PROVISIONS RELATING TO CENVAT CREDIT ON ‘INPUT SERVICES’

[Mr. M. GOVINDARAJAN]

Readers may know that the interpretation of the definition of ‘input service’ paves way too much litigation either by assessee or by the department in appeals. In this article the provisions, in to, relating to CENVAT credit on input services are discussed in detail.

DEFINITION

Rule 2(l) defines the term ‘input service’ as any service, -

(i) used by a provider of output service for providing an output service; or

(ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products up to the place of removal, and includes services used in relation to modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage up to the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation up to the place of removal; but excludes,-

(A) service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act (hereinafter referred as specified services) in so far as they are used for -

(a)  construction or execution of works contract of a building or a civil structure or a part thereof; or

(b) laying of foundation or making of structures for support of capital goods,

except for the provision of one or more of the specified services; or

(B) services provided by way of renting of a motor vehicle, in so far as they relate to a motor vehicle which is not a capital goods; or

(BA)  service of general insurance business, servicing, repair and maintenance , in so far as they relate to a motor vehicle which is not a capital goods,  except when used by -

(a) a manufacturer of a motor vehicle in respect of  a motor vehicle manufactured by  such person ; or

(b) an insurance company in respect of a motor vehicle insured or reinsured by such person; or

(C) 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.

TAKING AND UTILIZING CREDIT

Rule 3(1) provides that a manufacturer or producer of final products or a provider of output service shall be allowed to take credit of the service tax leviable under section 66 of the Finance Act; the service tax leviable under section 66A of the Finance Act; and the service tax leviable under section 66B of the Finance Act paid on any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, 2004, including the said tax, or cess paid on any input service, used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 214/86- Central Excise, dated the 25th March, 1986, published in the Gazette of India vide number G.S.R. 547 (E), dated the 25th March, 1986, and received by the manufacturer for use in, or in relation to, the manufacture of final product, on or after the 10th day of September, 2004.

Rule 3(4) provides that the CENVAT credit may be utilized for payment of -

(a) any duty of excise on any final product; or

(b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or

(c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or

(d) an amount under sub rule (2) of rule 16 of Central Excise Rules, 2002; or

(e) service tax on any output service:

While paying duty of excise or service tax, as the case may be, the CENVAT credit shall be utilized only to the extent such credit is available on the last day of the month or quarter, as the case may be, for payment of duty or tax relating to that month or the quarter, as the case may be.   CENVAT credit shall not be utilized for payment of any duty of excise on goods in respect of which the benefit of an exemption under notification No. 1/2011-CE, dated the 1st March, 2011 is availed.

CENVAT credit of service tax, paid on input services, used in the manufacture of final products cleared after availing of the exemption under the following notifications of Government of India in the Ministry of Finance (Department of Revenue),-

(i) No. 32/99-Central Excise, dated the 8th July, 1999 [G.S.R. 508(E), dated 8th July, 1999];

(ii) No. 33/99-Central Excise, dated the 8th July, 1999 [G.S.R. 509(E), dated 8th July, 1999];

(iii) No. 39/2001-Central Excise, dated the 31st July, 2001 [G.S.R. 565 (E), dated the 31st July, 2001];

(iv) No. 56/2002-Central Excise, dated the 14th November, 2002 [G.S.R. 764(E), dated the 14th November 2002];

(v) No. 57/2002-Central Excise, dated 14th November, 2002 [G.S.R.. 765(E), dated the 14th November, 2002];

(vi) No. 56/2003-Central Excise, dated the 25th June, 2003 [G.S.R. 513 (E), dated the 25th June, 2003]; and

(vii) No. 71/2003-Central Excise, dated the 9th September, 2003 [G.S.R. 717 (E), dated the 9th September, 2003],

shall, respectively, be utilized only for payment of duty on final products, in respect of which exemption under the said respective notifications is availed of.

CONDITIONS FOR AVAILING CREDIT

Rule 4 stipulates conditions for availing CENVAT credit on input services. Rule 4(7) provides that  The CENVAT credit in respect of input service shall be allowed, on or after the day on which the invoice, bill or, as the case may be, challan referred to in Rule 9 is received.

In case of an input service where the service tax is paid on reverse charge by the recipient of the service, the CENVAT credit in respect of such input service shall be allowed on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to in Rule 9.

In case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in Rule 9, is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT credit availed on such input service and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules:

If any payment or part thereof, made towards an input service is refunded or a credit note is received by the manufacturer or the service provider who has taken credit on such input service, he shall pay an amount equal to the CENVAT credit availed in respect of the amount so refunded or credited:

CENVAT credit in respect of an invoice, bill or, as the case may be, challan referred to in Rule 9 issued before the 1^st day of April, 2011 shall be allowed, on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to in Rule 9.

The explanation I to this sub rule provides that the amount mentioned in this sub-rule, unless specified otherwise, shall be paid by the manufacturer of goods or the provider of output service by debiting the CENVAT credit or otherwise on or before the 5th day of the following month except for the month of March, when such payment shall be made on or before the 31st day of the month of March.

The explanation II to this sub rule provides that if the manufacturer of goods or the provider of output service fails to pay the amount payable under this sub-rule, it shall be recovered, in the manner as provided in Rule 14 for recovery of CENVAT credit wrongly taken.

The explanation II to this sub rule provides that in case of a manufacturer who avails the exemption under a notification based on the value of clearances in a financial year and a service provider who is an individual or proprietary firm or partnership firm, the expressions, “following month” and “month of March” occurring in sub-rule (7) shall be read respectively as “following quarter” and “quarter ending with the month of March.

REFUND OF CREDIT

Rule 5 deals with the refund of CENVAT credit. Rule 5(1) provides that a service provider, who provides an output service which is exported without payment of service tax, shall be allowed refund of CENVAT credit as determined by the following formula subject to procedure, safeguards, conditions and limitations, as may be specified by the Board by notification in the Official Gazette:

A = (B+C) * D/E

 Where,-

• A is Refund amount - the maximum refund that is admissible;
• B is the Export Turnover of goods - the value of final products and intermediate products cleared during the relevant period and exported without payment of Central Excise duty under bond or letter of undertaking;
• C is Export turnover of services - payments received during the relevant period for export services + export services whose provision has been completed for which payment had been received in advance in any period prior to the relevant period – advances received for export services for which the provision of service has not been completed during the relevant period;
• D is the net CENVAT credit - total CENVAT credit availed on inputs and input services by the manufacturer or the output service provider reduced by the amount reversed in terms of sub-rule (5C) of rule 3, during the relevant period;
• E is the total turnover -  sum total of the value of -

(a) all excisable goods cleared during the relevant period including exempted goods, dutiable goods and excisable goods exported;

(b) export turnover of services determined in terms of clause (D) of sub-rule (1) above and the value of all other services, during the relevant period; and

(c) all inputs removed as such under sub-rule (5) of rule 3 against an invoice, during the period for which the claim is filed.

Rule 5(2) provides that this rule shall apply to exports made on or after the 1^st April, 2012.

The refund may be claimed under this rule, as existing, prior to the commencement of the CENVAT Credit (Third Amendment) Rules, 2012, within a period of one year from such commencement. No refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback allowed under the Customs and Central Excise Duties and Service Tax Drawback Rules, 1995, or claims rebate of duty under the Central Excise Rules, 2002, in respect of such duty; or claims rebate of service tax under the Service Tax Rules, 1994 in respect of such tax.

 For the purposes of this rule,-

(1) “export service” means a service which is provided as per rule 6A of the Service Tax Rules 1994, whether the payment is received or not;

(2) “relevant period” means the period for which the claim is filed.

For the purposes of this rule, the value of services shall be determined in the same manner as the value for the purposes of sub-rule (3) and (3A) of rule 6 is determined.

Rule 5B provides that a  provider of service providing services notified under sub-section (2) of section 68 of the Finance Act and being unable to utilize the CENVAT credit availed on inputs and input services for payment of service tax on such output services, shall be allowed refund of such unutilized CENVAT credit subject to procedure, safeguards, conditions and limitations, as may be specified by the Board by notification in the Official Gazette.

OBLIGATION OF A MANUFACTUER OR PRODUCER OF FINAL PRODUCTS AND A PROVIDER OF OUTPUT SERVICE

Section 6 deals with the obligations of a manufacturer or producer of final products and a provider of output service.

• Rule 6(1) provides that the CENVAT credit shall not be allowed for provision of exempted services, or input service used in or in relation to the manufacture of exempted goods and their clearance up to the place of removal or for provision of exempted services except in the circumstances mentioned in sub-rule (2).
• Rule 6(2) provides that where a manufacturer or provider of output service avails of CENVAT credit in respect of 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 the receipt and use of input services-

(i)      in or in relation to the manufacture of exempted goods and their clearance up to the place of removal;

(ii)     in or in relation to the manufacture of dutiable final products, excluding exempted goods, and their clearance up to the place of removal;

(iii)    for the provision of exempted services; and

(iv)    for the provision of output services excluding exempted services, and shall take CENVAT credit only on inputs under sub-clauses (ii) and (iv) of clause (a) and input services under sub-clauses (ii) and (iv) of above.

• Rule 6(3) provides that Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow any one of the following options, as applicable to him, namely:-

(i)     Pay an amount equal to six per cent of value of the exempted services; or

(ii)    Pay and amount as determined under sub-rule (3A); or

 If any part of the value of a taxable service has been exempted on the condition that no CENVAT credit of inputs and input services, used for providing such taxable service, shall be taken then the amount specified in clause (i) shall be six per cent. of the value so exempted. In case of transportation of goods or passengers by rail the amount required to be paid under clause (i) shall be an amount equal to 2 per cent. of value of the exempted services.

If the manufacturer of goods or the provider of output service, avails any of the option under this sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year. 

The credit shall not be allowed for provision of exempted services and on input services used exclusively in or in relation to the manufacture of exempted goods and their clearance up to the place of removal or for provision of exempted services. No CENVAT credit shall be taken on the tax paid on services that are not input services.

• Rule 6(3A) provides that for determination and payment of amount payable under clause (ii) of sub-rule (3), the manufacturer of goods or the provider of output service shall follow the following procedure and conditions, namely:-

(a) while exercising this option, the manufacturer of goods or the provider of output service shall intimate in writing to the Superintendent of Central Excise giving the following particulars, namely:-

(i)     name, address and registration No. of the manufacturer of goods or provider of output service;

(ii)    date from which the option under this clause is exercised or proposed to be exercised;

(iii)   description of output services;

(iv)   description of exempted services;

(v)    CENVAT credit of input services lying in balance as on the date of exercising the option under this condition;

(b)   the manufacturer of goods or the provider of output service shall, determine and pay, provisionally, for every month,-

• the amount attributable to input services used in or in relation to manufacture of exempted goods and their clearance up to the place of removal or provision of exempted services (provisional) = (E/F) multiplied by G, where E denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the preceding financial year, F denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the preceding financial year, and G denotes total CENVAT credit taken on input services during the month;

(c) the manufacturer of goods or the provider of output service, shall determine finally the amount of CENVAT credit attributable to exempted services for the whole financial year in the following manner, namely:-

• the amount attributable to input services used in relation to the provision of exempted services = (M/N) multiplied by P, where M denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the financial year, N denotes total value of output and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the financial year, and P denotes total CENVAT credit taken on input services during the financial year;

(d)    the provider of output service, shall pay an amount equal to the difference between the aggregate amount determined as per condition (c) and the aggregate amount determined and paid as per condition (b), on or before the 30^th June of the succeeding financial year, where the amount determined as per condition (c) is more than the amount paid;

(e) the provider of output service, shall, in addition to the amount short-paid, be liable to pay interest at the rate of twenty-four per cent. per annum from the due date, i.e., 30^th June till the date of payment, where the amount short-paid is not paid within the said due date;

(f)  where the amount determined as per condition (c) is less than the amount determined and paid as per condition (b), the said manufacturer of goods or the provider of output service may adjust the excess amount on his own, by taking credit of such amount;

(g)the manufacturer of goods or the provider of output service shall intimate to the jurisdictional Superintendent of Central Excise, within a period of fifteen days from the date of payment or adjustment, as per condition (d) and (f) respectively, the following particulars, namely:-

• details of CENVAT credit attributable to exempted goods and exempted services, month wise, for the whole financial year, determined provisionally as per condition (b);
• CENVAT credit attributable to exempted services for the whole financial year, determined as per condition (c);
• amount short paid determined as per condition (d), along with the date of payment of the amount short-paid;
• interest payable and paid, if any, on the amount short-paid, determined as per condition (e), and
• credit taken on account of excess payment, if any, determined as per condition (f);

(h)    where the amount equivalent to CENVAT credit attributable to exempted services cannot be determined provisionally, as prescribed in condition (b), due to reasons that no output service was provided in the preceding financial year, then the manufacturer of goods or the provider of output service is not required to determine and pay such amount provisionally for each month, but shall determine the CENVAT credit attributable to exempted goods or exempted services for the whole year as prescribed in condition (c) and pay the amount so calculated on or before 30^th June of the succeeding financial year;

(i)  where the amount determined under condition (h) is not paid within the said due date, i.e., the 30^th June, the manufacturer of goods or the provider of output service shall, in addition to the said amount, be liable to pay interest at the rate of twenty four per cent. per annum from the due date till the date of payment. 

• Rule 6(3B) provides that a banking company and a financial institution including a non-banking financial company, engaged in providing services by way of extending deposits, loans or advances, shall pay for every month an amount equal to fifty per cent. of the CENVAT credit availed on input services in that month.
• Rule 6(3D) provides that payment of an amount under sub-rule (3) shall be deemed to be CENVAT credit not taken for the purpose of an exemption notification wherein any exemption is granted on the condition that no CENVAT credit of inputs and input services shall be taken.
  • The amount mentioned in sub-rules (3), (3A) and (3B) unless specified otherwise, shall be paid by the manufacturer of goods or the provider of output service by debiting the CENVAT credit or otherwise on or before the 5th day of the following month except for the month of March, when such payment shall be made on or before the 31st day of the month of March;
  • If the manufacturer of goods or the provider of output service fails to pay the amount payable under sub-rule (3), (3A), and (3B), it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT credit wrongly taken;
  • Rule 6(6) provides that the provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods removed without payment of duty are either-
    • cleared to a unit in a special economic zone or to a developer of a special economic zone for their authorized operations; or
    • cleared to a hundred per cent. export-oriented undertaking; or
    • cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or
    • supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance(Department of Revenue) No.108/95-Central Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August, 1995; or
    • supplied for the use of foreign diplomatic missions or consular missions or career consular offices or diplomatic agents in terms of the provisions of 12/2012-Central Excise, dated the 17th March, 2012, number G.S.R. 163(E), dated the 17th March,2012; or
    • cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002; or
    • gold or silver falling within Chapter 71 of the said First Schedule, arising in the course of manufacture of copper or zinc by smelting; or.
    • all goods which are exempt from the duties of customs leviable under the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and the additional duty leviable under sub-section (1) of section 3 of the said Customs Tariff Act when imported into India and are supplied,—
      • against International Competitive Bidding; or
      • to a power project from which power supply has been tied up through tariff based competitive bidding; or
      • to a power project awarded to a developer through tariff based competitive bidding, in terms of 12/2012-Central Excise, dated the 17th March, 2012
      • supplies made for setting up of solar power generation projects or facilities.
      • Rule 6(6A) provides that the provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the taxable services are provided, without payment of service tax, to a Unit in a Special Economic Zone or to a Developer of a Special Economic Zone for their authorized operation;
      • Rule 6(7) provides that the provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the taxable services are provided, without payment of service tax, to a unit in a Special Economic Zone or to a developer of a Special Economic Zone for their authorized operations or when a service is exported;
      • Rule 6(8) provides that for the purpose of this rule, a service provided or agreed to be provided shall not be an exempted service when:-
        • The service satisfies the conditions specified under rule 6A of the Service Tax Rules, 1994 and the payment for the service is to be received in convertible foreign currency; and
        • such payment has not been received for a period of six months or such extended period as maybe allowed from time-to-time by the Reserve Bank of India, from the date of provision.

INPUT SERVICE TAX DISTRIBUTION’

Rule 7 provides that the input service distributor may distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, subject to the following conditions, namely:—

(a) the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon;

(b) credit of service tax attributable to service used in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed;

(c) credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit; and

(d) credit of service tax attributable to service used in more than one unit shall be distributed pro rata on the basis of the  turnover during the relevant period of the concerned unit to the sum total of the turnover of all the units to which the service relates during the same period.

DOCUMENTS

Rule 9 provides that the CENVAT credit shall be taken by the manufacturer or the provider of output service or input service distributor, as the case may be, on the basis of any of the following documents, namely :-

• A challan evidencing payment of service tax, by the service recipient as the person liable to pay service tax; or
• An invoice, a bill or challan issued by a provider of input service on or after the 10th day of, September, 2004;

No CENVAT credit shall be taken unless all the particulars as prescribed under the Service Tax Rules, 1994, as the case may be, are contained in the said document. If  the  said  document does not contain all the particulars  but contains the details of duty or service tax payable, description of the goods or taxable service, assessable value, Service Tax registration number of the person issuing the invoice, as the case may be, name and address of provider of output service, and the Deputy Commissioner of  Central Excise or the Assistant Commissioner of Central Excise, as the case may be, is satisfied that the services covered by the said document have been received and  accounted for in the books of the account of the receiver, he may allow the CENVAT credit.

The provider of output service availing CENVAT credit, shall submit a half yearly return in form specified, by notification, by the Board to the Superintendent of Central Excise, by the end of the month following the particular quarter or half year.

RECOVERY OF CREDIT

Rule 14 deals with the recovery of CENVAT credit wrongly taken or erroneously refunded.   The said rule provides that where the CENVAT credit has been taken and utilized wrongly or has been erroneously refunded, the same along with interest shall be recovered from the manufacturer or the provider of the output service and the provisions of sections 11A and 11AA of the Excise Act or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.

CONFISCATION AND PENALTY

Rule 15 provides that if any person, takes or utilizes CENVAT credit in respect of inputs wrongly or in contravention of any of the provisions of these rules, then, all such goods shall be liable to confiscation and such person, shall be liable to a penalty not exceeding the duty or service tax on such goods or two thousand rupees, whichever is greater.

In a case, where the CENVAT credit in respect of inputs has been taken or utilized wrongly by reason of fraud, collusion or any willful mis-statement or suppression of facts, or contravention of any of the provisions of the Excise Act, or of the rules made there under with intent to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Excise Act.

In a case, where the CENVAT credit in respect of input been taken or utilized wrongly by reason of fraud, collusion or any willful mis-statement or suppression of facts, or contravention of any of the provisions of these rules or of the Finance Act or of the rules made there under with intent to evade payment of service tax, then, the provider of output service shall also be liable to pay penalty in 78 of the Finance Act.

Any of the above order shall be issued by the Central Excise Officer following the principles of natural justice.