The Kolkata Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that services used for setting up a manufacturing plant remain eligible for CENVAT credit under the “means clause” of Rule 2(l) of the CENVAT Credit Rules, 2004, even after the deletion of the words “setting up” from the inclusive portion of the definition with effect from April 1, 2011. 

The bench of R. Muralidhar (Judicial Member) and K. Anpazhakan (Technical Member) set aside the denial of ₹6.65 crore in CENVAT credit, along with interest and penalty, holding that such services have a direct nexus with manufacturing. 

The appellant, a manufacturer of railway rolling stock components, automobile parts, and iron and steel products, established a new manufacturing facility (Plant V) in Jharkhand. During the period from January 2013 to March 2016, it availed CENVAT credit on various input services used in connection with setting up the plant.

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The company maintained that it did not avail credit on works contract services relating to construction of buildings or civil structures, but claimed credit on other eligible services such as commissioning, installation, technical consultancy, manpower recruitment, security, IT services, transportation, maintenance, and similar services essential for establishing and operating the manufacturing unit. Commercial production at the plant commenced on 21 July 2014. 

Following departmental audits conducted during 2015 and 2016, the department alleged that after the amendment made to Rule 2(l) of the CENVAT Credit Rules with effect from 1 April 2011, services used for “setting up” a factory no longer qualified as input services because the expression “setting up” had been deleted from the inclusive part of the definition.

A show cause notice proposed denial of CENVAT credit exceeding ₹6.72 crore, alleging that all services procured for establishing the factory became ineligible after the amendment. Subsequently, the adjudicating authority confirmed disallowance of ₹6.65 crore, while dropping a small excess demand arising from computational discrepancies. Interest and penalties were also imposed. 

The manufacturer argued that the definition of “input service” consists of three distinct parts the means clause, the inclusive clause, and the exclusion clause.

According to the appellant, even though the expression “setting up” was removed from the inclusive portion of the definition, services directly or indirectly used in relation to manufacture continued to qualify under the broader means clause.

The company further relied upon several judicial precedents, including the Tribunal’s decision in Pepsico India Holdings Pvt. Ltd., as well as later rulings involving SAIL, Tata Steel, Shell India, Aditya Aluminum, and Jamshedpur Continuous Annealing & Processing Co. Pvt. Ltd., all recognizing eligibility of credit for services used in establishing manufacturing facilities after the 2011 amendment. 

The Bench closely examined Rule 2(l) of the CENVAT Credit Rules and observed that the definition cannot be read by isolating the inclusive portion from the principal “means clause.”

The Tribunal held that services used for setting up a factory are intrinsically connected with manufacturing, because without establishing the factory, manufacture itself cannot commence.

According to the Tribunal, these services are therefore covered by the expression “used by a manufacturer whether directly or indirectly, in or in relation to the manufacture of final products.”

The Bench emphasized that once a service falls within the principal “means clause,” credit can be denied only if the service is specifically excluded under the exclusion clause.

The Tribunal noted that the disputed credits related to services including erection, commissioning and installation, fabrication of plant and machinery, technical consultancy, manpower recruitment, information technology services, air travel agency services, maintenance and repair, inward transportation of inputs and capital goods, security agency services, clearing and forwarding services, and business auxiliary services.

It found that these services were not related to construction of buildings or civil structures, but were directly connected with installation and operationalization of the manufacturing facility. Consequently, they remained eligible input services under Rule 2(l). 

The Tribunal observed that the controversy was no longer res integra. It relied extensively upon its earlier decision in Pepsico India Holdings Pvt. Ltd., where it had held that although setting up a factory is not manufacturing by itself, it is an activity directly related to manufacture and therefore falls within the main clause of Rule 2(l).

The Bench also referred to subsequent decisions in SAIL – Durgapur Steel Plant, Jamshedpur Continuous Annealing & Processing Co. Pvt. Ltd., Shell India Pvt. Ltd. (affirmed by the Supreme Court), Aditya Aluminum, and Tata Steel Ltd.

All these authorities consistently held that deletion of the words “setting up” from the inclusive clause does not eliminate credit where the services independently satisfy the principal definition of input service. 

The CESTAT held that the disputed services possessed a direct nexus with the manufacture of final products and were covered under the means clause of Rule 2(l). Since none of the services fell within the statutory exclusions, the denial of CENVAT credit was unsustainable.

The Tribunal accordingly set aside the order-in-original, restored the CENVAT credit of approximately ₹6.65 crore, and also quashed the corresponding interest and penalty, granting consequential relief to the manufacturer in accordance with law. 

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