A recent decision of the Tribunal has created quite a flutter, as it has held that canteen/ catering services provided by a company to its employees are unrelated to business and are, hence, not eligible as input services under the law. It is interesting to note that in arriving at this decision, the Single Member has set aside the order of the appellate Commissioner who had held that such services were indeed admissible for input tax credits. This is yet another case where the broad objective of ensuring that all input service taxes are offset against an output service tax, so as to ensure that the service tax operates as a pure value added tax, is not achieved.
The relevant provisions define input services as those used by a provider of taxable services for providing an output service or used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products. The definition extends further and includes a range of services. These will be addressed shortly, but if attention is to be paid to the initial part of the definition extracted above, it can be seen that for a service provider, as opposed to a manufacturer, any service used for providing the output service is an input service and hence admissible to credits.
The word for is, as per a series of judicial decisions, a word which is required to be interpreted in a broad manner and is a word of expansion and not contraction. Thus, all services which either directly or indirectly have a relation/ nexus to the provision of the output service would qualify. As regards the manufacturer, a service which is used whether directly or indirectly and in or in relation to the manufacture of final product qualifies for credits. Here again, the use may be direct or indirect and can be either in the manufacture or in relation to the manufacture of goods. The words directly or indirectly and in or in relation to have been judicially interpreted to be words of expansion. Therefore, even with regard to a manufacturer, inputs which have a broad relation/ nexus with manufacture would qualify.
In the case under reference, the canteen/ catering services were provided to workers who were engaged in manufacturing goods. Such services could conceivably qualify purely in terms of the initial part of the definition as discussed above. Therefore, arguably, such services would qualify under the first part of the definition of input services. If such services are mandatorily to be provided, in terms of the Factories Act, 1948, it can be argued that the point is further reinforced that the canteen/ catering services qualify as input services.
Proceeding to the subsequent and inclusive part of the definition, several services are referred to thereunder, including activities relating to business. The expression activities relating to business is then qualified by the words such as, which thereafter go on to include accounting, auditing, financing, recruitment, quality control, coaching and training, computer networking, credit rating, share registry, security and inward/outward transportation. Now, if these activities, which are described subsequent to the words such as are analysed, a clear conclusion can be drawn that these are disparate and heterogeneous activities. Consequently, no conclusion may be drawn that such activities are connected with business in any particular sense. Therefore, it can be argued that canteen/ catering services qualify here as well.
The Tribunal appears to have erred in understanding the activities as requiring a nexus with the business of manufacture. The inclusive part of the definition is distinct and distinguishable from the earlier part of the definition and is applicable to both the service provider as also the manufacturer. The problem is that the earlier part of the definition is related to manufacture whereas the inclusive part of the definition is not so related. A harmonious construction is therefore required to be done in this regard.
Arguably, canteen/ catering services qualify as input services not only within the first part of the definition but also under the subsequent and inclusive part of the definition, whether provided by a service provider or by a manufacturer. The case of the service provider is on a better footing. The basis by which the Tribunal has disallowed the benefit to such services is not explained or discussed in any meaningful sense. The decision simply holds that canteen and catering services cannot be treated as activities relating to business without affording any explanation as to why this is so. Further, the Tribunal has distinguished such activities by suggesting that they are welfare activities and thus not related to business. There has been no elaboration of either the appropriate interpretation of the definition of input services or the rationale followed by the Tribunal in arriving at its decision. It is a decision simplicitor without any substantive discussion.
It appears that a more detailed decision, harmoniously interpreting the entire definition of input services, is needed so that clarity is obtained on the matter. Meanwhile, it would also be advisable to consider amending the definition itself and perhaps the safe harbour provisions of Rule 6(5) of the CENVAT Credit Rules 2004 as well, so as to ensure that such services qualify for credits. It is hoped that this matter is addressed without delay since it is significant, both from a policy standpoint as well as in terms of the stakes involved.
S Madhavan The author is Leader, Indirect Tax Practices, PricewaterhouseCoopers. Views expressed are his own.