Cenvat Credit on Business Services vs Construction Services: CESTAT Hyderabad’s Partial Relief to Assessee

The decision in Hindustan Petroleum Corporation Ltd Vs Commissioner of Central Excise & Service Tax (CESTAT Hyderabad) deals with an important controversy on Cenvat credit eligibility for various input services used in a manufacturing business, especially around the amendment to the definition of “input service” with effect from 01.04.2011. The ruling provides clear guidance on how credits on business-related services and construction-related services are to be treated for periods before and after the amendment.

The assessee, M/s Hindustan Petroleum Corporation Ltd, challenged an order that denied Cenvat credit of Rs.1,15,08,642/- along with interest and penalty, for the period from October 2010 to October 2011, on the ground that several services did not qualify as “input services” under Rule 2(l) of the Cenvat Credit Rules, 2004.

Background of the Dispute

Period and Amount Involved

• Relevant period: October 2010 to October 2011
• Total Cenvat credit disputed: Rs.1,15,08,642/-
• Amount already reversed by the assessee prior to show cause notice: Rs.44,48,271/-
• Balance amount was contested as legitimately admissible credit

A show cause notice dated 05.10.2012 was issued alleging that the services in dispute were not “input services” under Rule 2(l) of the Cenvat Credit Rules, 2004, and consequently that the assessee was not entitled to avail such credit.

Nature of Input Services in Dispute

The services on which Cenvat credit was questioned included, among others:

• Manpower supply services
• Catering services
• Insurance services
• Construction and civil work-related services
• Repair and maintenance services
• Transportation and related services
• Cleaning and pest control services

The central question was whether these services could be treated as “input services” within the meaning of Rule 2(l) of the Cenvat Credit Rules, 2004, in light of the legal position before and after 01.04.2011, when the definition underwent a significant change.

Assessee’s Stand Before the Tribunal

The assessee argued that the bulk of the credit pertained to services squarely covered within the ambit of “input service” as defined under Rule 2(l).

Key Submissions

1. Broad definition prior to 01.04.2011

   • It was contended that before the amendment effective from 01.04.2011, the definition of “input service” was deliberately drafted in very wide terms.
   • In particular, the expression “activities relating to business” under the pre-amended clause extended the coverage to almost all services having a nexus with the business activities of the assessee.
   • On this basis, services like manpower, insurance, cleaning, repairs, catering and similar services, being integrally connected with running the refinery and associated operations, were argued to be eligible for Cenvat credit.

2. Post-01.04.2011 – Exclusions to be strictly construed

   • For the period after 01.04.2011, the assessee accepted that specific exclusions had been inserted in the amended Rule 2(l).
   • However, it was argued that such exclusions must be interpreted strictly and could not be expanded beyond what was expressly stated.
   • The assessee submitted that only services directly covered under the exclusion clause (for example, services used in the construction of a building or civil structure or laying of foundation) were barred from credit.
   • Other services such as manpower supply, insurance, cleaning, pest control, and routine repairs, which are necessary for safe and efficient conduct of manufacturing operations, were said to remain within the ambit of “input service” even post-amendment.