CA Sandesh Mundra
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Input Service under Service Tax - A New Jigsaw Puzzle
Input Service - A New Jigsaw Puzzle (Source dateyvs.com)
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’.
Definition of ‘input service’ has been changed w.e.f. 1-4-2011. The new definition is significantly different from the earlier definition of ‘input service’.
Rule 2(l) of Cenvat Credit Rules (as effective from 1-4-2011), defines ‘input service’ as follows –
“Input service” means any service, -
(i) used by a provider of taxable service for providing an output service; or
(ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal,
and includes services used in relation to 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 upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal;
but excludes services, -
(A) specified in sub-clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act (hereinafter referred as specified services), in so far as they are used for- (a) construction of a building or a civil structure or a part thereof; or (b) laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or
(B) specified in sub-clauses (d), (o), (zo) and (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods; or
(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee.
1-1 Analysis of the definition
The definition of ‘input service’ is broadly in three parts – First is main part, second is inclusive part and third part covers exclusions. First part of the definition is restrictive in scope as it covers input services used for providing taxable output service or used by manufacturer, directly or indirectly, in relation to manufacture or clearance of final product upto the place of removal.
Second i.e. inclusive part of the definition expands the scope much beyond the coverage of first part. The third part covers specific exclusions.
1-2 Meaning of ‘includes’
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 in definition, 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’ - similar views in RD, ESIC v. Highland Coffee Works - (1991) 3 SCC 617 = AIR 1991 SC 129 = 1991 AIR SCW 2821 (3 member bench) * CIT v. Taj Mahal Hotel - (1971) 3 SCC 550 = AIR 1972 SC 168 = (1971) 82 ITR 44 (SC) * Municipal Corporation v. Indian Oil Corpn - AIR 1991 SC 686 = (1991) Supp 2 SCC 18 * S K Gupta v. K P Jain (1979) 3 SCC 54 * Narmada Bachao Andolan v. UOI AIR 2005 SC 2994 (SC 3 member bench) * CTO v. Rajasthan Taxchem Ltd. (2007) 3 SCC 124 = 5 VST 529 = 209 ELT 165 (SC) * Karnataka Bank Ltd. v. State of AP (2008) 12 VST 459 (SC) * K N Farms Industries v. State of Bihar AIR 2009 SC 3031.
In Forest Range Officer v. P Mohammed Ali - AIR 1994 SC 120 = 1993 AIR SCW 3754 = 1993 (3) SCC (Supp) 627, it was observed : ‘Includes’ is used as extension. An interpretation clause which extends the meaning of a word does not take away its ordinary meaning. An interpretation clause of inclusive definition is not meant to prevent the word receiving its ordinary, popular and natural sense wherever that would properly be applicable, but to enable the word as used in the Act to be applied to some things to which it would be normally not applicable’ - same view in Black Diamond Beverages v. CTO 1997 AIR SCW 3654 = (1997) 107 STC 219 (SC) = AIR 1997 SC 3550, where it was held that inclusive part of definition cannot prevent the main provision from receiving its natural meaning.
When the word used is ‘includes’, such definition is to be given a wider meaning and not exhaustive or restricted to the items contained in the definition - Krishi Utpadan Mandi Samiti v. Shanker Industries - 1993 AIR SCW 762 = 1993 Supp (3) SCC 361(II) (SC) * Tamil Nadu Kalyana Mandapam Association v. UOI 2004 (167) ELT 3 = 4 STT 308 = 267 ITR 9 = 136 Taxman 596 = 135 STC 480 (SC) * Ponds India v. CTT (2008) 227 ELT 497 = 15 VST 256 (SC).
IDecision in Maruti Suzuki restricting scope of ‘includes’ doubted and issue referred to large bench - In Maruti Suzuki Ltd. v. CCE (2009) 9 SCC 193 = 22 STT 54 = 240 ELT 641 (SC),restricted meaning to word ‘includes’ in definition of ‘input’ under Cenvat Credit Rules was given and it was held that even in respect of second i.e. inclusive part of definition of ‘input’, relation with ‘manufacture’ is required – in appeal from Maruti Suzuki Ltd. v. CCE (2009) 238 ELT 180 (CESTAT). [This view has been doubted and the matter has been referred to a large bench in Ramala Sahkari Chini Mills v. CCE (2010) 29 STT 464 = 8 taxmann.com 122 = 260 ELT 321 (SC)]
1-3 Meaning of ‘in relation to’
Scope of inclusive part of definition of input service is further widened by use of the term ‘in relation to’.
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) 7 SCC 347 = 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 * State of Karnataka v. Azad Coach Builders (2010) 9 SCC 524 = 7 taxmann.com 28 = 4 GST 72 = 36 VST 1 = 262 ELT 32 (SC 5 member bench).
The expression ‘in relation to’ is of widest import. – Thyssen Stahlunion GMBH v. Steel Authority of India 1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999 (6) SCC 334.
2 Place of removal
The concept of ‘removal’ is borrowed from Central Excise and hence applies only to a manufacturer and not service provider.
CBE&C vide circular No. 137/3/2006-CX.4 dated 2-2-2006 has confirmed that when the words ‘place of removal’ are not defined in Finance Act, definition under Central Excise Act is to be considered. It has been clarified that in case of depot sale, depot is place of removal. Hence, service tax on freight upto depot will be eligible for Cenvat credit whether the duty is payable under section 4 (ad valorem) or section 4A (MRP basis).
The term ‘place of removal’ is not defined in Cenvat Credit Rules, but is defined in section 4(3)(c) of Central Excise Act as follows –
“Place of removal” means—
(i) a factory or any other place or premises of production or manufacture of the excisable goods;
(ii) a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty;
(iii) a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory
from where such goods are removed.
The words ‘from where such goods are removed’ apply to all the three clauses.
As per section 2(h) of Central Excise Act, ‘sale’ and ‘purchase’ with their grammatical variations and cognate expressions, means any transfer of possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuation consideration.
2-1 Place of where ownership gets transferred to buyer is place of removal when there is direct sale from factory
Normally, factory gate is place of removal, except in case of depot sales.
In Escorts JCB Ltd. v. CCE (2003) 1 SCC 281 = 53 RLT 1 = 146 ELT 31 (SC), the contract was for sale ex-factory. Goods were handed over to the carrier/transporter. However, insurance was arranged by assessee, though charged separately. It was contended by department that since insurance is arranged by seller, the property in goods passes to buyer only when goods reach the destination. Hence, buyer’s place will be the ‘place of removal’ and hence insurance and freight will be includible in the price. This view was rejected by SC. It was held that as per section 39 of Sale of Goods Act, delivery of goods to carrier is prima facie delivery of goods to buyer. Ownership in the property may not have relevance in so far as insurance of goods sold during the transit is concerned. It is not necessary that insurance of the goods and ownership of goods must always go together. [Reversing decision of CEGAT in Escorts JCB Ltd. v. CCE 2000(118) ELT 650 = 35 RLT 9 (CEGAT)]
However, if ‘sale’ i.e. takes place when ownership in goods is transferred to buyer at destination, that will be the ‘place of removal’ (except in case of depot sales).
2-2 ‘Place of removal’ if ownership is transferred at destination
In Escorts JCB Ltd. v. CCE 2000(118) ELT 650 = 35 RLT 9 (CEGAT), it was observed, in respect of provisions under old section 4, as follows - 'Place where excisable goods are sold can be place of removal. A place where goods are sold can be a place where the property in goods sold passes from buyer to seller. If goods are sold only when they reach the destination, that will be the place of removal’. – view confirmed in CCE v. Prabhat Zarda Factory Ltd. 2000(119) ELT 191 = 38 RLT 637 (CEGAT 5 member bench), where it was held that as per definition of 'sale' u/s 2(h) of CEA, transfer of possession of goods is the essence of sale. [In my opinion, though decision in case of Escorts JCB has been reversed by SC on different ground, the principle discussed above is still valid].
In Ambuja Cements v. UOI (2009) 236 ELT 431 (P&H HC DB), it has been held that if freight charges form part of assessable value, price is FOR destination, if ownership of goods remains with seller till delivery at customer’s doorstep, transit insurance is borne by assessee and property in goods is not transferred till delivery, outward transportation is ‘input service’ and is eligible for Cenvat credit. (thus, the customer’s place will be ‘place of removal’).
2-3 Port is place of removal in case of exports
In case of exports, the place of removal is port where export documents are presented to customs office – Kuntal Granites v. CCE (2007) 215 ELT 515 = 2007 TIOL 930 (CESTAT) – quoted and followed in Rajasthan Spinning & Weaving Mills v. CCE (2007) 8 STR 575 (CESTAT).
Port is the place of removal in exports as property gets transferred to buyer at port – RSWM v. CCE (2008) 223 ELT 481 (CESTAT SMB) * CCE v. Adani Pharmachem (2009) 19 STT 239 = 238 ELT 179 (CESTAT SMB) * Modern Petrofils v. CCE (2010) 253 ELT 609 (CESTAT SMB) * Cauvery Stones v. CCE (2010) 24 STT 400 = 257 ELT 152 (CESTAT SMB).
In CCE v. Rolex Rings (2008) 230 ELT 569 (CESTAT SMB), it has been held that in case of exports, port is the ‘place of removal’ as exporter continues to be owner of goods till the same are exported. Hence, CHA and surveyor services which are relating to export business are eligible for Cenvat credit.
2-4 Meaning of ‘Warehouse’
If goods are sold from warehouse, that will be treated as ‘place of removal’ in terms of section 4(3)(c)(ii). In such case, transport, handling and insurance charges upto warehouse incurred by assessee will be includible in the Assessable Value.
The term ‘warehouse’ has restricted meaning. It is confined only those warehouses which are notified under rule 20, where goods can be kept without payment of duty – Roha Dyechem v. CCE 2005 (179) ELT 39 (CESTAT SMB).
3. Services specifically excluded from definition of ‘input service’
Some services have been specifically excluded from definition of ‘input service’. These would not be eligible even if these would be eligible as per inclusive part of the definition of ‘input service’.
3.1 Services specifically excluded under clause (A)
Following services have been specifically excluded from definition of ‘Input Services’, if they are used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for support of capital goods The aforesaid services are termed as ‘specified services’ for purpose of this sub-clause] –
* Architect Services [Section 65(105)(p)]
* Port Services [Section 65(105)(zn)]
* Other Port Services [Section 65(105)(zzl)]
* Airport Services [Section 65(105)(zzm)]
* Commercial or Industrial Construction [Section 65(105)(zzq)]
* Construction of Residential Complex [Section 65(105)(zzzh)]
* Works Contract Service [Section 65(105)(zzzza)]
These ‘specified services’ will be eligible for Cenvat credit only if used for any of these ‘Specified Services’. e.g. Architect Service will be eligible as input service if used for Port Service or Construction Service or Works Contract Service.
Further, these services would not be eligible only if they are used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for support of capital goods. If these are used for other purposes, e.g. finishing services, repair, alteration or restoration, these should be eligible.
Port or airport services provided to aircraft or renting would be eligible.
3.2 Services specifically excluded under clause (B)
Following services are excluded from definition of ‘input service’ only so far as they relate to a motor vehicle –
* General Insurance Services [Section 65(105)(d)]
* Renting of a cab [Section 65(105)(o)]
* Motor vehicle related service (earlier termed as Authorised Service Station service) [Section 65(105)(zo)]
* Supply of tangible goods [Section 65(105)(zzzzj)]
However, these services will be eligible as ‘input services’ if used for provision of taxable services for which Cenvat credit of motor vehicle is available as capital goods.
Thus, specified input services relating to ‘motor vehicle’ are specifically excluded except in cases where motor vehicle is eligible for Cenvat Credit as capital goods (See definition of ‘Capital Goods’ for Cenvat Credit).
Meaning of motor vehicle – The term ‘motor vehicle’ is not defined in Cenvat Credit Rules. As per Central Excise Tariff Act, ‘motor vehicles’ are covered under chapter 87 of Central Excise Tariff.
As per section 65(73) of Finance Act, 1994; ‘motor vehicle’ has same meaning as assigned to it under section 2(28) of Motor Vehicles Act. As per that Act, ‘motor vehicle’ means any mechanically propelled vehicle adapted for use upon roads, whether the power or propulsion is transmitted thereto from internal or internal source and includes a chassis to which a body has not been attached and a trailer; but does not include a vehicle run on fixed rails or a vehicle of special type adapted for use only in a factory or in any other enclosed premises or a vehicle having less than four wheels fitted with engine capacity of not exceeding thirty five cubic centimeters.
Some vehicles (e.g. fork lift truck, excavators) require registration under Motor Vehicles Act, but they fall under chapter 84 of Central Excise Tariff. Goods falling under chapter 84 are eligible for Cenvat credit. Hence, insurance, repair services, renting etc. in respect of such vehicles should be eligible for Cenvat credit.
3.3 Services specifically excluded under clause (C)
Certain services like outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession have been specifically excluded.
However, this exclusion is only when such services are used primarily for personal use or consumption of any employee. This exclusion will not apply in other cases. For example, outdoor catering for ‘sales promotion’ would be eligible. Club membership fee of a director (who is not employee) would be eligible. Corporate club membership (without naming any specific employee) should be eligible.
The condition that these services must be used primarily for personal use or consumption of employees is essential. For example, say the company X organises Distributor’s conference in which service of outdoor catering is obtained. In the Distributor’s conference, there will be some employees of M/s X who will also take lunch or dinner along with the distributors. The services are not primarily meant for personal use. The services of outdoor catering are provided as incidental to Distributor’s conference. Therefore, the credit of service tax paid on such outdoor catering would be available as credit to M/s X.
4. What is wasteful expenditure as per the revised definition of input service
5. Eligibility of various services as input services
Based on aforesaid discussions, following is summary of various input services eligible and not eligible. Of course, litigation is inevitable in many cases.