2024 (1) TMI 1510 - AT - Service Tax

CENVAT credit allowed on steel inputs for tugs and hoppers used in taxable supply of tangible goods service, Rule 6(1).

CESTAT Ahmedabad allowed the assessee's appeal, setting aside the denial of CENVAT credit on HR steel sheets, MS plates, HR coils, angles, beams, channels ... CENVAT credit - goods such as HR Steel Sheets, Ms Plates, HR Coils, Angles, Beams, Channels, Etc. which were used in the manufacturer of tugs and hopper, and such Tugs and Hopper were used for providing taxable Service, namely, Supply of Tangible Goods Service on which Service Tax was duly discharged - credit was denied on the ground that inputs were not “direct input” for providing output service, inputs were used to manufacture tugs and hopper which were exempted from payment of Central Excise duty and hence, no credit was available on such inputs in terms of Rule 6 (1) of Cenvat Credit Rules, 2004 - HELD THAT:- The identical issue involved in the present case has been considered by this Tribunal in the case of Shreeji Shipping Vs. Commissioner of Central Excise & Service Tax, Rajkot [2023 (9) TMI 297 - CESTAT AHMEDABAD] wherein, this tribunal has held that 'the issue is no longer res-integra accordingly any material used for construction of building or fabrication of any equipment which is in turn used for providing output taxable service, on the material so used, the credit is correctly admissible.' From the above decision of this tribunal, it can be seen that the question of law and facts related thereto in the above case is absolutely identical with that of the present case. Therefore, the ratio of the aforesaid decision of this Tribunal is squarely applicable in the present case. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether Cenvat credit is admissible on steel and related goods (HR steel sheets, MS plates, HR coils, angles, beams, channels, etc.) used in fabrication/ manufacture of vessels (tugs and hopper) that are subsequently used to provide taxable output service (Supply of Tangible Goods Service) on which service tax was discharged. 2. Whether inputs used to manufacture goods that were exempted from Central Excise duty (the vessels) are not admissible as Cenvat credit under Rule 6(1) / the Cenvat Credit Rules, 2004. 3. Whether earlier Tribunal and High Court precedents construing Rule 2(k) and 2(l) of the Cenvat Credit Rules, 2004 (including decisions allowing credit on goods used to construct/jetties/warehouses/rail sidings used to provide taxable services) are applicable and binding on the present factual matrix; and whether any conflicting Larger Bench or amendment arguments displace those precedents. 4. Consequential issue: whether penalty/enhancement (and extended period demand) can survive if the substantive demand for reversal of credit is not sustained. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility of Cenvat credit on goods used to fabricate vessels that are used to provide taxable output service Legal framework: Rule 2(k) ('input') and Rule 2(l) ('input service') of the Cenvat Credit Rules, 2004 define what constitutes inputs and input services for providers of taxable services. Rule 2(k)(ii) expressly includes 'all goods ... used for providing any output service' (subject to specified exclusions). Rule 2(l)(i) includes services 'used by a provider of taxable service for providing an output service.' Explanation 2 and later amendments deal with goods used in manufacture of capital goods. Precedent treatment: Multiple decisions of High Courts and the Tribunal (reproduced and relied upon in the judgment) have held that goods/materials used in construction or fabrication of an asset (jetty, warehouse, rail siding, barges) which are in turn used to provide taxable services qualify as inputs for the purpose of Cenvat credit (examples cited: Mundra Ports, Sai Sahmita Storages, Vimla Infrastructure, Shreeji Shipping and prior Tribunal orders). Those authorities allowed credit in similar factual settings where construction/fabrication materials were used to enable the provider to render taxable services. Interpretation and reasoning: The Tribunal examined the statutory text of Rule 2(k) and (l) and previous judicial interpretations, applying the functional test - whether the goods were 'used in or in relation to' the provision of the output service such that without those goods the taxable service could not have been provided. The Tribunal followed the reasoning that if the fabricated vessels (tugs/hopper) are used to provide the taxable service and the steel goods were used in making those vessels, such goods are inputs 'used for providing any output service' under Rule 2(k)(ii). The Tribunal rejected the revenue's categorical denial that materials used in manufacture of an exempted product (the vessel, if characterized as an exempted excisable good) automatically disqualify credit; instead it followed the line of authority applying the functional connection between the goods used and the output service rendered. Ratio vs. Obiter: Ratio - the decisive ratio is that goods used in manufacture or construction of an item which is itself used to provide a taxable output service are eligible as inputs under Rule 2(k)(ii), provided the statutory exclusions do not apply. Obiter - ancillary discussion distinguishing when Explanation 2 or amendments might or might not apply to service providers (e.g., debate about whether an entity is a 'manufacturer' or a service provider) and commentary on legislative intent behind amendments (addressed but not essential to the dispositive holding). Conclusions: The Tribunal concluded that the credit on steel and related goods used in manufacture of tugs and hopper (which were subsequently used to provide taxable Supply of Tangible Goods Service) is admissible. The impugned denial was set aside and the appellant allowed consequential relief. Issue 2 - Effect of the fact that the manufactured vessels were exempted from Central Excise on credit admissibility (Rule 6(1) / exemption argument) Legal framework: Rule 6(1) was cited by the revenue to deny credit on the ground that inputs were used to manufacture excisable goods which were exempted, thereby allegedly rendering the inputs ineligible. The judgment analyses Rule 2(k)/(l) in conjunction with the overall Cenvat scheme rather than accept an absolute bar arising from exemption of the manufactured product. Precedent treatment: The Tribunal relied on consistent judicial authority holding that exemption of the constructed asset (e.g., jetty) does not ipso facto disqualify the provider from claiming credit on materials supplied by the provider for construction/fabrication, where those materials are used to provide taxable services. The cited High Court and Tribunal precedents rejected the blanket exclusion urged by revenue and allowed credit where the functional connection to the output service was established. Interpretation and reasoning: The Tribunal reasoned that the relevant inquiry is the functional utility of the inputs for providing the taxable service, not merely the excise treatment of the manufactured asset. The Tribunal observed that the appellant provided the service and the fabricated vessels were instrumental in providing that output service; hence the inputs satisfy the statutory definition of 'input' for a service provider. The Tribunal also addressed revenue's contention about construction being exempted and rejected the notion that exempted status of the constructed item automatically defeats input credit where the materials were provided by the service provider and used for the purpose of providing taxable service. Ratio vs. Obiter: Ratio - exemption of the fabricated/made item does not automatically bar Cenvat credit on materials if those materials are used 'for providing any output service' by the service provider under Rule 2(k)(ii). Obiter - comments on the two contractual methods of construction (contractor-supplied materials vs. provider-supplied materials) and legislative amendment timing. Conclusions: The Tribunal held that the exemption status of the vessels does not negate the eligibility for Cenvat credit on materials when those vessels are used to provide taxable services; therefore the denial based on exemption was unsustainable. Issue 3 - Applicability and treatment of precedents and amendments (including Larger Bench decision and legislative amendment arguments) Legal framework: Consideration of the scope of Rule 2(k) and the effect of amendments and judicial gloss on whether Explanation 2's treatment of goods used in manufacture of capital goods alters the entitlement of service providers to claim credit on construction/fabrication materials. Precedent treatment: The Tribunal followed a line of High Court and Tribunal decisions (Mundra Ports, Sai Sahmita, Vimla Infrastructure, Shreeji Shipping) which permit credit on materials used to construct assets employed in rendering taxable services. The judgment distinguished or did not follow the Larger Bench decision relied upon by revenue to the extent that the Larger Bench treated a later amendment as clarificatory; the Tribunal found no material to treat the amendment as retrospective clarification and criticized the Larger Bench's assumption about legislative intent as conjectural. Interpretation and reasoning: The Tribunal synthesized authority and concluded that the consistent view of High Courts and Tribunal supports allowing credit where goods are functionally used to provide taxable services. It found no basis to treat the amendment to Explanation 2 as operating retrospectively to exclude earlier claims or to nullify the established functional test. The Tribunal treated the prior consistent authorities as binding on the issue and applied them to the present facts. Ratio vs. Obiter: Ratio - established precedents applying the functional test to Rule 2(k) are controlling and were followed; the Larger Bench view suggesting clarificatory retrospective operation of amendment was not followed and treated as distinguishable/unsupported. Obiter - historical commentary on amendment notification practice and legislative intent. Conclusions: The Tribunal applied and followed the consistent line of authority permitting credit on inputs used to create assets that enable taxable services, and declined to accept the Larger Bench characterization of the amendment as clarificatory for the purpose of denying credit. Issue 4 - Extended period / penalty and consequential relief Legal framework: Penalty and extended period invocation are consequential on determination of admissibility of credit and confirmation of demand. Precedent treatment and reasoning: Since the Tribunal set aside the substantive demand for reversal of credit (finding credit admissible), consequential enhancement of penalty and extended period invocation had no basis to survive. The Tribunal applied the logical consequence that where demand is not sustained, penalty/ enhancement cannot stand. Ratio vs. Obiter: Ratio - denial of substantive demand removes the foundation for penalty/enhancement; such consequential measures must be dismissed where demand is vacated. Obiter - none. Conclusions: The Tribunal dismissed the revenue's appeal against enhancement of penalty as having no substance because the underlying demand was not sustained; consequential relief was allowed to the appellant. Net Disposition (as deduced from reasoning and conclusions) The Court applied the statutory definitions in Rule 2(k)/(l), followed established High Court and Tribunal authority, held that goods used to manufacture assets (tugs/hopper) which are used to provide taxable services qualify as inputs for Cenvat credit, set aside the impugned order denying credit (including demand raised under extended period), and dismissed the revenue's appeal on penalty/enhancement as consequentially untenable.