1. Scope and background:
1.1 Scope of ‘Inputs’/Input Services — Subject of extensive litigations:
The scope of ‘inputs’ and ‘input services’ eligible to CENVAT credit under the CENVAT Credit Rules, 2004 (CCR) has been subject of extensive judicial controversy having significant implications.
The Supreme Court had interpreted the scope of ‘inputs’ narrowly in the case of Maruti Suzuki Ltd. v. CCE, (2009) 240 ELT 41 (SC).
In Chemplast Ltd. v. CCE, (2010) 17 STR 253, it was held that ‘input services’ definition including activities relating to business cannot be interpreted to include post-manufacturing activities. In Kbace Tech Pvt. Ltd. (2010) 18 STR 281, a narrow interpretation of ‘input service’ was made on the basis of Supreme Court ruling in Maruti Suzuki (supra).
In the mean time, the Bombay High Court in a landmark ruling in Coca Cola India Pvt. Ltd. v. CCE, (2009) 15 STR 657 (Bom.) held that scope of ‘input services’ is very wide to cover all business related services.
However, in CCE v. Manikgarh Cements Works, (2010) 18 STR 275 (Tri.-Mumbai), the Tribunal, held that the Bombay High Court ruling in Coca Cola case has been impliedly overruled by the Supreme Court ruling in Maruti Suzuki in regard to inputs, and a narrow interpretation was given to the scope of ‘input service’. This ruling was confirmed by the Bombay High Court in CCE v. Manikgarh Cement, (2010) 20 STR 456 (Bom.).
In a subsequent ruling by the Bombay High Court in CCE v. Ultratech Cement Ltd., (2010) 20 STR 577 (Bom.), after considering the Supreme Court ruling in Maruti Suzuki and the Bombay High Court ruling in Coca Cola, a wide interpretation has been given to the scope of ‘input services’ eligible to CENVAT credit.
Amidst all this, in a subsequent ruling, the Supreme Court in Ramala Sahkari Chini Mills Ltd. (2010) 260 ELT 321 (SC) doubted the Supreme Court ruling in Maruti Suzuki and has referred the matter to a larger Bench.
On this backdrop, significant and far-reaching changes have been made in CCR w.e.f. 1-4-2011, in particular relating to scope of ‘inputs’/ ‘input services’ eligible to credit rule providing for proportionate credit rules, point of credit availment, etc.
The more important amendments, essentially from a service provider’s perspective are discussed hereafter.
1.2 Government clarification:
Relevant extract from the Department clarification dated 28-2-2011 explaining the amendments is as under:
Para 1.1
The changes in the Cenvat Credit Rules are guided inter alia by the following considerations:
(a) Describe the scope of eligible inputs and input services more clearly so as to minimise disputes in their interpretation;
(b) Eliminate distortions and areas of tax avoidance arising from differential treatment of goods and services used for similar purposes;
(c) Provide a practical scheme for the segregation of Cenvat credits used in respect of final products and output services where they are partially exempted with condition that no such credits shall be taken;
(d) Liberalise the provisions in certain areas to meet the legitimate demands of business;
Overall comments:
An overall study of the amendments in CCR in totality clearly indicates that the CENVAT credit benefit of service tax paid on input services, would be substantially curtailed with effect from 1-4-2011.
The rate of service tax was increased from 5% to 10% during a short period of about 15 months. At that time, questions were posed before the Government, as to how would the business and end consumers absorb the 100% increase in a short time. At that time, Government had explained to the effect that impact of increase in the rate of service tax would be substantially neutralised by introduction of CENVAT credit mechanism across goods and services. The amendments are clearly against the stated position of the Government.
Further, it is the cardinal principle of VAT/GST tax system prevalent in over 100 countries that taxes paid on expenditure incurred for the purpose of business can be set off against VAT/GST payable at the output stage. Amendments in CENVAT credit denying credit of service tax paid on business expenses, is against the principles of VAT/ GST system prevalent world-wide.
Further, amendments do not appear to be trade/ taxpayer-friendly in the backdrop of imminent introduction of GST regime.
2. Exempted services:
Definition of ‘exempted services’ in Rule 2(e) of CCR has been amended to include taxable service, which is partially exempted, on the condition that no credit of inputs/input services used for taxable service shall be taken.
An Explanation has been added to clarify that ‘exempted services’ includes trading.
Comments:
(a) It is commonly found that a person is often engaged in trading activity (buying and selling of goods/services). The same could exist in one or more of the following combinations:
- Only trading
- Manufacturing and trading
- Services and trading
- Manufacturing, services and trading
As regards pure trading activity, it was very clear that benefit of CENVAT credit (viz. Service Tax paid on input services and excise duty paid on inputs/capital goods) would not be available to such dealer.
In Metro Shoes Pvt. Ltd. v. CCE, (2008) 10 STR 382 (Tri.-Mumbai) it was observed as under:
“. . . . . . Credit availed on the services which are directly/wholly attributable to the trading activity is ineligible to be availed as input service credit.”
In regard to persons engaged in trading activities along with manufacturing/services/or both, there was no clarity as regards availment of CENVAT credit on common input services.
In the case of Orion Appliances Ltd. v. CST, (2010) 19 STR 205 (Tri.-Ahd.) where the assessee, providing taxable services and engaged in trading activity, availed CENVAT credit on iput services used for taxable services as well as trading activity, the Tribunal held as under:
Trading activity is nothing but purchase and sales and cannot be called a service and therefore it cannot be considered as exempted service.
Rules 6(2) and 6(3) of CCR only deal with a situation where service provider is providing taxable and exempted services. Therefore, since trading activity is not an exempted service, Rule 6 cannot be applied to such a situation.
(b) On this backdrop, the burning issue of common input services in regard to trading activity is sought to be addressed by treating ‘trading’ as ‘exempted service’ through insertion of an Explanation in Rule 2(e) of CCR which defines ‘exempted services’.
This is a significant amendment, spelling out an important policy perspective, which is likely to result in curtailment on CENVAT credit available to service providers involved in trading business. It is felt that a clarification need to be issued to the effect that the amendment would be effective 1-4-201
Further, one can understand ‘trading activities’ being treated on similar lines as ‘exempted services’ for the limited purpose of determination of proportionate credit under Rule 6 of CCR. However, amendment made in section 2(e) of CCR, is likely to result in larger legal issues as to whether ‘trading activity’ can be regarded as ‘service’ at all so as to be regarded as ‘exempted services’.
(c) It seems that all services in respect of which, abatement is claimed (in terms of Notification No. 1/2006-ST) would now get treated as ‘exempted services’. Thus services like mandap keeper construction of complex commercial or industrial construction, catering, etc. where abatement is allowed subject to the condition that CENVAT credit is not availed, would all be now treated as ‘exempt servi
