Hero MotoCorp CENVAT Credit Dispute: Broad Interpretation of ‘Input Service’ Reaffirmed by CESTAT Chandigarh

Background of the Dispute

Eight appeals came up before the CESTAT Chandigarh arising from a common order dated 30.07.2013 passed by the Commissioner of Central Excise, Delhi-III, Gurgaon. Seven of these appeals were filed by the assessee, M/s Hero MotoCorp Ltd (earlier Hero Honda Motors Ltd), and one appeal was preferred by the Revenue.

The Commissioner had:

  • Confirmed a duty demand of Rs. 3,87,87,373 on alleged inadmissible Cenvat credit on various input services, along with equal penalty and applicable interest, and
  • Dropped a separate demand of Rs. 59,57,187 related specifically to “Manpower Supply for Canteen Service”, treating that service as eligible input service.

The assessee is engaged in manufacturing two-wheelers and their spare parts falling under Chapter 87 of the First Schedule to the Central Excise Tariff Act, 1985, and avails Cenvat credit on inputs, input services, and capital goods in terms of the Cenvat Credit Rules, 2004 (CCR, 2004).

The department alleged that the assessee had claimed Cenvat credit on certain services that did not qualify as “input service” under Rule 2(l) of CCR, 2004, on the basis that such services were not used, either directly or indirectly, in the manufacture of final products or for provision of output services.

Seven show cause notices were issued covering a long stretch of time from 01.04.2004 to 31.03.2012, with the following break-up:

  • 18.08.2009: April 2004 – December 2008
  • 23.11.2009: January 2009 – July 2009
  • 28.07.2010: August 2009 – March 2010
  • 28.03.2011: April 2010 – September 2010
  • 18.08.2011: October 2010 – March 2011
  • 15.02.2012: April 2011 – September 2011
  • 01.08.2012: October 2011 – March 2012

Pursuant to adjudication, the Commissioner partly accepted the department’s stand and disallowed credit on a range of services, while permitting credit on manpower supply for canteen services. Both sides challenged the order to the extent adverse to them.

Services in Dispute

The order primarily concerned Cenvat credit availed on the following categories of services:

  • Freight and clearing on export
  • Construction services
  • Insurance / mediclaim for staff
  • Works contract services
  • Mandap keeper’s services
  • Interior decorator services
  • Club or association services
  • Photography services
  • Asset portfolio and fund management
  • Repairing motor vehicles
  • Manpower supply for canteen services
  • Architect services
  • Outdoor catering services
  • Repair and maintenance / after-sale service of motor vehicles

The Commissioner disallowed credit on most of the above except “Manpower Supply for Canteen Service,” on which the Revenue alone was in appeal.

Assessee’s Core Contentions

Wide scope of “input service” under Rule 2(l)

The assessee argued that the statutory definition of “input service” under Rule 2(l) of the Cenvat Credit Rules, 2004—both prior to and after 01.04.2011—has been consistently interpreted expansively by courts.

The key propositions put forward were:

  1. Two-part definition
    • The first limb of Rule 2(l) gives a specific meaning to input service, covering services used directly or indirectly in or in relation to manufacture and clearance up to the place of removal.
    • The second limb is inclusive, using the expression “includes services,” thereby extending coverage to a wide spectrum of services associated with business operations, even if not explicitly listed in the first part.