Clarification regarding availment of CENVAT credit on input services- Service Tax Circular No. 122/03/2010-ST, dated 30-4-2010

Department has issued Circular No. 122/03/2010- ST dated 30.04.2010 clarifying certain issues in relation to claim of CENVAT. In the said Circluar, the following issues have been clarified :-

(i) Issue of timing of Cenvat Credit in case of associated enterprises: –

A doubt has arisen as to whether CENVAT Credit can be taken by “Associate Enterprises” when debit is made in books of accounts or when book adjustments/ debit or credit in accounts is made, or if the CENVAT credit of the service tax paid on input service is available only after the actual payment of the value of input service has been made in money terms for transactions between associate enterprises.

The above doubt has been resolved by Circular No. 122/03/2010- ST dated 30-04-2010. This Circular specifies that when the substantive law i.e. section 67 of the Finance Act treats such book adjustments etc. as deemed payment, there is no reason for denying such extended meaning to the word ‘payment’ for availment of credit. As far as the provisions of Rule 4(7) are concerned, it only provides that the CENVAT credit shall be allowed, on or after the date on which payment is made of the value of the input service and of service tax. The form of payment is not indicated in the same and the rule does not place restriction on payment through debit in the books of accounts. Therefore, if the service charges as well as the service tax have been paid in any prescribed manner which is entitled to be called ‘gross amount charged’ then credit should be allowed under said rule 4(7). Thus, in the case of ‘Associate Enterprises”, credit of service tax can be availed of when the payment has been made to the service provider in terms of section 67(4) (c) of Finance Act 1994 and the service tax has been paid to the Government Account.

(ii) Issue of CENVAT when discounted payment is made to Service Provider.

Until 29-04-2010 there was no unanimity amongst the Indirect Tax professionals regarding the extent of Cenvat Credit to be availed if service recipient makes only part payment of invoice, bill or challan. According to one category of professionals (including the author) no Cenvat Credit is to be availed by the Service Recipient until he makes the entire payment of the value of input service and the service tax thereon. However, in the opinion of second category of professionals in case of part payment, Service Recipient is entitled to claim proportionate Cenvat Credit. As a consequence of both the foregoing widely prevailing practices, there was no clarity even amongst the wide range of departmental officers. In addition, there was lack of consequence on the subject of extent of Cenvat Credit in case final but discounted payment is made by a Service Recipient.  Thus, CBEC thought it advisable to settle this intriguing & critical matter by issuing Circular No. 122/03/2010- ST dated 30-04-2010 in relation to Final but discounted payment..  This Circular points out that in cases where the receiver of service reduces the amount mentioned in the invoice/bill/ challan and makes discounted payment, then it should be taken as final payment towards the provision of service. The mere fact that finally settled amount is less than the amount shown in the invoice does not alter the fact that service charges have been paid and thus the service receiver is entitled to take credit provided he has also paid the amount of service tax, (whether proportionately reduced or the original amount) to the service provider. The invoice would in fact stand amended to that extent.  However, in case of subsequent refund or extra payment of service tax, the credit would also be altered accordingly.

In order to truly appreciate the contents of this Circular, following simple examples are given:-

Common Facts:-Mr. A (being Service Provider) raises an invoice on Mr.  B (being Service Recipient) on 09-05-2010 as per following details: -Value of Taxable Services= Rs. 1,00,000, Service Tax (at prevailing rate) =Rs. 10,300.

Example 1:- Mr. B makes discounted payment of Rs. 90,000/- only due to discount agreed upon after issuance of invoice.

Example 2:- Mr. B makes discounted payment of Rs. 90,000/- together with proportionate Service Tax amount of Rs. 9,270/- due to unsatisfactory service provided by Mr. A

Example 3:- Mr. B makes the payments in two installments of Rs. 60,000/- and Rs. 40,000/- together with proportionate Service Tax of Rs. 6,180/- and Rs. 4,120/- respectively due to financial difficulties.

Example 4:– Mr. B makes the payment of Rs. 80,000/- together with Service Tax amount of Rs. 8,240/- in the month of May 2010. Further, Mr. B withholds as security Rs. 20,000/- alongwith the Service Tax amount of Rs. 2,060/- during the stipulated contract period of say five months.

Example 5:- Mr. B makes discounted payment of Rs.90,000/- for the value of services and full service tax amounting to Rs.10,300/-. Thus B makes payment of Rs.1,00,300/ – (90,000 + 10,300) to A.

The extent of Cenvat Credit which can be availed by Mr. B in each of above example is given below:-

Example 1:- Rs 8404/- which has been worked out by reverse calculation i.e. Rs. 90,000 is considered to be inclusive of Service Tax.(Rs.90,000/ 110.3 * 10.3)

Example 2:- Rs. 9,270/- (i.e. proportionate service tax paid)

Example 3:- Rs. 6,180-/- after making payment of first instalment.Similarl y, Rs. 4,120/- only after making payment of second installment.

Example 4:- Rs. 8,240/- Cenvat Credit can be availed  while discharging his service tax liability for the quarter ending 30^th June i.e. by 5^th/6^th July  2010 as the case may be.  The remaining amount of Cenvat Credit of Rs. 2,060/- can be availed subsequently while discharging his service tax liability for the quarter ending 31^st December i.e. by 5^th/6^th Jan 2011.

Example 5:– Rs.10,300/- CENVAT Credit can be claimed as service tax has been paid without any deduction and discounted price is only for the value of Services.

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Circular No. 122/03/2010 – ST

 

F. No. 137/71/2009 – CX.4

Government of India

Ministry of Finance

Department of Revenue

Central Board of Excise and Customs

New Delhi, dated the 30^th April 2010

To

The Chief Commissioners of Central Excise and Service Tax (ALL),

The Director General of Service Tax

The Director General of Audit

The Director General of Central Excise Intelligence,

The Commissioners of Service Tax (ALL)

Madam/Sir,

Subject: Clarification regarding availment of credit on input services – reg

Representations have been received by Board regarding denial of CENVAT credit on input services in certain cases. Some of the cases where doubts have been raised by field formations are given below:

2. As per Rule 4 (7) of the CENVAT Credit Rules, 2004, the CENVAT credit on input services is available only on or after the day on which payment of the value of input service and service tax is made. The section 67 (4) of the Finance Act, 1994, provides that gross amount charged includes payment made by issue of credit / debit notes or by entries in the books of account, where the transaction is with any associated enterprise.

A doubt has arisen as to whether CENVAT credit can be taken by “Associate Enterprises” when debit is made in book of accounts or when book adjustments/ debit or credit in accounts is made, or if the CENVAT credit of the service tax paid on input service is available only after the actual payment of the value of input service has been made in money terms.

3. As per sub-rule (7) of Rule 4 of the CENVAT Credit Rules, 2004,

“Credit in respect of 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 is indicated in invoice, bill or as the case may be, challan referred to in Rule 9”.

A doubt raised is as to whether the receiver of input service can take credit only after the full value that is indicated in the invoice, bill or challan raised by the service provider, and also the service tax payable thereon, has been paid. It has been represented that in many cases, after the invoice is issued by the service provider, the service receiver does not make the full payment of the invoiced amount on account of discount agreed upon after issuance of invoice; or deducts certain amount due to unsatisfactory service; or withholds some amount as security to be held during contract period. Due to these reasons the value paid may not tally with the amount indicated in the invoice, bill or challan. In such cases the department has raised objections to the taking of credit as it does not meet the requirement of the said sub-rule (7).

4. Thus the following issues relating to availment of CENVAT credit need clarification,-

Whether CENVAT credit can be claimed

(a) when payments are made through debit/credit notes and debit/credit entries in books of account or by any other mode as mentioned in section 67 Explanation (c) for transactions between associate enterprises; or

(b) where a service receiver does not pay the full invoice value and the service tax indicated thereon due to some reasons.

5. Matter has been examined and clarification in respect of each of the above mentioned issues is as under,-

(a) When the substantive law i.e. section 67 of the Finance Act, 1994 treats such book adjustments etc., as deemed payment, there is no reason for denying such extended meaning to the word ‘payment’ for availment of credit. As far as the provisions of Rule 4 (7) are concerned, it only provides that the CENVAT credit shall be allowed, on or after the date on which payment is made of the value of the input service and of service tax. The form of payment is not indicated in the same and the rule does not place restriction on payment through debit in the books of accounts. Therefore, if the service charges as well as the service tax have been paid in any prescribed manner which is entitled to be called ‘gross amount charged’ then credit should be allowed under said rule 4 (7). Thus, in the case of “Associate Enterprises”, credit of service tax can be availed of when the payment has been made to the service provider in terms of section 67 (4) (c) of Finance Act, 1994 and the service tax has been paid to the Government Account.

(b) In the cases where the receiver of service reduces the amount mentioned in the invoice/bill/challan and makes discounted payment, then it should be taken as final payment towards the provision of service. The mere fact that finally settled amount is less than the amount shown in the invoice does not alter the fact that service charges have been paid and thus the service receiver is entitled to take credit provided he has also paid the amount of service tax, (whether proportionately reduced or the original amount) to the service provider. The invoice would in fact stand amended to that extent. The credit taken would be equivalent to the amount that is paid as service tax. However, in case of subsequent refund or extra payment of service tax, the credit would also be altered accordingly.

6. The contents of this circular may be suitably brought to the notice of the field formations. In case any difficulty is faced in implementing these instructions, the same may be brought to the notice of the undersigned.