Deletion Of 'Setting Up' Does Not Bar CENVAT Credit On Plant-Setting Services: CESTAT Ahmedabad

On 19 August, the Ahmedabad Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that CENVAT credit cannot be denied merely because the expression “setting up” was omitted from the definition of “input service” under Rule 2(l) of the CENVAT Credit Rules, 2004, with effect from 1 April 2011.

A Bench comprising Judicial Member Dr. Ajaya Krishna Vishvesha and Technical Member Satendra Vikram Singh partially allowed appeals filed by ATC Tires Pvt. Ltd. against denial of CENVAT credit of Rs. 78.18 lakh, along with interest and penalties, and remanded the matter for a service-wise examination of the disputed services. The Tribunal held:

“Therefore, we are of the view that if input service(s) availed by the appellant are not falling under exclusion clause in the definition, omission of phrase 'setting up' will not impact allowability of Cenvat credit.”

The dispute arose from an audit of ATC Tires' records for the periods July 2013 to December 2015 and March 2016 to June 2017. The Department disputed CENVAT credit on services including engineering and procurement assistance, erection, commissioning and installation, fabrication, laying foundations, professional and management consultancy, Vastu and architectural services that ATC Tires used while setting up its manufacturing plant at Dahej.

It contended that ATC Tires could not claim credit on such services after the 2011 amendment to Rule 2(l), which omitted the expression “setting up” from the inclusive portion of the definition of “input service”.

The Department issued two show cause notices involving CENVAT credit of Rs. 57.80 lakh and Rs. 20.36 lakh respectively. The authorities confirmed the demands with interest and penalties. The Commissioner (Appeals) subsequently reduced the penalties.

ATC Tires contended that it used the disputed services not merely to set up the factory but also in connection with its manufacturing operations and expansion of production capacity. It pointed out that commercial production at the Dahej unit commenced on 12 March 2015. It also relied on judicial precedents holding that deletion of the words “setting up” from the inclusive portion of Rule 2(l) did not automatically exclude services that otherwise fell within the main part of the definition.

The Tribunal accepted this contention. It noted that the definition of “input service” continued to contain the main “means” clause, which covered services used directly or indirectly in, or in relation to, the manufacture of final products. It held that the deletion of “setting up” from the inclusive portion could not, by itself, disentitle ATC Tires from CENVAT credit where the services otherwise fell within the definition and did not fall under the exclusion clauses.

The Bench also relied on the CESTAT Hyderabad decision in Pepsico India Holdings Pvt. Ltd., which allowed CENVAT credit on services used in setting up a manufacturing plant despite the 2011 amendment. It also considered the Karnataka High Court's decision in Shell India Pvt. Ltd., which upheld CENVAT credit on disputed services after the deletion of “setting up”. The Tribunal noted that the Supreme Court ultimately dismissed the Revenue's challenge to that decision.

However, the Tribunal found that the lower authority had recorded that ATC Tires had not produced sufficient evidence to show that the disputed services did not relate to construction of civil structures, laying foundations or making structures supporting capital goods. The exclusion clauses under Rule 2(l) cover such services.

It therefore directed the Adjudicating Authority to examine each disputed service separately on the basis of the documentary evidence produced by ATC Tires. The Bench observed:

“We therefore remand the matter to the Adjudicating Authority for a limited purpose to re-examine each service availed by the appellant with reference to documentary evidence adduced by the appellant whether or not the said service is covered by exclusion clause in the definition of 'input service' under Rule 2(l).”

Accordingly, the CESTAT partially allowed both appeals by way of remand and left the eligibility of the Rs. 78.18 lakh CENVAT credit claim to the Adjudicating Authority for determination on a service-wise basis.

Counsel for the Appellant: Jigar Shah, Advocate

Counsel for the Revenue: A.R. Kanani, Superintendent (AR)