Services utilised in residential colony set up by appellant so that personnel are available 24 hours near factory - CENVAT Credit not available on such welfare activity in view of precedent decisions of High Courts - demand beyond a period of one year not sustainable but interest payable: CESTAT
By TIOL News Service
AHMEDABAD, NOV 23, 2012: THE appellant had availed CENVAT credit of service tax amounting to Rs. 5,73,371/- towards different services like Manpower Supply Services, Booking Services, Pest Control Services utilised in residential colony, Guest House and Sport Complex or services utilised for the persons who are not employees of the Company during the period July 2007 to June 2009.
The lower authorities held that these services have no relation to the manufacturing activity and are more in the nature of welfare activities and hence CENVAT credit is not available as these are not Input Services. Apart from confirming the contents of the demand notice dated 24.03.2010, an equivalent penalty and interest was also imposed.
Before the CESTAT the appellant took pains to explain to the Bench that the factory is located in a remote place in Ankleshwar and appellant is engaged in the manufacture of Glass; for manufacture of glass, melting sand etc, furnace is used and furnace once it is started, it is not stopped in its life time and it is quite normal for the furnace to function 15 to 20 years before it is stopped for maintenance or repairs; under these circumstances, since the factory, has to function continuously throughout the year without getting stopped any time and since the factory is located in a remote area, it becomes essential to establish residential colony so that staff is available 24 hours near the factory and they also have necessary facilities to make their stay comfortable so that their factory can run efficiently.
The appellant submitted that the decisions relied upon by the lower authorities in the case of Manikgarh Cement - (2010-TIOL-720-HC-MUM-ST) to hold that the services are ‘welfare services' is not proper in view of the decision in HEG Limited - (2010-TIOL-733-HC-CHHATTISGARH-CX) which requires that decision has to based on facts of each case. It was further submitted that the reliance placed on the Gujarat High Court decision in Gujarat Heavy Chemicals Limited - (2011-TIOL-383-HC-AHM-ST) is also not proper since in that case there was no submission by the assessee that the activities undertaken in the residential colony or providing residence to the employees was a necessity for the manufacturer and was not a welfare activity. In support of their claim the decisions in ITC Limited - (2009-TIOL-1199-CESTAT-BANG), Toyota Kirloskar Motor Pvt. Ltd. - (2011-TIOL-941-HC-KAR-ST) and that of the European Court in the case of Julius Fillibeck Sohne Gmb H & Company KG were relied upon to submit that activity undertaken is necessary for the requirement of business and hence service received has to be held as one received for business purpose.
In the alternative, it was submitted that since there were three contrary decisions during the relevant period as regards eligibility of credit of service tax paid on services utilised in the residential colony, extended period could not have been invoked in this case and no penalty could have been imposed and, therefore, the demand may be limited to the normal period of limitation and the penalty imposed may be set-aside.
The Revenue representative submitted that the Supreme Court in the case of Maruti Suzuki Ltd - (2009-TIOL-94-SC-CX) has made it very clear that there has to be nexus between manufacture and input service; that residential colony for whatever purpose is established cannot be said to have a nexus with the manufacture and therefore, credit cannot be allowed in such a situation.
The Bench observed -
"6. It is quite common in cement factories to provide residential colony to employees since cement factories are invariably located in remote areas. Similarly in the case of big chemical factories also residential colony virtually becomes a necessity since such big factories are established not always in the middle of the city where all facilities are available. Under these circumstances, the submission that residential colony is not welfare activity and when it is not welfare activity, credit is admissible does not seem to flow from the precedent decisions before me. Both, Hon'ble High Court of Bombay in the case of Mankigarh Cement and Hon'ble High Court of Gujarat in the case of Gujarat Heavy Chemicals Limited came to the conclusion that services received in residential colony cannot be considered as input service and did not fit into the necessity as the fact as to whether they were required or necessity or welfare activity or established because of legal compulsion. In the case of Ultratech Cement Limited, the Tribunal had taken a view that where there is legal compulsion, credit would be clearly admissible and this view was taken in respect of catering service. Therefore, where there is legal compulsion, it cannot be said that in terms of precedent decision, credit is admissible. However, as regards the services received in residential colony, the two decisions of two High Courts which have been cited, do not consider that it is necessary to consider whether the service is a welfare activity. In fact, in Gujarat Heavy Chemicals Limited, a view was taken that provision of residential quarters by manufacturer was voluntary and therefore credit is not admissible. However, there is no decision as to what would be the position when it is not voluntary. In Manikgarh Cement case also the Hon'ble High Court of Bombay took the view that expenditure incurred on services received in residential colony was welfare activity. It has to be noted that there was no submission in both the cases on the part of the assessees that it was a necessity for manufacture. However, in my opinion, it cannot be said that High Courts were not aware of the fact that these two units are big units located away from the town and residential colony is generally by practice, created and maintained by Companies. Therefore, even though the decisions do not specifically say that it is a welfare activity or voluntary only, credit has to be denied. As regards the decision of the European Court, unless it is examined the decision vis-a-vis the definition of input service and statutory provisions, it would not be appropriate to adopt the ratio. As regards the decision in the case of ITC Limited, it has to be noted that decision was rendered much before the subsequent decisions of the Hon'ble High Courts cited before me. Therefore, tribunal did not get benefit of these decisions at that time. It has to be noted that while rendering the decision in the case of Gujarat Heavy Chemicals, the decision of Karnataka High Court in the case of Toyota Kirloskar Limited was not available. However, decision in the case of Gujarat Heavy Chemicals is a subsequent decision and it is to be noted that Hon'ble Gujarat High Court had taken note of the decision in the case of Ultratech Cement, Manikgarh Cement to come to the conclusion that credit is not admissible. In the case of Ultratech Cement, view taken was that where there is legal compulsion, credit has to be allowed. In the case of Manikgarh Cement, it was held that in case of welfare activity credit can not be allowed. In my opinion, since the facts in Manikgarh Cement and Ultratech Cement as well as in present case are almost similar, it will not be appropriate for me to come to a conclusion that courts would have taken a different view had they been apprised of the need for residential colony and maintenance at the cost of the assessee. Under these circumstances, I consider it appropriate that I have to follow the decision of the High Courts of Bombay as well as Gujarat rather than following the precedent decisions of Tribunal which are in favour of the appellants. Under these circumstances, I do not consider that appellant has a case on merits as far as credit of service tax paid on various services received in the residential colony, are concerned."
However, the CESTAT observed that as the appellant could have entertained a belief that they are eligible for credit in view of the various decisions in favour, the demand for the period beyond done year cannot be sustained.
In fine, the demand for the period March, 2009 to June, 2009 was confirmed along with imposition of interest but penalty was set aside as the issue involved was a pure question of interpretation of law.