• Jan
  • 31
  • 2014

CENVAT Credit on Input Services

CA. Sanjeev Singhal

[Definition of Input Services under Rule 2(l) of CENVAT Credit Rules , 2004 commentary on above definition with case laws Instances on Input Services]

 RULE 2(l) : Input Services

 “Input Service” means any service,-

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

(ii) used by the 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;

S.N. Party Extract of Input definition w.e.f 1.7.2012
1 Manufacturer of final product Input service means any service used by used by the 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, Specific Inclusion :a) services used in relation to modernization, renovation or repairs of a factory or an office relating to such factory or premisesb) Advertisement or sale promotion

c) Market research

d) storage up to the place of removal

e) procurement of input

f) accounting , auditing, financing, recruitment, and quality control,

coaching and training, computer networking, , credit rating,, share registry, , security, business exhibition, legal services, inward transportation of input or capital goods and outward transportation  up to the place of removal

2 Provider of output service Input service means any service used by provider of output service for providing an output service;a) services used in relation to modernization, renovation or repairs of a premises of provider of output service or an office relating to such premises.b) Advertisement or sale promotion

c) Market research

f) accounting , auditing, financing, recruitment, and quality control,

coaching and training, computer networking, , credit rating,, share registry,  security, business exhibition, legal services, inward transportation of input or capital goods.

3 Specific exclusions;(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;

Meaning of “Includes”

The inclusive part of the definition cover input services used ‘ in relation to’ various activities. Definition are ‘inclusive’ or ‘exhaustive’. If the definition use the world ‘means’ it means that its restrictive and exhaustive. However if the word ‘includes’ is used in the definition it means that it is not exhaustive but inclusive. CCE v. Bakelite Hylam

Meaning ‘in relation to’

The word in relation to is very broad expression  and are word of comprehensiveness which might have both a direct or indirect significance depending on the context. They are not the word of restrictive content. State of karnataka v. Azad Coach Builders.

Place of removal

CENVAT credit is available for input service up to place of removal. The concept of removal is borrowed from central excise and hence applies to only manufacturer and not service provider.

The term ‘ place of removal’ has not been defined in CENVAT  Credit Rules but is defined in  Section 4 (3)(c ) of central excise act as follows :

‘Place of removal’ means

i)                    A factory or any other place or premises of production or manufacture of the excisable goods.

ii)                  A warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty.

iii)                a depot or premises of consignment agent or any other pace or premises from where the excisable goods are to be sold after their clearance from the factory,

from where such goods are removed.

The word ‘from where such goods are removed” apply to all the three clauses.

DSCL Sugar v. CCE, MP biscuit v. CCE

The place where ownership gets transferred to buyer is place of removal when there is direct sale from factory

Normally factory gate is place of removal. But in case of Ambuja Cements v. UOI [ Punjab and Haryana High Court][2009] it was decided that if the freight charges form part of the assessable value, price is  for destination,

Port is place of removal in case of export  

Kuntal Granites v. CCE [2007] , CCE v. Adani Pharmachem[2009]

Rajasthan spinning and weaving mills v. CCE [ 2007]

Expenses up to the place of removal are eligible for Cenvat. Centuary Ryon v. CCE [2012]

Services specially excluded from definition of ‘Input Services’

Some services have been specifically excluded from the definition of ‘input services’

Construction related services specifically excluded under clause (A)

(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,

Are excluded from the definition of ‘input services’

However these services are eligible as input services if used for the provision of one or more the specified services ( i.e construction/work contract of building or structure or laying of foundation etc as above)

♦  Services relating to setting up are not eligible ;

Broadly , services relating to setting  up  of unit are not allowed.

♦ Structural components which are essential part of equipment / machinery are eligible for Cenvat credit.

♦˜  Renting of motor vehicle specifically excluded under clause (B)

The term motor vehicle has not been defined in the Cenvat Credit Rules , 2004 . As per Central Excise motor vehicles are  covered under chapter 87 of the Central Excise Tariff . Some vehicle (e.g. forklift truck , excavators ) require registration under motor vehicle act , but they fall under chapter 84 of Central Excise Tariff. Goods falling under chapter 84 are eligible for Cenvat credit as capital goods . Hence , insurance, repair services , renting etc. in respect of such  vehicle should be eligible for Cenvat credit.

˜ ♦ Motor vehicle insurance and repair and maintenance services specifically excluded under clause (BA)

The clause as amended w.e.f 1.7.2012 is as follows;

Service of general insurance business, repair and maintenance , in so far as they relate to motor vehicle which is not capital goods will not be eligible for Cenvat credit 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

Services for personal use or consumption of employees specifically excluded under clause (C).

Services such as 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 have been specifically excluded from the definition of input services.

However, this exclusion is only when such services are used primarily for personal use or consumption of any employee. Like mobile phone to employee for business purpose is allowed. Club membership fees of director who is not employee should be eligible. Corporate club membership [ without any name of employee] shall be eligible .

Meaning of ‘such as’    the exclusion clause uses the word ‘such as’ . The world such as are used  only to illustrate the scope. It is not restrictive. Such as means for ‘example’

CCE v. JK Cement Works [2009], TTK Pharma Ltd v. CCE [ 1993]

Eligibility of Various Services as Input Services

Accounting Services Eligible as specifically included in definition
Advertisement [ may be recruitment , tender, sales promotion , legal notice etc.] Eligible as specifically included in definition
Air travel of employee Eligible if in relation to inclusive services mention in 2( l )
Airport services Eligible if in relation to inclusive services mention in 2( l ). The services is also eligible in case of construction or work contracts services or port or airport services.
Architect Services Not eligible if provided for  services specifically excluded under clause A of 2(l).If the service is used for other purpose shall i.e. finishing services , repair, alteration, or restoration , these should be eligible. The services is also eligible to person providing construction or work contract service itself.
Auditing Services Eligible as specifically included in definition
Authorised Service Station Usually not eligible except the clause BA of 2(l)
Banking Eligible under financing
Beauty treatment Not eligible
Brand Ambassadors Eligible as relating to Sales Promotion
Business exhibition Eligible as specifically included in definition
Business Support Services Eligible if related to inclusive part of definition
Canteen  Expenses Eligible as provided in recent circulars/ notification.
Clearing and forwarding agent Eligible for input and for final product up to the place of removal.
Club membership  Not eligible
Commercial coaching and training Eligible as specifically included in definition
Commission agent Eligible as relating to sales promotion or procurement
Computer networking Eligible as specifically included in definition
Consignment agent exp Eligible as consignment agent place is place of removal when sale is from depot
Construction of building or civil structure or part thereof Not eligible if provided for  services specifically excluded under clause A of 2(l).If the service is used for other purpose shall i.e. finishing services , repair, alteration, or restoration , these should be eligible. The services is also eligible to person providing construction or work contract service itself.
Construction of residential project Not eligible if provided for  services specifically excluded under clause A of 2(l).If the service is used for other purpose shall i.e. finishing services , repair, alteration, or restoration , these should be eligible. The services is also eligible to person providing construction or work contract service itself.
Consulting engineers management Eligible if for definition of  rule 2(l)
Courier Eligible
Credit rating Eligible as specifically included in definition
Custom house agent Eligible for procurement of input and also for export as port is place of removal
Depot expenses Eligible as depot is place of removal
Director Services Eligible as director control overall operation
Erection commissioning and installation Not eligible as setting up of plant but eligible as modernisation, renovation of factory
Financing ( bank charges, lease, hire purchase) Eligible as specifically included in definition
Foundation or support of capital goods Specifically excluded
Gardening Eligible if done as statutory requirement
Insurance of plant and machinery, building and transportation of input, capital goods and final product up to the place of removal Eligible
Insurance of Motor vehicle Ineligible except a] where vehicle is eligible as capital assets b] manufacturer of motor vehicle c] general insurance company
Health insurance Ineligible
Information technology software eligible if in relation to manufacture of taxable goods/ services and all services under the inclusive list.
Intellectual property service eligible if in relation to manufacture of taxable goods/ services, quality control, sales promotion , computer networking
Job work eligible if in relation to manufacture of taxable goods/ services and all services under the inclusive list.
Legal consultancy Eligible as specifically included in definition
Maintenance and repair eligible if in relation to manufacture of taxable goods/ services, modernisation and repair of factory or office, storage, quality control except where motor vehicle is not capital goods
Mandap keeper Eligible if in relation to recruitment, accounts, audit, sales promotion ,procurement of input, legal services, financing and computer networking
Manpower recruitment and supply eligible if in relation to manufacture of taxable goods/ services and all services under the inclusive list.
Market research Eligible as specifically included in definition
Mobile phone [ even if in the name of employee but reimbursed by employer] Eligible
Outward transportation Eligible up to the place of removal
Real agent services Ineligible
Renting of immovable property eligible if in relation to manufacture of taxable goods/ services and all services under the inclusive list.
Setting of plant and office building Ineligible
Showroom expenses Eligible as sale promotion
Software Eligible if in relation to manufacture of taxable goods/ services and all services under the inclusive list.
Supply of tangible goods for use service eligible if in relation to manufacture of taxable goods/ services and all services under the inclusive list except for motor vehicle .
Transportation charges for employees Ineligible
Travel by air , road, or water except by motor vehicle Eligible
Work contract service Not eligible if provided for  services specifically excluded under clause A of 2(l).If the service is used for other purpose shall i.e. finishing services , repair, alteration, or restoration , these should be eligible. The services is also eligible to person providing construction or work contract service itself.

Article written By CA. Sanjeev Singhal, FCA, DISA [ ICAI]


One Response to “CENVAT Credit on Input Services”

  1. Prasenjit says:

    We (Pvt. Ltd. company) are in the business of Residential Building Construction. I would like to know whether service tax charge of credit rating agency can be taken as cenvat credit.
    Thanks

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