IN RE: VMT SPINNING CO. LTD. Vs. STATE

JUDGEMENT

(1.) THE applicant which is engaged in the manufacture of different types of yarn proposes to construct within its factory premises, additional sheds for manufacturing and storing of yarn, as also residential quarters for its workers and staff, as a part of its programme to augment the production capacity. While the application originally mentioned that the residential quarters were to be constructed both within and outside the factory premises, subsequently it has been stated that the construction of the quarters would be confined to the factory premises. Advance ruling has been sought under Section 96C of the Finance Act, 1994 on the following issues:

(2.) RULE 3(1) of the Cenvat Credit Rules, 2004 permits a manufacturer to take credit of the service tax paid on an 'input service' and to utilize the same for payment of duty on the final product. Rule 2(1)(ii) defines 'input service' to mean any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture and clearance of final products. The applicant states that the manufacture of yarn is a continuous operation which is carried out each day in three shifts, each shift being of eight hours' duration. In order to ensure availability of workers round the clock, the applicant proposes to house the workers in a colony within the factory itself. Continuous availability of workers residing in a colony within the factory, ensures efficient production of yarn. The construction service required for building a residential colony for the workers, is therefore, indirectly connected with the manufacture and clearance of yarn and such construction service has to be regarded as an input service. The second part of the definition of input service in Rule 2(1)(ii) mentions services relating to business activities such as accounting, auditing, financing, coaching and training etc. which are very indirectly connected to the manufacture of a final product, to be included in the ambit of input services which are eligible for Cenvat credit. The coverage of such diverse services within the ambit of input service by insertion of the inclusive definition implies that this term has to be given a very broad coverage. The phrase 'in relation to' used in the definition has a very broad connotation and cannot be given a narrow meaning, as held in: Doypack System Pvt. Ltd. v. UOI and Collector of Central Excise v. Rajasthan State Chemical Works . Input service should therefore encompass the construction services utilized for building the residential colony and Cenvat credit of the service tax paid on such service should be available.

(3.) THE Commissioner of Central Excise, Chandigarh refutes all the claims of the applicant. He states that Rule 2(1)(ii) of Cenvat Rules in the inclusive part of the definition of input service allows only those services which are used in relation to setting up, modernization, renovation or repair of a factory or its office premises. It does not include services used in relation to construction of residences of workers and staff, as such a service has no bearing on manufacturing and cannot be even remotely said to be used in or in relation to manufacturing, storage or clearance of the final product. Making available residential houses to workers, can at best, be construed as a welfare service for employees, that has no linkage with the manufacture of yarn. Cenvat credit is therefore not available for service tax paid on the construction service. The higher rate of drawback in Customs Notification No. 68/07 cannot be claimed if credit of service tax paid on construction services has been availed of, as tax on input services used in exported goods, is factored in while calculating this drawback rate. The letter of Joint Secretary Drawback nowhere mentions that service tax on services, not directly relatable to the export goods, is not taken into account, while fixing the higher rate of drawback. Buildings are not considered as capital goods in Cenvat rules. The relevance of Rule 6(5) of Cenvat rules in the present case has not been brought out in the application. The Departmental Representative reiterated the comments of the Commissioner.