By TIOL News Service

MUMBAI, MAR 21 2013: FROM the day the appeal entered the hallowed portals of the CESTAT, fortunes started fluctuating for the assessee. It is a common phenomenon that an appellant tries to get a sense of which way his appeal is headed from the result of his Stay application but in this case something disastrous happened in the end.

In the present case, after the Stay application was heard by the Division Bench, the Vice President writing for the Bench, granted complete waiver of pre-deposit of the adjudged dues of Rs.2.78 Crores plus. This order passed in January, 2012 was reported by us as - (2012-TIOL-486-CESTAT-MUM).

Needless to mention, the said Stay order gave a fair indication that the appellant may finally win - and it was only a matter of time.

But, as they say, never count your chickens before they hatch!

When the matter was finally heard, the fortune oscillated to what could not have even been dreamt by the assessee.

Without carrying the suspense further, here are the facts and the extracts from the final order passed in November, 2012 and reported as - (2012-TIOL-1888-CESTAT-MUM) -

Facts:

A show-cause notice was issued for denial of CENVAT credit on the ground that the services were utilized for the construction/erection and installation of Ammonia Storage Tank outside the factory premises (at the port) and hence are not covered under the definition of input services as provided under CENVAT Credit Rules, 2004.

The CCE, Belapur held that the impugned services were received in respect of storage tank which is immovable property and hence they are not capital goods and, therefore, credit is not admissible.

Final Order:

The Division Bench [Member (T) writing for the Bench where incidentally the Vice President who penned the Stay order is the second Member] after hearing the submissions observed -

"6. We find that Revenue has denied the credit of service tax paid by the appellant on Consulting Engineer Service, Technical Inspection and Certification Service, Construction Service and erection, commissioning and installation service. These services were used in installation of Ammonia Storage Tank facility at JNPT which is outside registered premises of the appellants. Revenue's contention is that these services used in the installation of storage tanks which is immovable property and is outside the factory premises are not eligible for the service tax credit.

7. The input service are defined under Rule 2(l) of the CENVAT Credit Rules as under:

"x x x"

8. As per definition of final products under Rule 2(h) of the CENVAT Credit Rules final products means excisable goods manufactured or produced from inputs or using input service. Combined reading of the Rule 2(l) and 2(h) shows that input service means any service used by the manufacturer whether directly or indirectly in or in relation to manufacture of excisable goods manufactured or produced from input or said service. That means that only those services will qualify for the input services which are used after input stage or those input services are used in the manufactured or produced from input or said service. That means that only those services will qualify for the input services which are used after input stage or those input services are used in the manufacture of excisable goods by the manufacturer.

9. Further from the definition of input services the inclusive definition covers various services. The services used in respect of inputs are specifically mentioned in the inclusive definition. We find that the procurement of input and inward transportation of input or capital goods are specifically mentioned in the inclusive definition of the input services and will therefore qualify for the eligible input services for the CENVAT Credit. The legislature restricted the benefit of the CENVAT Credit for input services used in respect of inputs for these two categories only. Whenever legislature wanted to give the credit of service tax paid on input services in relation to inputs, it has clearly stated so in the Rule.

10. The learned Advocate has submitted that under Rule 4(7) of the CENVAT Credit Rules, there is no restriction about the use of input services outside the factory premises. We find that under Rule 4(7) there is no such restriction about the use of input services outside the factory but Rule 4(7) is to be read with definition of input service under Rule 2(l) of the CENVAT Credit Rules.

11. We find that Ammonia is imported by the appellant and after goods are cleared from the port and the goods are delivered to the appellants. Procurement of the input is over after taking delivery of the goods. Thereafter appellants are eligible for credit of service tax paid on inward transportation of the inputs as per definitions of the input service.

12. We find that these services are used in installation of storage tanks outside the factory. Inclusive definition of input service also includes input services used in relation to storage upto the place or removal. Storage upto place of removal will include the storage of final products and not storage of inputs because whenever legislature wanted to give the benefit, in respect of inputs it has done so by specifically mentioning as procurement of inputs and inward transportation of the inputs. We therefore, take a view that input services used in relation to storage of inputs outside the factory will not be eligible for the credit."

Thereafter the Bench noted that the CESTAT decisions cited by the appellant were all Single Member decisions and those were not binding on the Division Bench. As for the Karnataka High Court decisions, those too were distinguished on the ground that the same concerned denial of credit on inputs used in the construction of the storage tank which were inside the factory premises but in the case on hand the storage tanks were outside the factory.

Holding that the appellants were not eligible for the CENVAT Credit and the penalty under Rule 15A was rightly imposed, the CESTAT, Division Bench dismissed the appeal.

We had, while reporting this order, mentioned thus -

Inside Outside: In the present case, the same Division Bench had heard the Stay Petition. The SMB decision in Maharashtra Seamless - (2011-TIOL-1059-CESTAT-MUM) granting benefit of CENVAT credit in respect of various services rendered for their wind mill farm situated in Satara District [factory located at Raigad] was relied in another case of Maharashtra Seamless and by a Majority decision - (2012-TIOL-1225-CESTAT-MUM), the CESTAT after taking note that contrary decisions were available granted total waiver of pre-deposit. So, are we heading for a Larger Bench on the issue?

We are not in the know as to whether a Larger Bench would be necessitated on the issue but the fact of the matter is that the assessee involved in the present case took the expressway and went in appeal against this order of the CESTAT.

And the decision is what every assessee would have wished for.

The Bombay High Court after extracting the contents of Rule 3(1) of the CENVAT Credit Rules, 2004 held -

"5. Now at the outset it must be noted that Rule 3(1) allows a manufacturer of final products to take credit inter alia of service tax which is paid on (i) any input or capital goods received in the factory of manufacturer of the final product; and (ii) Any input service received by the manufacturer of the final product. The subordinate legislation in the present case makes a distinction between inputs or capital goods on the one hand and input services on the other. Clause (i) above provides that the service tax should be paid on any input or capital goods received in the factory of manufacture of the final product. Such a restriction, however, is not imposed in regard to input services since the only stipulation in clause (ii) is that the input services should be received by the manufacturer of the final product. Hence, even as a matter of first principle on a plain and literal construction of Rule 3(1) the Tribunal was not justified in holding that the Appellant would not be entitled to avail of CENVAT credit in respect of services utilized in relation to ammonia storage tanks on the ground that they were situated outside the factory of production. The definition of the expression 'input service' covers any services used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products. The words 'directly or indirectly' and 'in or in relation to' are words of width and amplitude. The subordinate legislation has advisedly used a broad and comprehensive expression while defining the expression 'input service'. Rule 2(l) initially provides that input service means any services of the description falling in sub clause (i) and (ii). Rule 2(l) then provides an inclusive definition by enumerating certain specified services. Among those services are services pertaining to the procurement of inputs and inward transportation of inputs. The Tribunal proceeded to interpret the inclusive part of the definition and held that the legislature restricted the benefit of CENVAT credit for input services used in respect of inputs only to these two categories viz. for the procurement of inputs and for the inward transportation of inputs. This interpretation which has been placed by the Tribunal is ex facie contrary to the provisions contained in Rule 2(l). The first part of Rule 2(l) inter alia covers any services used by the manufacturer directly or indirectly, in or in relation to the manufacture of final products. The inclusive part of the definition enumerates certain specified categories of services. However, it would be farfetched to interpret Rule 2(l) to mean that only two categories of services in relation to inputs viz. for the procurement of inputs and for the inward transportation of inputs were intended to be brought within the purview of Rule 2(l). Rule 2(l) must be read in its entirety. The Tribunal has placed an interpretation which runs contrary to the plain and literal meaning of the words used in Rule 2(l). Moreover as we have noted earlier, whereas Rule 3(1) allows a manufacturer of final products to take credit of excise duty and service tax among others paid on any input or capital goods received in the factory of manufacture of the final product, insofar as any input service is concerned, the only stipulation is that it should be received by the manufacturer of the final product. This must be read with the broad and comprehensive meaning of the expression 'input service' in Rule 2(l). The input services in the present case were used by the Appellant whether directly or indirectly, in or in relation to the manufacture of final products. The Appellant, it is undisputed, manufactures dutiable final products and the storage and use of ammonia is an intrinsic part of that process.

6. For these reasons, we have come to the conclusion that the judgment of the Tribunal is ex facie unsustainable…"

The Appeal was accordingly allowed.

(See 2013-TIOL-212-HC-MUM-CX)