Credit of service tax paid on services used in Business can not be denied

RS Sharma Advocate

  Though Service Tax and Central Excise Department continue to slap notices for denial of CENVAT credit of service tax paid on services used in business; the credit is undoubtedly admissible.

 Rule 2 (l) of CENVAT Credit Rules 2004 as amended defines “input service” as under:

 “input service” means any service,-

        (i) used by a provider of taxable service for providing an output service; or

      (ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products, upto the place of removal,

and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security,  inward transportation of inputs or capital goods and outward transportation upto the place of removal;”

Thus input service includes services used in activities relating to business. Though some examples have been given in the above said definition by specifying some of the activities “such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security” ; the said specified activities do merely denote some activities related to business which is only illustrative and not exhaustive and the scope and definition of the terms “in relation to” and  “as such” is very wide and connotes all the activities related to business.

The meaning assigned to “input service” is divided in two parts, first part giving the specific meaning and the second part gives the inclusive meaning of the same. In the second part an inclusive meaning is given to “input service”, which otherwise would not have been covered in the main first part.

From this, it is a logical conclusion that manufacturer/output service provider can take credit of the service tax paid on all activities related to business, which are specified in the expanded inclusive definition of “input service”.

The decision of Supreme Court in case of Commissioner of Central Excise & Ors Versus M/s. Solaris Chemtech Limited & Ors AIT-2007-270-SC in Appeal (civil) 6465-6475 of 2001 is also to the effect that the expression "in relation to" must be given a wide connotation.

Further, the definition cannot be given a restrictive meaning as held by the Supreme Court in the case of Regional Director vs. High land coffee Works as under:

"The word "include" in the statutory definition is generally used to enlarge the meaning of the preceding words and it is by way of extension, and not with restriction. The word `include' is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used, these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import but also those things which the interpretation clause declares that they shall include.

The credit of the service tax paid on the outdoor catering/canteen service is admissible as input service under Rule 2(l) of the Cenvat Credit Rules, 2004. has been held to be admissible by CESTAT in case of Victor Gaskets Limited, Bosch Chassis Systems India Limited &  M/s. Bajaj Electricals Ltd. Versus Commissioner of Central Excise, Pune-I AIT-2008-406-CESTAT  on the reasoning that it is covered within the ambit of activities related to business and thus entitled as “input service” under credit rules.

The appellants had provided a canteen facility in their factory for their employees.  This was a statutory requirement under Section 46 of the Factory Act.  The service provider issued the invoices to the appellants for the said Outdoor Catering Services and the appellants had availed the Cenvat Credit on the strength of such invoices.  The appellants  contended that they pay fringe benefit taxes on canteen related expenses under Income Tax Act and as the said tax is a levy on business related expenses, the Appellants’ payment of the same on the canteen related expenses would be considered as a business related expenses and hence, the same would get covered under the “activities relating to business” stipulated in the inclusive definition of input service u/r 2(l) of CCR, 2004. 

Larger Bench of CESTAT in APPEAL NO. E/ 1279/07-Mum & E/CO-239/07-Mum CCE, Mumbai-V Versus M/s GTC Industries Ltd AIT-2008-407-CESTAT has also ruled that employment of outdoor caterer for providing catering services has to be considered as an input service relating to the business and cenvat credit in respect of the same will be admissible.

Therefore the credit of service tax paid on activities although not directly or indirectly related to manufacture of goods, is admissible as input service credit to a manufacturer of final products as well as to output service provider treating the same as activities in relation to business.  The denial of such credit by the authorities is illegal and without any justification.

(The Writer is an Advocate & Consultant based in Delhi. He is advising several MNCs, PSUs and Indian Corporates on service tax, central excise, customs & Foreign Trade matters. He can be mailed at rssharma@gmail.com )

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