The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, has held that services used to establish a manufacturing facility may qualify as “input services” even after the expression “setting up” was deleted from the inclusive portion of the definition under the CENVAT Credit Rules, 2004.
The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) observed that the deletion of the expression with effect from April 1, 2011, did not automatically exclude every service connected with setting up a factory. If a service has a direct and demonstrable nexus with the creation or installation of a manufacturing facility, it may remain covered by the substantive part of the definition of “input service.”
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The appeal arose from an Order-in-Original passed by the Principal Commissioner of Central Tax, Visakhapatnam. The adjudicating authority had confirmed several demands of Central Excise duty and CENVAT credit, along with interest and penalties, pursuant to a show cause notice issued on March 6, 2019.
Lupin manufactures bulk drugs falling under Chapter 29 of the Central Excise Tariff Act, 1985, at its unit in JN Pharma City, Parawada, Visakhapatnam. The company availed CENVAT credit on capital goods, inputs and input services used in or in relation to the manufacture of its final products.
The principal dispute concerned CENVAT credit of ₹2,34,58,942 claimed on input services used for setting up the factory before the commencement of commercial production.
The Commissioner denied the credit on the grounds that the services had been received before commercial production began and that the words “setting up” were removed from the inclusive portion of Rule 2(l) of the CENVAT Credit Rules with effect from April 1, 2011.
Lupin submitted that commercial production began in August 2016, while the disputed services had been received from June 2015 onwards. It argued that even after the 2011 amendment, services used to establish a manufacturing facility continued to fall within the main or “means” part of the definition when used directly or indirectly in or in relation to manufacture.
Accepting the company’s contention, the Tribunal held that the mere deletion of “setting up” from the inclusive limb did not mean that every service connected with setting up a manufacturing facility became ineligible for credit.
The substantive portion of Rule 2(l), the Tribunal noted, continued to cover services used by a manufacturer, directly or indirectly, in or in relation to the manufacture of final products.
“A factory cannot manufacture its final products unless the manufacturing facility is first brought into existence and made operational,” the Tribunal observed.
It added that services having a direct and demonstrable nexus with the creation or installation of a manufacturing facility would satisfy the substantive portion of the definition, unless specifically covered by an exclusion clause.
The Tribunal relied on its decisions in Pepsico India Holdings Pvt. Ltd. v. Commissioner of Central Tax, GST-Commissionerate, Tirupati and Mangalam Cement Ltd. v. Commissioner of Central Goods, Excise and Service Tax, Udaipur.
It concluded that the timing of receipt of the services, namely before the commencement of commercial production, was not decisive. The relevant test was whether the services had a nexus with the manufacturing activity.
Accordingly, the demand of ₹2,34,58,942 was set aside.
The second issue involved CENVAT credit of ₹8,40,735 on common or fixed-expense services relating to the maintenance of roads, street lights, rainwater drainage and allied infrastructure. The charges for these facilities were recovered on an acreage basis.
The adjudicating authority denied the credit primarily because the facilities were situated outside the company’s registered factory premises.
Lupin argued that the infrastructure was essential for the movement of raw materials and finished goods and for the continuous operation of the manufacturing unit.
The Tribunal held that the location of a facility outside the physical boundary of the factory could not, by itself, determine whether input-service credit was admissible.
It stated that the applicable test was whether the service had a direct or indirect nexus with manufacture or the manufacturing business. Maintenance of approach roads, common roads, drainage systems, street lighting and similar infrastructure facilitating the operation of industrial premises could not be regarded as unrelated to manufacturing merely because the facilities were common or situated beyond the factory gate.
The Bench noted that the impugned order contained no finding that the expenses related to residential or personal facilities.
It therefore held that the credit was admissible, subject to verification that the expenses related to the industrial premises used by Lupin and were not incurred for any purely residential or personal facility. The demand of ₹8,40,735 was set aside.
The third dispute concerned credit of ₹14,55,256 on stainless steel stools, buckets, containers, drum racks, HDGI cable trays and ladders, stainless steel ladders, fire extinguishers, glass fittings and similar goods.
The department denied the credit on the grounds that the articles did not qualify as capital goods and were not shown to have been used directly in manufacturing the finished products.
Lupin argued that its claim was not restricted to the definition of “capital goods.” According to the company, the articles independently qualified as “inputs” under Rule 2(k) of the CENVAT Credit Rules.
The Tribunal observed that Rule 2(k), as applicable during the disputed period, gave a wide meaning to the expression “inputs.” Subject to the specified exclusions, it included goods used within the factory by the manufacturer of the final product.
Referring to the Rajasthan High Court’s decision in Union of India v. Hindustan Zinc Ltd. and the Tribunal’s ruling in Merino Industries Ltd. v. Commissioner of Central Excise, Noida, the Bench held that credit could not be denied merely because an item was not a component of the final product or did not fall within the definition of capital goods.
The eligibility of each item as an “input” had to be examined independently.
The department did not dispute that the goods were received and used inside the factory. There was also no finding that the articles were covered by any specific exclusion under Rule 2(k).
Consequently, the Tribunal ruled that denial of credit solely for want of direct use in production was unsustainable and set aside the demand of ₹14,55,256.
The department had also demanded differential duty of ₹2,66,731 on certain clearances made by Lupin to a related unit. The allegation was that the company failed to adopt 110% of the value determined under CAS-4.
Lupin did not seriously dispute the valuation requirement but maintained that it had already discharged the differential liability through a supplementary invoice dated March 29, 2019.
The adjudicating authority refused to recognise the supplementary invoice because it referred to an incorrect provision of Section 142 of the Central Goods and Services Tax Act, 2017, contained a discrepancy in quantity and charged Integrated GST.
The Tribunal observed that Section 142(2)(a) of the CGST Act expressly contemplated the issuance of a supplementary invoice or debit note when the price of goods supplied before the appointed day was revised upwards after the appointed day.
It also referred to CBIC Circular No. 76/50/2018-GST dated December 31, 2018, which clarified that the rate and nature of tax applicable under the GST regime would govern such a supplementary invoice.
The Bench held that the payment of IGST on an inter-State supplementary invoice did not, by itself, establish that the earlier differential duty liability remained unpaid. However, the payment had to be correlated with the original clearance, differential assessable value and supplementary invoice.
The issue was therefore remanded to the adjudicating authority solely to verify the supplementary invoice and corresponding payment.
The Tribunal directed that no double recovery should be made if Lupin established that tax equivalent to the differential duty had already been discharged through a legally permissible transitional mechanism.
It further clarified that a clerical reference to an incorrect statutory sub-clause would not, by itself, justify denial of the benefit if the substantive legal requirements were otherwise fulfilled.
Another dispute related to ₹6,48,171, which the department treated as the unappropriated portion of a total credit reversal of ₹15,01,222.
Lupin claimed that it had reversed the entire amount of ₹15,01,222 through its GSTR-3B return for May 2018 in relation to four admitted issues.
The adjudicating authority appropriated only ₹8,53,051 because the electronic credit ledger reflected that amount as the available balance. It confirmed the remaining demand of ₹6,48,171 on the ground that the balance reversal resulted in a negative figure.
The Tribunal held that the relevant question was not confined to the positive balance appearing in the electronic credit ledger on the date of reversal.
It was necessary to determine whether the company had accounted for the entire reversal and whether any consequential tax liability resulting from a negative balance had been discharged.
If the statutory return recorded the reversal of the entire amount and the reversal either reduced the available credit or increased the output-tax liability to the corresponding extent, the same amount could not be demanded again merely because part of the reversal produced a negative figure.
Since the issue required a factual reconciliation of the pre-GST CENVAT records, TRAN-1, GSTR-3B and the electronic credit ledger, the Tribunal remanded it to the adjudicating authority.
The authority was directed to recognise the entire ₹15,01,222 to the extent the reversal or payment was established from the statutory records and ensure that there was no duplication of recovery.
Lupin also challenged the demand for interest on credit that was allegedly availed but never utilised.
The Tribunal noted that Rule 14(1)(ii) of the CENVAT Credit Rules, as applicable during the material period, provided for the recovery of interest where credit had been wrongly taken and utilised.
It held that where disputed credit was merely availed but remained unutilised until its reversal, interest could not be demanded for that period.
The adjudicating authority was directed to verify whether the admitted credits forming part of ₹15,01,222 were actually utilised. Interest was ordered to be confined to the portion of credit found to have been utilised in accordance with the applicable statutory provision.
The show cause notice issued on March 6, 2019, covered a period extending back to February 2015 and invoked the extended limitation period on the allegation of suppression.
The Tribunal observed that substantial portions of the dispute involved the interpretation of Rules 2(l) and 2(k), particularly the eligibility of setting-up services, common infrastructure services and goods used within the factory.
The existence of several decisions by different Tribunal Benches on the same issues demonstrated that the disputes were interpretational in nature.
The Bench also found that Lupin had regularly filed statutory returns, supplied information sought by departmental officers during audit or investigation, and reversed credit concerning several admitted issues.
These circumstances were inconsistent with an allegation of deliberate suppression with an intention to evade duty unless supported by positive evidence.
As the department failed to produce any positive evidence of fraud, collusion, wilful misstatement or suppression with intent to evade payment, the Tribunal set aside the invocation of the extended limitation period. Penalties imposed on the basis of suppression or wilful misstatement were also quashed.
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