The Commissioner Of Central v. M/S.M.M.Forgings Limited

In the High Court of Judicature at Madras Dated :: 26.06.2015 Coram ::

The Hon'ble Mr. Justice R. Sudhakar and The Hon'ble Ms. Justice K.B.K. Vasuki C.M.A. No: 3326 of 2009 The Commissioner of Central Excise & Service Tax No: 1, Williams road, Cantonment Tiruchirapalli - 620 001.

... Appellant -vs1. M/s. M.M. Forgings Ltd.

Plant No: II, Erasanaikanpatty Viralimalai - 621 315.

Pudukottai District.

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: 549/09 dated 15.05.2009 on the file of the Hon'ble Customs, Excise and Service Tax Appellate Tribunal, Chennai.

For appellant :: Mr. K. Mohana Murali For 1st respondent :: Mr. S. Murugappan 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 Revenue is as against the order of the Customs, Excise and Service Tax Appellate Tribunal in allowing 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. This Court, admitted this appeal on 14.12.2009, on the following substantial questions of law :

"1.

Whether the canteen services, providied in the factor of M/s. M.M.Forging Limited, Viralimalai through the outdoor caterers was an input service used, whether directly or indirectly, in or in relation to manufacturer or clearance of the final products, within the meaning and comprehension of Rule 2 (1) of the Cenvat Credit Rules, 2004 ?

2. Whether the cenvat credit of the service tax, so paid for receiving the outdoor caterer's services by them for providing canteen services to their employees, was eligible for availment and utilization in terms of Rule 3 read with Rule 2 (1) ? and

3. Whether the Customs, Excise and Srvice Tax Appellate Tribunal, South Regional Bench, Chennai, was correct in relying on the impugned Final order on the ratio of the decisionof the Larger Bench in the case of CCE, Mumbai, vs. GTC Industries Limited, reported in 2008 (12) STR 468 (Tri.L.B.) without recording any findings as to the applicability of the ratio of the relied on case to the facts of the presen cast and allow the credit of service tax paid ont he outdoor catering services to M/s. M.M.Forging Limited, Viralimalai ? "

2. The brief facts of the assessee's case are as follows: "The assessee is a manufacturer of forgings (machined and unmachined) falling under Ch.7326 19 10 and 7326 90 99. The assessee is availing credit on inputs, capital goods and input services in terms of provisions contained in CCR '04 and utilize such

credit for payment of duty on the final products. The assessee had taken cenvat credit on input service viz. Outdoor catering services provided by M/s. S.M. Catering Service and M/s. MRS Catering Service. As it appeared that outdoor catering services come outside the purview of the definition provided for the input services, the department alleged that the assessee had taken credit wrongly in violationof Rule 2 (1) of CCR '04. Accordingly, a Show Cause Notice was issued to deny the ineligible credit of Rs. 3,14,839/- with interest under Rule 14 of CCR '04 read with Section 11 A (1) and 11 AB of CEA '44 adn penalty under Rule 14 of CCR '04 read with Sec. 11 AC of CEA '44. After due process of law, the Original Authority confirmed the said demand of Rs.3,14,839/- along with interest and imposed a penalty of Rs. 3,14,839/-.

Aggrieved by the Order-in-Original, the assessee pursued the matter before the Commissioner (Appeals), who rejected the appeal by holding that catering service cannot be treated as an activity related to business and even if it is obligatory on the part of the appellant as per the requirement of the Factories Act 1948, to provide a canteen, this does not automatically lead to the conclusion that a catering service relates to business activity. The assessee approached the Tribunal challenging the order of the Commissioner (Appeals).

3. The Tribunal, allowed the appeal by holding that, " 2. On hearing both sides, I find that the issue in dispute namely as to whether credit is admissible t the appellants, who are maufacturers of forgings, on outdoor catering service provided by M/s. SM Catering Service and MRS Catering Service, stands settled in favour of the assessees by the decision of the Larger Bench in Commissioner of Central Excise vs. GTC Industries Ltd. 2008 (12) S.T.R. 468 (Tri.L.B.). Following the decision cited supra, I hold that the appellants are entitled to the credit of the amount in question, set aside the demand together with interest and penalty and allow the appeal. "

Challenging this order of the Tribunal, the revenue 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 - HCMUM - 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.

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.

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.

of service tax paid out on catering services has been rightly allowed by the Tribunal.

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

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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.

9. 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 dismissed confirming the impugned order passed by the Tribunal.

No costs.

Index : Yes / No ( R.S.J. ) ( K.B.K.V.J. ) Internet : Yes / No 26.06.2015 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.

R. Sudhakar, J.

and K.B.K. Vasuki, J.

C.M.A. No: 3326 of 2009 26.06.2015