M/S. Kyungshin Industrial v. Commissioner Of Central

IN THE HIGH COURT OF JUDICATURE AT MADRAS

DATED :: 25.06.2015 CORAM ::

THE HON'BLE MR. JUSTICE R. SUDHAKAR AND THE HON'BLE MS. JUSTICE K.B.K. VASUKI C.M.A. No: 1141 of 2015 M/s. Kyungshin Industrial Motherson Ltd. (Unit II) Plot Nos: 23 & 24 Oragadam Village Sipcot Growth Center Kanchipuram District Tamil Nadu - 602 106.

... Appellant -vs1. The Commissioner of Central Excise Chennai - IV 692 MHU Complex Nandanam, Anna Salai, Chennai - 600 035.

2. Customs, Excise and Service Tax Appellate Tribunal No: 26 Haddows Road 1st floor, Shastri Bhavan Annexe Chennai - 600 006.

... Respondents Civil Miscellaneous Appeal under Section 35 G of Central Excise Act, 1944 against the Final Order No: 40157 of 2015 dated 13.02.2015 on the file of E/S/40317/2014 and E/40186/2014-SM of the Hon'ble Customs, Excise and Service Tax Appellate Tribunal, Chennai against the order of the customs Excise and service Tax Appellate Tribunal Chennai 600 006 order dated 18.11.2013 PAN/UID code AAACK4966AC against the order of the Commissioner of Central Excise (Appeals) Chennai 600 034 order dated 24.12.2010 No.57/2010 dt. 29.10.2010 against the show cause notice (dt. 14.11.2009) dt. 15.10.2009 For appellant :: M/s. Karthik Sundaram For 1st respondent :: Mr. V. Sundareswaran 2nd respondent :: Tribunal

J U D G M E N T

(Judgment of the Court was delivered by R. SUDHKAR, J.) This Civil Miscellaneous Appeal filed by the assessee is as against the order of the Customs, Excise and Service Tax Appellate Tribunal in dismissing the appeal filed by the assessee so far as denying the benefit of Cenvat credit on the service tax paid on outdoor catering services provided in the factory for employees of the factory. The assessee has raised the following substantial questions of law in this appeal :

"1. Whether "Outdoor catering Services"

availed by the Appellant in its factory, qualified as an 'input service' under Rule 2 (1) of the CENVAT Credit Rules, 2004, as it stood then during the period October 2008 to July 2009 ? and

2. Whether the Tribunal was correct in disallowing CENVAT credit to the Appellant for 'outdoor catering service' for the period October, 2008 to July, 2009 ?"

2. The brief facts of the assessee's case are as follows: "The assessee is a manufacturer of primary form in "Wiring Harness & Parts" classified under the First schedule to Central Excise Tariff Act, 1985. During the period from October 2008 to July 2009, the assessee had availed Cenvat Credit of the service tax paid on the services "Out Door Catering", " Rent-a-Cab" and " Pest Control and Water Treatment" totalling Rs. 3,93,232/- including cesses. In this regard, a Show Cause Notice was issued to the assessee disallowing the said credit on the ground that the said services do not fall under the category of "Input Service". After due process of law, the Original Authority confirmed the said demand along with interest and imposed a penalty of Rs.2,000/-.

Aggrieved by the Order-in-Original, the assessee pursued the matter before the Commissioner (Appeals), who rejected the appeal in toto by holding that the assessee had not produced any clinching evidence to establish that the expenditure incurred towards the impugned services forms part of the cost of production. It follows that these services do not add any value to the product in manufacture. The assessee approached the Tribunal challenging the order of the Commissioner (Appeals).

3. The Tribunal, partly allowed the appeal by holding that the Cenvat Credit in respect of "Transport Service" and " Pest Control Service" is admissible to the assessee as those were attributable to manfacture and in so far as " Catering Service" is concerned, the Tribunal has held that,

" 3. So far as catering service is concerned, appellant says it is a factory. Once Factories Act, 1948 requires a canteen to be maintained by a factory, no input credit on catering service shall be admissible.

4. On the above circumstances, denial of CENVAT Credit to appellant on catering service as ordered by learned adjudicating authority is confirmed and credit in respect of other two services is allowed." Challenging this order of the Tribunal, the assessee has filed the present appeal.

4. Heard learned Standing Counsel appearing for the Revenue and the learned counsel appearing for the assessee and perused the materials placed before this Court.

5. The core issue involved in this appeal is whether the assessee can utilise the cenvat credit facilities in respect of outdoor catering services, provided in the factory for its employees, as input service.

6. In an identical circumstance, this Court dealt with the issue in a batch of appeals in C.M.A.Nos.2 of 2010 batch and vide judgment dated 13.02.2015 held in favour of the assessee by following the decision of the Bombay High Court in the case of CCE V. Ultratech Cement Ltd. reported in 2010 -TIOL - 745 - HC- MUM - ST, wherein all the contentions raised by the respective parties have been considered in extenso including the definition of 'input service' as defined in the case of Maruti Suzuki Ltd. V. CCE reported in 2009 (240) ELT 641 (SC) . The Bombay High Court came to the conclusion that the decision of the Larger Bench of the CESTAT in the case of CCE V. GTC Industries Ltd. 2008 (12) STR 468 is a correct law, however, with a rider that where the cost of the food is borne by the worker, the manufacturer cannot take credit of that part of the service tax which is borne by the consumer.

7. For better clarity, the relevant portion of the decision of the Bombay High Court in the case of CCE V. Ultratech Cement Ltd. reported in 2010 -TIOL - 745 - HC- MUM - ST reads as follows: "28. In the present case, the question is, whether outdoor catering services are covered under the inclusive part of the definition of "input service". The services covered under the inclusive part of the definition of input service are services which are rendered prior to the commencement of manufacturing activity (such as services for setting up, modernization, renovation or repairs of a factory) as well as services rendered after the manufacture of final products (such as advertisement, sales promotion, market research etc.) and includes services rendered in relation to business such as auditing, financing ... etc. Thus, the substantive part of the definition "input service" covers services used directly or indirectly in or in relation to the manufacture of final products,

whereas the inclusive part of the definition of "input service" covers various services used in relation to the business of manufacturing the final products. In other words, the definition of "input service" is very wide and covers not only services, which are directly or indirectly used in or in relation to the manufacture of final products but also includes various services used in relation to the business of manufacture of final products, be it prior to the manufacture of final products or after the manufacture of final products. To put it differently, the definition of input service is not restricted to services used in or in relation to manufacture of final products, but extends to all services used in relation to the business of manufacturing the final product.

29. The expression "activities in relation to business" in the definition of "input service" postulates activities which are integrally connected with the business of the assessee. If the activity is not integrally connected with the business of the manufacture of final product, the service would not qualify to be a input service under rule 2(l) of the 2004 Rules.

30. The Apex Court in the case of Maruti Suzuki Ltd. (supra) has considered the expression 'used in or in relation to the manufacture of final product' in the definition of "input" under rule 2(k) of 2004 Rules and held as follows :- "14. Moreover, the said expression, viz., "used in or in relation to the manufacture of the final product" in the specific/substantive part of the definition is so wide that it would cover innumerable items as "input" and to avoid such contingency the Legislature has incorporated the inclusive part after the substantive part qualified by the place of use. For example, one of the categories mentioned in the inclusive part is "used as packing material". Packing material by itself would not suffice till it is proved that the item is used in the course of manufacture of final product.

Mere fact that the item is a packing material whose value is included in the assessable value of final product will not entitle the manufacturer to take credit. Oils and lubricants mentioned in the definition are required for smooth running of machines, hence they are included as they are used in relation to manufacture of the final product. The intention of the Legislature is that inputs falling in the inclusive part must have nexus with the manufacture of the final product.

16. In our earlier discussion, we have referred to two considerations as irrelevant, namely, use of input in the manufacturing process, be it direct or indirect as also absence of the input in the final product on account of the use of the expression "used in or in relation to the manufacture of final product". Similarly, we are of the view that consideration such as input being used as packing material, input used as fuel, input used for generation of electricity or steam, input used as an accessory and input used as paint are per se also not relevant. All these considerations become relevant only when they are read with the expression "used in or in relation to the manufacture of final product" in the substantive/specific part of the definition.

In each case it has to be established that inputs mentioned in the inclusive part is "used in or in relation to the manufacture of final product". It is the functional utility of the said item which would constitute the relevant consideration. Unless and until the said input is used in or in relation to the manufacture of final product within the factory of production, the said item would not become an eligible input. The said expression "used in or in relation to the manufacture" have many shades and would cover various situations based on the purpose for which the input is used. However, the specified input would become eligible for credit only when used in or in relation to the manufacture of final product.

Hydrogen gas used in the manufacture of sodium cyanide is an eligible input, since it has a significant role to play in the manufacturing process and since the final product cannot emerge without the use of gas. Similarly, Heat Transfer Oil used as a heating medium in the manufacture of LAB is an eligible input since it has a persuasive role in the manufacturing process and without its use it is impossible to manufacture the final product. Therefore, none of the categories in the inclusive part of the definition would constitute relevant consideration per se. They become relevant only when the above crucial requirement of being "used in or in relation to the manufacture" stands complied with. In our view, one has to therefore, read the definition in its entirety."

31. In our opinion, the ratio laid down by the Apex Court in the case of Maruti Suzuki Ltd. (supra) in the context of the definition of 'input' in rule 2(k) of 2004 Rules would equally apply while interpreting the expression "activities relating to business" in rule 2 (l) of 2004 Rules. No doubt that the inclusive part of the definition of 'input' is restricted to the inputs used in or in relation to the manufacture of final products, whereas the inclusive part of the definition

of input service extends to services used prior to/during the course of/after the manufacture of the final products. The fact that the definition of 'input service' is wider than the definition of 'input' would make no difference in applying the ratio laid down in the case of Maruti Suzuki Ltd. (supra) while interpreting the scope of 'input service'. Accordingly, in the light of the judgment of the Apex Court in the case of Maruti Suzuki Ltd. (supra), we hold that the services having nexus or integral connection with the manufacture of final products as well as the business of manufacture of final product would qualify to be input service under rule 2(l) of 2004 Rules.

32. As rightly contended by Shri Shridharan, learned Counsel for the respondent - assessee, in the present case, the assessee carrying on the business of manufacturing cement by employing more than 250 workers is mandatorily required under the provisions of the Factories Act, 1948 to provide canteen facilities to the workers. Failure to do so entails penal consequences under the Factories Act, 1948. To comply with the above statutory provision, the assessee had engaged the services of a outdoor caterer. Thus, in the facts of the present case, use of the services of an outdoor caterer has nexus or integral connection with the business of manufacturing the final product namely, cement. Hence, in our opinion, the Tribunal was justified in following the Larger Bench decision of the Tribunal in the case of GTC Industries Ltd. (supra) and holding that the assessee is entitled to the credit of service tax paid on outdoor catering service.

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.

with the business of the manufacture of cement, credit of service tax paid out on catering services has been rightly allowed by the Tribunal.

36...........

37...........

38. We concur with the above decision of this Court in the case of Coca Cola India (P.) Ltd. (supra). However, in that case, this Court has also held that the cost of any input service that forms part of value of final products would be eligible for CENVAT credit. That observation of the Division Bench is made in the context of a service which is held to be integrally connected with the business of manufacturing the final product. Therefore, the observation of the Division Bench in the case of Coca Cola India (P.) Ltd. (supra) has to be construed to mean that where the input service used is integrally connected with the business of manufacturing the final product and the cost of that input service forms part of the cost of the final product, then credit of service tax paid on such input service would be allowable.

39. The Larger Bench of CESTAT in the case of GTC Industries Ltd. (supra) has also observed that the credit of service tax would be allowable to a manufacturer even in cases where the cost of the food is borne by the worker. That part of the observation made by the Larger Bench cannot be upheld, because, once the service tax is borne by the ultimate consumer of the service, namely the worker, the manufacturer cannot take credit of that part of the service tax which is borne by the consumer. Shri Shridharan, learned Counsel for the assessee fairly conceded to the above position in law and in fact filed an affidavit affirmed by a responsible officer of the assessee wherein it is stated that the proportionate credit to the extent embedded in the cost of food recovered from the employee/worker has been reversed.

40. For all the aforesaid reasons, the question of law framed by the revenue is answered in the affirmative, i.e., in favour of the assessee and against the revenue. However, the CENVAT credit reversed by the assessee, belatedly, having not been verified by the Excise Authorities, the Excise Authorities are directed to verify the same and pass an appropriate order in that behalf. "

8. It is relevant to note that various High Courts have concurred with the above-said principle of the Bombay High Court and followed the above-said decision.

1. Therefore, the issue that the Cenvat Credit can be properly availed by the assessee in respect of outdoor catering services is clearly settled now.

10. For the foregoing reasons, we pass the following order: i) Following the above-said decisions, the issue involved in this appeal, is answered in favour of the assessee and against the Revenue;

ii) Accordingly this appeal is allowed by setting aside that part of the order of the Tribunal passed in respect of "Out door catering services".

No costs.

Sd/- Assistant Registrar //True Copy// Sub Assistant Registrar gp To

1. The Commissioner of Central Excise Chennai - IV 692 MHU Complex Nandanam, Anna Salai, Chennai - 600 035.

2. Customs, Excise and Service Tax Appellate Tribunal No: 26 Haddows Road 1st floor, Shastri Bhavan Annexe Chennai - 600 006.

3. The Commissioner of Central Excise (Appeal), Chennai 600 034.

+1cc to Mr.Karthik Sundaram, Advocate, S.R.No.31397 +1cc to Mr.A.P.Srinivas, Advocate, S.R.No.31723 TEJ(CO) EU(14/07/2015) C.M.A. No: 1141 of 2015