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Cenvat credit on services used in dutiable and exempted products

15th March 2013

In a significant ruling, the Bombay High Court has held that the a manufacturer of dutiable and exempted goods will be entitled to Cenvat credit of service tax paid on input services used in a location engaged in manufacture of exempted goods but such exempted goods are used further in another location in the manufacture of dutiable goods. 

Tribunal decision
In the case before the court, the appellant was manufacturing exempted crude oil at a facility and the same was used in a different plant where dutiable goods were manufactured. The Tribunal had held that crude oil being a saleable commodity, could not be termed as semi-finished goods and the input services used to manufacture crude oil were not eligible for credit availment.
Cenvat credit on services not exclusively used in manufacture of exempted goods
The High Court noted that the appellant, as per Rule 6(1) of Cenvat Credit Rules, 2004, the appellant as a manufacturer of exempted products would not be entitled to Cenvat credit on such quantity of input service which is used in the manufacture of exempted goods but the same is  subject to Rule 6(5) wherein the over-riding provision allowed availment of Cenvat credit in respect of certain specified taxable services unless they are used exclusively in or in relation to the manufacture of exempted goods. It held that merely because the appellant manufactured exempted goods, the same would be no justification to disallow the benefit of availing Cenvat credit on that quantity of inputs utilised in or in relation to the manufacture of dutiable final products.
‘Input service’
The Court, while allowing credit in this case, noted that the definition of the expression “input service”  was cast in broad terms and placed emphasis on the terms ‘directly or indirectly’ and ‘in or in relation to’ and relied upon Supreme Court rulings in Escorts v. Commissioner and Collector v. Solaris Chemtech. 

On facts, the court observed that the dutiable final products that are manufactured by the appellant at the different location were fundamentally premised upon the manufacturing process at the first location and manufacture of the dutiable final products was not possible without the process undertaken at the first location.
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