Court’s decision
The CESTAT (Customs, Excise and Service Tax Appellate Tribunal, Bangalore), allowed the appeal and set aside the order passed by the Commissioner of Central Tax and Central Excise, Kochi, which had denied CENVAT credit and confirmed demand, interest, and penalty against the assessee. The Tribunal held that the impugned services had a direct and inextricable nexus with manufacturing activity and therefore qualified as eligible input services under Rule 2(l) of the CENVAT Credit Rules, 2004.
The Tribunal concluded that the extended period of limitation was wrongly invoked and that penalties were unsustainable. Consequently, the entire demand was quashed and the appeal was allowed with consequential relief.
Facts
The Appellant is engaged in the manufacture and packing of cement and commenced operations at its Cochin unit in October 2015. During a multi-location audit, the Department alleged short payment of duty on MRP-based clearances and wrongful availment of CENVAT credit on several input services.
The major portion of the disputed credit related to service tax paid on upfront lease charges for land taken from the Cochin Port Trust for setting up the cement packing unit. Additional credits were questioned on services availed prior to commencement of production, credits distributed through an Input Service Distributor, and credits on event management and repainting services. A show cause notice culminated in confirmation of demand, interest, and penalty, which was challenged before the Tribunal.
Issues
The primary issue before the Tribunal was whether CENVAT credit of service tax paid on lease premium for land taken to set up a factory was admissible after the 01.04.2011 amendment to the definition of “input service”.
Connected issues included eligibility of credit on services availed prior to commencement of commercial production, credit distributed through the Input Service Distributor mechanism, credit on event management and repainting services, and whether the extended period of limitation could be invoked in the facts of the case.
Petitioner’s Arguments
The Appellant contended that even after the 2011 amendment, the “means” portion of the definition of input service continued to cover services used directly or indirectly in or in relation to manufacture. It was argued that without taking land on lease and setting up the factory, manufacturing activity itself would be impossible.
It was further submitted that services availed prior to commencement of production, including procurement of land and machinery and setting up of the plant, had a direct nexus with manufacture. The Appellant also argued that credits distributed by the Input Service Distributor could not be questioned at the recipient unit level and that event management and repainting services were integrally connected with business operations.
Respondent’s Arguments
The Department argued that services used for setting up of a factory were specifically excluded from the definition of input service with effect from 01.04.2011 and that lease premium for land could not be treated as an eligible input service.
It was further contended that services availed before commencement of production could not be considered as used in or in relation to manufacture. The Department supported the impugned order and justified invocation of the extended period of limitation on the ground of wrongful availment and utilisation of credit.
Analysis of the law
The Tribunal examined Rule 2(l) of the CENVAT Credit Rules, 2004, and reiterated that the scope of the expression “in or in relation to manufacture” is wide. It emphasised that although the phrase “setting up” was removed from the inclusive part of the definition in 2011, the main part of the definition continued to cover services directly or indirectly connected with manufacture.
The Tribunal also analysed the legal framework governing Input Service Distributor credits and held that eligibility of such credit must be examined at the ISD level, not at the recipient manufacturing unit.
Precedent Analysis
The Tribunal relied upon a consistent line of decisions holding that services used for setting up a factory qualify as input services even post-2011 amendment. It noted that similar views had been affirmed by High Courts and that Special Leave Petitions against such decisions had been dismissed by the Supreme Court.
The Tribunal also followed precedent holding that services availed prior to commencement of production are eligible for credit if they have nexus with future manufacturing activity, and that event management services used for business promotion and meetings are admissible input services.
Court’s Reasoning
The Tribunal reasoned that leasing of land for setting up a cement packing unit was an indispensable pre-condition for manufacturing activity and therefore had a direct nexus with manufacture. It held that denial of credit merely because the services were used at the stage of setting up the factory was unsustainable.
The Tribunal further held that credits distributed through the Input Service Distributor mechanism could not be recovered from the recipient unit, and that event management and repainting services were not hit by the exclusion clause. It also found that prior audits had not raised similar objections, rendering invocation of extended limitation unjustified.
Conclusion
The CESTAT, Bangalore, set aside the impugned order in its entirety and allowed the appeal. It held that all categories of disputed services qualified as eligible input services and that the demand, interest, and penalty were unsustainable in law.
The decision reinforces a liberal and purposive interpretation of the CENVAT Credit Rules and protects manufacturers from denial of credit on technical and narrow grounds.
Implications
This judgment has significant implications for legacy CENVAT disputes, particularly those involving lease of land, pre-production services, and Input Service Distributor credits. It provides clarity that manufacturing activity cannot be artificially compartmentalised to deny credit on essential preparatory services.
The ruling also strengthens the principle that extended limitation cannot be invoked where the Department had prior knowledge through audits, offering substantial relief to assessees in similar disputes.