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    Cenvat Credit of Input Services - a detailed study

    Introduction:

     

    CENVAT Credit Rules 2004 (for brevity ‘CCR 2004’) have replaced the erstwhile CENVAT Credit rules 2002 and Service Tax credit rules 2002, integrating the credit of goods and services, allowing adjustment against a manufacturer’s excise duty liability or a service provider’s service tax liability.

     

    However, credit for all services used by Manufacturer or service provider is not given. There are inclusions and specific exclusions to the ‘means part’definition of input services as per CCR, 2004. Also, CCR 2004 prescribes certain conditions for availing the credit on eligible input services. Let us have a brief look into the kind of services that are eligible for credit under CCR, 2004 and the procedure for availing the same.

     

    Constitution of ‘Input Service’ Definition:

     

    Rule 2(l) defines Input services. As said earlier, the definition has been broadly divided in to the following categories.

     

    • ‘Means’ part,

     

    • ‘Inclusion’ part,
    • ‘Exclusion’ part.

     

    In order to be eligible for credit as input service, the service should fall either under means part or inclusion part of the definition and the same should not be specifically excluded by the exclusion part.

     

    Let us look into each part and understand what is intended to be conveyed through them.

     

    Part 1: Input service means:

     

    1. Any service used by the service provider for providing an output service;

     

    1. Any service used by a manufacturer, whether directly or indirectly, ‘in or in relation to’ the manufacture of final products and clearance of final products upto place of removal.

     

    In other words, services, having direct or indirect nexus with the provision of output service or manufacture/clearance of excisable goods, are eligible as input service (subject to specific exclusions given in the definition).

     

    Part 2: Input service includes:

     

    • Services used in relation to modernisation, renovation or repairs of a factory, premises of service provider or an office relating to such factory or premises;
    • Advertisement or sales promotion, market research; storage upto place of removal, procurement of inputs;

     

     

     

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    • Accounting, auditing, financing;

     

    • Recruitment and quality control, coaching and training,computer networking;
    • Credit rating, share registry, business exhibition;
    • Security, legal services;
    • Inward transportation of inputs or capital goods and outward transportation upto place of removal.

     

    As one can observe, this part list outs two types of services. They are as follows:

     

    ØServices having direct nexus with the output service/goods. They are even covered under the ‘means part’ of the definition; But the same are specifically included under the ‘Inclusion part’ in order clarify the legislative intent and to put an end to certain vexatious litigation that took place over a period of time. Examples for such services are as follows;

     

    Ex- Services of Sales promotion, market research, storage upto place of removal,Inward transportation of inputs or capital goods and outward transportation upto place of removal.

     

    ØServices which do not have direct nexus, but are indirectly related/required for undertaking the business of providing output services or manufacture of excisable goods. Examples for such services are as follows;

     

    Ex-Accounting, auditing, financing,security etc.

     

    These are also specifically included, so as to make it clear that services which are used/required for the business, though not having direct/immediate nexus with provision of output service or manufacture/clearance of output good, are eligible as input services.

     

    Thus, one has to understand that these inclusions are not to be treated as exhaustive list, but as illustrative so as to explain the scope of the definition.

     

    Part 3: Input service excludes:

     

    1. Construction related services

     

    Works contract service and construction services including builder related services listed under clause (b) of section 66E of the Finance Act(hereinafter referred as ‘specified services’) used in construction of a building, civil structure or laying of foundation or making structures for support of capital goods are ineligible for CENVAT Credit as they are specifically excluded under the ‘Exclusion Part’ of the definition.

     

    However, the only exception is when the above specified services are used for the provision of one or more of similar specified services.

     

    By this, it can be said/understood that Credit of services (construction/works contract) relating to setting up of a manufacturing unit or office of service provider are not allowed;

     

     

     

     

     

     

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    CENVAT Credit of Input Services – A Detailed Study:

     

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    However, the said specified services are eligible for credit when they are used to provide similar services. Say for example, Mr.X has entered into a Contract with Mr. Y to construct an office building to him. In order to execute this contract, Mr. X has sub-contracted a portion of work to Mr. Z. As Mr. Z is providing works contract services to Mr. X, he will charge service tax. Mr. X is allowed to take Credit of this service tax as Mr. X is also engaged in providing similar service (construction / works contract) as that provided by Mr. Z.

     

    1. Motor vehicle related services:

     

    1. Services related to renting of a motor vehicle if they are related to a motor vehicle which is not a capital good (as per CCR 2004);
    2. Service of general insurance, servicing, repair and maintenance of a motor vehicle which is not a capital good (as per definition given in CCR 2004) except when used by:

     

    1. A manufacturer of motor vehicle in respect of a motor vehicle manufactured by such person,
    2. An insurance company in respect of a motor vehicle insured or reinsured by such person.

     

    In terms of the definition given for ‘Capital goods’, credit of excise duty paid on motor vehicles is allowed only for those service providers engaged in renting of motor vehicles, courier agency services and for transport of inputs and capital goods for any service provision. Thus, only for these service providers, the service tax paid on insurance, repair services, renting etc. in respect of motor vehicle are eligible for CENVAT credit. In all other cases, service providers are ineligible for CENVAT Credit.

     

    The above discussed analogy can be better understood by an example. A Chartered Accountant is engaged in providing services of a Chartered Accountant. He purchases a motor vehicle for use in his profession. As the motor vehicle purchased is neither used for renting, business of courier agency or transport of inputs, capital goods, credit of the excise duty paid on motor vehicle at the time of its purchase cannot be taken. Similarly, service tax paid any services procured by such Chartered Accountant in respect of such motor vehicle namely repairing, servicing, insurance shall not be allowed as Credit.

     

    However credit is allowed for service tax paid on re-insurance, repair services only to a manufacturer of motor vehicles or an insurance company engaged in the business of insurance and reinsurance of such motor vehicle.

     

    1. Services for personal use or consumption of employees:

     

    Services 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 any employee.

     

    The above mentioned list of services is just an illustrative and is not exhaustive. Thus service tax paid on any service procured by manufacturer or service provider for personal consumption of employees is ineligible for Credit

     

    However, this exclusion is only when such services are used primarily for personal use or consumption of any employee. Thus, service to employees for business purpose is allowed as input service.

     

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    CENVAT Credit of Input Services – A Detailed Study:

     

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    Ex: Telephone service for business purpose,

     

    Outdoor catering service for a promotional event of a company where apart from business delegates, employees also participate in the event.

     

    Procedure and conditions for availing CENVAT Credit on input services:

     

    1. Eligibility:

     

    Service used should be input service as per CCR 2004 by falling under the definition, and is consumed for providing taxable service or manufacture/clearance of excisable goods.

     

    1. Earliest point of time at which credit can be taken: Credit on input services can be availed at any time after the receipt of invoice from vendor.

     

    Even if the service is not yet received, you will be entitled to take credit upon receipt of invoice. However, the service should eventually be received and used for providing output service/manufacture of excisable goods. Thus credit is available even for advance payments alsofor which invoice is received, except in case where the services are not received at a later point of time.

     

    In case of services covered under reverse charge mechanism, where service receiver is required to pay service tax, credit cannot be availed upon receipt of invoice. Credit can be taken at any time after payment of the applicable service tax under reverse charge mechanism

     

    However, the credit availed in the above manner shall be required to be reversed in the following scenario:

     

    1. Credit availment should be within one year from invoice date. Thefact of availment should be established through ER1/ST-3 returns.

    In case of services not covered under reverse mechanism, the payment should within 3 months from invoice date. If not done, credit should be reversed. However, when payment made to vendor is made subsequently, credit can be availed again in the month of such payment.

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