T.K. Jayaraman, Member (T)

1. These appeals have been filed against the Order-in-Appeal No. 20 & 21/2008 dated 27.5.2008, passed by the Commissioner of Customs, Excise & Service Tax (Appeals-III), Hyderabad.

2. We heard both the sides in the matter.

3. The issue relates to service tax credit availed by the appellants on input services. Two Show Cause Notices dated 18.10.2006 and 11.4.2007 have been issued to the appellants for proposing to recover the credit of duty availed on input service utilized for maintenance of staff colony, plantation and ILTD. The period of dispute is from October 2005 to January 2007. The Order-in-Original confirmed the recovery of the credit. The appellants approached the Commissioner (Appeals) who passed the impugned Order-in-Appeal confirming the recovery of credit but dropping the penalty. The appellants are highly aggrieved over the impugned order. Hence they have come before the Tribunal for relief.

4. The learned Advocate urged the following points:

(i) The appellants are manufacturers of paper boards and specialty papers in their PSPD Division at Sarapaka. The factory located at Sarapaka is in a remote Scheduled Area (Scheduled Area as provided under Article 244 of the Indian Constitution). The nearest town with a railway station is 35 Kms away. In terms of the Regulations made by the Andhra Pradesh Government, transfer of any land located in the specified areas is prohibited. Consequently the employees working in the factory cannot acquire a flat / plot / building either by purchase or lease. Unless the company provides residential accommodation, within its precincts, it is legally impermissible to managers / employees to obtain a residential accommodation in the vicinity of the factory, in view of the said Regulation. The factory works round the clock. Hence all facilities have to be provided at the cost of the company and are accounted as business expenses for the purpose of Income Tax.

(ii) The major raw materials for the manufacture of paper and paper boards are different kind of soft wood trees. When the unit started in 1997, it was wholly dependant upon the suppliers of the Government from the natural forest. In the said dependency continued for a long time. The appellants would have suffered severe shortage of the raw materials, as the Government could not meet even 25% of the total wood requirement of the company. Therefore the appellants launched a major plantation programme in 1982. In order to achieve self sufficiency and improve the productivity, it was carried out social responsibility by way of providing farmers a viable alternative land used option. They also set up an R & D Centre with the following objectives:

Production of "designer fibre" through "desire tree" by genetics & breeding bio-technological methods for indigenous as well as exotic tree species, including bamboo.

Development of agro forestry models with pulpwood trees best suited to various types of sites and needs of farmers.

Implementation of sustainable farm practices and Forest Stewardship Certification.

Enhancement of state-of-the-art R & D and Extension Centre

Further development of technically sound and scientific site management practices to enhance productivity to international standards.

(iii) The appellants also clone seedlings of the species that would give them the wood yield that they require, and sell those seedlings to farmers to grow into trees. The appellants had by-back agreements with the farmers. They provide support in the form of extension services giving technical advice to the farmers and buy back the wood.

(iv) The appellants maintain a godown outside the factory in which they collect and store the raw materials required for manufacture. The activities used in the godown are relating to the business of the appellants. For the above activities, the appellants received certain services like renovation, repairs and maintenance, security, labour supply, advertising services, plantation works, rent a cab services, Business Auxiliary Service and manpower recruitment service. The appellants availed service tax credit on the input service used for maintenance of colony, plantation activity and ILTD. The said availment of credit is in dispute now.

(v) Our attention was invited to Rule 2(I) of the Cenvat Credit Rules, 2004 which defines input service". It was stated that the expression used is - "used by manufacture whether directly or indirectly, in or in relation to the manufacture of final products". The scope of the expression used by the manufacturer should be interpreted to contemplate situation where an input service is used and would not mean consumed as held in the following judgments:

Varuna Sulphonators Pvt Ltd. v. Union of India : 1993 (68) E.L.T. 42 (All.)

5...The words used and consumed are not identical and synonymous. They have not been defined in the Rules and in the Central Excises and Salt Act, 1944. The verb use as per Chambers English Dictionary means : "to put to some purpose : to avail oneself of; to resort to; to make use of; to take or consume...." The verb consume in the same dictionary means : "to destroy by wasting, fire, evaporation; to use up; to devour; to waste or spend; to exhaust...." The word used does not indicate that a thing, which is liquid, can be said to be used only when it is spent up to the last drop. The word consumed may be used in the sense that a thing which is consumed must be finished, exhausted or devoured in full, but that is not the sense in which the word used is used.

Therefore the manufacturer can take Cenvat credit on all those input services which are so used by him and it is not essential that the benefits arising out of these input services should necessarily be contained in the products manufactured. As long as it can be established that a service is used by a manufacturer in directly in relation to manufacture then credit should be allowed.

(vi) The term in relation to used in the means part of the definition of input service further widens its scope. The following decisions were relied on:

(a) Collector of Central Excise v. Rajasthan State Chemical Works : 1991 (55) ELT 444 (S.C.)

(b) Union of India v. Ahmedabad Electricity Co. Ltd. : 2003 (158) E.L.T. 3 (S.C.)

(c) Union Carbide India Ltd. v. CCE, Calcutta : 1996 (86) ELT 613

Hence, even if the activity is not directly connected with the manufacturing activity, the same will be covered under input service as long as it has some nexus to the manufacture activity.

(vii). The definition of input service under Cenvat Credit Rules, 2004 includes services used in relation to business activity of the manufacturer. The expression activities relating to business, has not been defined in the Rule. Such an expression is also not defined in the Central Excise Act, 1944 and in the Finance Act, 1994. Section 37 of the Income Tax Act, 1961 contains the term wholly and exclusively for the purpose of the business or profession. And the same has been the subject matter of detailed scrutiny by the courts in various decisions. In all the cases involved, the courts discussed the basic principle of commercial expediency. The courts laid down the law that if an expenditure is commercially required to be incurred with a view to benefit the trade and to facilitate the carrying on the business, such expenditure will be allowed as deduction under Section 37 pf the Income Tax Act, 1961. The following judgments were relied on:

(a) CIT v. Malayalam Plantations Ltd. : 53 ITR 140 (SC)

(b) CIT v. Mysore Iron : 115 ITR 219

(c) CIT v. Nainital Bank : 62 ITR 638 (SC)

(d) ITAT v. B. Hill and Co. (P) Ltd. : 1983 (142) ITR 185 (All.)

(e) Greaves Cotton and Co. Ltd. v. CIT : (2005) 279 ITR 42 (Bom)

Thus, any service received and which is commercially required for the purpose of carrying on the business of the manufacturer, will be covered by the expression activities relating to business. It was urged that the appellants were right in taking credit on the manpower supplied for the packing, house keeping and other divisions which are integrally connected with its manufacturing business and without which the manufacturing business would be impossible or commercially inexpedient to be carried on. In these circumstances the credit taken by the Noticee on the residential colony, plantation division and ILTD godown are correct and proper in law.

(viii) In support of the submissions the following case law was relied on:

Manikgarh Cement v. CCE & C., Nagpur 2008 TIOL 133 CESTAT MUM

4. The appellants contention as reflected in the reply to the show cause notice was that their factory was situated at a remote place where no facilities were available for stay of their engineers and workmen, and it was, therefore, necessary to construct a residential colony for the employees for being available on the spot in order to maintain continuity in the process of cement manufacture, has not been disputed. Therefore service provided is relatable to business and credit of service tax is admissible as the service in respect of repairs and maintenance, civil construction in relation to the residential colony are input services. My view finds support from the Tribunals order in the case of Indian Rayon & Industries Ltd v. CCE Bhavnagar 2006 (4) STR 79 holding that credit is admissible on service tax paid on mobile phones provided to employees to carry out business transactions. Credit has been held to be admissible even though the telephones are not installed within the factory premises. The decisions of the Honble Allahabad High Court in the case of ITAT v. B. Hill and Co. (P) Ltd. : 1983 (142) ITR 185 and the Honble Bombay High Court in the case of Greaves Cotton and Co. Ltd. v. Commissioner of Income Tax : (2005) 279 ITR 42 (Bom) also lend support to my view of Allahabad High Court has held that expenditure incurred on restoration of buildings and residential quarters or factory was available as revenue expenditure for the reason that repair and re-construction enable the assessee to carry on its business, while the Bombay High Court held that expenditure incurred on maintenance of transit quarters used for accommodating employees visiting Bombay from outstation for business purpose was to be allowed in computing the income chargeable under the head Profit and gain of business or profession under the provisions of Section 37(I)

5. In the light of the above decisions, I accept the contention of the assessees that they are eligible to avail input service tax credit, set aside the impugned order and allow the appeal.

The above decision of the Tribunal has been followed in the following cases:

(a) Victor Gaskets India Ltd. v. CCE Pune I 2008 VOL 409 CESTAT-MUM

(b) CCE Nagapur v. Manikgarh Cement reported in 2008 TIOL 1580 CESTAT-MUM

(c) CCE Raipur v. Century Cement reported in 2008 TIOL 1706 CESTAT-MUM

The decision in the case of Victor Gaskets (supra) which was passed in turn following Manikgarh Cement case (supra) has also been upheld by the Larger Bench of the Tribunal in the case of CCE, Mumbai v. GTC Industries Ltd. 2008 TIOL 1634 CESTAT-MUM-LB.

(ix) In the following decisions which have been held that a manufacturer or a service provider can take Cenvat credit of input service required in relation to the business of manufacturing or providing output service:

(a) CCE, Hyderabad-IV v. Deloitte Tax Services (I) Pvt Ltd. : (2008) 11 STR 266 (Tri. Bang.)

(b) Keltech Energies Ltd. v. CCE, Managlore 2008 TIOL 419 CESTAT-BANG

(c) Metro Shoes Pvt. Ltd. v. CCE, Mumbai 2008 TIOL 417 CESTAT-MUM

(d) CCE, Nasik v. Cable Corporation of India Ltd. 2008 TIOL 1180 CESTAT-MUM

(e) Parasom Machinery (India) Pvt. Ltd. v. Commissioner of Central Excise, Aurangabad 2008 TIOL 811 CESTA-MUM

(f) Indian Rayon & Industries Ltd v. Commr of C. Ex., Bhavnagar 2006 (4) STR 79 (Tri.-Mumbai)

(g) Universal Cables Ltd. v. Commissioner of C. Ex., Bhopal : 2007 (7) STR 310 (Tri.-Del)

(h) Force Motors Ltd. v. CCE, Pune 2008 TIOL 1199 CESTAT-MUM

(i) CCE, Goa v. Hindustan Coca Cola Beverages Pvt. Ltd. 2008 TIOL 270 CESTAT-MUM

(j) Vodafone Essar Digilink Ltd. v. CCE, Jaipur 2008 TIOL 180 CESTAT-DEL

(k) Ferromatik Milacron India Ltd v. CCE, Ahmedabad 2009 TIOL 01 CESTAT-AHM

(l) CCE (LTU), Chennai v. Brakes India Ltd. 2008 TIOL 1993 CESTAT-MAD

(m) Capiq Engineering Pvt. Ltd. v. CCE, Vadodara 2008 TIOL 1967 CESTAT-AHM

(x) Our attention was invited to the following observations of the Commissioner (Appeals) in the impugned order:

6. the definition of input services clearly highlights the dichotomy of multifarious functions any business organization is required to undertake while pursuing their objectives. The functions primarily encompass the entire gamut of process of manufacture form the stage of setting up a factory to marketing the produce. The other functions are in the realm of obligations - some self imposed and others by way of laws enacted for the welfare of the working classes....

The above observations only support the appellants case. In spite of holding such a view, the Commissioner (Appeals) concludes that the contention of the appellants is far-fetched and would only end up in stretching the definition of input service too far.

5. The learned SDR stated that the decisions cited by the appellants are not relevant. The activities in the present case for which input credit disallowed has no nexus directly or indirectly to the manufacturing activity or activities relating to business of the assessee. The Sections of Income Tax Act and the judicial pronouncements made therein are distinguishable and cannot be inferred in the context of service tax provisions. The case laws spell out various input services that are directly used in the activities relating to manufacturers business and commercial activity and hence allowed as input services. On the contrary, the input services claimed for credit are well beyond the scope of the definition. The maintenance of colony is neither an activity relating to business nor an activity relating directly or indirectly to manufacture of final product or clearance of final products from the place of removal. Hence the activity does not fall within the ambit of the definition of the term input service. The cloned saplings are sold by the appellants to the independent farmers for cultivation into plantations. Plantation activity is held by the farmers who are at liberty to sell the trees grown out of the cloned saplings in the open market. There is no nexus between plantation activity and the business conducted by the assessee. Hence they are not entitled for the Cenvat credit of service tax paid on service relating to plantation activities.. Input relief is to neutralize cascading effect of tax but not to extend the same for unconnected / unrelatable inputs / services at the expense of the tax liability.

6. We have gone through the records of the case carefully. In broad terms, the appellants availed service pertaining to the maintenance of staff colony and plantation. The service tax paid on input services were taken as credit in terms of the Cenvat Credit Rules, 2004. The actual taxable services are - (i) renovation; (ii) repair and maintenance; (iii) security; (iv) labour supply; (v) advertising services; (vi) plantation works; (vii) rent a cab services; (viii) Business Auxiliary Services; and (ix) manpower recruitment service. The definition of input service is reproduced herein below:

Rule 2(1) of the Cenvat Credit Rules 2004 defines "input service" as follows:

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, remises 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, arid security, inward transportation on inputs or capital goods and outward transportation upto the plate of removal;

The Commissioner (Appeals) has not accepted the contention of the appellants that maintenance of colony for the employees is an input service. According to him, the said view is far-fetched. He has stated that the maintenance of a residential colony is only obligatory activity in a situation exigent a service is in no way concern either directly or indirectly related to the manufacture of final products and hence held that such input services do not fall within the ambit of definition of input service in terms of Rule 2 of the Cenvat Credit Rules, 2004.

The appellants had stated that the area in which the factory is situated in a Scheduled Area, governed by Article 244 of the Indian Constitution and also Andhra Pradesh Scheduled Areas Land Transfer Regulation, 1959. There is a prohibition for sale and purchase of land. In this background, it is obligatory on the part of the appellants to provide residential accommodation in the vicinity of the factory. Such an accommodation is not provided, it would not be feasible for the appellants to carry on the manufacturing activity. We do not agree with the finding of the Commissioner (Appeals) that providing colony for the employees is not directly or indirectly connected with the manufacturing activity of the appellants. The factual situation is to be appreciated. We also take note of the expression activities relating to business used in the definition of input service. The scope of the definition of input service is very wide. It encompasses a variety of services which relate to not only manufacture of final products but also several activities relating to business. Some of the activities are also enumerated. We note the following expressions:

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 up to the place of removal;

The use of the expression "as such" indicates that list of activities given therein are only illustrative and not exhaustive. When the appellant is under an obligation to maintain a colony, all the services received in maintaining such a colony would also be covered as input services. In the light of the definition of input service, we do not agree with the Commissioner (Appeals) that the services undertaken like lawn mowing, garbage cleaning, maintenance of swimming pool, collection of household garbage, harvest cutting, weeding, etc. cannot be considered as input services. When a colony has to be maintained, all the above services are to be considered as input services.

7. As regards plantation activities, it is seen that the appellant is a paper manufacturing unit. The major raw materials are different kind to soft wood trees. They have also explained the circumstances under which they had to invest during improvement research. It cannot be said that this activity does not have any nexus with the manufacturing activity. The whole things should be viewed in a broader perspective in the light of the definition of the input service. According to the department, there is nothing on record to suggest that the cloned saplings sold to the farmers are sold back to the appellants after growing into trees. If the department was not satisfied with the submissions of the appellants they could have gone into some verification. Simply discussing their averment is not acceptable. The appellants contention that no one to one correlation is required to be shown under the Cenvat Credit Scheme to claim the credit is correct. It is not necessary that the farmers should sell their entire products to the appellants in order to claim the input service credit by the assessee. In our view, all input services enumerated are activities relating to business. The ratio of the Tribunals decision in Manikgarh Cement case (supra) is also squarely applicable to the present case. If a service or activity is relating to business, then it should be treated as an input service in the light of the definition o input service. In view of our above observations, we hold that that the appellants are entitled for the input service credit. Hence we allow the appeals with consequential relief if any.

(Pronounced in the court on. 13/05/2009)