[2009] 22 STT 54 (SC)
SUPREME COURT OF INDIA
Maruti Suzuki Ltd.
v.
Commissioner of Central Excise, Delhi-III
S.H. KAPADIA AND AFTAB ALAM, JJ.
CIVIL APPEAL NOS. 5554 AND 5555 OF 2009
AUGUST 17, 2009
Rule 2(g), read with rule 3, of the Cenvat Credit Rules, 2002 - Cenvat credit - Input - Period from January 2003 to October 2003 and November 2003 to March 2004 - Whether a manufacturer is entitled to Cenvat credit on eligible inputs utilized in generation of electricity to extent to which it is using produced electricity within its factory for captive consumption - Held, yes - Whether, clearance of excess electricity outside factory to joint ventures, vendors, grid, etc., would not be admissible for Cenvat credit, as such wheeled out electricity that was cleared for a price, would not fall within definition of ‘input’ in rule 2(g) - Held, yes [Paras 19 and 20]
Circulars and Notifications : Notification No. 13/2003-CE(NT), dated 1-3-2003
FACTS
The assessee-company was engaged in the business of manufacturing motor vehicles. It had installed gas turbines in its factory for generation of electricity. It used naphtha as fuel to run the gas turbines and availed Cenvat credit on same. During the relevant period, the assessee cleared a part of electricity generated in the factory to its joint ventures, vendors, etc., at different rates. The revenue reversed proportionate Cenvat credit to the extent of power wheeled out by the assessee to its sister concerns, vendors and joint ventures.
On appeal :
HELD
The definition of the word ‘input’ under rule 2(g) can be divided into three parts, namely: (i) specific part, (ii) inclusive part, and (iii) place of use. [Para 9]
Coming to the specific part, one finds that the word ‘input’ is defined to mean all goods, except light diesel oil, high speed diesel oil and petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not. The crucial requirement, therefore, is that all goods ‘used in or in relation to the manufacture’ of final products qualify as ‘input’. This pre-supposes that the element of ‘manufacture’ must be present. [Para 10]
Electricity generation is a separate and distinct activity. It is an independent activity. It has its own economics. It does not form a part of the process in which ‘inputs’ are transformed into separate identifiable commodity, though it may stand connected to such process. It may not have any concern with the manufacture of the finished product. However, it is an ancillary activity. It is an activity which is anterior to the process of manufacture of the final product. It is on account of the use of the above expression ‘used in relation to manufacture’, that such an activity of electricity generation comes within the ambit of the definition because it is integrally connected with the manufacture of the final product. [Para 13]
It may, however, be noted that in the definition of the term ‘input’, the expression ‘used in or in relation to the manufacture of final product’ is not a standalone item. It has to be read in entirety and when so read, it reads as ‘used in or in relation to the manufacture of final product whether directly or indirectly and whether contained in the final product or not’. These words ‘whether directly or indirectly’ and ‘whether contained in the final product or not’ indicate the intention of the Legislature. What the Legislature intends to say is that even if the use of input (like electricity) in the manufacturing process is not direct but indirect, still such an item would stand covered by the definition of ‘input’. In the past, there was a controversy as to what is the meaning of the word ‘input’, conceptually. It was argued by the department in a number of cases that if the identity of the input is not contained in the final product, then such an item would not qualify as input. In order to get over this controversy in the above definition of ‘input’, the Legislature has clarified that even if an item is not contained in the final product, still it would be classifiable as an ‘input’ under the above definition. In other words, it has been clarified by the definition of ‘input’ that the following considerations will not be relevant:
(a) use of input in the manufacturing process be it direct or indirect; and
(b) even if the input is not contained in the final product, it would still be covered by the definition.
These considerations have been made irrelevant by the use of the expression ‘goods used in or in relation to the manufacture of final product’ which, as stated above, is the crucial requirement of the definition of ‘input’. Moreover, the said expression, viz., ‘used in or in relation to the manufacture of the final product’ in the specific/substantive part of the definition is so wide that it would cover innumerable items as ‘input’ and to avoid such contingency, the Legislature has incorporated the inclusive part after the substantive part qualified by the place of use. For example, one of the categories mentioned in the inclusive part is ‘used as packing material’. Packing material by itself would not suffice till it is proved that the item is used in the course of manufacture of final product. Mere fact that the item is a packing material whose value is included in the assessable value of final product, will not entitle the manufacturer to take credit. Oils and lubricants mentioned in the definition are required for smooth running of machines, hence, they are included as they are used in relation to manufacture of the final product. The intention of the Legislature is that inputs falling in the inclusive part must have nexus with the manufacture of the final product. [Para 14]
Two considerations are irrelevant, namely, use of input in the manufacturing process, be it direct or indirect as also absence of the input in the final product on account of the use of the expression ‘used in or in relation to the manufacture of final product’. Similarly, consideration such as input being used as packing material, input used as fuel, input used for generation of electricity or steam, input used as an accessory and input used as paint are per se also not relevant. All these considerations become relevant only when they are read with the expression ‘used in or in relation to the manufacture of final product’ in the substantive/specific part of the definition. In each case, it has to be established that inputs mentioned in the inclusive part are ‘used in or in relation to the manufacture of final product’. It is the functional utility of the said item which would constitute the relevant consideration. Unless and until the said input is used in or in relation to the manufacture of final product within the factory of production, the said item would not become an eligible input. The said expression has many shades and would cover various situations based on the purpose for which the input is used. However, the specified input would become eligible for credit only when used in or in relation to the manufacture of final product. Hydrogen gas used in the manufacture of sodium cyanide is an eligible input, since it has a significant role to play in the manufacturing process and the final product cannot emerge without the use of gas. Similarly, Heat Transfer Oil used as a heating medium in the manufacture of LAB is an eligible input since it has a persuasive role in the manufacturing process and without its use, it is impossible to manufacture the final product. Therefore, none of the categories in the inclusive part of the definition would constitute relevant consideration per se. They become relevant only when the above crucial requirement of being ‘used in or in relation to the manufacture’ stands complied with. Hence, one has to read the definition in its entirety. [Para 16]
As stated, the definition is in three parts, namely, specific part, inclusive part and place of use. All the three parts are required to be satisfied before an input becomes an eligible input. [Para 17]
It may be noted from the Cenvat Credit Rules, 2004 vis-a-vis Cenvat Credit Rules, 2002 that the word ‘for’ in the inclusive part after the words ‘steam used’ is substituted by the expression ‘used in or in relation to the manufacture of final products’. In other words, the crucial requirement of the definition clause is restated by the Legislature. The Cenvat Credit Rules, 2004 came in force in September, 2004. In some of the cases, the show-cause notice goes right up to January 2005, hence, Cenvat Credit Rules, 2004 also apply to those cases. In short, an item would fall within the category of ‘inputs’ as defined only on compliance with all the three parts of the definition clause. [Para 18]
In the case of Collector of Central Excise v. Rajasthan State Chemical Works 1991 (55) ELT 444 (SC), the test laid down by the Court is whether the process and the use are integrally connected. Electricity generation is more of a process having its own economics. Applying the said test, it is held that when the electricity generation is a captive arrangement and the requirement is for carrying out the manufacturing activity, the electricity generation also forms a part of the manufacturing activity and the ‘input’ used in that electricity generation is an ‘input used in the manufacture of final product’. However, to the extent the excess electricity is cleared to the grid for distribution or to the joint ventures, vendors, and that too for a price (sale), the ‘process and the use test’ fails. In such a case, the nexus between the process and the use gets disconnected. In such a case, it cannot be said that electricity generated is ‘used in or in relation to the manufacture of final product, within the factory’. Therefore, clearance of excess electricity outside the factory to the joint ventures, vendors, grid, etc., would not be admissible for Cenvat credit, as such wheeled out electricity that was cleared for a price, would not fall within the definition of ‘input’ in rule 2(g) of the Cenvat Credit Rules, 2002. [Para 19]
To sum up, the definition of ‘input’ brings within its fold, inputs used for generation of electricity or steam, provided such electricity or steam is used within the factory of production for manufacture of final products or for any other purpose. The important point to be noted was that, in the instant case, excess electricity had been cleared by the assessee in favour of its joint ventures, vendors, etc., for a price at the agreed rate as arrived at from time to time. The assessee had also cleared such electricity in favour of the grid for distribution. To that extent, the assessee was not entitled to Cenvat credit. In short, the assessee was entitled to credit on the eligible inputs utilized in the generation of electricity to the extent to which it was using the produced electricity within its factory (for captive consumption). It was not entitled to Cenvat credit to the extent of the excess electricity cleared at the contractual rates in favour of joint ventures, vendors, etc., which was sold at a price. [Para 20]
On account of repeated amendments in the Cenvat Credit Rules, huge litigation in the country stands generated. In the circumstances, penalty was not leviable on the assessee, particularly when in large number of other cases, on account of conflict of views expressed by various Tribunals/High Court, the assessees had also succeeded. Hence, although the assessee failed in its civil appeal, the department would not impose penalty. [Para 21]
CASE REVIEW
Collector of Central Excise v. Rajasthan State Chemical Works 1991 (55) ELT 444 (SC) (para 19) followed.
CASES REFERRED TO
J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v. Sales Tax Officer [1965] 16 STC 563 (SC) (para 11), Union Carbide India Ltd. v. Collector of Central Excise 1996 (86) ELT 613 (CEGAT - LB) (para 12), Collector of Central Excise v. Ballarpur Industries Ltd. [1989] 4 SCC 566 (para 14), Collector of Central Excise v. Rajasthan State Chemical Works 1991 (55) ELT 444 (SC) (para 19),Collector of Central Excise v. Solaris Chemtech Ltd. 2007 (214) ELT 481 (SC) (para 19) and Vikram Cement v. CCE 2006 (194) ELT 3 (SC) (para 19).
V. Lakshmi Kumaran for the Appellant. Gourab Banerji for the Respondent.
Applicability of DVAT Act to a transaction of hiring of cabs by assessee to a company
When the contract in question is a composite contract of sale of goods and services, it is not permissible for the State Legislature to tax composite contracts comprising of both goods and services by applying DVAT Act.
HIGH COURT OF DELHI
Commissioner, VAT
v.
International Travel House Ltd.
ST. Appeal No. 10/2009
September 8, 2009
RELEVANT EXTRACTS:
** ** ** ** ** ** ** ** ** ** ** **
8. We take up firstly the second contention of the parties viz. whether the transaction in question is one of services or of sale of goods. If the transaction in question contains both the components of a sale of goods and services also, whether such a transaction can only be taxed as a service or can also be taxed as a sale of goods. which will also come in, is, if the contract is not severable as per the intention of the parties because separate values have not been fixed for the purposes of sale of goods and for sale of services; whether such a non-severable contract can be split up for taxing the sale of goods or even if it is not split up can the whole value of the contract be taken as the value of the sale of goods.
9. A careful reading of the BSNL .s case brings out the following ratio:-
1(i) Realizing that by virtue of locus classicus decision in the case of
State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., AIR 1958 SC 560 does not permit a composite contract of both goods and services (viz a works contract) to be taxed as sale of goods and does not permit severing of the contract for the value of goods to be culled out from the same, the need was felt to amend the Constitution to widen the definition of sale from that as was traditionally understood and which meant an agreement to transfer title, payment of consideration, and, transfer of title in the goods. Three proposals were mooted by the Law Commission in its report of 1974 to give the power to the State to tax goods included in works contracts, hire purchase transaction and transfer of controlled commodities by virtue of statutory orders. The Law Commission noted that there can be three actions, one of amending Entry Fifty-four of the State List, second of adding a fresh Entry in the State List or thirdly of inserting in Article 366 a wider definition of sale so as to include works contract. The Law Commission preferred the last alternative and, therefore, the Constitution came to be amended by the Forty-sixth Amendment Act, 1982 to add Sub-Article 29-A which included six sub-clauses. Each of the sub-clauses served to bring transactions where one or more essential ingredients of sale were absent so that it fell within the ambit of sale and purchase for the purpose of levy of sales tax. By virtue of adding of sub-clauses (b) and (f) it became permissible by legal fiction to divide specific composite contract as a result of which sale element could be isolated and be subjected to tax. {see paras 35,37,39, 40 to 42 of the Judgment in SCC}.
(ii) Except the specific contracts so provided under Article 366(29-A)
no other contracts can be artificially severed to tax the sale element with respect to goods as comprised in such composite contracts. Therefore, where the contracts are composite contracts, including therein both aspects of sale of goods and services, such contracts which are other than those specified in Article 366(29-A) (b) and (f), then such other contracts not falling within such sub-clauses of Article 366(29-A) cannot be split up taxing the sale element in the goods component thereof and which was only possible if the parties had in mind or intended that separate rights arising out of sale of goods and if there was no such intention then there is no sale of goods, even if such a contract could be disintegrated. {See paras 44,45,88,92(C) of SCC}.
10. Where the sale is distinctly discernible in the transaction i.e. the
contracts are by intention of the parties severable so that there are
separate values with respect to goods and services, only then one cannot deny the legislative competence of the State to levy sales tax on the value of the goods. This, however, does not allow the State to entrench upon the Union List and tax services by including the cost of such services in the value of goods. Even in the composite contracts which are by legal fiction deemed to be divisible under Article 366(29-A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax. Referring to the decision in Gujarat Ambuja Cements Ltd. & Anr. V. Union of India & Anr., held that mutual exclusivity which is referred to in Article 246(1) means that taxing entries must be construed so as to maintain exclusivity. Though liberal interpretation must be given to the taxing entries, however in substance if the statute is not referable to a field given to the State, then the Court will not by a principle of interpretation allow a statute to include in its field what is not covered in its field. theory (viz. the aspect of goods in composite contracts) would not apply to enable the value of the services to be included in the sale of the goods or the price of the goods in the value of the service. and 92(E) of SCC}.
11. The conclusion, therefore, which emerges with respect to the facts of the present case on applying the ratio of the BSNL .s case the contract in question is a composite contract of sale of goods and
services, clearly, it is not permissible for the State Legislature by applying DVAT Act to tax composite contracts comprising of both goods and services. Not only the contracts cannot be artificially split up so as to enable the sale element to be taxed, further, the States cannot treat the contract as only a contract of sale of goods and tax the whole value of the transaction as a sale of goods. Since the parties have not intended the contract to be mutilated/severable inasmuch as no different values are specified in the subject contract towards goods value separately and the value of services separately, it is not permissible by the DVAT Act to impose sales tax on the whole transaction value because that would amount to the State to entrench upon the Union List and tax services by including the cost of such services in the value of the goods. Thus, the contract in question being a composite contract is to be treated as a contract for services and no sales tax can be imposed on the contracts in question. It has also been held by the Constitution Bench of the Supreme Court in its judgment reported as Godfrey Phillips India Ltd. and Anr. V State of U.P. and Ors. (2005) 2 SCC 515 that taxing entries must be construed with clarity and precision so as to maintain exclusivity and a construction of a taxation entry which may lead to overlapping must be eschewed. Reference in that case was also made to the judgment in Kesoram Industries Ltd..s case that in our Constitution a conflict of the taxing power of the Union and States cannot arise. Question is taxed as services by the Central Government defining the same as services under the Finance Act, 1994, we would have to thus eschew an interpretation which will lead to overlapping in the taxation entries otherwise the same transaction will be taxed both as services as also goods. To avoid that overlapping, and more particularly in view of the legislative history behind the provision of Article 366(29-A) it becomes clear that a composite contract of both services and goods should be treated as a contract of services assessable to tax under the Finance Act, 1994 as the same has been defined and included therein. Our aforesaid discussion negates therefore the two pleas of the senior counsel for the appellant on the basis of the judgments reported as State of West Bengal v. Kesoram Industries Ltd. and Ors., (2004) 10 SCC 201 and Ralla Ram v. Province of East Punjab, AIR 1949 FC 81, that the measure of taxation being the whole value of the contract cannot mean that the tax is still not a tax on goods and that subject matter of the taxation being the goods, DVAT Act can impose tax on composite contracts on the entire value of the transaction.
** ** ** ** ** ** ** ** ** ** ** **
Levy of service tax on an institution imparting postgraduate programme in management under ‘commercial training or coaching centre’
All institutions imparting knowledge and conducting courses at fairly higher level such as post graduate level, cannot be just termed as ‘commercial training or coaching centre’ and subjected to service tax under this category.
CESTAT, SOUTH ZONAL BENCH, BANGLOARE
Indian School of Business
v.
CCE
Appeal No. ST/194/2008
March 16, 2009
RELEVANT EXTRACTS:
** ** ** ** ** ** ** ** ** ** ** **
6.1 Service Tax by its very definition is a tax on rendering of taxable services at a given percentage of the taxable value. It is not a tax on income generated for providing such services. On the same ground, therefore, the appellant having been granted exemption under the Income-tax Act is of no assistance to them in matters relating to their liability under Service Tax alws. It is an admitted position that the appellants have got themselves registered under ‘Management Consultancy’ with effect from 2-6-2006.
7.2 We do not state that it is not proper to tax under the Service Tax category management education, etc., that is not our concern. As it stands, the Tribunal has to interpret the law. When we go strictly by
the definition of "commercial training or coaching centre" in terms of the statutory provisions we are of the view that the said provisions can be applied only in respect of the institutions which are commercial in nature. How to decide whether the objective of the institution is commercial? One has to only go through the Memorandum of Association and Articles of Association and find out. In the present case,, as per the memorandum and articles of the appellant, the main objects include promoting education and
advancement of knowledge in various disciplines, especially in the
areas of management providing support, maintaining, giving grants or
subsidies to "schools, colleges, universities, institutions, etc.. promoting education and advancement of knowledge to graduate or undergraduate course, diploma course, etc., and providing learning understanding and, guidance in all areas, branches, disciplines and in matters including administration. advertising, publicity, management, marketing, manufacturing, etc., by itself through its branches, whether in India or abroad.. It is also seen that the appellant's institution had affiliations with three of the world leading business course viz., Rellogg School of Management, Wharton School and the London Business School making it as one of its kind in Asia. They offer Post Graduate Programme in Management and Executive Education Programme. On a proper understanding of commercial coaching or training, we would never subscribe to the view that the courses imparted by these institutions are on the same footing as of coaching or training imparted by tutorial colleges or institutions preparing students for imparting certain skills or preparing for examination for getting higher marks; which stand entirely on a different footing. We are only trying to interpret the terms commercial training or coaching as given in the Finance Act and we are of the firm opinion that all institutions imparting knowledge and conducting courses at fairly higher level such as post graduate level, cannot be just termed as 'commercial training or coaching centre' and subjected to Service Tax under this category. It is immaterial whether the degrees offered by them are recognized' by law or not. So long as, the nature of the activity is not considered as commercial training or coaching, it would not fall under the taxable category.
7.3 Moreover, the fact that the appellant gets concession or exemption under the various provisions of income-tax Act is not without any significance. They are indicating that the primary objective of the appellant institution is not commercial at all. The term "commercial" has also been interpreted in the Board's circular which has not been deleted. In view of this, we cannot subscribe to the view of the learned special counsel that any institution can be considered as coming under the category of ‘commercial training or coaching centre’ so long as they impart the training for fees.
** ** ** ** ** ** ** ** ** ** **
[2009] 22 STT 13 (BANG. - CESTAT)
CESTAT BANGALORE BENCH
Ex-servicemen Industrial Guards (P.) Ltd.
v.
Commissioner of Central Excise, Trivandrum
M.V. RAVINDRAN, JUDICIAL MEMBER
AND T.K. JAYARAMAN, TECHNICAL MEMBER
FINAL ORDER NO 462 OF 2009
APPEAL NO. ST/268 OF 2008
APRIL 16, 2009
Section 65(94) of the Finance Act, 1994 - Security agency service - Period July, 2001 to September, 2004 - Whether activity of ‘bird scaring’ does not fall within purview of activities of ‘Security agency’ - Held, yes [Para 7]
FACTS
The assessee was engaged in providing security agency services. It had received certain amount towards EPF, ESI and bonus for posting security guards for bird scaring for the Airport Authority of India during the relevant period. The adjudicating authority confirmed the demand of service tax on above receipts and imposed penalties under sections 76 and 78. On appeal, the Commissioner (Appeals) upheld the adjudication order, holding that the security services included security of property, but granted relief to the assessee by setting aside the penalty imposed under section 78.
On appeal :
HELD
It was undisputed that the assessee had an agreement with the Airport Authority of India for ‘bird scaring services’ on job contract basis. On a perusal of the said agreement, which was on record, the contract was given as a lump sum contract for only ‘bird scaring activity’. The scope of said activity is to scare the birds in the airport area by periodical firing at specified places. The bird scaring activity is a preventive measure in maintaining the airport as per the international norms as aeroplanes if hit by birds, may cause accidents. [Para 6]
From the definition of ‘security agency’ in section 65(94) it is clear that the activity of ‘bird scaring’ does not fall under the purview of the activities of the ‘security agency’. If an activity or a service is not covered under a particular service it cannot be taxed. Undoubtedly, in the instant case, it was nobody’s case that bird scaring activity was related to the security services. The Commissioner (Appeals)’s finding that the activity of ‘bird scaring’ fell under the category of ‘security of property’, was totally misplaced and mis-conceived. In view of the above reasoning, the impugned order was liable to be set aside and the appeal was to be allowed. [Para 7]
CASES REFERRED TO
Maruthi Detective & Security Agency v. CCE [2007] 6 STT 164 (Bang. - CESTAT) (para 7) and Oberoi Flight Service v. CST [2007] 10 STT 469 (New Delhi - CESTAT) (para 7).
Ms. Sudha Koka for the Respondent.
