CENVAT Credit Allowed on Factory Repair Services and GTA Freight: Analysis of Balkrishna Industries Ltd. vs Commissioner (CESTAT Delhi)
Background of the Dispute
The case of Balkrishna Industries Ltd. vs Commissioner before the CESTAT Delhi dealt with denial of CENVAT credit on two distinct sets of input services:
Services linked to repair and maintenance of:
- Factory premises
- Office premises
- Plant and machinery
GTA-related services, i.e., service tax embedded in freight charged by a supplier/trader on transportation of inputs/fuel, based on the supplier’s invoices.
Balkrishna Industries Ltd. is engaged in manufacturing pneumatic tyres classifiable under Chapter 40 of the First Schedule to the Central Excise Tariff Act, 1985. During an audit covering May 2012 to March 2015, the Department raised objections on certain CENVAT credits availed on input services.
The central controversy was whether:
- The impugned services were in the nature of works contract/construction services excluded under
Rule 2(l)of the CENVAT Credit Rules, 2004, or - They were properly classifiable as repair and maintenance services, which fall within the inclusive part of the definition of “input service”.
A further issue related to whether the assessee could claim CENVAT credit of service tax on freight where the supplier’s invoice stated that the amount was inclusive of service tax on freight, and service tax had been deposited by the consignor.
Audit Objections and Initial Departmental Stand
Alleged ineligible construction-related services
During audit, the Department observed that the assessee had taken CENVAT credit on services relating, inter alia, to:
- Civil work
- Erection of steel structures
- Gate fixing
- Pipe railing fixing
- Fabrication work
- Shed fabrication
- Other repair/maintenance activities within the factory
The Department treated these as works contract or construction services, supposedly covered by the exclusion in Rule 2(l) of the CENVAT Credit Rules, 2004, and therefore not eligible as “input service”.
GTA/freight-related credit
In June 2013, the assessee received non-calcined Grade ‘A’ petroleum coke from M/s Satchidanand Petroleum Pvt. Ltd. (SPPL), which had procured the goods from Reliance Industries Ltd., Jamnagar (Gujarat). This petroleum coke was used as fuel in the boiler for generation of steam for tyre manufacturing.
The assessee took CENVAT credit of ₹9,312 based on six invoices issued in June 2013, wherein:
- The invoices did not show service tax separately.
- The invoices contained a stamp to the effect that the total amount was inclusive of service tax of ₹9,312 charged on freight of ₹2,55,395, and that this tax was paid by the supplier.
The Department alleged that:
- SPPL was not a GTA service provider.
- SPPL had not charged service tax in the manner prescribed.
- Hence the assessee, though recipient of the freight service, could not avail credit of this GTA-related service tax.
Show Cause Notice and Proposed Demand
A show cause notice dated 10.03.2016 proposed to:
- Disallow CENVAT credit of ₹6,48,346 on alleged construction/works contract services, said to be unrelated or not directly/indirectly used for manufacture or clearance of final products.
- Disallow CENVAT credit of ₹9,312 on freight-related service tax embedded in the supplier’s invoice.
Total CENVAT credit proposed for disallowance: ₹6,57,658.
The Department further contended that services linked to construction of a building or civil structure are expressly excluded from the definition of “input service” under Rule 2(l).
First Round of Litigation and Remand
Initial adjudication
The show cause notice was first adjudicated by the original authority vide Order-in-Original dated 30.11.2017, confirming the entire demand. This order was passed ex parte.