credit Rules, 2004. The definition of 'input service' includes services used directly or indirectly in or in relation to the manufacture or clearance of final products and extends to services related to modernization, renovation, repairs, advertisement, sales promotion, market research, procurement of inputs, accounting, and more.3. Manner of Determining Consideration:The adjudicating authority's decision was based on the manner of determining consideration (percentage of sales). The tribunal noted that the nature of a service depends on the activity undertaken and its intended object, not merely on how consideration is determined.4. Definition and Scope of 'Input Service':The tribunal emphasized that the definition of 'input service' is broad and includes services used in relation to various activities essential for manufacturing and sales. The inclusive clause of the definition covers a wide range of services that may not be directly related to manufacturing but are crucial for business operations.5. Evaluation of Services Received:- Development of Vendor Network: HMSI's activities in identifying and scrutinizing potential vendors qualify under the Means clause and 'procurement of inputs' under the Inclusive clause. These services help ensure the quality of raw materials and final products.- Development of Dealer Network: HMSI's assessment of potential dealers is covered under the Means clause and qualifies as 'sales promotion' under the Inclusive clause.- Support for Quality Management: HMSI's inspection and alert mechanism for quality control qualify under 'quality control' in the Inclusive clause.- Marketing and Promotion Support: HMSI's promotional activities for genuine parts qualify as 'sales promotion' under the Inclusive clause.- Assistance in Statutory Compliance: HMSI's assistance in obtaining Form-C from dealers is covered under 'legal' and 'accounting' services in the Inclusive clause.- Assistance in Collection of Funds: HMSI's follow-up with dealers for account settlement and balance reconciliation qualifies under 'financing' in the Inclusive clause.- Market Information Service: HMSI's market research and performance reports qualify as 'market research' under the Inclusive clause.- Business Support Service: HMSI's support in issuing notices and addressing concerns of dealers and vendors is part of the business of manufacturing and covered under the Means clause and 'procurement of inputs,' 'sales promotion,' and 'quality control' in the Inclusive clause.6. Admissibility of Credit on Services Received Outside the Factory:The tribunal rejected the revenue's contention that services must be received within the factory to qualify as 'input service.' Judicial precedents support that Cenvat credit can be availed on input services received outside the factory.7. Imposition of Penalty and Invocation of Extended Period:The tribunal found no merit in imposing a penalty or invoking the extended period as the appellant rightly availed credit on the impugned services. The details of credit availed were duly declared in the Cenvat register and ER-1 returns, indicating no intent to defraud the revenue.Conclusion:The tribunal held that the appellant rightly availed Cenvat credit on the impugned services and quashed the adjudicating authority's order denying the credit. Consequently, no demand for interest or penalty was sustained. The appeal was allowed in full with consequential relief to the appellant, and the misc. application for change of name of the appellant in the cause title was also allowed.