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    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.

    Remission Or Cessation Of Future Liability - Tax Impact

    Income Tax Act, 1961("Act") provides for deduction of allowance or expenditure while computing business income chargeable to tax . However if after claiming the amount as expenditure earlier, any benefit is derived in subsequent year, such amount will be brought to tax by virtue of provisions of section 41 of the Act.

    The benefit obtained may be in the form of cash or any other manner. In order to attract the provisions of section 41(1) the benefit is with reference to loss or expenditure or some benefit in respect of trading liability by way of remission or cessation thereof.


    In case of succession of business the taxability, of any benefit with reference to loss or expenditure or cessation or remission of trading liability, is on the successor.

    The Loss or expenditure or remission or cessation of trading liability may be by way of writing off such liability unilaterally by the assessee or successor in business. [Explanation 1 to Section 41(1)].

    The remission or cessation is of trading liability in order to attract the provisions of section 41(1) -Nectar Beverages (P.) Ltd. v. Dy. CIT [2004] 139 Taxman 70/267 ITR 385 (Bom.).

    Creation of Provision and it's impact:‑

    Issue1:- If assessee creates a provision towards the liability to be incurred in future and such liability ceases to exist in the next year, will it attract the provisions of section 41(1)?

    Issue2:- Whether cessation of future liability will attract the provisions of section 41(1)?

    These issues came up before Bombay High Court in CIT Vs Jet Airways (India)Ltd(High Court Bombay- 66 166)


    Brief Facts of the case:- Assessee had made a provision of Rs. 3.28 Crores up to 31st March, 2005 in respect of expenses likely to be incurred on redelivery of the four air craft's taken on lease.

    During the relevant assessment year, the lease period in respect of the four aircrafts was to expire. However, the lease of the four air crafts was extended/renewed for a further period. As a result, the Respondent was not required to redeliver the four aircrafts to the lessor during the subject assessment year.

    1[Explanation 2].—For the purposes of this sub-section, “successor in business” means,—

    • where there has been an amalgamation of a company with another company, the amalgamated company;
    • where the first-mentioned person is succeeded by any other person in that business or profession, the other person;
    • where a firm carrying on a business or profession is succeeded by another firm, the other firm;
    • where there has been a demerger, the resulting company


    On the basis of the above, the Assessing Officer invoked Section 41(1) of the Act and held that there was cessation of liability and sought to bring the entire amount which was provided for on the above account of Rs. 3.28 Crores to tax.

    Assessee has filed appeal before CIT(Appeals) against the order of the assessing officer. The CIT(Appeals) held that there was no cessation of liability as the lease has been extended for a further period. Thus, expenses which are likely to be incurred at the time of redelivery of the four air crafts continue and the provision made continue. Thus, there was no occasion to invoke Section 41(1) of the Act and the addition was deleted.

    Department has filed an appeal against the order of CIT(Appeals) to the Tribunal. Tribunal upheld the findings of the CIT(Appeals). Further, the department has filed an appeal against the order of Tribunal to the High Court.

    The Bombay High Court held that the lease for the air crafts has been extended for further period and liability of expenses at the time of redelivery of the aircrafts has not ceased. Thus, the same would have to be provided for, as it is likely to be incurred when the lease expires and said four air crafts are redelivered.

    "Section 41(1) of the Act has application only when there is cessation and/or remission of liability incurred (which has been duly paid and/or pro vided for) in the subsequent years, consequent of which some benefit in cash or in any other manner were obtained by the party whose liability has ceased. In this case, in fact, there is no cessation or remission of liability nor any benefit obtained by the Respondent-Assessee for the purposes of Section 41(1) of the Act to be invocable.”


    Brief Facts of the case:‑

    Assessee purchased five aircrafts under hire purchase agreement and claimed depreciation on them. Later Assessee sold five aircrafts which had been taken on hire purchase basis and in view of the fact that the air crafts have been sold the balance amount of instalments payable in future would not now be payable.

    The Assessing Officer held that non-payment of balance instalments resulted in benefit referred to in section 41(1) and hence taxable. Thus, made an addition of the benefit of Rs. 100.52 Crores a result of the difference between sale consideration received and instalment payable which is now not payable. This benefit of Rs. 100.52 Crores being chargeable to tax under Section 41(1) of the Act.

    Assessee filed an appeal before CIT (Appeals) challenging the order of the assessing officer. CIT (Appeals) held that "Assessee was the owner of the said aircrafts as held in the earlier assessment years and the claim of depreciation on this aircraft has also been allowed. However, on the sale of the five aircrafts, their value was also reduced from the block of assets. Thus, there was no question of any cessation or remission of liability for the purpose of Section 41(1) of the Act to apply".

    Department filed an appeal against the order of CIT (Appeals) before Tribunal. Tribunal upheld the order of CIT (Appeals).


    On further appeal to High Court the court held that the amount of Rs. 361.72 Crores being instalment payable in the future was never claimed as a deduction/expenditure/loss or trading liability by the Respondent-Assessee.


    Thus, no occasion arises for the purposes of Section 41(1) of the Act being invoked. Accordingly, the findings of the CIT(Appeals) and Tribunal that Section 41(1) of the Act is not applicable in the facts of the present case is self-evident. Therefore, the proposed of question of law as formulated does not give rise to any substantial question of law and not entertained.



    Cessation of future liability is not a benefit within the meaning of provisions of section 41(1) as no deduction or allowance was claimed. Though the expenditure under section 41(1) covers capital


    expenditure also mere cessation of future liability towards it will not warrant applicability of provisions of section 41(1).


    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

    Frequently Asked Questions- Payment Of Bonus Act,1936

    1. To which companies / establishments, the payment of bonus act shall be applicable?

    The Act is applicable to Factories employing 10 or more persons and other establishments employing 20 more persons on any day during the financial year.

    When once applicable, the Act will continue to be applicable even when the numbers of persons employed have reduced in the subsequent financial year.

    1. Is Payment of Bonus Act is applicable to newly established factories and establishments?

    Yes. The Act is applicable to newly established factories and establishments from the date of profits being derived as stipulated under the Act irrespective of completing 5 years or not.

    For Clarity, the financial year in which the first invoice is raised is taken as the year of commencement of business. After the said year, during the first five years, bonus will become payable only for the financial years in which the new factory or establishment derives profit. If the company has not derived profit during the first 5 years of its existence after completion of the financial year in which first invoice has been raised, the company is not required to pay bonus under the Act.

    1. One company may have different units established at different times. Some unit may be profitable and some other units may be incurring losses. Whether all the units are entitled for bonus or not?

    As long as separate accounts and individual balance sheets are maintained for distinct units, bonus is payable in accordance with profit derived by the respective units.

    In the matter of workmen of Modern Mills Vs General Manager [1986 (2) LLJ 329] it has been held that where a separate profit and loss account and balance sheet has been maintained by the employer as regards any unit or branch thereof, employees of that unit would be entitled to bonus on the basis of the financial statements of that unit but the requirement being that he has done so in the previous year also.

    The Supreme Court in the matter of workmen of HMT Vs National Tribunal [AIR 1973 SC 2300] held that in case where the different units have been treated separately for the purpose of computation of bonus and separate balance sheet, profit and loss accounts have been prepared in respect thereof the unit would not lose their separate identity as establishment.

    1. Is employer liable to pay bonus even when the company has not made any profits?

    After completion of first 5 years from the financial year in which first invoice is raised, the company is liable to make payment of bonus to its eligible employees at a rate of 8.33 percent of the wages or salary earned during the financial year subject to other conditions stipulated in this regard even though the company does not have allocable surplus in the accounting year.


    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

    Proposed Caro, 2016 With Additional Reporting Requirements


    On 9th February, 2016 the Ministry of Corporate Affairs has proposed new Companies (Auditor's Report) Order (CARO), 2016. The Ministry had set-up a Committee on 16th September, 2015 to examine and recommend matter for inclusion in the statement to be attached with Auditor’s Report under Section 143(11) of the Companies Act, 2013 (2013 Act) for the financial year 2015-16 onwards.

    Section 143(11) of the Companies Act, 2013requires that the auditor’s report of specified class of companies should include a statement on the prescribed matters. As per the section 143 of the Companies Act, 2013, every report of the auditor under this section should contain matters specified under applicable CARO.

    The newly proposed CARO, 2016 contains 15 clauses, out of which some clauses have been carried forward from present CARO, 2015. MCA has issued exposure draft of CARO, 2016 for stakeholders’ comments. The draft, if approved, shall be applicable for FY 15-16 onwards.

    In comparison to CARO (2015), CARO (2016) proposes few additional reporting requirements and eliminates some of the reporting requirements.

    1. Applicability

    Every report made by the auditor under Section 143 of the 2013 Act for Financial Year commencing on or after April 1st 2015 would include CARO 2016. There is no difference between CARO, 2016 and CARO, 2015 from the point of view of applicability, except that CARO, 2016 is not applicable on private limited company, not being a subsidiary or holding of a public company, when its:

    • Paid up capital and reserves and surplus does not exceed Rs. 1 crore as at balance sheet date; and
    • Total borrowings from banks or financial institution at any point of time during financial year does not exceed Rs. 1 crore; and
    • Total revenue, including revenue from discontinuing operations, does not exceed Rs. 10 crore.

    Other companies not covered under CARO 2016

    • Banking company as defined under section 5(c) of the Banking Regulation Act, 1949.
    • Insurance company as defined under the Insurance Act, 1938
    • Companies incorporated with Charitable objects, that is companies licenses to operate under the Section 8 of 2013 Act.
    • One Person Company as defined under section 2(85) of the 2013 Act
    • Small company as defined under section 2(85) of the 2013 Act

    CARO, 2016 shall not apply to the auditor's report on consolidated financial statements whereas CARO, 2015 is applicable in such case. CARO is applicable to a foreign company as defined under Section 2(42) of the 2013 Act.


    As compared to CARO 2015, the reporting requirements under the CARO 2016 (draft) have been increased.

    .               Additional reporting requirements in CARO, 2016 Fixed Assets

    Auditor should report whether title deeds of immovable properties are held in the name of the company. If not, provide details thereof.

    Loans and investments

    Auditor should report whether the company has granted any loans, secured or unsecured to companies, firms or other parties covered by clause (76) of Section 2 of the Companies Act, 2013. If so whether the terms and conditions of the grant of such loans are not prejudicial to the company's interest.

    Auditor should report in respect of loans, investment and guarantees, whether provisions of section 185 and 186 of the Companies Act, 2013have been complied with. If not, details should be provided


    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

    Exploring The Controversy Of Service Tax Applicability On Goods Transport Operators


    Under the erstwhile positive based taxation scheme, service tax on road transport services was initially introduced in the year 1997 and the levy is on ‘Goods Transport Operators’. Considering the hue and cry from the truck operators across the nation, levy of service tax is withdrawn. Levy of service tax is re-introduced in year 2004 on ‘Goods Transport Agency Services’.Now under the Negative list regime effective from 01.07.2012, all goods transport services are covered under Negative list except the services of ‘Goods Transport Agency’ and Courier Agency

    The above mentioned legal developments would certainly indicate that there is no service tax on services of ‘Goods Transport Operator’ services. However recent judicial decisions are contrary to this view on the reasoning that goods transport agency services includes services of truck operators. In this backdrop, an attempt is made to unleash various facets of this controversy.

    Legislative Background in Levy of Service Tax on ‘Goods Transport Agency’ Service:

    As discussed above, after the levy was withdrawn on the services of truck operators, Government has constituted a Committee(Bharadwaj Committee) to suggest the modalities to levy service tax on goods transport services. The key recommendations of this Committee are reproduced as under;

    1. Recommended to levy service tax on services provided by any commercial concern which (is common carrier under the Carriers Act, 1865) books the goods for transportation by road, issues consignment note and provides value added services over and above the mere carriage of the goods be called the goods booking agency.
    2. The committee recommended to make it mandatory to these agencies to issue a consignment note to the sender of goods against the receipt of goods for transportation. For this purpose, it is recommended to amend the Carrier Act, 1865. It is also suggested that till such time the said act is amended, the said requirement can be made mandatory under Service Tax laws or by notifications.
    3. Any organization/person who possesses the vehicle by virtue of ownership under lease/hire agreement etc and is responsible only for affecting the carriage of goods and is not required to issue consignment note. The truck owner can alternatively be called as truck operator. Normal truck operators who hire their vehicles for transportation are not subject to service tax.
    4. As transport sector is unorganized, the committee also recommended implementing reverse charge mechanism keeping the liability to pay service tax to Government either on the consignor or consignee responsible to pay freight.


    With these recommendations, service tax is reintroduced in the FY 2004-05 on the services of ‘Goods transport agency’ i.e. those providing services in relation to transport of goods by road and are required to issue consignment note.

    Accordingly, the term ‘Goods Transport Agency’ was defined under the erstwhile section 65(50b)— “means any person who provides service in relation to transport of goods and issues consignment note by whatever name called .”

    With these legal developments and committee recommendations, it is very clear that the legislative intent is not to tax the services of truck owners whether it is individual truck owners or organizations owning trucks. Otherwise there is no requirement to re-draft/rephrase the legal provisions when the levy is re-introduced in the FY 2004-05. Further, this legislative intent is clearly evident by budget speech of Finance Minister. The relevant extract is reproduced as under;

    “149. 58 services have been brought under the net so far. I propose to add some more this year. These are business exhibition services; airport services; services provided by transport booking agents, transport of goods by air; survey and exploration services; opinion poll services; intellectual property services other than copyright; brokers of forward contracts; pandal and shamiana contractors; outdoor caterers; independent TV/radio programme producers; construction services in respect of commercial or industrial constructions; and life insurance services to the extent of risk premium. I may clarify that there is no intention to levy service tax on truck owners or truck operators........................................................ ” (emphasis supplied)

    Now under the Negative List regime, Section 66D provides for negative list of services. Entry(P) of this list provides that all services provided by way of transportation of goods by road except the services of a ‘goods transport agency’ or ‘courier agency’. Further the term ‘Goods Transport Agencny’ has been defined under Section 65B(26) by reproducing the same definition as prevailing under section 65(50b) as stated above.

    Thus the legal provisions both under erstwhile regime as well as under the negative list regime are same and moot the intention to levy service tax only on services of goods transport agency alone. However, the revenue went on to stretch the meaning of the word ‘goods transport agency’ to include services of truck operators also and accordingly the matter landed before the judicial forums.

    Position upheld by Judicial Forums in the initial years of levy:

    The judicial forums in the initial years of levy have resorted to the same interpretation considering the committee report and finance minister speech, concluded that services provided by truck owners are not subject to service tax. The following decisions are for reference.

    1. Lakshminarayana Mining Co vs. CST, 2009(16)STR691(Tri-Bang)
    2. CCE vs. Kanakadurga Agro Oil Products Private Limited, 2009(15)STR399(Tri-Bang)
    3. KMB Granites Private Limited vs. CCE,2010(19)STR437(Tri-Bang)

    Subsequent Regulatory Legislation ‘The Carriage By Road Act, 2007’ in congruence with above position:

    Subsequently, a regulatory legislation ‘The Carriage by Road Act, 2007 was passed by Parliament which

    repealed the earlier Carriers Act, 1865. As stated above, the committee recommended to levy service tax

    on services of common carriers alone excluding the truck operators. Accordingly, ‘Common Carrier’ is

    defined under section 2(a) of the Act as follows;

    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.


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