The definition of “input service” under Cenvat Credit Rules, 2004 has been amended drastically w.e.f. April 2011 and because of such amendments, majority of interpretations and settled positions have taken U-turn. One of them is CENVAT credit on catering service was allowed prior to April 2011. However, w.e.f. April 2011, there is specific exclusion of catering service from the definition of “input service” and accordingly, almost all the companies have stopped taking CENVAT credit on catering service.
Rule 2 (l) of Cenvat Credit Rules excludes outdoor catering from the definition of input service under clause (c), which is as under-
(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as leave or Home Travel Concession, when such services are used primarily for personal use or consumption of employee;
In the definition of input service Government has specifically used the words such as “used primarily for personal use or consumption of any employee”, and every word has it meaning in the law. The same was also held by Hon’ble Supreme Court in the case of Union of India Vs. Hansoli Devi - 2002 (9) TMI 799 - SUPREME COURT, wherein it has observed that “the legislature never waste its words or say anything in vain and a construction which attributes redundancy to legislation will not be accepted except for compelling reasons”.
The intention of exclusion of such services by the Government appears to be to negate claims for expenses that are passed off as business expenses, but are personal in nature. However, this exclusion is only when such services are used primarily for personal use or consumption by any employee. This exclusion will not apply in other cases.
Cenvat credit on outdoor catering services used in relation to business activities continuous to be eligible input service even after amendment in the definition of input service w.e.f. April 1, 2011, when the cost is borne by the company not recovered from the employees.
In Circular No.943/4/2011-C., dated 29 April 2011 wherein it was clarified that outdoor catering service is per se not an ineligible input service but it is not eligible for credit only when it is used for personal use or consumption of any employee or a sub-group of employees.
Further, in this connection, recently one decision was published in the case of M/s Hindustan Coca Cola Beverages Pvt. Ltd. v/s CCE, reported in 2014 (12) TMI 596 - CESTAT MUMBAI wherein the Hon’ble CESTAT, Mumbai Bench held that post 2011, catering service is excluded from input service definition only when such service is primarily for personal use or consumption of any employee. When the company has borne the cost of catering and not recovered from the employees, then in that case, it cannot be treated as such catering service is primarily for personal use or consumption of employee and accordingly, CENVAT credit is allowed. In other words, catering service would be treated as primarily used for consumption of employee only when any cost of catering is recovered from the employees of the company.
It should be possible to claim CENVAT credit in respect of all the services which are not primarily meant for personal use or consumption of employee. In other words, if the assessee could prove that primary intention of procurement of the service is to facilitate taxable output activity and the element of personal use is only incidental, there should not be any difficulty in claiming CENVAT credit for the same. What is the element of personal use or consumption would be a matter of fact and could vary from case to case.
In case of Stanzen Toyotetsu India (P) Ltd. Vs.CCE, Bangalore-2011 (4) TMI 201 - KARNATAKA HIGH COURTthe Hon'ble High Court adverted to the mandatory provisions of Section 46 of the Factories Act and took the view that CENVAT credit could not be denied in respect of outdoor catering service as it was their statutory liability to maintain a catering where the number of employees were more than 250. As the catering services are provided by the appellant as a part of its business need and obligation to the employees who are the essential hands of the business and without the said workers/employees, the appellant would not be in position to provide the output service. Hence, it has a direct bearing on output services.
Service tax paid on outdoor catering would be eligible for CENVAT credit provided that the service is used by the company for business purposes. By which we mean that such costs incurred should form part of the cost of final product sold, leviable to excise duty or forms part of the gross amount charged for arriving at the value of output service provided for levy of service tax and the expense incurred should not be borne/ reimbursed from the employees.
Accordingly, if a business has incurred outdoor catering expenses, then the treatment given for claiming credit needs to be evaluated. Therefore, in light of the recent judgments and the provisions of CENVAT credit, it is imperative that a business should undertake a review of its entire credit and accordingly decides the treatment for claiming of credit.