Factory setup input services qualify for CENVAT credit under Rule 1(I) despite deletion from Rule 2(l)

CESTAT Chennai allowed appellant's appeal regarding CENVAT credit denial for input services related to factory setup during 01.01.2011 to 01.10.2013. Despite deletion of phrase "input services in relation to setting up of factory" from Rule 2(l) of CCR effective 01.04.2011, tribunal followed coordinate bench precedent in Aditya Aluminium case, holding such services remain covered under main definition clause of input services in Rule 1(I) of CCR 2004, qualifying as input service credit.

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The core legal questions considered by the Tribunal in this appeal are as follows:

i. Whether the services for which CENVAT credit was denied fall under the category of 'input services in relation to setting up of factory' as per the definition existing prior to 01.04.2011, and whether credit can be denied on the ground that this phrase was deleted from the definition of 'input service' from 01.04.2011 onwards.

ii. Whether, notwithstanding the deletion of the phrase 'setting up of factory' from the definition of 'input service', such services remain eligible for CENVAT credit under the broader definition of input services.

iii. Whether the extended period of limitation could be invoked for recovery of credit and imposition of penalty under Section 11AC of the Central Excise Act and Rule 15 of the CENVAT Credit Rules in the facts and circumstances of the case.

Issue-wise detailed analysis:

Issue i & ii: Eligibility of CENVAT credit on input services related to setting up of factory post deletion of phrase 'setting up of factory' in Rule 2(l) of CCR

The relevant legal framework is Rule 2(l) of the CENVAT Credit Rules, 2004 (CCR), which defines 'input service'. Prior to 01.04.2011, the definition included the phrase 'input services in relation to setting up of factory'. This phrase was deleted by Notification No. 03/2011-CE (NT) dated 01.03.2011, effective from 01.04.2011. The amended definition retained a broad 'means clause' stating that input service means any service used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance up to the place of removal. The 'includes clause' lists specific services but no longer mentions 'setting up of factory' explicitly.

Precedents considered include:

• M/s Aditya Aluminium vs Commissioner of Central Excise, Customs and Service Tax, CESTAT Kolkata (2023)
• M/s Saint Gobain India Limited vs Commissioner of Central Excise and Service Tax, CESTAT Chennai (2023)
• Pepsico India Holdings Pvt. Ltd. vs Commissioner of Central Tax, CESTAT Hyderabad (2021)

The Tribunal in Aditya Aluminium held that the definition of input service comprises three limbs: the 'means clause', the 'includes clause', and the 'excludes clause'. The 'means clause' covers any service used by a manufacturer directly or indirectly in or in relation to manufacture. The Tribunal reasoned that services used for setting up the factory fall within this 'means clause' because setting up is directly linked to manufacture; without such services, manufacture cannot commence. Therefore, even if the phrase 'setting up of factory' was deleted from the 'includes clause', the services remain eligible under the 'means clause' unless specifically excluded.

The Tribunal relied on the principle that deletion of a phrase from the 'includes clause' does not negate the broader coverage of the 'means clause'. It was further held that the deletion was likely intended to remove redundancy since 'setting up' is already covered under 'in relation to manufacture' in the main clause.

In Pepsico India Holdings, the Tribunal elaborated that the scope of 'input service' post-2011 is wide and includes services used not only in manufacture but also 'in relation to' manufacture, whether directly or indirectly. The Tribunal emphasized that activities such as setting up the factory, though not manufacture per se, are activities directly in relation to manufacture and thus qualify as input services. This interpretation aligns with the legislative intent to allow credit on services integrally connected to manufacture.

In the present case, the appellant's services such as landscaping, lease rent, infrastructure development, installation of equipment, and interior designing were all used for setting up the factory and thus fall squarely within the 'means clause' definition. The Tribunal noted the agreements with the lessor and infrastructure developer, which demonstrated that these services were used in relation to manufacture of final products to be supplied to the lessor's integrated manufacturing activity.

The Tribunal rejected the department's argument that deletion of the phrase 'setting up of factory' implied denial of credit. It held that the deletion was not intended to exclude such services but to avoid duplication, as these services are already covered under the broader definition.

Thus, the Tribunal concluded that the appellant was entitled to CENVAT credit on the input services used in setting up the factory during the relevant period.

Issue iii: Invocation of extended period of limitation and imposition of penalty

The appellant contended that the Show Cause Notice did not invoke essential ingredients for invoking the extended period of limitation. Further, since the issue was one of interpretation of law with scope for different views, the extended period should not have been invoked. The appellant also contended that penalty under Section 11AC read with Rule 15(2) of the CCR was not justified.

The respondent reiterated the impugned order's stand that the amendment to the definition was not redundant and that the legal position changed post-amendment.

The Tribunal, after considering the settled legal position in favor of the appellant on the eligibility of credit, held that the question of invoking the extended period and penalty did not survive. Since the credit was rightly availed, recovery along with interest and penalty could not be sustained.

Significant holdings:

The Tribunal's crucial legal reasoning is encapsulated in the following verbatim excerpts:

"...the credit in dispute, which was availed during the relevant period, were inter alia used for setting up of the plant. These input services are directly linked to the manufacture of the final product in as much as without availing the aforesaid services, the Appellant could not have set up the factory for manufacture of the goods. Hence, the input services utilized for setting up of a factory are covered within the ambit of 'means clause' i.e. service "used by a manufacturer whether directly or indirectly in or in relation to the manufacture of the final products". Since the subject input services are covered in the 'main clause' of the definition of input service, unless it is specifically excluded under the excludes clause of the definition, the Appellant is entitled to CENVAT Credit on the subject input services used in setting up of the factory."

"For a service to qualify as 'input service' under CENVAT Credit Rules, 2004 post 2011, the service in question need not be covered even by the very wide definition of manufacture under section 2(f) of the Central Excise Act. Any service which is used not only in manufacture but also 'in relation to' manufacture will also qualify as input service. The scope of input service is further enlarged with the expression whether directly or indirectly used in the definition of input service... Although setting up the factory is not manufacture in itself, it is an activity directly in relation to manufacture. Without setting up the factory, there cannot be any manufacture. Services used in setting up the factory are, therefore, unambiguously covered as 'input services' under Rule 2 (l) (ii) of the CENVAT Credit Rules, 2004 as they stood during the relevant period (post 1.4.2011)."

The core principle established is that the deletion of the phrase 'input services in relation to setting up of factory' from the 'includes clause' of the definition of 'input service' does not exclude such services from eligibility for CENVAT credit if they are covered under the broader 'means clause' which includes any service used directly or indirectly in or in relation to manufacture.

The Tribunal finally determined that the appellant was entitled to CENVAT credit on the input services used for setting up the factory, the extended period for recovery could not be invoked, and penalties imposed were not sustainable. The impugned order was set aside and the appeal allowed with consequential relief.

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