► Head notes :

Central Excise Act, 1944 - Section 2(l) - The appellant is engaged in manufacture of parts and accessories of two wheelers/ four wheelers, steering wheels and parts thereof - The records of appellant were audited by the team of Central Excise Audit Commissionerate - The Audit team noticed that the appellant was supplying the parts and accessories manufactured by it to M/s. Hero Moto Corp Ltd., along with other buyers - On scrutiny of cenvatable invoices the team also observed that appellant wrongly availed Cenvat credit on various bills raised by M/s. Hero Moto Corp. Neemrana for penalty charged in the name of segregation of defective components -  The team observed that the service is not related to manufacturing activity of the appellant in terms of defects of import services contained under Rue 2(l) – Vide Show Cause Notice the amount was proposed to be recovered from the appellant along with the interest and appropriate penalties – The said proposal was initially confirmed - The appeal thereof has been rejected by Commissioner (Appeals) - CESTAT - The place of providing services is not relevant for availment of Cenvat credit and the basic requirement is that the service should have been provided by the manufacturer or by any other person on his behalf to the consumer - Even post removal service can be eligible to Cenvat credit, however, if and only if, those are provided in relation to the manufacture either directly or indirectly - The buyer of the appellant who himself has undertaken the responsibility of segregating such defective pieces where defect was not arising out of mis-handling and has charged the compensation in form of penalty from the appellant for undertaking such an activity and this particular fact is sufficient to hold that the activity was performed by the buyer for himself, as such cannot be called as eligible input service in terms of section 2(l) - The activity in question is the activity undertaken by the buyer of the manufacturer that too to ensure his right as he got reserved between the contracting parties for not receiving the damaged goods - Appeal dismissed

► Name of Judge : Rachna Gupta Member (Judicial)

► Order:

Rachna Gupta

The appellant in the present case is engaged in manufacture of parts and accessories of two wheelers/ four wheelers, steering wheels and parts thereof. The records of appellant were audited by the team of Central Excise Audit Commissionerate, Jaipur. The Audit team   noticed that the appellant was supplying the parts and accessories manufactured by it to M/s. Hero Moto Corp Ltd., Neemrana along with other buyers. On scrutiny of cenvatable invoices the team also observed that appellant wrongly availed Cenvat credit amounting to Rs.25,658/- during the period December 2015 to August 2016 on various bills raised by M/s. Hero Moto Corp. Neemrana for penalty charged in the name of segregation of defective components i.e. finished goods of the assessee at the site of M/s. Hero Moto Corp. The team observed that the service is not related to manufacturing activity of the appellant in terms of defects of import services contained under Rue 2(l) of Cenvat Credit Rules, 2004. Accordingly, vide Show Cause Notice No. 819 dated 22.08.2019 the aforementioned amount of Rs. 25,658 was proposed to be recovered from the appellant along with the interest and appropriate penalties. The said proposal was initially confirmed vide Order-in-Original No. 07/2020-21 dated 7.9.2020. The appeal thereof has been rejected by Commissioner (Appeals) vide Order-in-Appeal No. 142/2021 dated 10.12.2021. Still being aggrieved, the appellant is before this Tribunal.

2. I have heard Shri B L Yadav, learned Consultant for the Appellant and Shri Mahesh Bhardwaj, learned Authorised Representative for the Respondent.

3. It is submitted on behalf of the appellant that denial of Cenvat credit to the appellant by the authorities below is absolutely illegal and untenable.   It is submitted that the service in question was the activity of segregation of finished goods out of the goods supplied by the appellants which was to be done by the appellants but as per the contract between the appellant and its buyer i.e. M/s. Hero Moto Corp. Ltd.; that with respect to the defects not arising from mis-handling, the buyer had reserved the right to reject the defective material where the defect was not arising from mishandling. It is impressed upon that   the activity of segregation was actually the after sale service to be provided by the appellant to its buyers, however was performed by the buyer itself out of contract between the two. Hence, it was an eligible service for Cenvat Credit in terms of Rule 2(l) of Cenvat Credit Rules, 2004as also in terms of Rule 3 of the said Rules. Learned Counsel has relied upon the decision of this Tribunal, Ahmadabad Bench in the case of Commissioner of Central Excise Vapi vs Alidhara Textool Engineers Pvt. Ltd. reported as [2009 (1) TMI-129 CESTAT-Ahmadabad] wherein it was held that it is not necessary for the eligible input service to have been rendered at the factory of manufacturer itself

4. He also relied upon the decision of this Tribunal Delhi Bench in the case of M/s. New Holland Construction Equipment (I) Pvt. Ltd. vs Commissioner of Central Excise, Ujjain, [2021 (8) TMI 963] wherein it was held that Cenvat credit on amount of service tax paid for the services provided by the dealers to the customers on behalf of the appellants manufacturer for the goods for fulfilling the warranty obligation of the appellant was allowed. Learned Counsel further impressed upon that service provider i.e. M/s. Hero Moto Corp.    has considered the activity as of segregation as taxable service which is apparent from the invoices issued by the said service provider to the appellant and that the appellant has paid service tax on the impugned service. The said payment has never been objected by the appellant nor it ever got the refund of the said amount.   Service tax once paid, the appellant is entitled for the Cenvat credit of the same. Hence, the findings of the adjudicating authority below are not sustainable. The order is, accordingly, prayed to be set aside and appeal is prayed to be allowed.

5. While rebutting the submissions, learned departmental representative has impressed upon that the Commissioner (Appeals) has duly appreciated the facts of the case in the light of Rule 2(l) of Cenvat Credit Rules and it is thereafter that he had concluded that the impugned activity performed by M/s. Hero Moto Corp. the buyer of manufactured goods of the appellant, is not service being provided by or on behalf of the appellant. The amount rather had been charged as a penalty imposed on the appellant for failure to meet the threshold quality as required in the course of manufacture of finished product that too at customer’s site. Hence the impugned activity cannot be called as service used by the appellant either directly or indirectly in or in relation to manufacture of final product and clearance of final product up to place of removal. No infirmity is impressed upon in the findings of Commissioner (Appeals) which are based upon the decision of Hon’ble Apex Court.    The appeal is accordingly, prayed to be dismissed.

6.  Having heard the rival contentions of the parties perusing the records, it is observed and held as follows:

The appellant is manufacturing parts and accessories of two /four wheelers as their final products and are clearing them to M/s. Hero Moto Corp. under a contract vide which the buyer i.e M/s. Hero Moto Corp. had reserved the right to reject the defective material where the defect was not arising from mishandling.   Accordingly, M/s.   Hero Moto Corp.    the buyer was segregating finally manufactured product of the appellant at their site. The buyer is charging a penalty amount from the appellant against an invoice inclusive of service tax. The said amount is being paid by the appellant.

From the Cenvat Credit Rules, it is clear that every amount of service tax paid is not eligible for the availment of Cenvat credit to decide the eligibility of service tax credit. Hence what is to be examined in the present case is:

“whether the service in question can be held to be rendered in or in relation to manufacture directly or indirectly.”

The relevant provision is Rule 2(l)   of Cenvat Credit Rules, 2004. It reads as follows:

[2(l) ―input service‖ means any service, -

i. used by a provider of [output service] for providing an output service; or

ii. used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal, and includes services used in relation to modernisation, 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, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal;

[but excludes], -

service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act (hereinafter referred as specified services) in so far as they are used for –

construction or execution of works contract of a building or a civil structure or a part thereof; or

laying of foundation or making of structures for support of capital goods,

except for the provision of one or more of the specified services; or

services provided by way of renting of a motor vehicle], in so far as they relate to a motor vehicle which is not a capital goods; or

[(BA) service of general insurance business, servicing, repair and maintenance, in so far as they relate to a motor vehicle which is not a capital goods, except when used by –

​​​​​​​​​​​​​​a. manufacturer of a motor vehicle in respect of a motor vehicle manufactured by such person; or

b. an insurance company in respect of a motor vehicle insured or reinsured by such person; or]

c.  such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee;]

[Explanation. - For the purpose of this clause, sales promotion includes services by way of sale of dutiable goods on commission basis.]”

7.  A perusal of the provision makes it abundantly clear that the place of providing services is not relevant for availment of Cenvat credit. Place, no doubt can be the place of manufacture or it can be any other place including the place of buyer. No doubt the after sale service can also be eligible for Cenvat credit as was held by this Tribunal in the case of New Holland Construction Equipment (I) Pvt. Ltd. (supra) but the basic requirement is that the service should have been provided by the manufacturer or by any other person on his behalf to the consumer. Thus, even post removal service can be eligible to Cenvat credit, however, if and only if, those are provided in relation to the manufacture either directly or indirectly.

8. From the facts of the present case, the activity in question is not provided by the appellant nor by anybody else on his behalf. It is rather the buyer of the appellant who himself has undertaken the responsibility of segregating such defective pieces where defect was not arising out of mis-handling and has charged the compensation in form of penalty from the appellant for undertaking such an activity. This particular fact is sufficient to hold that the activity was performed by the buyer for himself, as such cannot be called as eligible input service in terms of section 2(l) of Cenvat Credit Rules. The activity in question also do not qualify Rule 3 of Cenvat Credit Rules 2004. The Rule reads as follows:

“RULE 3 (1) -A manufacturer or producer of final products or a provider of output service shall be allowed to take credit (hereinafter referred to as the CENVAT Credit) of-

(ix) the service tax leviable under Section 66 of the Finance Act; (ixa) the Service Tax leviable under Section 66A of the Finance Act; ((ixb) the Service Tax leviable under section 66B of the Finance Act,

Provided that the CENVAT credit shall be allowed to be taken of the amount equal to central excise duty paid on the capital goods at the time of debonding of the unit in terms of the para 8 of notification No. 22/2003- Central Excise, published in the Gazette of India, part II, Section 3, sub- section(i),vide number G.S.R. 265(E), dated, the 31st March,2003.

paid on-

i. any input or capital goods received in the factory of manufacture of final product or by the provider of output service on or after the 10th day of September, 2004; and

ii. any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, 2004, including the said duties, or tax, or cess paid on any input or input service, as the case may be, used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 214/86-CE, dated the 25th March, 1986, published in the Gazette of India vide number G.S.R. 547(E), dated the 25th March 1986, and received by the for use in, or in relation to, the manufacture of final product, on or after the 10th day of September, 2004."

The perusal thereof makes it abundantly clear that any service to be eligible for Cenvat credit under this Rule is to be the one which has been received by the manufacturer for manufacturing final product. But the activity in question is the activity undertaken by the buyer of the manufacturer that too to ensure his right as he got reserved between the contracting parties for not receiving the damaged goods. From no stretch of imagination, said activity performed by the buyer can be called as the service which is eligible for Cenvat credit in terms of either Rule 2(l) of Cenvat Credit Rules or Rule 3 of Cenvat Credit Rules, 2004. Hence, I do not find any infirmity in the findings given by the adjudicating authority below. Resultantly, the order of Commissioner (Appeals) is hereby upheld and appeal stands dismissed.

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► Summery :

CESTAT, New Delhi - The buyer of the appellant who himself has undertaken the responsibility of segregating such defective pieces where defect was not arising out of mis-handling and has charged the compensation in form of penalty from the appellant for undertaking such an activity and this particular fact is sufficient to hold that the activity was performed by the buyer for himself, as such cannot be called as eligible input service in terms of section 2(l). The activity in question is the activity undertaken by the buyer of the manufacturer that too to ensure his right as he got reserved between the contracting parties for not receiving the damaged goods.