1. Background :
Since the introduction of tax on services in 1994 and till the prescription of CENVAT Credit Rules, 2004 — (CCR), service tax on various key services like telephone, insurance, consulting engineers, advertising, manpower recruitment, management consultancy, audit, etc. meant a cost addition initially of 5% and from 2003 of 8% for the entire manufacturing — industrial sector. As a measure of integrating tax on goods and services, extension of intersectoral credit was introduced by prescribing CENVAT Credit Rules, 2004 to come into effect on 10th September, 2004 both under the Central Excise Act, as well as under the service tax law which is part of the Finance Act, 1994. Under the premise that credit would be available of service tax paid on input services, the rate of service tax was simultaneously increased from 8% to 10%.
A Press Note dated August 12, 2004, [Reported at 2004 (17) ELT-T19] highlighted salient features of the proposed CENVAT Credit Rules. The relevant paras (iii) and (iv) are reproduced below :
(iii) In principle, credit of tax on those taxable services would be allowed that go to form a part of the assessable value on which excise duty is charged. This would include certain services which are received prior to commencement of manufacture but the value of which gets absorbed in the value of goods. As regards services received after the clearance of the goods from the factory, the credit would be extended on services received up to the stage of place of removal (as per S. 4 of Central Excise Act). In addition to this, services like advertising, market research, etc. which are not directly related to manufacture but are related to the sale of manufactured goods would also be permitted for credit.
(iv) Full credit of service tax on services (such as telephone, security, construction, advertising service, market research, etc.) which are received in relation to the offices pertaining to a manufacturer or service provider would also be allowed.
2. During the past five years of introduction of CENVAT Credit of service tax on input services, innumerable litigations across the country took place at all levels involving both interpretational as well as procedural issues. However, the most significant among them revolved around interpretation of the definition of ‘input service’ and more so in relation to the manufacturing activity. Consequent upon divergent views and conflicting opinions of various Benches of CESTAT, at least in two important cases the matter was referred to Larger Benches. The decision in both viz. CCE, Mumbai-V v. GTC Industries Ltd., 2008 (12) STR 468 (Tri. – LB) and ABB Ltd. v. Commissioner of C. EX. & S.T., Bangalore 2009 (15) STR 23 (Tri. – LB) — (provided in BCAJ in Part-B under Service Tax feature in December 2008 and July 2009 issues, respectively) analysed the term ‘input service’ to reach the conclusion. Soon thereafter, independently i.e., without considering any of the above decisions, the Bombay High Court in the case of Coca Cola India Pvt. Ltd. v. CCE-Pune-III, 2009 (15) STR 657 (Bom.) examined and made in-depth analysis of ‘input service’.
3. What is ‘input service’ :
The term ‘input service’ in Rule 2(1) in CCR is defined as follows :
‘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, modernisation, 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 up to 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 up to the place of removal.” (emphasis supplied)
4. In the case of GTC Industries Ltd. (supra), the Larger Bench of CESTAT, Mumbai examined the above definition in a fairly detailed manner. The definition was analysed in the context of services of outdoor caterer used by the manufacturer in the canteen for workers. Both the appellant and the respondent agreed in principle that the said service of outdoor caterer was to be considered as one relating to business and therefore, would fall under the inclusive part of the definition and not the main definition. Therefore, the analysis of the definition was focussed with special and specific reference to the word ‘includes’ and the term ‘activities relating to business’ used in the definition. The appellant in this case contended that the term ‘includes’ enhances the scope of the definition and therefore it cannot take a restrictive approach. In this regard, inter alia the extract from the Apex Court’s decision in the case of Regional Director v. Highland Coffee Works, 1991 (3) SCC 617 was cited as follows :
“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. [See (i) Stroud’s Judicial Dictionary, 5th edn. Vol. 3, p. 1263 and (ii) CIT v. Taj Mahal Hotel 1, (iii) State of Bombay v. Hospital Mazdoor Sabha]”
It was further contended that the term ‘such as’ used in the definition was an adjective indicative of the draftsman’s intention that he is assigning the same meaning or characteristic to the noun as has been previously indicated, but it does not prohibit any other activity which can define noun in a similar way and therefore, the expression only connotes that whatever activities are given are only illustrations that relate to the business. Therefore, any activity relating to business of the assessee would be covered as an input service. Further, stress was laid for this interpretation by stating that the words ‘such as’ used after the expression ‘activity relating to business’ in the inclusive part of the definition further supported the contention that the activities mentioned therein were illustrative and not exhaustive and it could not limit the scope of the definition of the input service once the term was used after the usage of the word ‘includes’ in the said definition. In this context, the reference was also made to the extract of the Press Note of the Draft Rules made at point 1 above. By facilitating comparison between the Draft Credit Rules and the CCR, the scope and application of the term ‘activities relating to business’ was construed wide enough to cover various aspects of the activities relating to business. The submissions of the Revenue with the aid of several Supreme Court decisions however revolved around contending that the list in the inclusive part of the definition is exhaustive. The Larger Bench however concluded with the following remark :
“We find that it is well settled that every clause of the statute should be construed with reference to the context in which it is issued. A bare mechanical interpretation of words and application of legislative intent is devoid of concept and purpose will reduce most of the remedial and beneficial legislations to futility. To be literal in meaning is to see the skin and miss the soul.” . . . . “The context in which and the purpose for which the Credit Rules have been issued are clear from the Press Note dated August 12, 2004 issued by the Ministry of Finance, prior to introduction of the Credit Rules wherein the draft rules were circulated for inviting comments from trade and industries. This Note clearly states that “in principle, credit of tax on those taxable services would be allowed that go to form a part of the assessable value on which excise duty is charged.”
5. Little different dimension and perspective was provided by the Larger Bench in the case of ABB Ltd. v. CCE & ST, Bangalore (supra). While examining allowability of CENVAT credit service tax paid on outward transportation service for movement of final products from the place of removal till the customer’s place, it was observed that the definition of input service could be conveniently divided into the following five categories vis-à-vis the manufacturers :
- Any service used by the manufacturer, whether directly or indirectly, in or in relation to the final products.
- Any service used by the manufacturer, whether directly or indirectly, in or in relation to clearance of final products from the place of removal.
- Services used in relation to setting up, modernisation, renovation or repairs of a factory, or an office relating to such factory.
- Services used in relation to advertisement or sales promotion, market research, storage up to the place of removal, procurement of inputs.
- Services used in relation to activities relating to business and outward transportation up to the place of removal.
On making the above division, the Larger Bench observed that each of the above was an independent benefit or concession and even if one was satisfied, the credit on input service would be admissible.
In this case also, the expression ‘activities relating to business’ was analysed in depth by examining the expression ‘in relation to’ as analysed in the case of Doypack Systems (P) Ltd. v. UOI, (1988) (36) ELT 201 (SC) and also examining the qualification ‘activities’ and the expression ‘such as’.
In the case of ABB Ltd. (supra), the Bench relying on and discussing the decisions of Kerala State Co-op-erative Marketing Federation Ltd. & Ors. v. CIT, (1998) 5 SCC 48, Share Medical Care v. UOI, 2007 (209) ELT 321 (SC) and HCL Ltd. v. Collector, 2001 (130) ELT 405 (SC) held that when the general expression ‘activities relating to business’ covered transportation up to the customer’s place, credit could not be denied by relying on specific coverage of outward transportation up to the place of removal in the inclusive clause. According to the Bench, the principle laid down in various Supreme Court cases that a specific provision will override a general one did not apply to exemptions. On the basis of this contention, the Bench held that the Revenue’s view was incorrect to contend that “since outward transportation was specifically mentioned in the inclusive clause of the definition, credit for outward transportation could not be allowed with reference to other general limb of the definition. Also, in this decision, there was a categorical observation by the Larger Bench as to the wide import of the word ‘business’ as held in the case of Mazagaon Dock Ltd. v. CIT, (AIR 1958 SC 861). The Tribunal reached the conclusion by stating that the use of the expression ‘outward transportation’ in the inclusive clause was by way of abundant caution so as to avoid any dispute being raised on the ‘means’ clause (which refers to clearance from place of removal).
According to the Larger Bench in ABB Ltd.’s case (supra), as opposed to the decision in the case of GTC (supra) discussed above, there was no requirement in law that the cost of freight should have entered transaction value to qualify for admissibility of credit or stated in other words non-inclusion of a particular cost in the transaction value by itself is not a limiting factor for admissibility of credit as the issue did not relate to valuation of excisable goods and the issues of ‘valuation’ and CENVAT credit were independent of each other.
(Note : Karnataka High Court has stayed the operation of decision in the above ABB Ltd.’s case.)
It is to be noted here that the Punjab and Haryana High Court, a few months earlier, also reached a similar decision in the case of Ambuja Cement Ltd. v. UOI, 2009 (14) STR 3 (P & H) that outward transportation up to the place of removal was an input service. However, the premise under which this was held was somewhat different. In this case, reliance was placed on the Board’s Circular No. 97/6/2007-ST of 23/08/2007 and the principle that the Revenue was precluded from challenging the correctness of the Circular which provided that when the ownership of the goods remained with the seller of the goods till its delivery, the seller bore the risk of change during transit to destination and when the freight formed part of the price of goods, the credit was admissible. Further, a subtle mention was also made to the definition of ‘input service’ that the definition inter alia includes outward transportation up to the place of removal and since in the instant case, ownership of goods remained with the seller till the doorstep of the buyer, insurance was borne by the seller and also that freight formed part of the value of goods, the conditions of the Circular were satisfied and therefore, the credit was admissible. To sum up, this case did not discuss or analyse the definition of input service to reach the conclusion.
However, the decision of the Bombay High Court in the case of Coca Cola India Pvt. Ltd. v. CCE, 2009 (15) STR 657 (Bom.) — 22 STT 130 (Bom.) (discussed in BCAJ October 2009 issue) interpreted the definition ‘input service’ at great length discussing the terms used in the definition ‘means’, ‘includes’, ‘such as’, ‘business’ while examining whether or not advertising service used by a concentrate manufacturer was an admissible credit when the soft drinks were bottled and removed for sale by a group company and the advertisement related to the final product as bottled and sold by the latter.
- In the case of Coca Cola India (supra) while interpreting the definition, relying on the decisions in cases like Regional Director v. Highland Coffee Works, 1991 (3) SCC 617 (reiterated in CIT v. TTK Health Care Ltd., 2007 (11) SCC 796), M/s. Mahalakshmi Oil Mills v. State of Andhra Pradesh, AR 1989 Supreme Court 335 and Bharat Co-operative Bank (Mumbai) Ltd. v. Co-op. Bank Employees Union, (2007) 4 SCC 685, it was held that the expression ‘means and includes’ is exhaustive. By the word ‘includes’ the services which otherwise may not have come within the ambit get included and by the word ‘means’, they are made exhaustive.
- After reaching this conclusion, the High Court considered and analysed the meanings of the term ‘such as’ relying on Good Year India Ltd. v. Collector, 1997 (95) ELT 450 and concluded that the words ‘such as’ are illustrative and not exhaustive.
- Next, it was held that the expression ‘business’ meant a continuous activity, which is not confined to a mere manufacture of the product. Therefore, activities in relation to business could cover all the activities related to the functions of business. Relying on State of Karnataka v. Shreyas Paper Pvt. Ltd., 2006 SCC and Mazagaon Dock (supra), [(also relied on by the Larger Bench in ABB Ltd., (supra),] it was held that the ‘business’ in particular in fiscal statutes is of wide import.
- Thereafter in paras 26 to 30, the phrase ‘activity relating to business’ was analysed citing extracts from Supreme Court cases viz. Doypack Systems Limited v. UOI, 1988 (36) ELT 261 (SC), CIT v. Chandulal Keshavlal & Co., (1961 38 ITR 61 (SC), Eastern Investments Ltd. v. CIT, 1951 (20) ITR 1 and Allahabad High Court’s decision in Additional Commissioner of Income Tax v. Symonds Distributors (P) Ltd., (1977) 108 ITR 947 (All) to conclude that the scope of the said phrase widens the scope of the definition. Among the quotes used in the decision, the following extract from the speech of Lord Hope of Craighead in the context of credit under VAT in Customs and Excise Commissioners v. Redrow Group Plc, (1999 Simon Tax cases 161) is both apt and interesting to note :
“The word services is given such a wide meaning for the purposes of value added tax that it is capable of embracing everything which a taxable person does in the course or furtherance of a business carried on by him which is done for a consideration. The name or description, which one might apply to the service, is immaterial, because the concept does not call for that kind of analysis. The service is that which is done in return for the consideration. As one moves down the chain of supply, each taxable person receives a service when another taxable person does something for him in the course of furtherance of a business carried on by that other person for which he takes a consideration in return. Questions such as who benefits from the service or who is the consumer of it are not helpful. The answers are likely to differ according to the interest, which various people may have in the transaction. The matter has to be looked at from the standpoint of the person who is claiming the deduction by way of input tax. Was something being done for him for which, in the course or furtherance of a business carried on by him, he has had to pay a consideration which has attracted value added tax ? The fact that some-one else, in this case the prospective purchaser, also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it for the benefit of the deduction.” (emphasis supplied)
- Like in the case of ABB Ltd., (supra), in the case of Coca Cola India (supra) as well, it was discussed that the definition of ‘input service’ could be effectively divided into five categories vis-à-vis a manufacturer (not reproduced here as it is along the same lines as provided above at para 5).
7. It is further noteworthy at this point that in all the three cases viz. GTC Industries Ltd. (supra), ABB Ltd. (supra) and Coca Cola India (supra), the definition of ‘input service’ as a whole was examined with reference to Draft CENVAT Credit Rules, 2004, Ministry’s Press Note on the subject matter and considering the underlying factor that service tax is a value added tax and therefore the ultimate burden of service tax must be borne by the ultimate consumer and not the intermediary i.e., the manufacturer or the service provider.
8. With the above important decisions in place, the readers may be shocked to note that in a very recent decision given by the Single Member Bench of the Mumbai CESTAT in the case of CCE, Nagpur v. Manikgarh Cement Works, 2009 TIOL 2059 CESTAT-Mum. wherein primarily the Tribunal examined the allowability of credit on service tax paid on construction service, repairs and maintenance service, manpower recruitment service, etc. used for residential colony outside the assessee’s factory and relying on the Supreme Court’s decision in the case of Maruti Suzuki Ltd. v. CCE, Delhi 2009 (240) ELT 641 (SC) (this decision related to examination of the term ‘input’ vis-à-vis use of fuel in the electricity generation, the excess of which was sold to power grid), held as follows :
“Where an inclusive part of a definition provides a list of items, any such item should also satisfy the quint-essential ingredients of the main part of the definition. In other words, the definition has to be considered in its entirety. The inclusive part is not independent of the main part. It is not a stand-alone provision. This ruling in the case of Maruti Suzuki Ltd. (supra) is applicable to ‘input services’ given the definition of this expression under Rule 2(1) of the CENVAT Credit Rules. There is nothing in this definition to indicate that the legislative intent behind it is different from the one underlying the definition of ‘input’.
Accordingly, I hold that any service which is apparently covered by the parameters of the inclusive part of the definition of ‘input service’ should also satisfy the quintessential requirements of the main part of the definition and, accordingly, any person claiming the benefit of CENVAT credit on input service in terms of the inclusive part of the definition of ‘input service’ should establish that such service was used, directly or indirectly, in or in relation to the manufacture of the final products or the clearance of such products from his factory.”
The Tribunal went on to further hold that the Supreme Court’s ruling in Maruti Suzuki Ltd. (supra) case implicitly overruled the High Court’s decision in Coca Cola India Pvt. Ltd. (supra) and is constitutionally binding on the Tribunal. As a matter of fact, in the earlier case of the same assessee, the Coordinate Bench of the Tribunal had held that CENVAT credit was admissible [refer to 2008 (9) STR 554 (Tri.-Mum.)] (the decision is presently under challenge by the Revenue before the High Court).
Conclusion :
From the above, it can be observed that in spite of the two Larger Benches of the Tribunal and a High Court doing in-depth analysis of the term ‘input service’, the era of dispute sees no end, given the fact that the issue involved in the decision in the case of ABB Ltd would be examined a fresh by Karnataka High Court. Much remains to be examined yet as to the allowability of credit on service tax paid on various services used for providing output services in spite of the fact that various Tribunals have examined this aspect and rendered decisions using pragmatism. One such instance is the case of Deloitte Tax Service India Pvt. Ltd. v. CCE, Hyderabad-IV, 2008 (11) STR 266 (Tri.-Bang). Nevertheless, seeing conflicting stands followed by various Benches of the Tribunals, both manufacturing and service sector would like to see the issue settled, given the fact that service tax is a value added tax and that interpretation of the term is done with the underlying consideration that intersectoral credit was facilitated with a view to reducing cascading effect of the taxes.
