Background- With the introduction of Cenvat Credit Rules in 2004 (“the Credit Rules”), cross credit between Service tax and Excise duty was allowed for the first time. While the intention of introducing these Rules was to prevent the cascading effect of taxes, the manner in which these Rules have been worded resulted in a lot of interpretational ambiguities. One of such ambiguities is the scope of the term ‘input services’ (services with respect to which credit/ set-off can be taken) especially in cases where the expenses are not directly linked to the provision of output services/ manufacturing activity. These include expenses pertaining to employees, catering, telephones installed at the residence of the employees, sales promotion, insurance, consulting, etc.
Analysis
On a perusal of the rulings issued during the past one year, it appears that the key criteria applied by the judiciary in determining the admissibility of credit of Service tax paid is that whether the underlying expense is in relation to business activity. If the answer is in affirmative, the Courts, by and large, have allowed the credit. The other key observations made by the judiciary are as under:
• Definition of ‘input services’ is much wider than the definition of ‘inputs’ and unlike the latter, the former should include in its scope, any expense relating to a business activity whether directly used in provision of output service/ manufacturing activity or not.
• The expression ‘such as’ in the inclusive part of the definition of ‘input services’ is only illustrative and not exhaustive.
• Credit of Service tax paid on any promotional activity that increases the sales of a business should be available.
• Service tax paid on any expense that is required to be incurred to fulfil any statutory requirement should be available as credit.
• Credit of Service tax paid on expenses that form part of the assessable value on which Excise duty is charged should be available.
• Service tax paid on any expense without which, it would not be feasible to undertaken the operations, should be available as credit.
• Credit of Service tax paid on expenses recovered by the assessee from its employees should not be available.
Applying the above principles, illustrative list of expenses/ services with respect to which credit has been allowed are as under:
• Insurance Services, Telecommunication Services, Cab Services;
• House Keeping Services, Pest Control Services;
• Security Services, etc.
The notable exceptions (where credit has been disallowed) include expenses pertaining to shifting of household goods of employees, amusement expenses, auditorium expenses, etc. The same has been disallowed primarily on the ground that services are not connected with business activity of the assessee. Further, there are contrary rulings on services like Outdoor Catering Services, Garden Maintenance Services, etc.
In this respect, it would also be worthwhile to mention the ruling of Bangalore Tribunal in case of Kbace Tech Pvt Ltd & others V/s CCE/CST, Bangalore (AIT-2010-116-CESTAT) . In this case, the Tribunal effectively questioned the validity of the Credit Rules to the extent it provide for availability of credit with respect to services covered under the inclusive part of the definition of ‘input services’.
Having stated the above, we would like to highlight that this ruling has been an exception since, as mentioned above, credit of expenses falling under the inclusive part of the definition have mostly been allowed.
Conclusion
As evident from the above, if the recent trend is any indication, it appears that judiciary, by and large, has been taking a rather liberal view on this issue. However, inspite of this, there have been regular instances of authorities (especially at the lower level) raising disputes on this front.
Accordingly, the Industry would be hoping that the Department issues a Circular on this matter so as to bring in more clarity.
Further, it is expected that most of these disputes should be put to rest upon the introduction of Goods and Service tax regime, wherein the provisions pertaining to input credit are expected to be liberal, in line with the practices followed internationally.
