2025 (11) TMI 1549 - HC - Central Excise

CENVAT credit allowed on offsite windmill services as input services under Rule 2(l) of CCR, 2004

HC held there was no substantial error of law in granting CENVAT credit on service tax paid for installation, commissioning, civil works, and maintenance ... Substantial error of law in holding that CENVAT Credit of service tax paid on services, like installation, commissioning and civil works as well as maintenance for a windmill comes within the purview of Rule 3 of CCR, 2004, or not - substantial error of law or not, in denying the CENVAT credit of service tax paid on services, like installation and commissioning as well as civil works and maintenance of a windmill only because the windmill was located at a place other than the factory premises and electricity generated at the site of windmill was not excisable. HELD THAT:- The issue on hand has already been decided by this Court by order of even date in Tax Appeal No.1037 of 2008 [2025 (11) TMI 1439 - GUJARAT HIGH COURT], wherein it has been held that 'in absence of words 'within the factory of production' in Rule 2(l) which defines “input service” which would mean that any service used by a provider of taxable service for providing an output service or used by the manufacturer whether directly or indirectly, or in relation to the manufacture of final product and clearance of final product from the place of removal, the definition of ‘input service’ has to be widely construed and therefore, the appellant would be entitled to the credit of service tax paid on inputs or capital goods or services received for Windmills for goods manufactured in the factory because only stipulation is that the input service should be received by the manufacturer of products.' The questions of law answered in favour of the appellant assessee and against the Revenue - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether services of erection, commissioning, installation, civil works and maintenance relating to a windmill used to generate electricity adjusted against electricity consumed in the factory qualify as 'input service' under Rule 2(l) of the Cenvat Credit Rules, 2004, so as to entitle the manufacturer to Cenvat credit under Rule 3. 1.2 Whether Cenvat credit of service tax paid on such windmill-related services can be denied solely on the grounds that (a) the windmill is located outside the factory premises and (b) electricity generated is not an excisable product. 1.3 Whether the Cenvat Credit Rules, 2004 require that input services be received at, or confined 'within', the factory premises of the manufacturer for credit admissibility. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Qualification of windmill-related services as 'input service' under Rule 2(l) Legal framework 2.1 The Court referred to section 65(29) and 65(39a) of the Finance Act, 1994 defining 'commissioning and installation agency' and 'erection, commissioning or installation'. 2.2 The Court extracted Rule 2(l) of the Cenvat Credit Rules, 2004 defining 'input service' as any service used by a provider of taxable service for providing an output service, or by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal, including services used in relation to, inter alia, setting up, modernization, renovation or repairs of a factory or premises related to such factory, and activities relating to business. 2.3 Rule 4(1) regarding conditions for allowing Cenvat credit was noticed, which provides that Cenvat credit in respect of inputs may be taken on receipt in the factory of the manufacturer; read with Rules 3 and 4 as interpreted in binding precedents for input services. Interpretation and reasoning 2.4 The Court noted that electricity generated by the windmill was supplied into the State grid and, based on certificates and adjustment mechanism, an equivalent quantity of electricity was allowed and utilised in the appellant's manufacturing unit, without separate electricity charges for such equivalent units, thereby establishing a direct nexus between the electricity generated by the windmill and the manufacturing activity. 2.5 The Court held that services of installation, erection, and maintenance of the windmill were 'exclusively used in relation to manufacturing activity' because the electricity generated was adjusted against electricity consumption in the factory for manufacture of dutiable final products. 2.6 Relying on the width of Rule 2(l), the Court held that 'management, maintenance and repair of windmills installed by the appellant would fall within 'input service'', since Rule 2(l) covers services used directly or indirectly 'in or in relation to the manufacture of final products' and also covers 'activities relating to business'. 2.7 The Court adopted and applied the reasoning of the Bombay High Court in Endurance Technology Pvt. Ltd. and of the Madras High Court in Ashok Leyland Ltd., which held that management, maintenance and repair of windmills used to generate electricity adjusted against factory consumption constitute 'input service' and that Rule 3 and Rule 4 allow credit on any input service received by the manufacturer of final products. 2.8 The Court further relied on its own decision in Excel Crop Care Ltd., which interpreted Rule 2(l) broadly to hold that services (there, mobile telephony) used in relation to the assessee's business and for providing taxable output service/manufacturing activity qualify as 'input service', and rejected denial of credit on the ground that such services were not confined to the factory premises. Conclusions 2.9 Services of erection, commissioning, installation, civil work, management, maintenance and repair of the windmill, whose generated power is adjusted against electricity used in manufacture of final products, qualify as 'input service' within Rule 2(l) of the Cenvat Credit Rules, 2004. 2.10 Cenvat credit of the service tax paid on such services is admissible to the manufacturer under Rules 3 and 4. Issue 2: Effect of windmill location outside factory and non-excisability of electricity on Cenvat credit Legal framework 2.11 The Court contrasted Rule 2(k) (definition of 'input' as it stood prior to 1-4-2011), which specifically used the expression 'within the factory of production', with Rule 2(l) defining 'input service', in which such words are absent. 2.12 The Court referred to precedents (Excel Crop Care Ltd., Endurance Technology Pvt. Ltd., Ashok Leyland Ltd., Ultratech Cement, Deepak Fertilizers) which held that Rule 2(l) is to be given a broad construction and that Rule 3/Rule 4 do not require input services to be received at the factory premises. Interpretation and reasoning 2.13 The Court held that there is 'no provision in the Rules which stipulates that input services received by the manufacturer must be received by the manufacturer at the factory premises'. The only stipulation under Rule 3/Rule 4 is that the input service be 'received by the manufacturer of the final product'. 2.14 By emphasising the deliberate omission of the words 'within the factory of production' in Rule 2(l), the Court inferred that input services are not geographically restricted to the factory premises, unlike inputs defined in Rule 2(k). 2.15 Adopting the reasoning of the Bombay and Madras High Courts, the Court held that the fact that the windmill is located far from the factory does not break the nexus between the services used for the windmill and the manufacturing process, since the electricity generated is admittedly adjusted against the factory's consumption. 2.16 The Court accepted the position that the definition of 'input service' is wider than that of 'input' and encompasses services used in relation to the business of manufacturing the final product; geographic location of the service use is not decisive where functional nexus with manufacture is established. 2.17 On the contention that electricity is not an excisable product, the Court, following Endurance Technology Pvt. Ltd. and Ashok Leyland Ltd., treated this as irrelevant to the availability of Cenvat credit on input services, since the relevant question is the relation of the services to manufacture of dutiable final products, not the excisability of the intermediate electricity itself. Conclusions 2.18 Cenvat credit cannot be denied merely because the windmill is situated outside the factory premises, so long as the services relating to the windmill have a direct or indirect nexus with manufacture of dutiable final products and the input service is received by the manufacturer. 2.19 The non-excisability of the electricity generated at the windmill site does not bar Cenvat credit on the associated input services where such electricity is effectively and demonstrably used (through grid adjustment) in manufacture of excisable final products. 2.20 Denial of Cenvat credit by the authorities and the Tribunal on the grounds of location of the windmill and non-excisability of electricity was contrary to the Cenvat Credit Rules and binding judicial precedents; the questions of law are answered in favour of the assessee and against the Revenue, and the appeal is allowed.