Deleted 'setting up' from Rule 2(l). Hotels still won CENVAT credit.

Two Hotels, One Rule Change, and a ₹ Crore Question on CENVAT Credit

M/s Asrani Inns & Resorts Pvt. Ltd. built two hotels—one in Delhi, another in Hyderabad. To bring them to life, the company hired architects, structural consultants, soil investigators, fabricators, and irrigation specialists. It paid for telephones, security, and legal advice. On every one of these services, it paid service tax and claimed CENVAT Credit. The tax department said no. The stakes: the entire credit on services used to build the very premises from which the company would render its taxable output. The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Mumbai, had to decide whether a 2011 rule change that deleted the words “setting up” from the definition of “input service” killed the credit—or whether the hotels themselves were the answer.

The construction that became a tax dispute

Asrani Inns & Resorts is a registered service tax assessee in Mumbai. It constructed hotel premises in two cities. During construction, it availed a range of services: architect service, telephone expenses, security services, legal and professional service, structural consultancy, soil investigation, fabrication, and irrigation. The company paid service tax on these and claimed CENVAT Credit under Rule 2(l) of the CENVAT Credit Rules, 2004.

The Commissioner of Central Excise & Service Tax, Navi Mumbai, denied the credit. The reason: with effect from 1 April 2011, the definition of “input service” in Rule 2(l) was amended. The words “setting up” were deleted. The department argued that the services used to construct the hotels fell within the excluded category of “setting up” and therefore no credit was admissible.

The company appealed to the Commissioner of Central Excise & Service Tax (Appeals), Mumbai. On 9 January 2019, the appellate authority confirmed the denial. Order-in-Appeal No. MKK/409/RGD APP/2018-19 upheld the original order. The company then moved the CESTAT, Mumbai Regional Bench, in Service Tax Appeal No. 87325 of 2019.

What the department argued

The department’s case was straightforward: after 1 April 2011, the definition of “input service” no longer included services used for “setting up” of a business. The construction of a hotel from scratch, they said, was precisely that—setting up. The credit was therefore barred. The deletion was deliberate. The rule-makers intended to exclude capital expenditure on creating new assets from the credit chain.

What the company argued

The company’s counsel took a different route. They pointed to a directly on-point precedent: Lemon Tree Hotel v. Commissioner of Central Excise, Hyderabad (2017) 84 taxman.com 157, decided by a coordinate bench of the same Tribunal. In that case, the Tribunal had held that input services availed for works contract, project management, and structural professional services used for construction of a building which is subsequently used for rendering taxable output services are eligible for CENVAT Credit. The Tribunal had observed: “It is unimaginable that a hotel can render services without a building.”

The company argued that the services it used—architect, structural consultancy, soil investigation, fabrication, irrigation—were all directly related to bringing into existence the hotel premises. Those premises, once built, would be used to provide taxable output services like accommodation, food, and banquet facilities. The credit, they said, was not for “setting up” in the abstract. It was for “input services” that were integral to the output.

The distinction the Tribunal drew

Justice Anil G. Shakkarwar, Member (Technical), writing for the CESTAT Mumbai Regional Bench, examined the issue. The key question: did the deletion of “setting up” from Rule 2(l) w.e.f. 1 April 2011 exclude services used for constructing hotel premises?

The Tribunal held that it did not. The activity in question was “construction,” not “setting up.” The services—architect, telephone, security, legal, structural consultancy, soil investigation, fabrication, irrigation—were used to bring into existence immovable property. That property, once built, would be used for rendering taxable output services. The credit was therefore admissible.

The Tribunal followed Lemon Tree Hotel without hesitation. The reasoning: a hotel cannot provide its services without a building. The services used to create that building are input services. The deletion of “setting up” does not change that fundamental reality. What matters is the functional connection between the input service and the output service—not the label of the activity.

THE PLAY: If you used services to construct premises that will be used to render taxable output services, the CENVAT Credit survives the 2011 amendment—provided you can show the services were “input services” functionally connected to the output, not merely “setting up” in the abstract.

Why this matters for practitioners

This decision is a reminder that the CENVAT Credit regime is not a trap for the unwary. The deletion of “setting up” from Rule 2(l) was intended to exclude capital expenditure on creating new businesses from the credit chain. But it was not intended to deny credit for services that are integral to the output itself.

For advocates advising hotel, resort, and hospitality clients: the key is documentation. Show that the services—architect, structural consultancy, soil investigation, fabrication, irrigation—were used to create the premises from which taxable services will be rendered. Show the functional link. The Lemon Tree Hotel principle applies: if the building is essential to the output, the services used to build it are input services.

For CFOs and founders: this judgment protects your credit on construction-related services. If you are building a hotel, a resort, a convention centre, or any premises from which you will provide taxable services, the CENVAT Credit on architect fees, structural consultancy, soil investigation, fabrication, and similar services is admissible—even after the 2011 amendment. Do not let the department’s “setting up” argument scare you into giving up the credit.

The bottom line

The CESTAT set aside the impugned order and allowed the appeal. M/s Asrani Inns & Resorts Pvt. Ltd. gets its CENVAT Credit. The message is clear: if you build it, and you use it to provide taxable services, the credit follows—rule change or not.