Input credit by outdoor caterers

Food for thought – Service Tax paid by Outdoor Caterers for running Canteen Services in a factory is an Input Service for availing Credit : Tribunal MUMBAI, MAR 18, 2008 : WE are hungry. Just three months back, we reported the Tribunal decision in the case of Bajaj Electricals [2007-TIOL-1866-CESTAT-MUM], where the Single Member Bench observed that prima facie there was no case for a complete waiver of the cenvat credit demand of Rs.33,956/- availed on Service Tax paid by Outdoor Caterers on Canteen services provided in the company & accordingly the appellant was ordered to make a pre-deposit of Rs.15,000/-. After that decision was passed, in another case of Manikgarh Cement [2008-TIOL-133-CESTAT-MUM], the question before the Bench was whether the Service tax paid on Repairs & Maintenance of civil construction viz. residential colony for factory employees was available as cenvat credit. The Tribunal while allowing the appeal in that case held that such services were relatable to business & hence the credit was admissible. Now, the said matter of M/s Bajaj Electricals came up before the Tribunal (SMB) for a final hearing along with similar appeals of two more assessees & the results are dramatic – yes, dramatic! But before that, we would like to point out a recently carried a decision of the Tribunal, WZB in the case of Mahindra Sona Ltd., Ace Glass Containers Ltd. & Jindal Saw Ltd. [2008-TIOL-199-CESTAT-MUM] constituted by the Vice President wherein the same issue had come in a bunch of appeals filed by the CCE, Nasik & the Bench had passed an Order No. A/108 to 113/08/WZB/SMB/C-III dated 18.01.2008 holding in clear terms that – • Canteen/Catering services is in the nature of welfare activity and not an activity relating to business. • Canteen/Catering services provided to employees may be obligatory as per the Factories Act, 1948 but it cannot automatically lead to the conclusion that the same relates to business activity – Credit not available. Be that as it may, the short facts common to all the present three appeals are – “Whether the appellants are entitled to the Input Service Credit of the service tax paid on the Outdoor Catering Services. The appellants have provided a canteen facility in their factory for their employees. This is claimed to be a statutory requirement under Section 46 of the Factory Act. The service provider issued the invoices to the appellants for the said Outdoor Catering Services and the appellants had availed the Cenvat credit on the strength of such invoices. The question is whether Outdoor Catering Services can be regarded as an input service under Rule 2(1) of the Cenvat Credit Rules, 2004.” The Tribunal analyzed the definition of “input service” contained in rule 2(l) of the CCR, 2004 observed thus – • The meaning assigned to “input service” is divided in two parts, first part giving the specific meaning and the second part gives the inclusive meaning of the same. In the second part, an inclusive meaning is given to “input services”, which otherwise would not have been covered in the main first part. • From this, it is evident that manufacturer/output service provider can take credit of the service tax paid on business related activities, which are specified in the expanded inclusive definition of “input service”. • Expression used in the said Rule 2(l) is “such as” which means that the stipulated activities that follow the said expression in the definition are only illustrations and not limitations inasmuch as the expanded part of the definition is an inclusive one and not an exhaustive list of the activities on which the input service credit can be taken by the appellants. • The term “in relation to” used in Rule 2(l) ibid has to be given a wide connotation as held by the Apex Court in the case of Solaris Chemtech [2007-TIOL-135-SC-CX] & Doypack Systems [2002-TIOL-389-SC-MISC]. • Canteen facility, although not specifically stated in the list of activities in the definition of the ‘input service’ under Rule 2(l) ibid, yet it is an activity relating to the business of the appellants as this facility is being provided exclusively only to the employees of the factory of the appellants within the premises of the factory. The canteen facility is beneficial for the workers as they are served with foodstuff, etc. at concessional rates and it is they who are engaged in the business of the appellants, which is nothing but the manufacture of goods. In any case the canteen facility provided can also be said to be used by the manufacturer indirectly as the canteen facility is only for the benefit of the appellant’s employees, who play a significant role in the activity of manufacture. • Section 46 of Factories Act, 1948 lays down that every employer having more than 250 workers has to provide canteen facility for workers. Rule 79 of Maharashtra Factories Rules, 1963 also mandates such a requirement of provision of canteen. The appellants’ factory has more than 250 workers. Since the provisions for canteen facility is a mandatory requirement, as stated above, the appellants would be subject to penal action by the State Government, if they violate the mandatory requirements. • Levy of fringe benefit tax is on business expenses. The appellants have contended that they pay fringe benefit tax on canteen related expenses under Income Tax Act and as the said tax is a levy on business related expenses, the Appellants’ payment of the same on the canteen related expenses would be considered as business related expenses and hence, the same would get covered under the “activities relating to business” stipulated in the inclusive definition of input service u/r 2(l) of CCR, 2004. The Tribunal also placed reliance on its decisions in the case of Manikgarh Cement [2008-TIOL-133-CESTAT-MUM]; Indian Rayon & Industries Ltd. [2006-TIOL-1152-CESTAT-MUM]; Excel Crop Care Ltd [2007-TIOL-701-CESTAT-AHM] & concluded that credit of the Service tax paid on the outdoor catering (canteen) service is admissible as input service under Rule 2(l) of the Cenvat Credit Rules, 2004. Accordingly, the orders of the Commissioner (Appeals) were set aside & all the appeals were allowed with consequential relief. Oh, what a relief! Gastronomical issues: Although we had reported the decision of the WZB on 6th February, 2008 [2008-TIOL-199-CESTAT-MUM] & the hearing in the present case(s) was held only on 13/15.02.2008, this decision was woefully not brought to the notice of the Bench by the Revenue. In fact, the order that we are carrying today has been pronounced only on 29.02.2008. As for the present case, we just felt like putting the following items on the menu – • The Constitution Bench of the SC in Hari Khemu Gawali v. Deputy Commissioner of Police, Bombay and another [AIR 1956 SC 559], stated: “...It has been repeatedly said by this Court that it is not safe to pronounce on the provisions of one Act with reference to decisions dealing with other Acts which may not be in pari materia.” • By the way, will this decision also satisfy the appetite of Service providers who are not covered under the Factories Act, 1948 [may be other Central/State government laws] but have in-house canteen facilities for their employees & so also recreational facilities like a Club house, Swimming pools, Auditoriums for screening films/movies via satellite via cable etc. etc. Nonetheless, some manufacturers too have these facilities, we understand … So, if the manufacturer also employs security services for the worker’s residential colonies, the credit would be … • Pithily, the sum & substance is whereas one cannot avail Cenvat credit on LSHS used in producing electricity (in a factory) to the extent it is consumed by the residential colony of the factory's workers' families, schools etc., [Solaris Chemtech 2007-TIOL-135-SC-CX], he can certainly avail credit of Service Tax paid on Repairs & Maintenance of civil construction viz. residential colony for factory employees & by an Outdoor Caterer who provides canteen facilities in a factory – probably, because in the former case they are not business related expenses! So, what’s on the Board canteen menu today? (See 2008-TIOL-409-CESTAT-MUM in 'Service Tax' +2008-TIOL-409-CESTAT-MUM in 'Legal Corner')