CENVAT Credit on Factory Land Lease & Infrastructure Charges Allowed: CESTAT Hyderabad Ruling Explained

Background of the Dispute

Kellogs India Pvt Ltd Vs Commissioner of Central Tax came up before CESTAT Hyderabad in appeal against Order-in-Appeal No. TTD-EXCUS-000-APP-131-18-19 dated 17.01.2019. The central issue was whether CENVAT credit could be claimed on service tax paid towards:

  • Lease charges for industrial land; and
  • Infrastructure development and maintenance charges

paid to M/s Sri City (P) Ltd and taxed under the category “Renting of Immovable Property Service”.

The adjudicating authority had denied CENVAT credit of Rs. 1,39,52,380/-, ordered its recovery under Rule 14 of the CENVAT Credit Rules, 2004 read with Section 11A of the Central Excise Act, 1944, and imposed penalty under Rule 15(2) of the CENVAT Credit Rules, 2004 read with Section 11AC of the Central Excise Act, 1944. The first appellate authority confirmed this decision, leading to the present appeal before the Tribunal.

The assessee is engaged in the manufacture of prepared foods obtained by swelling or roasting cereals or cereal products, and holds both central excise and service tax registrations. Anti-evasion officers initiated investigation on the premise that the assessee had availed ineligible CENVAT credit on certain input services connected with the setting up of its factory in an industrial estate managed by M/s Sri City (P) Ltd.

Nature of Agreements and Services Involved

Development and Lease Arrangements with Sri City

The assessee had entered into:

  • A development agreement, and
  • A lease deed

with M/s Sri City (P) Ltd, the developer and operator of the industrial estate where the manufacturing facility was to be located.

Under these arrangements:

  1. The assessee obtained an industrial plot on lease for setting up its factory.
  2. M/s Sri City (P) Ltd also levied infrastructure development charges, which covered, among others:
    • Internal roads
    • Power distribution and electricity network
    • Water supply facilities
    • Sewerage and waste disposal systems
    • Related estate infrastructure and maintenance

Service tax was charged on these amounts, and the service provider classified the services under “Renting of Immovable Property Service”. The assessee availed CENVAT credit of the service tax so paid.

The Revenue contended that such services were used for “setting up” the plant and therefore, after 01.04.2011, became ineligible as input services due to an amendment in the definition under Rule 2(l) of the CENVAT Credit Rules, 2004.

Reliance on Deletion of “Setting Up” from Rule 2(l)

The department’s case rested on the amendment brought in by Notification No. 3/2011-CE(NT) dated 01.03.2011, effective from 01.04.2011, which modified the definition of “input service” under Rule 2(l) of the CENVAT Credit Rules, 2004.

Post-amendment, Rule 2(l) defines “input service” as:

“(l) ‘input service’ means any service, –
(i) used by a provider of output service for providing an output service; or
(ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal, and includes services used in relation to modernisation, renovation or repairs of a factory, premises 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, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal but excludes, –
(A) service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act (hereinafter referred as specified services) in so far as they are used for –
(a) construction or execution of works contract of a building or a civil structure or a part thereof; or
(b) laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or”

Before this amendment, the inclusive limb contained the expression “and includes setting up, modernisation …”, thereby explicitly covering services used for setting up a factory.