Cenvat Credit Rules, 2004

4. Cenvat Credit Rules, 2004 :

4.1 Input Service :

Definition of input service with reference to any service
used by a manufacturer is amended and thereby restricted to include only those
services which are directly or indirectly used in relation to the manufacture of
final products and clearance of final products up to the place of removal
instead of ‘from the place of removal’.

Since the integration of credit rules vide CENVAT Credit
Rules, 2004 to facilitate credit of central excise duty and service tax across
goods and services, divergent views prevailed to interpret the term ‘input
service’ and more particularly, in the context of a manufacturer. On one hand,
services such as those in relation to modernisation, renovation, sales
promotion, market research and even auditing, credit rating, share registry,
etc. are specifically termed as input services and on the other hand in the
context of transportation of goods in a number of disputes, beginning with the
case of Gujarat Ambuja Cements Ltd. v. CCE, Ludhiana 2007 (6) STR 249
(Tri.-Del.), the meaning of the term ‘input service’ was interpreted narrowly,
and accordingly, credit of service tax paid on outward transportation of
manufactured goods in a process of sale was not considered allowable. In a
number of decisions, this decision was followed. However, in case of India
Cement & Others v. CCE, Tirupati 2007 (8) STR 43 (Tri.-Bang), it was held
that it is well covered within the main part of the definition and will squarely
fall within the meaning of the words ‘used in or in relation to the manufacture
of final products’ to constitute ‘input service.’ Considering diverse opinion on
interpretation of the term by the two Co-ordinate Benches, the matter has been
referred to a Larger Bench of the Tribunal of which the decision is still
awaited. The decision for all practical purposes will impact only cases pending
once this issue for the period until February, 2008 as post March 01, 2008, the
amendment in the definition has restricted the coverage. The question that
arises in any rational mind is that on one hand the Government made a move
forward in the direction of value added concept by specifically extending credit
in respect of service tax paid on activities relating to business such as
coaching and training, computer networking, credit rating, etc. which do not
have a direct relationship with manufacturing activity and also allowing credit
on post-manufacturing expenses of advertisement, sales promotion and market
research. What rationale is applied in narrowing the meaning in another context
in the same definition by modifying the words ‘from the place’ to ‘up to the
place’ ? The otherwise liberal and wide purview of the expression ‘whether
directly or indirectly in or in relation to the manufacture of final products’
appeared harmonious with the inclusive part of the definition prior to the
amendment and therefore the restriction appears not only inconsistent and
contradictory within the language of the definition, but also with the spirit of
extension of CENVAT credit and therefore, can be described as a backward step
from the movement towards the Goods and Service Tax (GST).

4.2 Introduction of proportionate CENVAT
credit :

Given the complexities in multifarious business enterprises,
examined below primarily is provision of Rule 6(2) of the CENVAT Credit Rules,
2004 (CCR) :

4.2.1 Rule 6(2) of CCR :

“Where a manufacturer or provider of output service avails
of CENVAT credit in respect of any inputs or input services and manufactures
such final products or provides such output service which are chargeable to duty
or tax as well as exempted goods or services, then, the manufacturer or provider
of output service shall maintain separate accounts for receipt, consumption and
inventory of input and input service meant for use in the manufacture of
dutiable final products or in providing output service and the quantity of input
meant for use in the manufacture of exempted goods or services and take CENVAT
credit only on that quantity of input or input service which is intended for use
in the manufacture of dutiable goods or in providing output service on which
service tax is payable.“

How does one maintain separate accounts for receipt,
consumption and inventory of input services meant for use in output service
and exempted service ? Unlike goods, quantification of services cannot be done
precisely and especially in case of services like telephone, security, auditing,
management consultancy, maintenance or repairs and many others, except
segregating on proportional basis, no other method is possible to maintain
separate account of receipt and consumption. In the scenario, condition of
maintaining separate accounts of receipt and consumption of input services used
for taxable output services and exempted services appears unrealistic. This is
besides the fact that the term ‘inventory’ being inapplicable to ‘input
services’, is faultily used in the context thereof. As a result, until 31st
March 2008, the only option left was to utilise only twenty percent of CENVAT
credit in case of all service providers providing both taxable and exempted
services and this led to huge accumulation of unutilised CENVAT credit balance
appearing as an asset in books of account.

4.2.2 New substitution :

An attempt now is made to overcome this by substituting the
said Rule 6(3) of the CCR with effect from April 01, 2008 by introducing an
option for a manufacturer to pay 10% of the value of exempted goods and for
service provider to pay 8% of the value of exempted services. In the
alternative, the manufacturer or the output service provider is required to pay
an amount equal to CENVAT credit attributable to inputs and input services used
for the manufacture of exempted goods or for providing exempted services, as the
case may be. The procedure for determining the portion of duty of service tax
inputs or input services is specified in Rule 6(3A).