Pranav B Prem

The Bangalore Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that manufacturing and packaging of cement are not civil construction activities and therefore cannot be treated as an excluded category of works contracts for the purpose of denying CENVAT credit. Allowing the appeal of Zuari Cement Limited, the Tribunal ruled that the various input services used for setting up and operating the cement packing plant had a direct nexus with the manufacture of the final product and therefore qualified as eligible input services.

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The bench of P.A. Augustian (Judicial Member) and Pullela Nageswara Rao (Technical Member) set aside the adjudication order confirming the demand of ₹6,54,97,114 in alleged ineligible CENVAT credit on input services. The case originated from an audit by the Additional Director General of Audit, which claimed short payment of central excise duty on MRP-based clearances and alleged that the appellant availed ineligible CENVAT credit. Although the appellant reversed the alleged short payment during audit, the authorities proceeded to issue show-cause notices alleging wrongful availment, leading to the demand and recovery proceedings now under appeal.

The primary dispute related to the credit of ₹6,18,00,000 on service tax paid towards upfront lease charges for land taken from the Cochin Port Trust for the purpose of setting up the cement packing plant. The department argued that since the expenditure related to “setting up” of the factory — a phrase removed from the inclusive part of the definition of “input service” after the 2011 amendment — such credit was inadmissible. Rejecting this, the Tribunal observed that the services were “ultimately meant for accomplishing the objective of providing the output service” and held that deletion of the phrase “setting up” from the inclusive definition did not exclude the services from the main part of the definition of input service. It noted that without the leased land, the manufacturing activity itself could not commence, thereby establishing a direct nexus with the output service .

The Tribunal further held that credit of ₹36,97,114 on services received prior to commencement of production could not be denied merely because they were availed before commercial manufacture began. It accepted the appellant’s submission that taking land on lease, procurement of machinery and setting up of plant were indispensable services for undertaking manufacturing operations and therefore squarely fell within the ambit of input service under Rule 2(l) of the CENVAT Credit Rules, 2004.

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As regards the credit of ₹1,21,727 distributed through the Input Service Distributor (ISD) invoices issued by the appellant’s marketing offices at Hyderabad, Bangalore and Chennai, the Tribunal found that the tax burden had been borne by the ISD and that the assessee-unit receiving the credit was not responsible for examining the eligibility of the distributed credit. It held that the credit pertained to services used for marketing of the final product and therefore had nexus with manufacture and sale, making the denial untenable.

The Tribunal also set aside the denial of ₹90,716 of credit on event management services utilised for business meetings and promotional events, holding that such activities were directly connected with marketing and promotion of the output product and therefore qualified as input services. Similarly, the credit of ₹1,34,123 availed for repainting services was allowed, with the Tribunal clarifying that the exclusion in the definition of input service pertains only to works contracts involving construction of buildings or civil structures, not works service contracts undertaken for commercial upkeep or maintenance.

On limitation, the Tribunal held that invocation of the extended period and imposition of penalty were unjustified, particularly because the earlier audit conducted for a prior period had not raised these objections, and the entire basis for the demand was derived from the assessee’s own records. It therefore held that allegation of suppression could not be sustained.

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Concluding that the services in question all had a direct nexus with the manufacturing and marketing activity of the appellant and that none fell within the exclusionary portion of the definition of input service, the Tribunal set aside the impugned order and allowed the appeal with consequential relief in accordance with law.

Appearance

Counsel for Appellant/ Assessee: Meghna Lal and Vani Dwevedi

Counsel for Respondent/ Department: Rajashekhar. B. N. N, Superintendent

Cause Title: M/s. Zuari Cement Limited v. Commissioner of Central Tax & Central Excise

Case No: Central Excise Appeal No. 20591 of 2022

Coram: P.A. Augustian (Judicial Member), Pullela Nageswara Rao (Technical Member)