Input Service

1.1 Cenvat Credit is available on input goods, input services and capital goods.

Manufacturer as well as service provider will be eligible to get Cenvat credit of ‘input services’. Rule 2(l) of Cenvat Credit Rules reads as follows –

Wide coverage of input services – The words used in the definition in relation to manufacturer are ‘in relation to’. ‘In relation’ expands the scope of coverage. It is not restrictive.

The expression ‘in relation to’ (so also ‘pertaining to’) is a very broad expression, which pre-supposes another subject matter. These are words of comprehension which might both have a direct significance as well as an indirect significance depending on the context. -. - ‘Relating to’ is equivalent to or synonymous with as to ‘concerning with’ and ‘pertaining to’. The expression ‘pertaining to’ is an expression of expansion and not of contraction - Doypack Systems P Ltd. v. UOI  (1988) 2 SCR 962 = 1988 2 SCC 299 = (1989) 65 Comp Cas 1 = 1988 (36) ELT 201 (SC) = AIR 1988 SC 782 * Tamil Nadu Kalyana Mandapam Association v. UOI 2004 (167) ELT 3 = 4 STT 308 = 267 ITR 9  = 136 Taxman 596 = 135 STC 480 (SC) CCE v. Solaris Chemtech (2007) 9 STT 412 = 214 ELT 481 (SC).

'In relation to' are words of comprehensiveness which might have both a direct significance or indirect significance depending on the context. They are not words of restrictive content. - State Waqf Board v. Abdul Azeer Sahib (1967) 1 MLJ 190 = AIR 1968 Mad 79.

Input service should have relation to ‘manufacture’?

1.1-1 As discussed below, definition of ‘input service’ is very wide. Any service in relation to business is input service. So far, there was no resistance from industry for service tax, since they had a feeling that they will be able to avail Cenvat credit of service tax paid by them on all their input services.

However, in recent Tribunal decisions, a restrictive view is being taken that ‘input service’ should have relation with manufacture.

In Colgate Palmolive P Ltd. v. CCE (2007) 7 STR 294 (CESTAT), a prima facie view was expressed that credit of input services which are common to manufactured as well as exempted/traded goods is not available.

In Coca Cola India v. CCE (2007) 7 STR 529 (CESTAT), assessee was manufacturing concentrate for cold drinks. He was incurring expenditure for advertisement of aerated ware and not concentrate. It was held that advertisement expenses is not his ‘input service’ since it is not related to manufacture of ‘concentrate’ but related to sale of aerated waters. The reason given was that such advertisement expenses are not includible in assessable value of base essence [Really, the issue is highly arguable. Aspect of valuation is independent of aspect of eligibility of Cenvat credit].

In case of in Gujarat Ambuja Cement Ltd. v. CCE (2007) 8 STT 122 = 6 STR 249 (CESTAT). Hon. Tribunal in para 12 of the decision has observed, ‘Crucial point to be noted in regard to Cenvat Credit is that credit availability is in regard to 'inputs'. The credit covers duty paid on input materials as well as tax paid on services, used in or in relation to the manufacture of the 'final product'. Therefore, extending the credit beyond the point of duty paid removal of the final product, would be contrary to the Scheme of Cenvat Credit Rules’.

In Excel Crop Care v. CCE (2007) 9 STT 249 = 7 STR 451 (CESTAT SMB), it was held that services of CHA (Customs House Agent) in relation to export is not in relation to manufacture and clearance and hence Cenvat credit is not eligible Same prima facie view was held in GHCL Ltd. v. CCE (2007) 10 STT 254 (CESTAT) [Really, in case of exports, port is ‘place of removal’ since property in goods is passed on to buyer only when goods are handed over to shipping company. Hence, all expenses upto that place should be considered as ‘input service’].

In Excel Crop Care v. CCE (2007) 9 STT 249 = 7 STR 451 (CESTAT SMB), it was also held that construction services for setting up circles/gardens for putting sign boards is not in relation to advertisement of the product and is not eligible.

In GHCL Ltd. v. CCE (2007) 10 STT 254 (CESTAT), prima facie view was held that services received at residential colonies of staff do not qualify as ‘input service’.

These observations can and do mean that only input services relating to manufacture of final product or provision of output service are eligible for Cenvat credit. Hopefully, the matter will be set right soon either by large bench of Tribunal or Supreme Court.

Apart from the fact that definition of ‘input service’ is very wide, following factors need consideration –

·        Whole purpose of Cenvat scheme is to avoid cascading effect. The interpretation should not be such as to defeat this basic purpose.

·        The integration of Cenvat credit of excise duty and service tax is a pre-cursor to GST (Goods and Service Tax), where intention is to eliminate distinction between goods and services. The whole scheme of credit of ‘input service’ is designed from this point of view.

·        It is well established that when two interpretations are possible, interpretation favouring assessee is to be preferred.

·        The interpretation of definition of ‘input service’ should not lead to the situation where ‘operation is successful but patient died’.

1.1-2 Purposive construction – Rule of Purposive construction  states that interpretation of statute should be done having regard to the purpose of the Statute. An eminent jurist of UK (Late) Lord Denning (1899 - 1999) has evolved this rule of construction.

Lord Denning had observed – ‘It is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing : be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning'. - quoted with approval in K P Varghese v. ITO - (1981) 131 ITR 597 = AIR 1981 SC 1922. = 1982 (1) SCR 629 = (1981) 4 SCC 173 = 7 Taxman 13 (SC) * DLF Universal Ltd. v. Appropriate Authority  243 ITR 730 = 2000 AIR SCW 1838 = 110 Taxman 315 (SC) – same view in Amrendra Pratap Singh v. Tej Bahadur Prajapati 2004 AIR SCW 4103.

The purpose of wide definition of ‘input service’ has been stated by Finance Minister in para 148 of his budget speech on 8-7-2004 as follows, ‘I propose to take a major step towards integrating the tax on goods and services. Accordingly, I propose to extend credit of service tax and excise duty across goods and services’.

Thus, the purpose is to move toward GST (Goods and Service tax). Another basic purpose of Cenvat credit is to avoid cascading effect.

These purposes cannot be ignored while interpreting the definition of ‘input service’.

1.1-3 Coverage beyond manufacturing/service provision stage  

Inclusive definition clause of rule 2(l) extends scope of ‘input services’ even beyond stage of ‘manufacture’ or ‘provision of service’. The inclusive clause makes it clear that services much earlier to manufacture or provision of service or even after manufacture and after provision of provision of service will be eligible as service tax credit.

Services which do not have even any casual relation with manufacture of goods or provision of service have been covered in the definition of ‘input service’. In fact, any service in relation to business of assessee is ‘input service’.

Thus, though the words used in rule 2(l)(ii) are ‘used by the 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’, in view of the words ‘includes’, the scope of definition is much wider than ‘in or in relation to manufacture’ and would cover even services unrelated to ‘manufacture’. This is also clear from the fact that service tax paid at Head Office and branches/depots can be utilised as Cenvat credit through the mechanism of ‘input service distributor’.

The services that will be covered are services in relation to –

(a)     Setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises

(b)     Advertisement or sales promotion

(c)     Market research

(d)     Storage upto the place of removal

(e)     Procurement of inputs

(f)       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.

Wide scope due to use of word ‘includes’ - The word used in explanation is ‘includes’.

The word ‘includes’ denotes that scope is expanded, beyond normal meaning of term ‘in relation to manufacture or clearance of final products’ or ‘in relation to providing an output service’.

Definitions are ‘inclusive’ or ‘exhaustive’. If the definition uses the word “means” it means that it is restrictive and exhaustive. However, if the word “include/s “ is used it means that the definition is not exhaustive but it is inclusive, i.e. it expands the meaning - Doypack Systems (P.) Ltd. v. UOI (1988) 2 SCR 962 = (1988) 2 SCC 299 = 65 Comp Cas 1 = 36 ELT 201 = AIR 1988 SC 782 * Lucknow Development Authority v. M K Gupta (1994) 1 SCC 243 = 1994 AIR SCW 97 = AIR 1994 SC 787 = 80 Comp Cas 714 (SC) * Feroze N Dotivala v. P M Wadhwani 2002 AIR SCW 4904.

In Corporation of City of Nagpur v. Its Employees AIR 1960 SC 675, it was held : ‘The inclusive definition is a well recognised devise to enlarge the meaning of the word defined, and, therefore, the word defined must be construed as comprehending not only such things as it signifies according to its natural import but also those things the definition declares that it should include’

Activities relating to business

1.2 All services relating to business will be eligible for service tax credit. The words used are ‘activities relating to business, such as -  -  -  -  -  ’.  The activities specifically mentioned are as follows –

·        Accounting, auditing, financing

·        Recruitment and quality control

·        Coaching and training

·        Computer networking

·        Credit rating

·        Share registry

·        Security

·        Inward transportation of inputs or capital goods and

·        Outward transportation upto the place of removal.

However, these are only illustrations, as the words used are ‘such as’. The illustrations do not mean that only these services are covered under ‘activities relating to business’. For example, the words used are ‘outward transportation upto the place of removal’. It does not mean outward freight after place of removal is excluded.

See discussions below for meaning of ‘such as’. The words ‘such as’ are used only to illustrate the scope. It is not restrictive.

Meaning of ‘such as’ - The words ‘such as’ are used only to illustrate the scope. It is not restrictive.

If the word used are ‘such as’, it means it is illustrative only, they are not exhaustive - Royal Hatcheries (P.) Ltd. v. State of AP - (1994) 92 STC 239 (SC) = AIR 1994 SC 666 = 53 ECR 200 = (1994) Supp 1 SCC 429 * Jalal Plastic Ind. Co. v. UOI - 1981 (8) ELT 653 (CEGAT). * Gramophone Co. of India Ltd. v. CCE - 1991 (52) ELT 247 (CEGAT).

Thus, if definition is ‘namkeens such as Bhujiya, Chabena’, it means other namkeens like ‘fry snack foods’ are also covered. - TTK Pharma Ltd. v. CCE - 1993 (63) ELT 446 (CEGAT).

The input services relating to business can be used for any purpose whatsoever - As per inclusive definition of ‘input service’ [rule 2(l)], all services used for activities relating to business’ are ‘input services’. The definition does not say ‘activities relating to business pertaining to manufacture or provision of output services’. Thus, all input services used in activities relating to business are ‘input services’, whatever may be its purpose.

1.2-1 Scope of ‘activities relating of business’ – It is clear that in view of the use of words ‘such as’, any input service relating to business will be eligible for service tax credit. This is also clear from the fact that service tax paid at head office/regional offices will be available as credit on the basis of invoice/challan/Bill issued by ‘input service distributor’.

Some of the input services which may get covered under this head are as follows – (a) telephone (b) Security Services (c) Travel Agents (d) Audit (e) Banking and financial services (f) Business Auxiliary Services (g) Commercial training (h) Consulting Engineer (i) CHA services (j) Management consultant (k) Manpower recruitment (l) Rent-a-cab (m) Storage and warehousing (n) Technical inspection and testing (o) Goods Transport Agency.

Reasonableness of expenditure has to be adjudged from point of view of the businessman  and not of the revenue – CIT v. Walchand & Co. (1967) 65 ITR 381 (SC).

Management of Business is ‘activity relating to business’ - Management of business is an activity relating to business. Hence, all input services relating to ‘management of business’ should be eligible for service tax.

Mobile phones eligible for Cenvat Credit – Earlier Service Tax Rules required ‘installation’ of telephones in the business premises. Hence, CBE&C had clarified vide circular No. 59/8/2003-ST dated 20-6-2003 that Cenvat credit will not be available in case of mobile phones. Now there is no such requirement. Hence, service tax paid on mobile phones will be eligible for Cenvat credit w.e.f. 10-9-2004, so long as these are used for ‘activity relating to business’ – view confirmed in Indian Rayon v. CCE 2007 (6) STT 328 = 4 STR 79 (CESTAT SMB) – followed in Nice Telecommunication v. CCE (2007) 8 STT 159 (CESTAT) * Excel Crop Care v. CCE (2007) 9 STT 249 = 7 STR 451 (CESTAT SMB) * Rajasthan Textile Mills v. CCE (2007) 10 STT 349 = 7 STR 400 (CESTAT SMB) – reiterated in para 8.3 of CBE&C Circular No. 97/8/2007-ST dated 23-8-2007.

Internet services eligible – Cenvat credit is available in respect of internet services, as it is utilised for information relating to manufacture, sale and despatch – Universal Cables Ltd. v. CCE (2007) 7 STR 310 (CESTAT).

1.2-3 Outward freight after place of removal is not ‘input service’?

One of the illustrations given in inclusive part of definition of ‘activities relating to business’ is ‘outward freight upto place of removal’. Hence, a doubt is expressed that freight paid after place of removal is not ‘input service’. This is not correct. As already explained, ‘such as’ means what follows are only illustrations. These are not limitations. It does not mean outward freight after place of removal is excluded from definition of ‘input service’. It should be eligible if it is in relation to activities of business.

In CCE v. KTMS Engineering (2007) 7 STR 274 (CESTAT), a prima facie view was expressed that service tax paid on outward freight from place of removal is eligible for Cenvat credit – same view in Gujarat Sidhee Cement v. CCE (2007) 7 STR 571 (CESTAT).

However, this view has not been accepted by Tribunal. In Gujarat Ambuja Cement Ltd. v. CCE (2007) 8 STT 122 = 6 STR 249 (CESTAT), it has been held that outward freight is not an input service. Service tax paid on the cost of transportation from the factory/depots to the buyers' premises, would not be available as credit – followed in India Japan Lighting P Ltd. v. CCE (2007) 8 STR 124 (CESTAT) – same prima facie view in stay petition in Ultratech Cement v. CCE (2007) 8 STT 152 = 6 STR 364 (CESTAT).

This was also followed in Universal Cables Ltd. v. CCE (2007) 10 STT 271 = 7 STR 310 (CESTAT SMB), in respect of courier services utilised for despatch of finished goods.

In CCE v. NHK Springs Ltd. (2007) 9 STT 548 = 7 STR 63 (CESTAT SMB) also, it was held that credit of service tax on outward freight is not available [earlier, in NHK Spring India Ltd. In re 2006 (204) ELT 189 (Comm Appl), it was held that outward freight from factory to customer’s place is covered within the definition of ‘input service’ – same view expressed prima facie while granting stay application in HEG Ltd. v. CCE (2007) 7 STT 240 = 6 STR 177 (CESTAT SMB). The decision has now been reversed].

However, in India Cements Ltd. V. CCE (2007) 10 STT 271 = 8 STR 43 (CESTAT), the view held in Gujarat Ambuja Cement has not been accepted and the issue has been referred to a large bench.

From the Tribunal judgment in case of Gujarat Ambuja Cement, it seems that assessee’s main contention was that the ‘outward freight’ is covered in main definition itself, and its scope cannot be restricted by ‘inclusive part’ of the definition. The assessee probably took this stand because of the words ‘outward transportation upto the place of removal’ in the inclusive part of the definition.

The main definition of ‘input service’ as per rule 2(l)(ii) reads ‘any service used by the manufacturer in or in relation to clearances of final products from the place of removal’. Department took help of some decisions under service tax and successfully argued that ‘outward transport’ is not ‘clearance of final products’.

In my view, the argument should have been in reverse. The outward freight is in relation to business and in view of the words ‘such as’, it is certainly covered in inclusive part of the definition. The words ‘from the place of removal’ in main part of the definition only support this view.

This can also be justified from various heterogeneous illustrations given in definition of ‘input service’ which have no relation with manufacturing or provision of output service. It can also be justified from concept of ‘input service’ where services availed at HO and branches and depots are allowed as Cenvat credit.

Issues relating to valuation in excise need consideration - Issue relating to valuation under Central Excise need to be taken into account while considering aspect of outward freight. If contract is FOR delivery and ownership is transferred only after delivery to buyer, the FOR price is relevant for excise valuation since buyer’s place will be ‘place of removal’.

Even if price is FOR, the property in goods can pass to buyer at the factory/depot and that can be ‘place of removal’. Similarly, if contract is ex-works, freight is not addible even if seller arranges transport of final products and recovers freight from customer. In such case, transporter acts as agent of buyer and delivery to transporter is delivery to buyer. In such cases, in my view, outward freight is still in ‘relation to business’ and eligible for Cenvat credit.

What assessee should do? - There is no doubt that Tribunal decision is binding on all assessees, adjudicating authority and even coordinate bench of Tribunal. The assessees (other than assessee against whom Tribunal has given a decision) cannot go in appeal against the present decision, since they are not ‘aggrieved’ by the decision, though they may be ‘disappointed’ by the decision. Avenue of writ petition is available to other assessees, but not advisable.

Of course, it cannot be said the issue is final and closed for ever. A coordinate bench of Tribunal can be requested to refer the matter to large bench, in view of various issues involved as explained above.

If stakes are not heavy, assessee may simply reverse the credit as soon as possible and inform department, since cost of litigation may exceed possible benefits.

If Cenvat credit is considerable but if assessee feels that issue relating to valuation (i.e. ‘place of removal’) is likely to affect him, it is better to forget about the credit.

However, if he is of the view that the issue is not likely to affect his position relating to ‘place of removal’ under central excise valuation, I would suggest following course of action.

If assessee had already taken credit in the past, he should suo motu inform the department and pay the amount under protest. He should immediately file refund claim and get appealable order from adjudicating authority and Commissioner (Appeals). Then he can file regular appeal and try to convince Tribunal to refer the matter to a large bench.

In respect of future, he may take Cenvat credit in records and reverse it under protest. At the end of month/quarter, he should religiously file a refund claim, to keep his claim alive. This should be done after informing department in advance.

Can assessee ‘take’ credit but not utilise it? - There is one view that assessee may take credit of service tax on outward freight but not utilise it. In my opinion, such course is not advisable, since even ‘taking’ wrongful Cenvat credit is an offense under Cenvat Credit Rules. However, keeping records and informing department that you reserve your right to take and utilise credit if Tribunal/Court gives a favourable decision in future can not be an offense.

Credit only after payment is made to service provider

1.3 Credit of input services can be availed only after the output service provider makes payment of value of input services and the service tax payable on it, as shown in invoice of input service provider. [Rule 4(7) of Cenvat Credit Rules]. [In case of excise duty, credit is available as soon as goods are received in the factory. There is no condition that credit can be availed only after payment is made to supplier of goods].

This peculiar provision has a specific purpose.  The reason for this provision is that as per Service Tax Rules, the service tax is payable only after the amount is actually received by the service provider. Thus, the service provider of input services will be liable to pay service tax only when the person who has availed the service (output service provider in this case) pays the amount of his invoice.

It may happen that the output service provider may avail credit of service tax on input services on the basis of Invoice raised by provider of input services. However, he may not actually pay the amount of Invoice to the input service provider. If such thing happens, the service provider of output services will avail credit of service tax, while service provider of input services will not be paying the service tax, as he has not received the payment. Hence, it is provided that service provider of output services can avail credit of service tax only when he makes payment of invoice of input service tax provider, including service tax charged by the input service tax provider.

Mere payment of service tax to service provider is not sufficient – Suppose the invoice is for Rs 100 and service tax is Rs 12.36, can you avail Cenvat credit if you pay only Rs 12.36 to the input service provider? The answer is no, as the words used are ‘value of input services and the service tax payable on it’.

Date of payment when payment made by cheque - In CIT v. Ogale Glass Works AIR 1954 SC 29 = 25 ITR 529 (SC), it was held that payment by cheque which is subsequently honoured and encashed, relates back to the date of the cheque and in law date of payment is the date of delivery of the cheque. – followed in K Saraswathi v. PSS Somasundaram Chettiar (1989) 4 SCC 527 = AIR 1989 SC 1553 – quoted and followed in Vardhaman Chemicals v. CCE (2003) 133 Taxman 103 (Bom HC DB).  - - This would apply to Government payments also, i.e. when cheque is issued and delivered on or before due date, payment will be considered ‘in time’ even if cheques is passed later – CCE v. Genus Overseas Electronics Ltd. 2003 (155) ELT 541 (CEGAT 3 member bench). – same view in Essar Oil v. CC 2003 (154) ELT 390 (CEGAT). In Hindustan Motors v. CCE 2003 (155) ELT 306 (CEGAT), it was held that while granting refund to assessee, interest is payable till date of issuance of cheque to him.

Thus, once cheque is issued to the person who had provided service, Cenvat credit can be taken, even if the cheque gets passed later.

If cheque is sent by post, date of posting the cheque can be taken as date of payment, as the post office is in position of agent of the addressee and delivering document to agent is equivalent to delivering document to Principal.