CENVAT Credit – Third Party Services

Preliminary

It is very common in business to outsource a wide range of
third party services that are availed for business activities by manufacturers
and service providers. However, the said services may not be received / availed
in the factory / business premises. In such cases, efforts are often made by ST
Department to deny CENVAT credit availed by the manufacturers / service
providers in regard to service tax paid on such services. This aspect has been
recently considered in a Kolkata Tribunal ruling as discussed below:

Ruling in Tata
Motors Ltd. vs. CCE (2017) 50 STR 28 (Tri – Kolkata)

a)  Facts in brief

     In this case, the appellants were engaged
in the manufacture of commercial motor vehicles & chassis and parts thereof
at their factory located at Jamshedpur. The appellants availed CENVAT credit of
duty paid on inputs as well as input services received and used by them in the
manufacture of final products. Appellants did not have facility to manufacture
axles and gear boxes in their factory and accordingly, they supplied raw
materials to job workers to manufacture axles, gear boxes and components
thereof. The inputs procured/ purchased by the appellants were supplied
directly to the job workers and they always belonged to the appellants.

     The appellants had also availed services of
some third party processors, who processed the raw materials / inputs sent to
job workers on behalf of the appellants and send those processed inputs / raw
materials to the said job workers for manufacturing of axles and gear boxes which
are used by the appellants in the manufacture of motor vehicles. The appellants
had paid processing charges to these third party processors along with
applicable service tax under the “Business Auxiliary Services”. Accordingly,
the appellants had taken credit of the service tax paid since the said services
were used in the manufacture of axles and gear boxes, which are used in the
manufacture of final products manufactured by the appellants.

     However, Show Cause Notices were issued and
after due process of law, the demand was confirmed under Rule 14 of CENVAT
Credit Rules, 2004 read with section 11A of Central Excise Act, 1944. The
appellants went in for appeal before the Tribunal against the adjudication
order.

b)  Arguments before the Tribunal in brief.

     The appellant company reiterated the
grounds of appeal and submitted that they were receivers of services rendered
by the job workers and the said services were used directly or indirectly, in
or in relation to the manufacture of final products and accordingly they were
entitled to credit of service tax paid on the input services. It was further
submitted that the ld. commissioner in the impugned order totally ignored the
expression “services used by the manufacturer whether directly or indirectly, in
or in relation to the manufacture of final product”. It is a settled legal
position that the expression “in or in relation to the manufacture of final
product” itself is of wide import. Definition of “input services” not only uses
the expression “in or in relation to the manufacture of final product” but has
also used the expression “whether directly or indirectly, in or in relation to
the manufacture of final products.” Various judicial rulings to support the
stand were relied upon.

     AR reiterated the discussion and findings
of the impugned order.

c)   Findings of the Tribunal

     On this issue paragraphs 7.2 and 7.3 of the
case law Endurance Technologies Pvt. Ltd. vs. CCE (2011) 273 ELT 248 (Tri. –
Mumbai) are relevant and are as follows:

     “Para
7.2 Input services
rendered for manufacture of wind mills for generation of electricity is not in
dispute. The electricity so generated is used in the manufacture of final
product. Therefore, the service falls under the definition of input service. As
regards input service used at a different place it is pertinent that there is
no mandate in law that it should be used in the factory unlike inputs, which is
clear from Rules 4(1) and 4(7) of the CENVAT Credit Rules, 2004 reproduced
herein : –

     Rule 4(1).
– The CENVAT credit in respect of inputs may be taken immediately on receipt of
the inputs in the factory of the manufacturer or in the premises of the
provider of output service:

     ……………

     Rule
4(7) – The CENVAT credit in respect of input service shall be
allowed, on or after the day which payment is made of the value of input
service and the service tax paid or payable as is indicated in invoice, bill
or, as the case may be, challan referred to in Rule 9.”

     Para 7.3

     The Hon’ble High Court in the case of
Ultratech Cement Ltd. has held that 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 case of CCE & C vs. Ultratech Cement Ltd. – 2010 – TIOL – 1227 – CESTAT
– MUM = 2011 (21) S.T.R. 297 (Tri.-Mum), this Tribunal has held that the denial
of CENVAT Credit on the ground that services were not received by the
respondent in factory premises is not sustainable.”

     In the aforesaid decision, it was held that
services rendered outside the factory when having a nexus with the manufacture
of final product then such services are covered under definition of “input
service” of the CENVAT Credit Rules, 2004. This decision of the Tribunal has
been upheld by the Hon’ble High Court of Bombay in CCE&C vs. Endurance
Technology Pvt. Ltd. [2015 – VIL – 221-BOM-ST]. Similar view has been
expressed by the Larger Bench of the Tribunal in Parry Engg. &
Electronics. P. Ltd. vs. C.C.E. & S.T. 
(2015) 40 S.T.R. 243 (Tri – LB)]. Paragraph No. 7 is relevant and is
reproduced as follows:

     “We find that the Hon’ble Bombay High Court
in the case of Endurance Technologies Pvt. Ltd. (supra) held that CENVAT credit
is eligible on maintenance or repair services of windmills, located away from
the factory. It is well-settled that the decision of Hon’ble High Court is
binding on the Tribunal. It was pointed out at the time of hearing that the
definition of “input service” credit was subsequently amended in 2011. We find
that the present appeals are involving for the period 2006-2007. In any event,
this issue is not before the Larger Bench. Hence, the view taken by the
Tribunal in the case of Endurance Technologies Pvt. Ltd. (supra) is correct.”

     Respectfully
following the above decision of the Hon’ble High Court and the Coordinate Bench
of the Tribunal, we hold that the appellants are the receiver of the services
rendered by the third party job workers and the said services have been used
directly or indirectly, in or in relation to the manufacture of motor vehicles
chassis. Hence, the appellants are entitled to credit of service tax paid on
the input service. The definition of input services is very clear; that the
receiver of service does not mean receiver of inputs. The CENVAT Credit Rules,
2004 itself recognise the distinction between input and input services
according to which it has been made mandatory to receive inputs in the factory
of production to avail CENVAT credit on inputs. There is no condition to avail
CENVAT credit on input services that services availed should be received by the
service receiver/ manufacturer in the registered premises. In the case on hand,
the goods, on which services were provided, instead of coming to the appellants
factory were dispatched to another job workers of the appellants. As already
emphasised, definition of input services does not specify that the services
should be received in the factory of the manufacturer. The condition to avail
CENVAT credit on input service is that it should be used in or in relation to
the manufacture of final products. In this case, the service was used in the
manufacture of motor vehicle chassis directly or indirectly. It is also a fact
that the service charge paid by the appellants to the job worker is included in
the assessable value of the final products. 

In view of the above observations, the appeal was allowed
with consequential relief.

Conclusion