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CX – SCN invokes rule 3(5) of CCR for denial of credit on construction services – this rule proposes reversal of credit availed on inputs/capital goods removed as such, hence demand is unsustainable: CESTAT

2019-TIOL-2303-CESTAT-MAD

IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
REGIONAL BENCH, CHENNAI
COURT NO. III

Excise Cross Application No. 41760 of 2013
(on behalf of Respondent) In
Excise Appeal No. 40746 of 2013

Arising out of Order-in-Appeal No. 68/2012 (M-IV), Dated: 20.12.2012
Passed by the Commissioner of Customs, Central Excise and Service Tax (Appeals), Chennai-I Commissionerate, 26/1, Mahatma Gandhi Marg, Chennai – 600034

Date of Hearing: 22.03.2019
Date of Decision: 29.04.2019

COMMISSIONER OF GST AND CENTRAL EXCISE
CHENNAI SOUTH COMMISSIONERATE, NO. 692, ANNA SALAI
MHU COMPLEX, NANDANAM, CHENNAI – 600035

Vs

M/s MOTHERSON AUTOMOTIVE TECHNOLOGIES AND ENGINEERING
PANDUR VILLAGE, SRIPERUMBUDUR TK
KANCHIPURAM DIST. – 602105

Appellant Rep by: Ms T Usha Devi, AR
Respondent Rep by: Shri Santhana Gopalan D, Adv.

CORAM: Sulekha Beevi C S, Member (J)
Madhu Mohan Damodhar, Member (T)

CX – The assessee-company manufactures Motor Vehicle Parts of Plastics – It availed Cenvat credit on input goods, services & capital goods – It set up its factory, for which it received construction service from providers during the relevant period – The service providers collected service tax from the assessee for the total constructed area and the assessee availed credit on the service tax paid for the services – The Revenue noted that a portion of the factory premises was rented out by the assessee on the basis of a joint venture agreement and a lease agreement – The Revenue opined that the assessee is ineligible for credit as it pertained to a part of the factory which was not used for manufacturing final product – SCN was issued proposing to recover the credit so wrongly availed, with interest and also proposed to impose penalties – On adjudication, the proposals in the SCN were confirmed – On appeal, the Commr.(A) set aside such findings – Hence the Revenue’s appeal.

Held: During the relevant period, the definition of input service had a very wide ambit and included the words ‘activities relating to business‘ – Leasing out a part of the factory which is not used by the manufacturer can help raise funds or other business benefits – Such activities used in relation to the business of manufacture would be covered by the inclusive part of the definition – Besides, during the relevant period, the service relating to setting up a factory was eligible input service – Post amendment in 01.04.2011, the service of setting up of factory as also activities relating to business of manufacture were deleted – Hence for the period prior to 01.04.2011, the credit availed on construction services for setting up of factory was eligible – When credit is eligible for setting up of factory and the respondents have correctly utilized the construction services for setting up of the factory, it cannot be denied alleging that a part or portion of the factory was leased out to another – Moreover, the SCN invokes Rule 3(5) of the CCR 2004 for reversal of irregularly availed credit – This rule proposes reversal of credit availed on inputs or capital goods cleared as such – The SCN does not allege that inputs or capital goods were cleared as such – Hence the demands proposed in the SCN are unsustainable – Thus the Commr.(A) justifiably quashed the demands: CESTAT

Revenue’s appeal dismissed

Case laws cited:

Commissioner of C.Ex., Nagpur Vs. M/s. Ultratech Cement Ltd – 2010-TIOL-745-HC-MUM-ST… Para 3.2

M/s. ABB Ltd Vs. Commissioner Of C.Ex. & S.T., Bangalore – 2009-TIOL-830-CESTAT-BANG-LB… Para 3.2

FINAL ORDER NO. 40693/2019

Per: Bench:

Brief facts are that the assessee are engaged in the manufacture of Motor Vehicle Parts of Plastics and are registered with the Central Excise Department. They were availing CENVAT Credit on inputs, capital goods and input services in terms of the CENVAT Credit Rules, 2004. They set up their factory covering an area of 23,858 sq. metres for which they received construction services from service providers during the period from November 2004 to March 2006. The service providers collected service tax from the respondents for the total constructed area and the respondent availed CENVAT Credit of Rs. 97,64,676/- on the service tax paid for such services. It was then noticed that a portion of the factory premises, to an extent of 7409 sq. metres, was rented out by the respondent to M/s. Balda Motherson Solutions India Ltd. on the basis of a joint venture agreement dated 10.03.2006 and a lease agreement dated 12.12.2006.

2.1 The Department was of the view that the respondent is not eligible for the credit to the tune of Rs. 30,32,309/- being the credit attributable to the part of the factory that has been leased out to another person and not used for the manufacture of final products.

2.2 A Show Cause Notice was issued proposing to demand the wrongly availed credit along with interest and also for imposing penalties. After due process of law, the Original Authority confirmed the demand of Rs. 30,32,309/- along with interest and imposed equal penalty under Section 11AC of the Central Excise Act, 1944. In appeal, the Commissioner (Appeals) vide impugned order dated 20.12.2012 set aside the same. Hence, the Department is now in appeal before the Tribunal.

3.1 Ld. AR Ms. T. Usha Devi appeared and argued the matter on behalf of the Department. She submitted that the order passed by the Commissioner (Appeals) is neither legal nor proper. The respondent has not used the entire building in or in relation to the manufacture of their final products. They have rented out a portion of the building to another person. Therefore, the credit availed on such construction of the building itself is ineligible. The credit availed on the premises rented out to another person is not related to the manufacturing of the goods and hence, the credit becomes ineligible. The assessee has thus contravened the provisions of the CENVAT Credit Rules, 2004 in as much as the input services have not been used in or in relation to the manufacture of final products. The services cannot be treated as input services as the premises were not used in the manufacture, but have been leased out.

3.2 The case laws relied upon by the Commissioner (Appeals) are regarding ‘inputs’ removed as such, on which the service tax credit was availed whereas the case on hand is not about ‘inputs’ but about service tax credit availed on ‘input services’. In the case of Commissioner of C.Ex., Nagpur Vs. M/s. Ultratech Cement Ltd. reported in 2010 (260) E.L.T. 369 (Bom.) 2010-TIOL-745-HC-MUM-ST, the Department has filed SLP before the Hon’ble Supreme Court, which is still pending decision. So also, in the case of M/s. ABB Ltd Vs. Commissioner Of C.Ex. & S.T., Bangalore reported in 2009 (15) S.T.R. 23 (Tri. – LB) = 2009-TIOL-830-CESTAT-BANG-LB, the basic condition for availing CENVAT Credit is that such services are to be utilized in or in relation to the manufacture of final products as per Rule 2(l) of the CENVAT Credit Rules, 2004. As the building was not utilized in the manufacture of final products, the credit ought to have been disallowed.

4.1 Ld. Advocate Shri. Santhana Gopalan D. appeared on behalf of the respondent. It is submitted by him that the respondent had received construction services from service providers during the period from November 2004 to March 2006 and the credit was availed by them in March 2006 itself. Later, the respondent had entered into a lease agreement on 12.12.2006 with their joint venture partner whereby a portion of the factory encompassing an area of 7409 sq. metres was leased out. The Department vide a Show Cause Notice has demanded reversal of the credit of Rs. 30,32,309/- being the CENVAT Credit on construction services attributable to the portion of the factory leased out by the respondent.

4.2 The Show Cause Notice has been issued invoking Rule 3(5) of the CENVAT Credit Rules, 2004. The said Rule is not at all applicable as the same relates to reversal of credit on inputs and capital goods when they are removed as such. In the present case, there is no allegation that inputs or capital goods were removed as such and therefore, the demand raised invoking Rule 3(5) ibid is without any legal basis.

4.3 He submitted that the respondent had availed services of setting up of factory premises. The said service is covered by the inclusive portion of the definition of ‘input service’ as it stood during the relevant period. The Department does not dispute that the portion leased out by the respondent is a factory premise. Thus, the CENVAT Credit has been rightly availed by the respondent. There is no requirement that the services relating to setting up of factory premises have to be used in or in relation to the manufacture of final products since such services are covered under the inclusive portion of the definition of ‘input service’. He placed reliance on the decision of the Hon’ble High Court of Bombay in the case of M/s. Ultratech Cement Ltd. (supra). Therefore, the very basis of the Show Cause Notice itself is incorrect.

4.4 The credit was availed in March 2006 and at that time, the premises were not leased out. Therefore, at the time of availing the credit, there was no irregularity as alleged by the Department. Even assuming that subsequently the respondent had leased out part of the factory premises, the credit is not reversible since the respondent started paying service tax on the leased out portion with effect from 01.06.2007 under the category of ‘Renting of Immovable Property Services’ when such services became taxable.

4.5 He also submitted that the extended period of limitation is not invokable and that the entire demand is time-barred. The respondent was under the bona fide belief that the credit is eligible. The issue involves interpretation of legal provisions. Further, there is no mala fide alleged against the respondent with an intention to evade payment of service tax. Therefore, there are no grounds for invoking the extended period of limitation. So also, he prayed that the penalties may be set aside.

5. Heard both sides.

6. The Department is aggrieved by the order passed by the Commissioner (Appeals) who allowed the credit availed by the respondent with respect to the portion of the factory premises that was rented out to another.

7. From the facts it is brought out that, at the time of availing the credit, the respondent was using the factory. In other words, at the time of availing the credit, the portion of the factory was not leased out to anyone. Later, in December 2006, the respondent leased out part of the factory premises to their joint venture partner. The very next year itself, ‘Renting of Immovable Property Services’ became taxable and the respondent has been paying service tax on such output services of Renting of Immovable Property.

8.1 Be that as it may, the allegation of the Department is that a portion of the factory premises that is rented out cannot be said to be used for the manufacture or clearance of final products. During the relevant period, the definition of ‘input service’ had a wide ambit as it included the words ‘activities relating to business’. For better appreciation, the said definition is reproduced as under :

” 2(l) “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 up to 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 relating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal”

8.2 The said definition has been analysed in the decision rendered by the Hon’ble High Court of Bombay in the case of M/s. Ultratech Cement Ltd. (supra). The Hon’ble High Court held that the inclusive part of the definition of input services purport to cover not only services used prior to the manufacture of final products or subsequent to the manufacture of final products, but also services relating to business such as accounting, auditing, etc. Thus, the definition of ‘input service’ seeks to cover every conceivable service used in the business of manufacture of final products. The analyzation of the inclusive part of the definition of ‘input service’ as rendered by the Hon’ble High Court of Bombay in the case of M/s. Ultratech Cement Ltd. (supra) is reproduced as under :

“33. It is argued on behalf of the Revenue that not only the ratio but the decision of the Apex Court in the case of Maruti Suzuki Ltd. (supra) must be applied ipso facto to hold that the credit of service tax paid on outdoor catering services is allowable only if the said services are used in relation to the manufacture of final products. That argument cannot be accepted because unlike the definition of input, which is restricted to the inputs used directly or indirectly in or in relation to the manufacture of final products, the definition of “input service’ not only means services used directly or indirectly in or in relation to manufacture of final products, but also includes services used in relation to the business of manufacturing the final products. Therefore, while interpreting the words used in the definition of ‘input service’, the ratio laid down by the Apex Court in the context of the definition of ‘input’ alone would apply and not the judgment in its entirety. In other words, by applying the ratio laid down by the Apex Court in the case of Maruti Suzuki Ltd. (supra), it cannot be said that the definition of ‘input service’ is restricted to the services used in relation to the manufacture of final products, because the definition of ‘input service’ is wider than the definition of ‘input’.

34. Therefore, the definition of input service read as a whole makes it clear that the said definition not only covers services, which are used directly or indirectly in or in relation to the manufacture of final product, but also includes other services, which have direct nexus or which are integrally connected with the business of manufacturing the final product. In the facts of the present case, use of the outdoor catering services is integrally connected with the business of manufacturing cement and therefore, credit of service tax paid on outdoor catering services would be allowable.

35. The argument of the Revenue, that the expression “such as” in the definition of input service is exhaustive and is restricted to the services named therein, is also devoid of any merit, because, the substantive part of the definition of ‘input service’ as well as the inclusive part of the definition of ‘input service’ purport to cover not only services used prior to the manufacture of final products, subsequent to the manufacture of final products but also services relating to the business such as accounting, auditing….. etc. Thus the definition of input service seeks to cover every conceivable service used in the business of manufacturing the final products. Moreover, the categories of services enumerated after the expression ‘such as’ in the definition of ‘input service’ do not relate to any particular class or category of services, but refer to variety of services used in the business of manufacturing the final products. There is nothing in the definition of ‘input service’ to suggest that the Legislature intended to define that expression restrictively. Therefore, in the absence of any intention of the Legislature to restrict the definition of ‘input service’ to any particular class or category of services used in the business, it would be reasonable to construe that the expression ‘such as’ in the inclusive part of the definition of input service is only illustrative and not exhaustive. Accordingly, we hold that all services used in relation to the business of manufacturing the final product are covered under the definition of ‘input service’ and in the present case, the outdoor catering services being integrally connected with the business of the manufacture of cement, credit of service tax paid out on catering services has been rightly allowed by the Tribunal.”

8.3 Similarly, leasing out a part of the factory which is not used by the manufacturer and that too, to their joint venture partner, can help the manufacturer in raising funds or other business benefits. Such activities which are used in relation to the business of manufacture would be covered by the inclusive part of the definition.

9. Again, it has to be said that in the definition reproduced above, during the relevant period, the services relating to setting up of factory was an eligible input service. By the amendment which was introduced with effect from 01.04.2011, the services of setting up of factory as also activities relating to business of manufacture were deleted. Thus, for the period prior to 01.04.2011, the credit availed on construction services for setting up of factory was eligible.

10. The Department does not have a case that the respondents have used the construction services for setting up of a building or civil structure which is not a factory. The allegation is that the factory was set up using the construction services and thereafter, part of the factory was leased out to another without being used in the manufacture of final products. When credit is eligible for setting up of factory and the respondents have correctly utilized the construction services for setting up of the factory, the same cannot be denied alleging that a part or portion of the factory was leased out to another.

11. It is also seen from the Show Cause Notice that the Department has invoked Rule 3(5) of the CENVAT Credit Rules, 2004 for demanding the alleged irregularly availed credit. Rule 3(5) ibid speaks about reversal of credit availed on inputs or capital goods when such goods are cleared as such. There is no allegation in the Show Cause Notice that ‘inputs’ or ‘capital goods’ have been cleared as such. For this reason also, the demand raised in the Show Cause Notice cannot sustain.

12. From the discussions made hereinabove, we are of the considered opinion that the Commissioner (Appeals) has rightly set aside the demand.

13. We do not find any merit in the appeal filed by the Department. The same is therefore dismissed. The Cross Objection filed by the assessee is disposed of accordingly.

(Order pronounced in the open court on 29.04.2019)

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