Citation Codes

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Case Number

1Final Order Nos. A/1553-1555/2012-WZB/AHD, in Appeal Nos. E/364-366/2012

Judges

M.V Ravindran, Member (J)
B.S.V Murthy, Member (T)

Acts

Rule 15 of Cenvat Credit Rules, 2004 on M/s. Castrol India
Rule 4(A) of the Service Tax Rules, 1994
Rule 7 of Cenvat Credit Rules, 2004
Rule 7 of the Cenvat Credit Rules,
Rule 2(l) of the 2004 Rules.8.The
Rule 2(m) of Cenvat Credit Rules,
Rule 7 of Cenvat Credit Rules,
Rule 2(l) of 2004 Rules

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Smart Summary

Tribunal Order — B.S.V. Murthy, Member (T) (Castrol India Limited)

Factual and Procedural Background

This order arises from verification of records of the assessee, M/s. Castrol India Limited, which revealed that the assessee had availed Cenvat credit of service tax on various input services on the basis of invoices issued by its head office acting as an Input Service Distributor (ISD). The Revenue alleged that the credits were taken in respect of services that were received elsewhere and not by the assessee, that there was no nexus between some services and manufacture, and that some credits were claimed for services beyond the place of removal.

Proceedings culminated in an impugned order confirming a demand of Rs. 15,29,76,083/- with interest, imposing a penalty equal to the amount demanded on M/s. Castrol India Limited under Rule 15 of the Cenvat Credit Rules, 2004, and imposing penalties of Rs. 25 lakhs each on two officials (Shri Prasanna Pranjape and Shri Amitabh Sharma of the Silvasa Plant). The Tribunal heard both sides, considered submissions and records, and pronounced the operative order setting aside the impugned order and allowing the appeals.

Legal Issues Presented

Whether, when Cenvat credit is availed on the basis of invoices issued by an Input Service Distributor (ISD), any challenge to admissibility of credit should be raised against the ISD rather than at the receiving unit.
Whether service tax credit is inadmissible for services used beyond the place of removal of final products (i.e., whether no credit is admissible after the place of removal).
Whether, for the nineteen services in dispute, there exists sufficient nexus with manufacture (or with the business of manufacture) to permit Cenvat credit under Rule 2(l) of the Cenvat Credit Rules, 2004.
Whether penalty was properly imposable on the assessee-company and on the named employees in respect of the disputed credits.

Arguments of the Parties

Appellant's Arguments (Castrol India Limited)

The assessee availed Service Tax credit on the basis of invoices issued by its head office which is registered as an Input Service Distributor (ISD), not on invoices of the original service providers; therefore, any enquiry into admissibility of such credit should have been made against the ISD and not at the unit level receiving ISD invoices.
Under Rule 7 of the Cenvat Credit Rules, credit distribution by an ISD is subject to conditions (notably that distributed credit does not exceed the service tax paid and that credit for services used exclusively for exempted goods/services shall not be distributed); the show cause notice lacked any allegation that these conditions were not fulfilled.
The assessee contended that where credit had been inadvertently taken (such as for housing colony), it had promptly reversed such credits.
On merits, several of the disputed services (e.g., advertising, event management, technical inspection) are directly relatable to the business of manufacturing or promotion of goods and therefore qualify as input services under Rule 2(l).

Revenue's Arguments (as reflected in the show cause notice and impugned order)

The credit taken by the assessee was in respect of services which were received elsewhere and not by the assessee unit in question.
Certain credits lacked requisite nexus with the manufacture of final products.
Some credits were claimed for services provided beyond the place of removal of final products and therefore were not admissible.
Penalties were imposed on the assessee and on named employees for wrongful availment of credits.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner of Central Excise, Nagpur v. Ultratech Cement Limited (Bombay High Court)	Interpretation of "input service" under Rule 2(l) — the definition is wide, covering services used directly or indirectly in or in relation to manufacture, services for clearance up to place of removal, and an inclusive part covering services "in relation to business"; "activities in relation to business" must be integrally connected with the business of manufacture.	The Tribunal relied on Ultratech to reject the Revenue's contention that credit is not admissible after the place of removal, and to conclude that many of the disputed services fall within the wide scope of "input service" and are admissible.
Maruti Suzuki Limited v. Commissioner of Central Excise, New Delhi (Supreme Court)	The case was noted; the Tribunal observed that Ultratech had taken note of the Supreme Court decision.	The Tribunal held that reliance on Maruti Suzuki by the Revenue was misplaced in the circumstances, because Ultratech (considered and applied by the Tribunal) had already taken the Supreme Court decision into account.
Metro Shoes Pvt. Limited (CESTAT)	Authority for admissibility of service tax credit on certain services (as cited generally).	The Tribunal referred to this decision among others to support the conclusion that credit of service tax on specified services (e.g., advertising, business auxiliary/support services) is admissible.
Cadila Healthcare Limited v. CCE (CESTAT)	Authority indicating admissibility of service tax credit on certain categories of services.	Referred to as supporting precedent for allowing credits on listed services.
Semco Electrical Pvt. Limited v. CCE (CESTAT)	Authority indicating admissibility of credit for certain services.	Used as one of several precedents to support admissibility of credits for the services in question.
Commissioner of Central Excise v. Mundra Port & Special Economic Zone Limited (Gujarat)	Authority on admissibility of service tax credit for port/related services and other listed services.	Referred to in support of admissibility of port service and related credits.
Ambalal Sarabhai — TA No. 433 of 2010 (Gujarat High Court)	High Court authority cited in support of credit admissibility principles.	Referred to as part of the body of decisions justifying admissibility of various input service credits.
Rajratan Global Wires Limited v. CCE (CESTAT)	Authority supporting admissibility of service tax credit for listed categories.	Referred to in the aggregate reasoning allowing credits for several services.
CCE, Guntur v. Hindustan Coca-cola Beverages Pvt. Limited (CESTAT - Bangalore)	Authority supporting admissibility of certain service tax credits.	Included among decisions relied upon to permit credit on the enumerated services.

Court's Reasoning and Analysis

The Tribunal proceeded in two analytical stages: first addressing the procedural/technical contention relating to ISD invoices and then addressing the substantive merits concerning the nexus and place-of-removal issues.

1. ISD / Procedural Point:

The Tribunal examined Rule 2(m) (definition of Input Service Distributor) and Rule 7 of the Cenvat Credit Rules, 2004, which govern distribution of credit by an ISD and impose conditions (notably that credit distributed against documents in Rule 9 not exceed the service tax paid and that credit for services used exclusively for exempted goods/services should not be distributed).
The Tribunal observed that the show cause notice did not allege non-fulfilment of these specific conditions (for example, it did not allege that distributed credit exceeded the service tax paid, nor that the credits related to services exclusively for exempted goods).
The Tribunal noted that the verification whether the credit distributed exceeded service tax paid can be done only at the ISD level; therefore, the absence of such allegations in the show cause notice undermined the Revenue's case at the unit level. On this ground alone the Tribunal found merit in the assessee's contention.

2. Merits / Nexus and Place of Removal:

The Tribunal reproduced the definition of "input service" under Rule 2(l) and placed heavy reliance on the Bombay High Court's reasoning in Ultratech Cement (paras 27–29) which explains that Rule 2(l) has a broad scope: it covers services used directly or indirectly in or in relation to manufacture, services for clearance up to the place of removal, and an inclusive part covering services "in relation to business". The inclusive part covers services used prior to manufacture, after manufacture (e.g., advertising), and business-related services (e.g., accounting, auditing, security).
Applying Ultratech, the Tribunal concluded that the Revenue's categorical stance that "no credit is admissible after the place of removal" is untenable. The Tribunal also noted that Ultratech had considered the Supreme Court decision in Maruti Suzuki, rendering direct reliance on Maruti Suzuki by the Revenue misplaced in the present context.
The Tribunal then considered the nineteen services for which credit had been disallowed. Relying on Ultratech and a number of tribunal/high-court decisions cited in the order, the Tribunal held that credits for various services (examples listed in the order: Advertising Agency Services, Business Auxiliary Services, Business Support Services, Management and Consultancy Services, Online Information and Database Access Service, Port service, Maintenance and Repair Service, Consulting Engineer’s service, Security Agency Service, Storage and Warehousing) are admissible.
Where the assessee had voluntarily reversed credits that were clearly not related to factory/office use (e.g., housing colony, certain security agency services, cleaning services, survey and mapmaking services used other than for factory/office), the Tribunal took account of those reversals (aggregate reversal recorded as Rs. 2,07,181/-).
Specific contested categories were addressed: event management services were held to be relatable to the business of manufacturing/promoting goods in the absence of evidence to the contrary; technical inspection services, being for quality verification, were held to be relatable to manufacture. Accordingly, such credits were admitted.
On the issue of penalty, the Tribunal reasoned that where the assessee had taken credit correctly, and where inadvertent or mistaken credits had been promptly reversed (and where there also existed judicial authority to the effect that some categories — e.g., housing colony credits — may be admissible), penal consequences were not warranted. The assessee succeeded on merits; therefore penalties on the company and on the employees were held not to arise.

Holding and Implications

Holding: The Tribunal's final order set aside the impugned order and allowed the appeals. In its operative conclusion the Tribunal SET ASIDE the demand and penalties as recorded in the impugned order and granted consequential relief to the appellants.

Implications:

Direct effect on the parties: The confirmed demand of Rs. 15,29,76,083/- with interest and the penalties (penalty equal to the demand on the company and Rs. 25 lakhs each on two employees) were set aside; the appeals were allowed and consequential relief granted to the appellants.
The Tribunal's decision was grounded on interpretation of Rule 2(l), Rule 2(m) and Rule 7 of the Cenvat Credit Rules and on existing judicial precedents (as cited). The opinion does not purport to lay down a new legal precedent; rather, it applies and follows earlier authority (including Ultratech and the other cited decisions) to the facts of this case.

Operative part of the order was pronounced in Court.

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Castrol India Limited v. Commissioner Of Central Excise, Vapi

[Order per : B.S.V. Murthy, Member (T)]. - During the verification of records of the assessee M/s. Castrol India Limited, it was found that assessee had availed Cenvat credit of service tax paid on various input services on the basis of invoices issued by their head office which has been registered as Input Service Distributor (ISD). On the ground that the credit has been taken in respect of services which were received elsewhere and not by the assessee and also on the ground that the credit taken in respect of services have no nexus with the manufacture and some of which have been availed beyond the place of removal, proceedings were initiated against the appellant which culminated into the impugned order. In the order, demand for cenvat credit of Rs. 15,29,76,083/- with interest has been confirmed and a penalty equal to amount demanded has been imposed under Rule 15 of Cenvat Credit Rules, 2004 on M/s. Castrol India Limited (Castrol) and penalty of Rs. 25 Lakhs each has been imposed on Shri Prasanna Pranjape, Dy. Manager and Shri Amitabh Sharma, Unit Head of Silvasa Plant.

2. Heard both sides and considered various submissions and records.

3. Learned counsel submitted that assessee had availed Service Tax credit based on invoices issued by the ISD and not on the basis of invoices of service providers. Since the credit has been availed on the basis of ISD invoices, demand, if any, regarding admissibility of credit as such, should have been raised at the end of ISD and not at the unit level.

4. According to Rule 2(m) of Cenvat Credit Rules, input service distributor means, an office of the manufacturer or purchaser of final products or provider of output service which receives invoices issued under Rule 4(A) of the Service Tax Rules, 1994 towards purchase of input services and issue invoice, bill or, as the case may be, challans for the purpose of distributing the credit of service tax paid on said services to such manufacturer or purchaser or provider as the case may be. According to Rule 7 of Cenvat Credit Rules, input service distributor may distribute the credit to its manufacturing units providing output service subject to following conditions, namely; the credit distributed against the documents referred to in Rule 9 does not exceed an amount of service tax paid thereof or; credit of service tax applicable to service used for unit exclusively engaged in the manufacture of exempted goods or providing of exempted services shall not be distributed.

5. Based on the definition given above and Rule 7 of the Cenvat Credit Rules, learned advocate submitted that the grounds taken in the show cause notice for denial of service tax are not at all valid since what was required to be seen by the Revenue in the unit which is receiving invoices from the ISD is whether, two conditions in the Rule 7 of Cenvat Credit Rules, 2004 have been fulfilled or not. In the absence of any allegation in the show cause notice indicating non-fulfilment of these conditions, no case can be said to have been made out.

6. We find considerable force in the arguments advanced by the learned counsel. It has not been alleged in the show cause notice nor there is finding that the credit distributed against the documents is more than the amount of service tax paid and in any case, this can be verified only at the end of ISD. It is also not the case of the department that credit has been received by the assessee in respect of services/goods which are totally exempted. Under these circumstances, on this ground alone, probably the matter can be decided but the learned advocate is fair enough to argue the case on merits and also agree to reverse the credits which are patently inadmissible. Therefore, we proceed to consider the issue on merits also.

7. In respect of nineteen services, the credit availed has been disallowed. The disallowance has been made on the ground that there is not nexus with manufacture and credit is admissible only up to the place of removal. Before, we proceed further, it is necessary to reproduce the definition of input service which is as under :-

“2(l) “Input service” means any service. -

(i) used by a provider of taxable service for providing an output service, or,

(ii) used by the 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 setting up, modernization, 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 up to the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit relating, share registry, and security, inward transportation of inputs or capital goods and outward transportation up to the place of removal :”

This definition was considered by the Hon’ble High Court of Bombay, at Nagpur in the case of Commissioner of Central Excise, Nagpur v. Ultratech Cement Limited - (Bom.) = (Bom.). Paragraphs 27 to 29 are relevant and are reproduced :-

“27. The definition of “input service” as per Rule 2(l) of 2004 Rules (insofar as it relates to the manufacture of final product is concerned), consists of three categories of services. The first category, covers services which are directly or indirectly used in or in relation to the manufacture of final products. The second category, covers the services which are used for clearance of the final products up to the place of removal. The third category, includes services namely;

(a) Services used in relation to setting up, modernization, renovation or repairs of a factory,

(b) Services used in an office relating to such factory,

(c) Services like advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs,

(d) Activities relating to business such as, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit relating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal.

Thus, the definition of ‘input service’ not only covers services, which fall in the substantial part, but also covers services, which are covered under the inclusive part of the definition.

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.”

8. The above observations of the Hon’ble High Court would clearly show that the stand taken by the Revenue that no credit is admissible after the place of removal of the goods, is totally untenable. Further, reliance on the decision in the case of Maruti Suzuki Limited v. Commissioner of Central Excise, New Delhi - (S.C.) is also misplaced since while rendering the decision in the case of Ultratech Cement, the decision of Hon’ble Supreme Court in the case of Maruti Suzuki Limited was taken note of.

9. In the light of the decision of the Hon’ble High Court of Bombay in Ultratech Cement Limited and in the light of following decisions; Metro Shoes Pvt. Limited - (Tri.), Cadila Healthcare Limited v. CCE - (Tri.), Semco Electrical Pvt. Limited. v. CCE - (Tri.), CCE v. Mundra Port & Special Economic Zone Limited - (Guj.), Ambalal Sarabhai - TA No. 433 of 2010 (Guj. HC), Rajratan Global Wires Limited. v. CCE - (Tri.), CCE, Guntur v. Hindustan Coca-cola Beverages Pvt. Limited - (Tri.-Bang.), the credit of service tax paid on Advertising Agency Services, Business Auxiliary Services, Business Support Services (in the case of this assessee, it is Advertising Agency Service), Management and Consultancy Services, Online Information and data base Access Service, Port service, Maintenance and Repair Service, Consulting Engineer’s service, Security Agency Service and Storage and Warehousing credit is admissible.

10. As regards the construction services in respect of office and factory etc. there is no dispute that credit is admissible and appellant voluntarily reversed the credit taken in respect of service availed for housing colony of the appellant. Similarly, appellants have also reversed the credit taken in respect of security agency services, Cleaning services, Survey and Mapmaking service in respect of services received other than for the purpose of factory/office. Total amount of Rs. 2,07,181/- has already been reversed.

11. As regards event management service, event management firms provide services to companies to undertake promotional activities for their products in various places. In the absence of any evidence to show that the said event management services were received for other purposes, the services have to be held as relatable to business of manufacturing only since the services are directly relatable to promotion of goods. Technical inspection services are availed in respect of quality verification etc. and such services are definitely relatable to manufacture. Therefore, credit is admissible in respect of such services also.

12. After considering the submissions made during the hearing, what we find is that appellant has taken credit correctly and where credit has been taken inadvertently or by mistake for housing colony etc. they have promptly reversed the amount. In any case, there were decisions taking a view that credit of service tax paid on service received in respect of housing colony is also admissible. Therefore, availment of credit can be said by mistake and therefore, no penalty is imposable.

13. Since the appellants succeed on merits, question of imposition of penalty either on the appellant Company or on the employees does not arise.

14. In the result, impugned order is set-aside and appeals are allowed with consequential relief to the appellants.

(Operative part of the order pronounced in the Court)

Castrol India Limited v. Commissioner Of Central Excise, Vapi

Tribunal Order — B.S.V. Murthy, Member (T) (Castrol India Limited)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments (Castrol India Limited)

Revenue's Arguments (as reflected in the show cause notice and impugned order)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Castrol India Limited v. Commissioner Of Central Excise, Vapi

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