Commissioner Of Central Excise & St vs Axles India Ltd

[Arising out of Order-in-Appeal No.12/2009 dt. 20.4.2009 passed by the Commissioner (Appeals), Central Excise & Service Tax, LTU, Chennai]

For approval and signature:

Honble Shri R. PERIASAMI, Technical Member

1. Whether Press Reporters may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? :

2. Whether it should be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? :

3. Whether the Member wishes to see the fair copy of the Order? :

4. Whether Order is to be circulated to the Departmental Authorities? :

Commissioner of Central Excise & ST LTU Chennai Appellant

Versus

Axles India Ltd. Respondent

Appearance:

Shri P. Arul, Superintendent (AR) For the Appellant Shri S.Murugappan, Advocate For the Respondent

CORAM:

Honble Shri R. Periasami, Technical Member

Date of hearing : 9-12-2014 Date of Pronouncement :9-1-2015

FINAL ORDER No.40018/2015

Revenue filed the appeal against Order-in-Appeal No.12/2009 dt. 20.4.2009 passed by Commissioner (Appeals).

2. The brief facts of the case are that respondents, a 100% EOU, are manufacturers of Rear Axles Housing (Motor Vehicle parts) falling under CH 8708 of CETA'85 and exported their finished goods to various countries and availed cenvat credit of duty paid on inputs as well as service tax paid on input services used by them in relation to manufacture of final products. In respect of goods exported to USA, prior to delivery, the goods are subjected to quality control and cleaning operations at the warehouse of buyer. For this purpose, the respondents engaged the services of M/s. Product Action International, USA for carrying out the quality control and cleaning operations such as deburring and removal of rust developed during transit. As a recipient of service they paid service tax under Business Auxiliary Service under reverse charge and availed credit of the service tax paid. A show cause notice dt. 3.3.2008 was issued to the respondents demanding reversal of service tax credit of Rs.10,28,524/- on the grounds that the said activities have no nexus to the manufacture of final products and the service activity was rendered outside India, outside the place of removal of excisable goods. The adjudicating authority in his order dt.13.8.2008 confirmed the demand and ordered for recovery of the credit along with interest and dropped penal proceedings. Aggrieved by the order, the respondents filed appeal and Commissioner (Appeals) vide impugned order has set aside the adjudication order and allowed their appeal. Revenue filed the present appeal.

3. The Ld. AR on behalf of the Revenue reiterated the grounds of appeal. He submits that though the respondents paid services tax under reverse charge mechanism, they are not eligible to avail credit. As per the definition of "input services" the activity carried out by the overseas company do not qualify as input services and has no nexus to the manufacture of final product. The service is rendered outside the place of removal. He submits that clause (ii) of definition of "input service' of Rule 2(l) of CCR has four categories (i) it should be related to setting up, modernization, renovation or repairs of a factory, premises of provider of output service (ii) the input service should have been directly used in or in relation to the manufacture of final product and clearance of final product upto the place of removal (iii) activities relating to business, such as advertisements or sales promotion, market research, such as accounting, auditing, financing, recruitment, and quality control etc. and (iv) inward transportation of inputs or capital goods and outward transportation upto the place of removal. All the above four categories should be directly relating to manufacture of goods. He further submits that the activity carried out at the buyer's premises at USA is only cleaning the rust and it is not to rectify any manufacturing defect. These activities are not covered as "input service" in relation to manufacture or clearance of goods. The said service is to be considered as post-manufacturing and post-clearance activity after the sale and do not fall under the inclusive definition of "input services" defined under CCR. He relied on the following case laws :-

(1) CCE Ahmedabad Vs Cadila Healthcare Ltd.

2013 (30) STR 3 (Guj.) (2) CCE Nagpur Vs Manikgarh Cement 2010 (20) STR 456 (Bom.) (3) CCE Vs Gujarat Heavy Chemicals Ltd.

2011 (22) STR 610 (Guj.) (4) TELCO Construction Equipment Co. Ltd. Vs CCE Belgaum - 2013 (32) STR 482 (Tr.-Bang.)

(5) Maruti Suzuki Ltd. Vs CCE Delhi-III 2013 (240) ELT 641 (SC) The Commissioner (Appeals) has not considered these facts and pleaded that the impugned order is to be set aside.

4. On the other hand, Ld. Advocate for the respondents reiterated the findings of the impugned order. He submits that the entire dispute relates to interpretation of inclusive definition of "input service". He submits that payment of service tax under reverse charge is not disputed by the department. He submits that the lower appellate authority has discussed the issue in detail and set aside the adjudication order. It is rightly covered within the inclusive definition of "input service'. Department in their grounds of appeal, artificially tried to categorize and interpreted the inclusive definition into four categories whereas the whole definition is to be read together. He submits that none of the activities mentioned in the inclusive definition has any direct relation to the manufacture and clearance of excisable goods. The words used in the definition "such as" confirms that it is only an illustrative example and not restrictive. The activities of removing dust, deburring before delivery is directly related to business. Without this activity, they cannot carry out business. The definition of "input service" provided in Rule 2(l) of CCR 2004 is not integrally connected to manufacture of final product. The activities of post-manufacturing, sales promotion accounting, auditing, financing, computer networking, credit rating, share registry all related to their business activity and they are rightly eligible for the credit. The lower appellate authority has rightly set aside the adjudication order and allowed their appeal. The Ld. Advocate relied on the following citation :-

(1) CCE Vs Nilkamal Crates & Bins.

2010 (19)STR 431 (Tri.-Ahmd.)

5. Ld. AR countered the learned advocate's submission that Tribunal's decision relied by Single Member Bench of Ahmedabad is not applicable in view of Gujarat High Court decision in the case of Cadila Healthcare Ltd. (supra). He also submits that since the respondents are not aggrieved by the order their cross objections is not maintainable. To this learned advocate submits same may be treated as written defence to the Revenue's appeal. Ld. Advocate countered that Cadila Healthcare case dealt by Gujarat High Court is not applicable to their case as Cadila Health Care case relates to commission paid and not related to sales promotion.

6. Ld. Advocate undertook to file copy of agreement between the buyer and the service provider and additional submissions.

7. I have carefully considered the submissions and the grounds of appeal and the defence submissions by the respondent and carefully gone through the records. The short issue in the Revenue appeal relates to whether service tax paid by the respondent as recipient of service under Section 66A of Finance Act is eligible to be taken as cenvat credit under CCR 2004 during the period of dispute viz. March 2007 to July 2007. I find that the adjudicating authority has demanded reversal service tax credit availed by them on the service tax paid under reverse charge as a recipient of service. The lower appellate authority has set aside the order and allowed the respondent's appeal. I find that payment of service tax by the respondent as recipient of service is not in dispute as the service provider has no office in India. On perusal of the show case and adjudication order, and the impugned order, I find that the respondent is a 100% EOU for manufacture and export of Rear Axels Housing which is classifiable under CH 87089900 of CETA'85 as motor vehicle parts. These goods are manufactured by the respondent as per the design and specification provided by the buyer. These Rear Axles Housing are used in the assembly/ manufacture of motor vehicle at the buyer's end. The respondents have carried out the activities of removing the rust developed during transit, deburring of certain machined area of axels and also cross checking of dimensions. I find that they engaged a Overseas service provider to carry out these activities at buyer's premises at USA. As seen from the SCN, and the adjudication order the only ground on which the service tax credit was denied is that services were rendered outside the place of removal of goods from the factory premises which is in the nature of post-removal activities. For the sake of convenience, paragraph 8 of the SCN is reproduced as under :-

"8. From the plain reading of the above definition, it appears that the above services rendered by M/sProduct Action International, USA would not qualify as input services and are not eligible for availment of service tax credit. In the instant case, the services are rendered much later after the excisable goods are manufactured and cleared from the place of removal. Further the services are provided after the removal of the goods from the factory premises of the assessee and at the place of the buyer of the goods, i.e. in USA. The activities carried out by the Service Provider iz. M/s.Product Action International, are in the nature of post removal activities and hence it appears that the services rendered by them as stated supra are not eligible for availing cenvat credit as input service. Therefore it appears that the cenvat credit availed by the assessee is inadmissible and requires to be expunged."

8. Whereas, I find from the grounds of appeal at para S.No.7 to 19 the Revenue has brought out new grounds. As seen from the copy of the purchase order and extract of Supplier Quality & Development Manual, the respondents secured orders for supply of "Housing  S110, S130, 19060S, S140 Axle and also Axle Housing of various other part numbers for Dana Commercial Vehicle Mfg. The respondent has to manufacture and supply the Motor Vehicle parts as per the ISO/TS 16949 or ISO 9001 standard and adhere to customer's specific requirements and the product should conform to all engineering standards. The activities carried out by M/s.Product Action International, USA at the DANA Commercial Vehicle, USA warehouse surely related to meeting the specification and quality control of the axle housings. These activities certainly qualify to be considered under quality control and in relation to business.

9. Revenue has mainly contended that the service rendered by overseas agent is not covered under the definition of "input service" defined under Rule 2 (l) of CCR. It is relevant to see the definition of input services as existed during the relevant period which reads as under :-

"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 from 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 rating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal.

10. On careful reading of sub-clause (i) and sub-clause (ii) of the above definition, the sub clause (i) stipulates that input services means any service used by the provider of taxable service for providing output service and sub-clause (ii) stipulates input services used by the manufacture whether directly or indirectly or in relation to the manufacture of final products and clearance of final products and the said definition also provides inclusive definition with illustration of various activities. The department interpreted the definition by dividing into four categories of what is directly relating to manufacture of goods and the activities relating to clearance of goods etc. I find that inclusive part of definition has to be read in totality not in isolation.

11. Revenue relied on Gujarat High Court judgement in the case of CCE Vs Cadila Healthcare Ltd. (supra) in support of their contention. The said case related to commission paid to foreign agents regarding sale of goods whereas the present case relates to quality control activity carried out by the respondent. Therefore the above case law is not applicable to the instant case. The Hon'ble High Court judgement in the case of CCE Vs Manikargh Cement (supra) is also not applicable to the present case as the said case relates to denial of credit of service tax availed on the construction of residential colony which is a welfare activity. The same is not applicable to the present case. In the case of CCE Vs Gujarat Heavy Chemicals Ltd. (supra) wherein also the High Court has denied credit on security service provided to the residential quarters of the manufacturer which is voluntary and welfare activity and not in relation to the manufacture whereas the service activity carried out by the service provider is not a welfare activity or voluntary activity but it is related to the quality control of the finished goods sold to the overseas buyer. The Tribunal in the case of CCE Vs Nilkamal Crates & Bins. (supra) has dismissed the Revenue's appeal by relying the Hon'ble Bombay High Court in the case of Coca Cola India Pvt. Ltd. Vs Commissioner - 2009 (15) STR 657 (Bom.). The relevant paragraphs of the above Tribunal's decision is reproduced as under :-

"4.? I have considered the submissions made by both sides. In this case, department is in appeal on the ground that the respondent is not eligible for the benefit of credit of service tax paid on commission paid to the agent situated abroad in case of the exports made by them. The contention of the Revenue is that such service was rendered after the removal and it is beyond the place of removal. Therefore, the decision of the Tribunal in case of M/s. Metro Shoes P. Ltd. which had taken a view that any service rendered if it relates to the activities up to the place of removal, credit of service tax paid on such service, would be admissible, is not applicable. However, in the case of M/s. Coca-cola India (P) Ltd., reported in 2009 (15) S.T.R. 657 (Bom.) = 2009 (242) E.L.T. 168 (Bom.), Honble High Court of Mumbai had considered the admissibility of credit of service tax to a manufacturer and a detailed analysis of admissibility was made and observed as follows :

39.?The definition of input service which has been reproduced earlier, can be effectively divided into the following five categories, in so far as a manufacturer is concerned :

(i) Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacturer of final products

(ii) Any service used by the manufacturer, whether directly or indirectly, in or in relation to clearance of final products from the place of removal

(iii) Services used in relation to setting up, modernization, renovation or repairs of a factory, or an office relating to such factory,

(iv) Services used, in relation to advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs,

(v) Services used in relation to activities relating to business and outward transportation upto the place of removal.

Each limb of the definition of input service can be considered as an independent benefit or concession exemption. If an assessee can satisfy any one of the limbs of the above benefit, exemption or concession, then credit of the input service would be available. This would be so even if the assessee does not satisfy other limb/limbs of the above definition. To illustrate, input services used in relation to setting up, modernization, renovation or repairs of a factory will be allowed as credit, even if they are assumed, as not an activity relating to business as long as they are associated directly or indirectly in relation to manufacture of final products and transportation of final products upto the place of removal. This would, follow from the observation of the Supreme Court in Kerala State Co-operative Marketing Federation Ltd. and. Ors. v. Commissioner of Income tax - 1998 (5) SCC 48, which is as under :

7.?We may notice that the provision is introduced with a view to encouraging and promoting growth of co-operative sector in the economic life of the country and in pursuance of the declared policy of the Government, the correct way of reading the different heads of exemption enumerated, in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a co-operative society is exempt. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption.

5.?In the said decision of Honble High Court of Mumbai, the conclusion that emerges is the legislative intent in respect of inputs for manufacture and input service in case of manufacture are to be treated differently and when input services are rendered in relation to the business activity, credit is admissible. It cannot be said that the service of the commission agent is not relatable to the business activity.

6.?In fact, it can be taken as sales promotion. There is no doubt that the commission agent would help in increasing of sale and render service in relation to the business activity. Therefore, in view of the decision of the Honble High Court of Mumbai in the case of M/s. Coca-cola India (P) Ltd., the respondents are eligible for the benefit of credit of service tax paid on the service rendered by the agent also. Accordingly, appeal filed by the Revenue has no merit and therefore, the same is rejected."

In the present case, the respondents have availed the services of overseas service provider to carry out quality control activity on Rear Axle Housings at buyer's premises. Appellant being 100% EOU, they have secured orders for fulfillment of export obligation. Being manufacturer of Rear Axles Housing (Motor Vehicle parts), as per the drawing, design and specifications of the overseas buyer, the respondents have to ensure that the activities viz. removal of rust, deburring, quality control checking are done at buyer's premises. If the respondent do not satisfy the quality of the parts manufactured by them, and if it results in rejection, certainly, it will be a loss to his business. Therefore, these activities are related to quality control and in relation to the business of the respondent. Therefore, I am of the considered view that the said services availed by the respondents from the overseas service provider are rightly covered in the inclusive definition of "input services" defined under Rule 2 (l) of CCR. By respectfully following the Hon'ble Bombay High Court judgment in the case of Coca-cola India (P) Ltd. (supra) which is relied by the Tribunal's in CCE Vs Nilkamal Crates & Bins (supra), the respondents are eligible for the input credit of the service tax paid under reverse charge on the service rendered by the overseas service provider carried outside India. I do not find any merit in the appeal and hence I am not inclined to interfere with the order of the lower appellate authority. Accordingly, I uphold the impugned order and reject the Revenue's appeal. The cross-objection filed by respondent gets disposed of.

(Pronounced in open court on 9.1.2015)

(R. PERIASAMI) TECHNICAL MEMBER

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