Payment of ‘off-the shelf software’ held not to be royalty

Mumbai Tribunal Ruling: Once the payment of ‘off-the shelf software’ held not to be chargeable to tax as a royalty on the basis of the certificate obtained from a chartered accountant, no penalty and interest can be levied on the grounds that the assessee did not take prior approval of the assessing officer under section 195(2) of the Act

[ADIT v. Tata Communications Ltd. (2010-TII-157-ITAT-MUM-INTL)]

Facts:

Tata Communications Ltd. (‘the assessee’) had made payment for ‘off-the shelf software’ to a company resident in USA without deducting tax at source on the basis of a certificate obtained from a Chartered Accountant under an alternate procedure laid down by the Central Board of Direct Taxes (CBDT). The assessee had not applied to the assessing officer (‘the AO’) under section 195(2) of the Income-Tax Act (‘the Act’) for determining whether or not, the tax was liable to be deducted at source. The AO issued a show-cause notice for raising the demand under section 201 read with section 195 of the Act.

In response to the show-cause notice, the assessee contented that it had purchased ‘off-the shelf software’ and it did not have any tax implications in India as the assessee had not purchased any copyrights in the software; but had purchased only a copyright software. The assessee further submitted that since the USA based company from whom, software was purchased, did not have a Permanent Establishment (PE) in India, the question of income could have arisen only in the event of the payment for purchase of software being treated as royalty, but given the facts of the case and given the fact that purchase was made only of the copyright software and not copyright per se, the amount had not therefore been treated as royalty in the hands of the USA based company.

However, the AO held that it is not open to the assessee to take any unilateral decisions on whether the amounts paid by the assessee are chargeable to income tax or not, and, therefore, the assessee could not have made the payments without deduction of tax at source, without the concurrence of the AO under section 195(2) of the Act. The AO further noted that “provisions of section 195(2) are not provisions of convenience, which the assessee may use or may not use”.

The AO held that since the assessee had not made any payment for purchase of software but only for licence to use the software, the amount was paid by the assessee is clearly in the nature of ‘Royalty’. Accordingly, the AO held that the amount paid to USA based company for the purchase of software was taxable under section 9(1)(vi) r.w. Explanation 2(iva) of the Act as also under the India – USA Double Taxation Avoidance Agreement (tax treaty). Since, the assessee failed to discharge the obligation of deducting the tax at source under section .195(1), the assessee was liable to pay the amount of tax along with interest under section 201(1A) of the Act.

On appeal, the Commissioner of Income Tax (Appeals) [‘CIT(A)’], held that the purchase of

‘off-the shelf software’ was only a copyright software and that the amount paid for the purchaseof software is not liable to be taxed in India in terms of the provisions of the Act as also applicable tax treaty. Accordingly, the CIT(A) relying on various decisions reversed the order of the AO.

Aggrieved by the order of the CIT(A), the Revenue filed an appeal before the Income Tax Appellate Tribunal (‘the Tribunal’).

Observation and decision of the Tribunal:

• In the landmark case of Motorola Inc v. DCIT (95 ITD 269), the Special Bench of theTribunal took a note of the fact that copyright article is distinct from copyright per se and payment for copyright article, therefore, cannot be treated as payment of copyright, which could be brought to tax. While payment for use of copyright in indeed covered by the definition of ‘royalty’, the payment for use of copyright article would not be covered by the definition of ‘royalty’. It is, thus, clear that so far as the merit of the issue is concerned, there is unanimous view of various benches of the Tribunal that payment for use of copyright article cannot be brought to tax as royalty.

• As regards the question that it is not open to the assessee to decide whether or not tax is required to be deducted at source from payment, it is only an elementary that tax deduction liability at source is a vicarious liability and it can be invoked only when primary liability survives. As the Tribunal has held that the USA company itself did not have any tax liability in respect of the payments, the vicarious tax liability does not survive either.

• In accordance with the procedure stipulated by the CBDT, the assessee had duly obtained the Chartered Accountant’s certification regarding applicability tax withholding right and based on the certification, made the remittance for deduction at source. The Tribunal found no infirmity in this approach of the assessee and in such a situation, and particularly when no tax is indeed payable by the recipients of the income, a demand under section 201(1A) cannot be raised on the assessee merely because he had not obtained prior approval of the AO under section 195(2) of the Act.

• Section 195(2) is based on the “principle of proportionality”. The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of “income” chargeable to tax in India. It is in this context, the Supreme Court in case of India GE Technology Centre Pvt Ltd v. CIT, 327 ITR 456 (SC) stated that, “If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words “such sum” clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. The above observations of Supreme Court in Transmission Corporation case [239 ITR 587 (SC)] with respect, has been misunderstood by the Karnataka High Court in the case of Samsung Electronics Company Limited (320 ITR 209) to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all “chargeable to tax in India”, then no TDS is required to be deducted from such payment.

This interpretation of the High Court completely loses sight of the plain words of section 195(1) which in clear terms lays down that tax at source is deductible only from “sums chargeable” under the provisions of the Act, i.e., chargeable under Sections 4, 5 and 9 of the Act.

• Thus, unless the amount remitted by the assessee constitutes tax liability in India in the hands of recipients, the withholding tax liability under section 195 cannot arise.

Sales-Tax "Remission" is a Capital Receipt: ITAT Spl Bench

Sulzer India Ltd vs. JCIT (ITAT Mumbai Special Bench)



If NPV of future sales-tax liability is paid, there is no “remission” for s. 41(1)

The assessee availed of the sales-tax deferral schemes of 1983 & 1988 offered by the Maharashtra State Govt under which the sales-tax collected by the assessee could be paid after 12 years. The total sales-tax collected by the assessee was Rs. 7,52,01,378 which was deemed to have been paid and deduction was allowed u/s 43B. In 2002, the State issued a circular permitting premature repayment of the deferred sales-tax liability at its Net Present Value (NPV). The NPV of the deferred sales-tax liability was computed at Rs. 3,37,13,393, which the assessee paid and was discharged of the liability to pay Rs. 7,52,01,378. The difference between the deferred sales-tax and its NPV amounting to Rs. 4,14,87,795 was treated by the assessee as a capital receipt. The AO took the view that as a deduction for the sales-tax liability had been allowed u/s 43B, the “remission” from that liability was taxable u/s 41(1). This was upheld by the CIT (A). On appeal by the assessee, the issue was referred to the Special Bench in view of conflicting judgements. HELD by the Special Bench deciding in favour of the assessee:

(i) For s. 41(1) to apply, two conditions have to be satisfied. First, the assessee should have obtained an allowance or deduction in respect of any loss, expenditure or trading liability and second, the assessee should have subsequently (i) obtained any amount in respect of such loss or expenditure or (ii) obtained any benefit in respect of such trading liability by way of remission or cessation thereof;


(ii) The first requirement of s. 41(1) that the assessee should have obtained an allowance or deduction in respect of loss, expenditure or trading liability is not satisfied because all that CBDT Circular No. 496 dated 25.9.1987 provides is that “…the statutory liability shall be treated to have been discharged for the purposes of s. 43 B”. Accordingly, the benefit of deduction was allowed for the purpose of s. 43 B only and not under any other provisions of the Act. The AO applied the aforesaid Board Circular while giving the benefit of deduction u/s. 43B. Circulars are binding on the department;

(iii) The second requirement of s. 41(1) is also not satisfied because in paying the NPV, the assessee has paid the equivalent of the Future Value of the sum. As the sum of Rs. 3,37,13,393 is the NPV of the future sum of Rs.7,52,01,378 and its payment discharges the full liability, there is no remission or cessation of liability by the State Govt. It is a simple case of collecting the amount at net present value which is due later on (principles of s. 63 of the Contract Act applied);

(iv) The fact that the assessee has not obtained the modified Eligibility Certificate or that it used the expression ‘remission’ of loan liability in its books are irrelevant because the making or absence of an entry cannot determine rights and liabilities of parties.

Expenditure on ESOP’s allotted to the employees is not allowed as a “Business Expenditure”

Income Tax - Section 37 - Business Expenditure – Expenditure on ESOP’s allotted to the employees is not allowed as a “Business Expenditure”


IN THE INCOME TAX APPELLATE TRIBUNAL BENCHES 'F', MUMBAI


ITA No.7242/Mum/08 Assessment Year 2005-06
ITA No.1004/Mum/08 Assessment Year : 2006-07



M/s VIP INDUSTRIES LTD Vs DCIT, CC 32, AAYAKAR BHAWAN,GR FLR, M K ROAD, MUMBAI - 20


11. Ground No. 6 relates to the disallowance of Rs.66,24,877/- made by the A.O. and confirmed by the ld. CIT(A) on account of expenses claimed to be incurred by the assessee company on account of Employees Stock Option Scheme (ESOP).


12. During the year under consideration, the assessee company had allotted shares to its employees under the Employees Stock Option Scheme (ESOP). The said ESOP was granted on 22.11.2004 in respect of 8 lacs shares of the assessee company at Rs.30/- per share as against the market price of Rs.53.80/- per share. There was thus a price difference of Rs.23.80 per share which came a total of Rs.190.40 lacs in respect of 8 lacs shares given under ESOP. Out of this total amount, the assessee company had charged ` 66.25 lacs to its P&L account for the year under consideration and the balance amount of Rs.124.15 lacs claimed in the immediately succeeding year i.e. A.Y. 2006-07. In support of the claim made on this issue, reliance was placed on behalf of the assessee company before the A.O. on relevant SEBI Rules which specified that the difference between the market price and the price at which the option is exercised by the employees has to be debited in the P&L account as expenditure. It was contended that since there was no specific provisions contained in the Income Tax Act dealing with this issue, accounting practice suggested by the SEBI is required to be applied and adopted for tax purposes also.


13. The submissions made on behalf of the assessee on this issue were not found acceptable by the A.O. for the following reasons given in the assessment order:-


“ (i) The market price of the shares of the assesee company was Rs.53.80 and the assessee company allotted the shares at ` 30.00/-. Thus, there was a price difference of Rs.23.80.


(ii) During the year under consideration the assessee company allotted the shares of Rs. 66,24,877/- to its employees and debited this amount in the profit and loss account.


(iii) The shares were the capital of the assessee company and any loss to the capital can be considered as capital loss and not the revenue expenditure.


(iv) By allotting the shares the assessee has reduced the tax liability by an amount of Rs. 66,24,877/- .


(v) The employees also did not disclose the gain as taxable in their hands.”


13. For the reasons given above, the A.O. held that the loss suffered by the assessee as a result of allotment of shares to its employees under ESOP below the market price was on capital account and the same was not allowable as deduction.


14. The matter was carried before the ld. CIT(A) and reliance was placed on behalf of the assessee on the decision of Chennai Bench of ITAT in the case of SSI vs. DCIT reported in 85 TTJ 104 wherein it was held that ESOP will not be taxable either in the hands of the employees or in the hands of the employers. A reference again was made to the relevant SEBI Rules specifying the accounting treatment to be given to the difference between the market price and the price at which shares were allotted to the employees under ESOP. It was contented that the accounting treatment so prescribed is required to be adopted even for Income Tax purpose and the difference amount debited as expenditure in the P&L account has to be allowed as deduction being expenditure incurred wholly and exclusively for the purpose of business. It was contended that ESOP was one of the ways to compensate the top management employees of the assessee company in order to stay with it and do hard work so that the company could earn more profit.


15. The submissions made on behalf of the assessee on this issue did not find favour with the ld. CIT(A) who confirmed the disallowance made by the A.O. on account of assesse's claim for deduction on account of ESOP expenditure for the following reasons given in para 6.3 and 6.4 of his impugned order:


“ I have carefully considered the submission of the appellant and perused the order of the Assessing Officer. The appellant has formulated employees stock option scheme and granted 800000 shares @ 30 per share on 22.11.2004. At the time of granting option, the market price of the share was 53.80. Thus there was a price difference 23.80 per share on the total shares allotted of 800000 which comes to ` 190.40 lakhs. Out of the said amount the assessee company has charged to the Profit & Loss account a sum of ` 66.25 lakhs in this year and the balance in A.Y. 06-07. The Assessing Officer has not allowed this expenditure being a capital expenditure on the ground that by allotting the shares the assessee has reduced tax liability by an amount of Rs.66,24,877/-. The appellant has relied on the decision of Hon'ble Chennai ITAT in the case of SSI v. DCIT 85 TTJ 1049 in which the Tribunal has held that ESOPS received by the employees was not taxable as perquisites by virtue of proviso to section 17(2)(3c) of the I.T. Act which is omitted with effect from 1.4.2008 by Finance Act 2007. Since the amount of ESOPS was not perquisited in the hands of the employees, the same was not allowable as expenditure in the hands of the company also. This fact has not properly represented before the ITAT Chennai by the Department. Moreover, the decision of ITAT is with reference to appeal against the revision order passed by CIT u/s 263 and not on the basis of regular appeal. In view of this fact, I respectfully dis-agree with the observation of the Hon'ble ITAT that ESOPS expenditure is allowable as revenue expenditure to the assessee.


The appellant's contention that whatever is correct under accounting practices is also correct for tax purpose cannot be accepted. There is no provision under the income tax Act to allow distribution of capital by way of share or difference in market price of shares as allowable expenditure u/s 37 of the IT Act. When the company received any premium on allotment of shares over and above the issue price the same is credited to the premium reserve account and it never offered as taxable income or revenue receipt. In the same logic any capital distribution over and above on account of difference of the cost of shares and its market price of the share under ESOP scheme is going to reduce the reserve and allowable as business expenditure u/s. 37(1) of the I.T. Act. The appellant has not explained that in allotting shares to the employees, it incur any revenue loss on account of the price difference. In view of the above, the Assessing Officer is justified in not allowing an amount of ` 66,24,877/- as business expenditure to the appellant. The disallowance made by the Assessing Officer is confirmed. This ground of appeal is not allowed.”


16. The ld. Counsel for the assessee submitted that ESOP 2004 framed by the assessee company was approved by its Board of Directors as well as in its Annual General Meeting held on 24.9.04. He submitted that as specified in the relevant SEBI Rules, the difference between the market value of shares and value at which they were allotted under the scheme was debited by the assessee company in its P&L account and note to this effect was also given in the notes forming part of the final accounts of the assessee company. He submitted that the option under the scheme was granted by the assesasee company to its employees on 22.11.04 and since the same was vested with them on 30.11.05, the total expenses of Rs. 190.40 lacs were written off during the year under consideration as well as in the subsequent year on pro rata basis taking the vesting period as 22.11.04 to 30.11.05. He contended that the expenditure incurred by the assessee on ESOP being the difference between the market price of shares and the price at which the said shares were allotted to the employees was taxable as perquisite in the hands of the employees as per the provisions of section 17(2)(iii)(c) upto 31.3.01 and the same has now been treated as fringe benefit w.e.f. 1.4.08 whereby the benefit given to the employees is treated as fringe benefit and the company has to pay fringe benefit tax. He contended that this treatment given by the statute to ESOP itself shows that the expenditure incurred on ESOP is of revenue nature and there was no justification for the authorities below to treat the same as capital expenditure. In support of this contention, he relied on the decision of Hon'ble Supreme Court in the case of CIT vs. Infosys Technologies Ltd. 297 ITR 16. He also relied on the decision of Chennai Bench of ITAT in the case of SSI vs. DCIT (supra) to contend that once the ESOP is granted and exercised by the employees, the liability of the company in this behalf is an ascertained liability which is admissible an expenditure in accordance with the SEBI guidelines. He contended that the assessee company had an option to pay even directly to its employees certain sum as compensation for the services rendered without taking ESOP rout and the employees could have used the said amount for acquiring the shares in the assessee company. He contended that the payment made to employees in such scenario would have been considered as allowable business expenditure. He also contended that the ESOP was framed by the assessee company to give incentive to its top management employees in order to encourage them to continue to stay with the assessee company and also to do hard work so that the company can earn more profit. He contended that the ESOP expenditure thus was incurred by the assessee wholly and exclusively for the purpose of its business and the same being revenue in nature should be allowed as deduction.


17. The ld. D.R., on the other hand, submitted that this issue is squarely covered in favour of the Revenue and against the assessee by the decision of the Delhi Bench of ITAT in the case of Ranbaxy laboratories Ltd. vs. Addl. CIT 124 TTJ (Del) 771. He submitted that in the said case involving in similar facts and circumstances, the co-ordinate Bench of this tribunal has held that the issue of shares under ESOP at less than market price only results in short receipt of share premium and not in incurring of any expenditure within the meaning of section 37. It was held that such notional loss therefore cannot be allowed as deduction.


18. In the rejoinder, the ld. Counsel for the assessee submitted that the Tribunal while deciding a similar issue against the assessee in the case of Ranbaxy Laboratories Ltd. (supra) cited by the ld. D.R. has not taken into consideration several material aspects. He contended that the Tribunal has not considered the vital aspect that ESOP was taxable as perquisite in the hands of employees upto A.Y. 2000-01 and the same has subsequently been made liable to FBT as perquisite from A.Y. 2008-09. He contended that even the important aspect of business consideration involved in allotment of shares to the permanent employees under ESOP was not considered by the Tribunal. He pointed out that even the decision of Chennai Bench of ITAT in the case of SSI (supra) was cited on behalf of the assessee before the Tribunal but the same has not been followed on the ground that the issue in the said case was involved in the context of order passed by the CIT u/s 263. He contended that even the SEBI guidelines specifying the accounting treatment for the difference in the market value of shares and the value at which the same were allotted to the employees under ESOP were not properly appreciated by the Tribunal in the case of Ranbaxy Laboratories Ltd. (supra). According to him, even the cases relied upon by the Tribunal to decide the similar issue against the assessee in the case of Ranbaxy Laboratories Ltd. (supra) involved different issue and the same were also distinguishable on facts.


19 We have heard the arguments of both sides and also perused the relevant material on record. We have also carefully perused the case laws cited by the ld. Representatives of both the sides. In our opinion, the decision of Delhi Bench of ITAT in the case of Ranbaxy Laboratories Ltd. (supra) cited by the ld. D.R. is directly applicable in the present case and the same squarely covers the issue under consideration against the assessee and in favour of the Revenue. In the said case, the decision of Chennai Bench of ITAT in the case of SSI Ltd. (supra) heavily relied upon by the learned counsel for the assessee in the present case was also cited on behalf of the assessee. The same, however, was found by the Tribunal to be distinguishable on facts for the following reasons given in para 7.16 of its order:


“ The decision of Tribunal, Chennai in the case of S.S.I. Ltd. (supra) relied upon by the learned counsel for the assessee is also distinguishable on facts. In the case the assessee claimed similar expenditure which was allowed by the Assessing Officer. The learned CIT in his revision jurisdiction under s. 263 held such expenditure as notional and contingent in nature. The Tribunal held that in view of SEBI guidelines which the assessee was required to follow, such expenditure are in the nature of ascertained liability and not contingent liability upon happening of certain events. Hence, it was held that the order was not erroneous so as to be validly revised under s. 263 of the Act. However, the Tribunal in the said case has not answered the issue whether the loss is notional in nature or not. The Tribunal has also not considered the decision of Hon'ble Supreme Court in the case of Eimco K.C.P. Ltd. (supra) and that of Delhi High Court in the case of Reinz Talbros (P) Ltd. (supra) which is a jurisdictional High Court for us. For all the reasons stated above we, therefore, hold that the expenses as claimed by the assessee are not allowable as such.”


20. In the case of Ranbaxy Laboratories Ltd. (supra), shares were allotted by the assessee company to its employees under ESOP at price less than the market price and the resultant difference was claimed as expenditure relying, inter alia, on SEBI guidelines. The Tribunal, however, confirmed the disallowance made by the authorities below on account of the said expenditure after examining all the relevant aspects and after giving elaborate reasons as can be seen from the relevant portion of its order which is extracted from the held portion:


“ The assessee was to issue shares of face value of Rs.10 /- by receiving a sum of Rs.595/- per share from its employees. Thus the assessee was entitled to receive Rs.585/- towards premium on issue of shares. The market price at Rs. 738.95 per share would have resulted in realization of higher share premium. The assessee has not accounted for the difference between Rs.738.95 and Rs.10/- as its income during the year. Thus there is no loss of income held to be taxable. What is loss to the assessee is by way of short receipt of share premium amount and not by way of any expenditure or incurring any liability for such expenditure. By issuing shares at below market price, the same does not result into incurring any expenditure. By issuing shares at below market price, the same does not result into incurring any expenditure rather it results into short receipt of share premium which the assessee was otherwise entitled to. Though the guidelines of SEBI requires the assessee to account for short receipt of share premium as employees compensation expense, for claiming such expense as allowable, the assessee has to qualify that expenses are incurred and the same are wholly and exclusively for the purpose of business. By issuing shares at lesser that market price, the assessee cannot be said to have incurred any expenditure rather it amounts to short receipt of share premium. The receipt of share premium is not taxable and hence any short receipt of such premium will only be a notional loss and not actual loss for which no liability is incurred. SEBI guidelines are relevant for the purpose of accounting but are not conclusive for the purpose of allowing the same as expenditure. Therefore, such notional losses are not allowable under the Act. The assessee is not to defray or pay any liability under the claim. Therefore, such notional loss cannot be held to be allowable under the scheme of the Act.


What is allowable under s. 37 is any expenditure not being expenditure of the nature described in ss. 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee. Such expenditure should be wholly and exclusively for the purpose of business. Thus, the prerequisite is that the assessee should have incurred an expenditure. ‘Expenditure' is what is ‘paid out or away' and is something which has gone irretrievably. A benefit or income foregone cannot be considered as in expenditure. Since the assessee had not incurred any expenditure but has merely received lesser amount of share premium, the same does not amount to expenditure within the meaning os s. 37. Therefore, the claim of assessee is not allowable. – Eimco K.C.P. Ltd. Vs. CIT (2000) 159 CTR (SC) 137 : (2000) 242 ITR 659 (SC) and CIT vs. Reinz Talbros (P) Ltd. (2001) 252 ITR 637 (Del) followed.


It is now settled law that entry or absence thereof in books of account is not conclusive either for treating the amount as income or allowability or otherwise of the expenditure. Thus, only on the basis of entry in the books of account the claim of expenditure is not allowable. The entry is made on the basis of recommendation of SEBI which is said to be mandatory for a listed company. The same may be relevant for the purpose of accounting but for allowability of expenditure under IT Act the direction of SEBI does not determine the alowability of expenditure. For the purpose of allowability of expenditure under IT Act the same has to be in consonance with the scheme of the Act. In the instant case the entry made in books of accounts as per direction of SEBI cannot be held to be conclusive for the purpose of allowing expenditure under s. 37. Unless the provision of s. 37 is complied with, the deduction is not permissible.- New India industries Ltd. Vs. asstt. CIT (2007) 112 TTJ (Del)(SB) 917 : (2008) 1 DTR (Del) (SB) (Trib) 247 and TVS Finance & services Ltd. Vs. jt. CIT (2009) 23 DTR (Mad) 33”


21. At the time of hearing before us, the ld. Counsel for the assessee has made an attempt to point out that certain aspects have not been considered by the tribunal while rendering its decision in the case of Ranbaxy Laboratories Ltd. (supra) on the similar issue. In our opinion, the said aspects pointed out by the ld. Counsel for the assessee, however, are not material enough to have any direct bearing on the well considered and well reasoned decision rendered by the Tribunal. As held by the Tribunal, any short receipt of share premium would only be a notional loss to the assessee and not an actual loss. As further held by the Tribunal, any benefit or income foregone by the assessee cannot be considered as an expenditure and since the assessee had not incurred any expenditure but had merely received lesser amount of premium, the same could not amount to expenditure within the meaning of section 37. In our opinion, the issue involved in the present case as well as all the material facts relevant thereto are thus similar to the case of Ranbaxy laboratories Ltd. (supra) and the decision rendered in the said case by the co-ordinate Bench of this Tribunal is squarely applicable in the present case. Even the decision of Hon'ble Supreme Court in the case of CIT vs. Infosys Technologies Ltd. (supra) cited by the ld. Counsel for the assessee was rendered in altogether different context and the same cannot be of any help to the assessee on the issue involved in the present case. Respectfully following the decision of the co-ordinate Bench of this Tribunal in the case of Ranbaxy Laboratories Ltd. (supra), we uphold the impugned order of the ld. CIT(A) confirming the disallowance made by the A.O. on account of ESOP expenses claimed by the assessee and dismiss ground No. 6 of the assessee's appeal.

Cenvat Credit on outdoor catering admissible to a manufacturer--CCE, Nagpur vs. Ultratech Cement Ltd

In a recent ruling by the Bombay High Court in the case of CCE, Nagpur vs. Ultratech Cement Ltd. (assessee), it has been held that the assessee is entitled to avail Cenvat credit on outdoor & catering services provided in the factory for employees. The judgment of the Honorable High Court has also held that the definition of input service is wider than that of 5input.


The High Courts ruling is decisive in interpreting the meaning of the expressions such asand &activities in relation to business& used in the definition of input service under CENVAT Rules.

The High Court has negated the argument of the revenue to apply the judgment of Maruti Suzuki in its entirety and instead followed only the ratio of Martuti Suzuki.

CENVAT Credit – Service Tax - input service - extends to all services used in relation to the business of manufacturing the final product – 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



IN THE HIGH COURT OF BOMBAY


AT NAGPUR BENCH


Central Excise Appeal No.7 of 2010


THE COMMISSIONER OF CENTRAL EXCISE, NAGPUR


Vs


1) ULTRATECH CEMENT LTD


AT POST AWARPUR, TQ AWARPUR


DISTT CHANDRAPUR (M S)


2) THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL


WEST ZONAL BENCH, MUMBAI


Case Law Referred:


1. Commissioner of Central Excise vs. GTC Industries Ltd (para 7)


2. M/s Maruti Suzuki Ltd. vs. CCE. Delhi - (para 9)


3. Doypack Systems (P) Ltd. vs. Union of India (para 13)


4. All India Federation of Tax Practitioners vs. Union of India - (para 15)


5. Coca Cola India Pvt. Ltd. vs. CCE - (para 15).


JUDGEMENT


Per: J P Devadhar:


1. The substantial question of law raised by the Revenue in this appeal reads thus:


"Whether the Hon'ble CESTAT was correct in holding that the respondent is entitled to avail the CENVAT Credit on outdoor 'catering services' provided in the factory for employees of the factory as a input service credit despite the fact that outdoor catering service does not fall under the ambit of the definition of "Input service" specified under Rule 2(1) of Cenvat Credit Rules, 2004, as the catering/canteen services are neither used in or in relation to the manufacture or clearance of final product nor can it be said, to be an activity relating to business."


2. The appeal is admitted on the above substantial question of law and by consent, the appeal is taken up for final hearing.


3. The facts relevant for the present appeal are that the Respondent-assessee is engaged in the manufacture of cement which is excisable under Chapter 25 of the Central Excise Tariff Act, 1985.


4. On scrutiny of the CENVAT register, it was noticed by the Excise Authorities that, during the period 2004-08, the assessee had availed credit of service tax paid on outdoor catering services under the provisions of Cenvat Credit Rules, 2004 (In short, "the 2004 Rules") & utilized the same in paying excise duty, that is, central value added tax on clearance of cement manufactured by the assessee.


5. The Assistant Commissioner, Central Excise, Chandrapur was of the opinion that outdoor catering services was not a "Input service" under Rule 2 (1) of the 2004 Rules and therefore, the assessee was not entitled to take credit of service tax paid on outdoor catering services. On issuance of show-cause notices, the assessee contended that, under the Factories Act, 1948, it was mandatory for the assessee to provide canteen facilities to the employees working in the plant and the administrative Offices of the assessee/Company. It was contended that, in order to comply with the aforesaid statutory requirement, the assessee had engaged the services of M/s. Shrikrishna Catering Services. Since the cost of food including service tax paid thereon by the Caterer was reimbursed by the assessee, it was contended that the assessee was entitled to take credit of the said service tax and utilize the same in paying the excise duty i.e. Central Value Added Tax (CENVAT) on the cement manufactured by the assessee.


6. Rejecting the contention of the assessee, the Assessing Officer held that the service tax paid by the outdoor caterer would not qualify as "Input Service" under Rule 2(1) of the 2004 Rules. Accordingly, the Assessing Officer confirmed dis-allowance of the CENVAT credit as well as the credit of education cess/Secondary and Higher Secondary Education Cess taken by the assessee on outdoor catering services and demanded the same with interest and penalty under Rules 14 and 15 of the 2004 Rules r/w Section 11(A)(B) of the Central Excise Act, 1944 and Section 75 of the Finance Act, 1994.


7. Being aggrieved by the orders passed by the Assessing Officer, the assessee filed appeals before the Commissioner of Central Excise (A) who, by a common order dt. 24.2.2009, allowed the said appeals by following the larger Bench decision of CESTAT in the case of Commissioner of Central Excise vs. GTC Industries Ltd reported in 2008 (12) STR 468 (T-LB. The larger Bench in the case of GTC Industries Ltd. (supra) had held that the cost of food borne by the factory would form part of the cost of production and hence, credit of duty paid thereon was allowable.


8. Being aggrieved by the afore-said order passed by the Commissioner of Central Excise (A), the Revenue filed appeals before the CESTAT. By the impugned order dt.8.9.2009 the CESTAT upheld the order of the Commissioner of Central Excise (A) by following the larger Bench decision of the Tribunal in the case of GTC Industries Ltd. (supra). Challenging the said order of the Tribunal, the Revenue has filed the present appeal. We are informed that the appeal filed by the Revenue against the larger Bench decision of the Tribunal in the case of GTC Industries Ltd. (supra) is pending before the Principal Bench of this Court at Mumbai.


9. Mr. S. K. Mishra, learned Assistant Solicitor General appearing on behalf of the Revenue submitted, firstly, that the Tribunal was wrong in placing reliance on the larger Bench decision of the Tribunal in the case of GTC Industries Ltd. (supra) because, in that case, duty on the final product was payable on the assessable value; whereas in the present case, duty on the final product is payable on tonnage basis. Therefore, the larger Bench decision of the Tribunal in GTC Industries Ltd. (supra) being distinguishable on facts, the Tribunal ought not to have applied the ratio of the said decision to the facts of the present case. Secondly, the credit under Rule 2(1) of the 2004 Rules is available only if the taxable service is used in or in relation to the manufacture of the final products. The outdoor catering service is not a service used in or in relation to the manufacture of cement and therefore, the assessee could not avail credit of service tax paid on outdoor catering services. Thirdly, recent decision of the Apex Court in the case of M/s Maruti Suzuki Ltd. vs. CCE. Delhi reported in 2009 (240) ELT 641 (SC) squarely applies to the facts of the present case and in the light of the above decision of the Apex Court, the question raised in the appeal be answered in favour of the revenue.


10. On the other hand, Mr. Shridharan, learned Counsel appearing on behalf of the assessee submitted that the decision of the Tribunal is in consonance with the Scheme of the Value Added Tax and if the contention of the Revenue is accepted, it would defeat the very object of the CENVAT Scheme. Relying on the Finance Minister's speech while introducing Union Budget 2004-05, the Draft Cenvat Credit Rules, 2004 and the Press note dt. 12.8.2004, Counsel for the assessee submitted that the CENVAT Scheme introduced under the 2004 Rules envisages integration of tax on goods and services used in relation to the manufacturing business and therefore, credit of service tax paid on any taxable service that forms part of the assessable value of the final product has to be allowed under the 2004 Rules. He submitted that the expression "Input Service" as per Rule 2 (1) of the 2004 Rules cannot be restricted to the services used in or in relation to the manufacture of the final products, but is liable to be extended to all services that are used in relation to the business of the manufacturer. In the present case, the assessee, carrying on the business of manufacturing cement, is mandatorily required under the Factories Act, 1948, to supply food to the employees. He submitted that, to comply with the above statutory provisions, outdoor catering services were engaged. Such an activity mandatorily required to be complied with would be an activity relating to the business of the assessee covered under the definition 'Input service' under Rule 2 (1) of the 2004 Rules.


11. Counsel for the assessee further submitted that the inclusive part of the definition of "Input service" under Rule 2 (1) of the 2004 Rules makes it clear that credit of service tax paid on services which are used in relation to the business such as accounting, auditing, etc. would be allowable even if the said services are not per se used in or in relation to manufacture of the final product. He submitted that the very object of the Cenvat Scheme is to allow credit of taxes paid on inputs used in or in relation to the manufacture of the final product and service tax paid on services used in relation to the manufacture of final products as well as the services used in relation to the business of the manufacture. Counsel for the assessee further submitted that the expression "such as" in Rule 2 (1) of the 2004 Rules is merely illustrative and not exhaustive. Therefore, credit of service tax paid on any service used by the assessee in relation to the business of manufacturing cement has to be allowed. In support of the above contention, Counsel for the assessee referred to the meaning of the word "such as" in Concise Oxford Dictionary and Chambers Dictionary. He also relied upon the decisions of the Apex Court in the case of Good Year Ltd. vs. Collector of Customs, 1997 (95) ELT 450 and Royal Hatcheries (P) Ltd. vs. State of Andhra Pradesh reported in 1994 SUPP (1) 429.


12. Counsel for the assessee further submitted that the business activity is an integrated/continuous activity and is not confined/ restricted to mere manufacturing activity. Therefore, business activity covers all activities that are related to carrying on the business. Therefore, the term "in relation to business" in Rule 2(1) of the 2004 Rules cannot be given a restricted meaning so as to cover only those activities which churn out the final product from the raw materials. In support of the above contention, he relied upon the decisions of the Apex Court in the case of State of Karnataka vs. Shreyas Paper Pvt. Ltd. reported in 2006 (1) SCC 615, Mazgaon Dock Ltd. vs. CIT reported in AIR 1958 SC 861.


13. Counsel for the assessee further submitted that the expression "activity relating to business" in Rule 2(1) of the 2004 Rules clearly denotes that the legislature intended to give wider meaning and not narrower meaning. In this connection, he relied upon the decision of the Apex Court in the case of Doypack Systems (P) Ltd. vs. Union of India reported in 1988 (36) ELT 201 (SC).


14. Relying on the decision of the Apex Court in the case of CIT vs. Chandulal Keshavlal and Co. reported in 1960 (38) ITR 601 (SC) and Eastern Investments Ltd. vs. CIT reported in 1951 (20) ITR-I (SC), Counsel for the assessee submitted that the expenses incurred as a result of commercial expediency are covered by the term "activities relating to business". Relying on the decision of the House of Lords in the case of Customs and Excise Commissioner vs. Redrow Group PLC reported in 1999 SIMON Tax Cases 161, Counsel for the assessee submitted that where the services used have direct and immediate link with the business of the assessee, then credit of service tax paid on those services would be allowable.


15. Counsel for the assessee further submitted that the Service Tax is a Value Added Tax which, in turn, is a destination based consumption tax i.e. a tax on commercial activities and it is not a charge on the business, but a charge on the consumer. In support of this contention, he relied on the CBEC Circular No.56, dt. 25.4.2003, the Circular No.80, dt.17.9.2004, the decision of the Apex Court in the case of All India Federation of Tax Practitioners vs. Union of India reported in 2007 (7) SCC 527 and the Division Bench Judgment of this Court in the case of Coca Cola India Pvt. Ltd. vs. CCE reported in 2009 (242) ELT 268 (Bom).


16. We have carefully considered the rival submissions. Before dealing with the rival submissions, it would be appropriate to set out brief history regarding the levy of excise duty on goods manufactured in India.


17. Central Excise & Salt Act, 1944 ("1944 Act" for short) was enacted with a view to impose excise duty on goods manufactured in India. As per the 1944 Act, manufactured goods on which excise duty has been paid, if used as inputs in the manufacture of the final products, then excise duty was again leviable on the manufacture of final products. This resulted in levying duty on duty. To avoid this cascading effect of duty, proforma credit scheme was introduced under the Central Excise Law. Under the proforma credit scheme, excise duty and counter vailing duty paid on the inputs were allowed as proforma credit while paying excise duty on the final products, provided both the inputs as well as the final products were liable to duty under the same tariff item. Originally excise duty was payable at the rate prescribed under the Schedule to the 1944 Act. With the introduction of the Central Excise Tariff Act, 1985 ("1985 Act" for short), excise duty became payable at the rate prescribed under the schedule to the 1985 Act.


18. Since the benefit under the proforma credit scheme was limited to a very small area, the Government introduced the Modified Value Added Tax Scheme (MODVAT scheme) with effect from 01-3-1986. The basic object of the MODVAT scheme was to shift the burden of excise duty from the inputs to the final products so that the duty paid on inputs as well as the final products is ultimately passed on to the consumer. The MODVAT scheme was initially introduced by inserting Rule 57 A to 57 l in the Central Excise Rules, 1944 in respect of goods falling under specified chapters of the Central Excise Tariff Act, 1985. Later on the MODVAT scheme was extended to the remaining chapters of the Central Excise Tariff. Subsequently MODVAT Scheme was extended to cover capital goods by inserting Rule 57 Q to 57 U to the Central Excise Rules, 1944. As per the MODVAT Scheme, the manufacturers were entitled to take credit of duty paid on inputs used in the manufacture of the final products and utilize the said credit in paying the excise duty on the final products.


19. With the introduction of service tax in the year 1994-95, persons rendering specified services became liable to pay service tax on services rendered. 'Service Tax', as held by the Apex Court in the case of All India Federation of Tax Practitioners (supra) is a value added tax, which in turn is a general tax, which applies to all commercial activities involving production of goods and provision of services. Thus, levy of excise duty was on manufacture of goods whereas, levy of service tax was on rendering specified services.


20. Since the excise duty as well as the service tax are ultimately borne by the consumer, the Government decided to integrate the tax on goods and services under the "Value Added Tax System" ('VAT System' for short). Under the VAT System, tax is levied on the value added to any goods manufactured or services rendered each time when there is change of hand. In implementation of the VAT System, Section 3 of the 1944 Act was amended thereby renaming the levy of excise duty as "Central Value Added Tax" ('CENVAT' for short) with effect from 12-5-2000. Thereafter, the Government introduced the CENVAT Credit Rules, 2001 under which Modvat on inputs/capital goods and service tax were sought to be amalgamated into one integrated scheme. These Rules were replaced by CENVAT Credit Rules, 2002. Simultaneously, Service Tax Credit Rules, 2002 were also framed by the Government under which credit of service tax paid on services used in the output services was allowed to be taken.


21. With a view to totally integrate the tax on goods and services the Government introduced CENVAT Credit Rules, 2004 ('2004 Rules' for short) by superseding the CENVAT Credit Rules, 2002 and Service Tax Credit Rules, 2002. The object of 2004 Rules is to extend the credit of service tax and excise duty across goods and services.


22. As per Rule 3 of 2004 Rules a manufacturer or producer of final products is entitled to take credit of duty of excise, additional duty of excise, national calamity contingent duty, education cess, secondary education cess etc. paid on any input or capital goods received in the factory of manufacturer of final products on or after 10-9-2004 as well as credit of service tax paid on any input service received by the manufacturer of the final product or by the provider of output service on or after 10-9-2004. The said credit called "CENVAT Credit" can be utilized in paying excise duty (CENVAT) on the final products/service tax on any output service.


23. Rule 2 (k) and Rule 2(1) of the 2004 Rules define the expression "input" and "input service" as follows :-


"2(k) "input" means -


(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production;


(ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service;


2(1) "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 upto 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 upto the place of removal:"


24. In the present case, the dispute is, whether the assessee is entitled to take credit of service tax reimbursed by the assessee to the outdoor caterer (whose services were engaged for providing canteen facilities to the employees of the assessee) and utilize the said credit in discharging the excise duty/CENVAT payable on the cement manufactured by the assessee?


25. In the present case, the CESTAT following the Larger Bench decision of the Tribunal in the case of GTC Industries Ltd., (Supra) held that the assessee is entitled to the credit of service tax paid on the outdoor catering services. According to the Revenue, the Tribunal was wrong in relying upon Larger Bench decision of the CESTAT in the case of GTC Industries Ltd. (Supra) because in that case the CENVAT on the final product was payable on the assessable value, whereas in the present case the CENVAT on cement is payable on tonnage basis. We see no merit in the above contention because, if in law the assessee is entitled to take credit of service tax paid on outdoor catering services then the said credit cannot be denied merely because the duty on cement is levied on tonnage basis. Therefore, the fact that the CENVAT on cement is payable on tonnage basis cannot be a ground to deny the credit of service tax if in law the assessee is entitled to the credit of service tax paid on outdoor catering service.


26. The question, therefore, to be considered is, whether the service of an outdoor caterer used by the assessee is an 'input service' used in the manufacture of cement?


27. The definition of "input service" as per Rule 2(1) 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(1) 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. They become relevant only when the above crucial requirement of being "used in or in relation to the manufacture" stands 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(1) 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(1) 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. Accordingly, we hold that all services used in relation to the business of manufacturing the final product are covered under the definition of 'input service' and in the present case, the outdoor catering services being integrally connected with the business of the manufacture of cement, credit of service tax paid out on catering services has been rightly allowed by the Tribunal.


36. The argument of the Revenue that the expression "such as" in Rule 2(1) of 2004 Rules is restricted to the categories specified therein, runs counter to the C.B.E.C. Circular No.97, dated 23rd August, 2007. In that Circular the C.B.E.C. (vide para 8.3) has held that the credit of service tax paid in respect of mobile phone service is admissible provided the mobile phone is used for providing output service or used in or in relation to manufacture of finished goods. Mobile phone service is neither used in the manufacture of final product nor it is specifically included in the definition of input service. Even then, the C.B.E.C. has construed the definition of input service widely so as to cover not only the services specifically enumerated in the definition of 'input service' but also cover all services which are used in relation to the business of manufacturing the final products. Therefore, the argument of the revenue which runs counter to stand taken by the C.B.E.C. cannot be accepted.


37. In the case of Coca Cola India Pvt. Ltd. (Supra) a Division Bench of this Court has considered scope of the expression "input service' as defined in rule 2(1) of 2004 Rules. In that case, the question for consideration was, whether a manufacturer of non alcoholic beverage bases (concentrates) is eligible to avail credit of service tax paid on advertisement, sales promotion, market research etc. The argument of the revenue in that case was that the advertisements are not relatable to the concentrate manufactured by Coco Cola India Pvt. Ltd. (supra) and hence, the credit in respect thereof cannot be allowed. Considering the Finance Minister's Budget Speech for 2004-05, press note issued by the Ministry of finance along with the Draft 2004 Rules and various decisions of the Apex Court, this Court held that the expression 'activities in relation to business' in the inclusive part of the definition of 'input service' further widens the scope of input service so as to cover all services used in the business of manufacturing the final products and that the said definition is not restricted to the services enumerated in the definition of input service itself. The Court rejected the contention of the revenue that a service to qualify as an input service must be used in or in relation to the manufacture of the final products and held that any service used in relation to the business of manufacturing the final product would be an eligible input service.


38. We concur with the above decision of this Court in the case of Coco Cola India Pvt. 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 Pvt. 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 (see last para). 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.


41. The appeal is disposed of in the above terms with no order as to costs.