2010 (10) TMI 13 - HC - Central Excise

Rule 2(l) treats input service broadly; outdoor catering for cement manufacture qualifies, but employee food cost credit disallowed

HC held the definition of 'input service' under Rule 2(l) is wide, covering services directly or indirectly used in manufacture and those used in the ... CENVAT credit on input service - interpretation of 'input service' under Rule 2(l) of Cenvat Credit Rules, 2004 - activities relating to business - nexus/integral connection test - illustrative 'such as' in inclusive clause - application of Maruti Suzuki (ratio on 'input') - remand for verification of reversed creditCENVAT credit on input service - interpretation of 'input service' under Rule 2(l) of Cenvat Credit Rules, 2004 - activities relating to business - nexus/integral connection test - Entitlement to CENVAT credit of service tax paid on outdoor catering services engaged to provide canteen facilities to factory employees. - HELD THAT: - The Court construed Rule 2(l) of the 2004 Rules as covering not only services used directly or indirectly in or in relation to manufacture of the final product but also services used in relation to the business of manufacturing the final product. The inclusive part of the definition is wide and services that have a nexus or are integrally connected with the business qualify as 'input service'. In the facts, the assessee was mandatorily required by the Factories Act, 1948 to provide canteen facilities for workers and engaged an outdoor caterer to comply with that statutory obligation. Use of the catering service therefore had an integral connection with the business of manufacturing cement and fell within the definition of 'input service', so that CENVAT credit of the service tax reimbursed to the caterer was allowable. The method of levy of excise on cement (tonnage basis) does not preclude allowance of credit if in law the credit is otherwise available. [Paras 31, 32, 34, 35]Credit of service tax paid on outdoor catering services is allowable as CENVAT since the service is integrally connected with the business of manufacturing cement.Application of Maruti Suzuki (ratio on 'input') - interpretation of 'input service' under Rule 2(l) of Cenvat Credit Rules, 2004 - Extent to which the Apex Court's reasoning in Maruti Suzuki (on definition of 'input' in Rule 2(k)) applies to the definition of 'input service' in Rule 2(l). - HELD THAT: - The Court held that the ratio in Maruti Suzuki concerning the need for nexus applies to interpreting the inclusive categories, but not ipso facto to restrict 'input service' to services used only in relation to manufacture. Unlike the definition of 'input' in Rule 2(k), Rule 2(l) expressly includes services used in relation to the business; therefore Maruti Suzuki's emphasis on nexus informs but does not override the broader scope of 'input service'. Accordingly, services with a direct nexus or integral connection to the business of manufacture qualify as input services. [Paras 31, 33]Maruti Suzuki's nexus principle applies to inclusive categories, but Rule 2(l)'s wider language permits allowance of business-related services as input services.Illustrative 'such as' in inclusive clause - remand for verification of reversed credit - Whether the examples following 'such as' in Rule 2(l) are exhaustive and whether the reversal of credit attributable to amounts recovered from employees requires verification. - HELD THAT: - The Court held that the expression 'such as' in the inclusive part of Rule 2(l) is illustrative and not exhaustive; the inclusive list does not constrain the wide scope of 'input service'. The Court also rejected the Larger Bench's observation that credit is allowable even where cost is borne by the worker to the extent it was stated, holding that any portion of service tax ultimately borne by employees must be reversed. The assessee had belatedly reversed the proportion embedded in amounts recovered from employees, but that reversal was not verified by the Excise Authorities. The Court therefore directed the authorities to verify the reversal and pass appropriate orders. [Paras 35, 39, 40]The 'such as' list is illustrative; illustrative services do not limit eligibility. The Excise Authorities are directed to verify the assessee's reversal of credit attributable to amounts recovered from employees and pass appropriate orders.Final Conclusion: The appeal is allowed in favour of the assessee: service tax paid on outdoor catering services engaged to provide mandatory factory canteen facilities qualifies as CENVAT-able 'input service' under Rule 2(l) of the Cenvat Credit Rules, 2004; Maruti Suzuki's nexus principle applies but does not narrow Rule 2(l)'s scope; the Excise Authorities are directed to verify the proportion of credit reversed by the assessee in respect of amounts recovered from employees and pass consequential orders. Issues Involved:1. Entitlement to CENVAT Credit on outdoor catering services.2. Definition and scope of 'Input Service' under Rule 2(l) of Cenvat Credit Rules, 2004.3. Applicability of the Maruti Suzuki Ltd. case.4. Relevance of the inclusive part of the definition of 'Input Service'.5. Legislative intent and interpretation of 'activities relating to business'.Detailed Analysis:1. Entitlement to CENVAT Credit on Outdoor Catering Services:The core issue was whether the respondent could avail CENVAT Credit on outdoor catering services provided in the factory for employees. The Revenue argued that outdoor catering services do not fall under the definition of 'Input Service' as per Rule 2(l) of the Cenvat Credit Rules, 2004. However, the Tribunal, following the larger Bench decision in the case of GTC Industries Ltd., held that the assessee was entitled to such credit. The High Court upheld this view, stating that the services used in relation to the business of manufacturing the final product, such as mandatory canteen services under the Factories Act, 1948, qualify as 'Input Services'.2. Definition and Scope of 'Input Service' under Rule 2(l) of Cenvat Credit Rules, 2004:The definition of 'Input Service' includes services directly or indirectly used in the manufacture of final products and services used in relation to the business of manufacturing the final products. The High Court emphasized that the definition is broad and covers various services used in relation to the business of manufacturing final products, whether before, during, or after the manufacturing process. The court concluded that outdoor catering services, being integrally connected with the business of manufacturing cement, fall within this definition.3. Applicability of the Maruti Suzuki Ltd. Case:The Revenue cited the Maruti Suzuki Ltd. case to argue that credit is only available if the service is used in or in relation to the manufacture of final products. The High Court clarified that while the Maruti Suzuki Ltd. case pertains to the definition of 'input' under Rule 2(k), the definition of 'Input Service' under Rule 2(l) is broader. It includes services used in relation to the business of manufacturing the final product, thus extending beyond the scope of the Maruti Suzuki Ltd. case.4. Relevance of the Inclusive Part of the Definition of 'Input Service':The inclusive part of the definition of 'Input Service' covers a wide range of services such as accounting, auditing, financing, recruitment, etc. The High Court held that this inclusive part is illustrative and not exhaustive, meaning it encompasses all services used in relation to the business of manufacturing the final product. The court rejected the Revenue's argument that the expression 'such as' is restrictive.5. Legislative Intent and Interpretation of 'Activities Relating to Business':The High Court examined the legislative intent behind the CENVAT Credit Rules, 2004, which aim to integrate tax on goods and services. The court noted that the term 'activities relating to business' should be interpreted broadly to include all activities integrally connected with the business of manufacturing the final product. This interpretation aligns with the object of the CENVAT Scheme, which is to allow credit of taxes paid on services used in relation to the business of manufacturing.Conclusion:The High Court affirmed the Tribunal's decision, holding that the assessee is entitled to CENVAT Credit on outdoor catering services as they are integrally connected with the business of manufacturing cement. The court directed the Excise Authorities to verify the reversed CENVAT credit proportionate to the cost of food recovered from employees. The appeal was disposed of with no order as to costs.