MAY 04, 2010

By Abhijit Saha

THE Bangalore Tribunal in the case of Kbace Tech Pvt. Ltd. case [2010-TIOL-564-CESTAT-BANG] while deciding on the refund claim under Rule 5 of the Cenvat Credit Rules, 2004 (CCR) has raised some very interesting fundamental question of law which requires serious consideration.

The power to make rules under the Finance Act, 1994 (Act) is given in section 94 of the Act. As per section 94(2) the government can make rules interalia on the following matters:

(i)  Section 94(2)(ee) – the credit of service tax paid on the services consumed for providing a taxable service in case where the services consumed and the services provided fall in the same category of taxable service;

(ii)  Section 94(2)(eee) – the credit of service tax paid on the services consumed or duties paid or deemed to have been paid on goods used for providing a taxable service;

(iii)  Section 94(2)(h) – rebate of service tax paid or payable on the taxable services consumed or duties paid or deemed to have been paid on goods used for providing taxable services which are exported out of India;

(iv)  Section 94(2)(hh) – rebate of service tax paid or payable on the taxable services used as input services in the manufacturing or processing of the goods exported out of India under section 93A

The power to grant rebate is provided in section 93A of the Act which states that where any goods or services are exported , the Central Government may grant rebate of service tax paid on taxable services which are used as input services for the manufacturing or processing of such goods or for providing any taxable services and such rebate shall be subject to such extent and manner as may be prescribed.

The above statutory provisions of the Act define the scope of the relevant rules. In exercise of the power under Section 94(2)(ee) & (eee) the CCR has been enacted. As per Rule 2(l) of the CCR ‘input service' means any service (i) used by a provider of taxable 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 setting up, 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, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation up to the place of removal.

The question has been raised in the above tribunal decision as to whether the scope of the definition of the input service appearing in Rule 2(l) of the CCR is beyond the scope of the statute and hence is ultra vires the Act?

Moreover Rule 5 of the CCR and Rule 5 of the Export of Service Rules, 2005 (ESR) has been enacted by exercising the power under Section 94(2)(h) of the Act. Rule 5 of the CCR specified that refund of Cenvat credit is allowed if the input service is used in providing output services which is exported. Rule 5 of the ESR stipulates rebate of service tax paid on input service used in providing taxable service exported.

It is evident from the above that the scope of Rule 5 of the CCR & ESR are beyond the scope of Section 94(2)(h) of the Act. Does it mean that the said rules are ultra vires the statute? Moreover, different phrases have been used in Rule 2(l) of CCR and Rule 5 of the CCR & ESR.

The retrospective amendment of the Notification No. 5/06-CE(NT) dated 14.3.2006 issued under Rule 5 of the CCR in the proposed budget of 2010 has no relevance since neither the Act or the Rule 5 of CCR have been retrospectively amended.

Since the legislature has used the expression "services consumed for providing a taxable service" for the purpose of making rules for grant of credit of service tax, it follows that the rule making power has to be exercised by the Central Government within this mandate of the statute. In other words, the rules cannot provide for credit and rebate of service tax in respect of services which are not consumed for providing output services.

However, in respect of the difference in the language in Rule 2(l) of the CCR and Rule 5 of CCR, the Board vide circular No. 120/01/2010-ST dated 19.01.2010 has clarified that t here cannot be different yardsticks for establishing the nexus for taking of credit and for refund of credit. Even if different phrases are used under different rules of CCR, they have to be construed in a harmonious manner.

In view of the above, it is necessary to understand the object of the legislation and the real intention of the Legislature by carefully attending to the whole scope of the statute to be considered.

It is very difficult to define ‘consumption' of service unlike the consumption of goods. It is precisely because of this intangible character of services that the Government has given such a wider meaning to ‘input service' in CCR. And it is only imperative that a broader interpretation of this definition should be given effect to by all the concerned authority. After all, CENVAT Credit Scheme is a beneficial piece of legislation . The Court has even held so which is confirmed by the fact that CESTAT has consistently held that service tax on input services which are utilized for providing output services or manufacture of goods are allowed as credit. Hence, service tax on catering services, equipment hiring, professional consultation service, recruitment service, security service, telephone service, transport service, training service, facility operation service, courier service, cafeteria service and advertisement service, rent-a-cab service etc. are allowed as credit.

In the case of Coca Cola India Pvt. Ltd. Versus CCE, Pune-III [2009-TIOL-449-HC-MUM-ST] it has been held that “consumption tax derives its name from the fact that tax burden is ultimately borne by the final consumer and business does not bear the burden of the tax, since the business are allowed to take credit of tax paid on inputs supplied/received by them. If therefore Cenvat is denied to the input service received by the assessee as in the present case, they will become burden to the assessee, which is against the very grain or principle of VAT being a consumption tax .Service tax therefore, paid on expenditure incurred by the assessee on advertisements sales promotion, market research will have to be allowed as input stage credit more particularly if the same forms a part of the price of final product of the assessee on which excise duty is paid. In other words, credit of input service must be allowed on expenditure incurred by the assessee which form a part of the assessable value of the final product. If the above is not done, as sought to be done by the department in the present case, it will defeat the very basis and genesis Cenvat i.e. value added tax. ”

In view of the above, it is evident that the object and scheme of the legislation is to uphold the broader meaning of the input service for the purpose of ‘Cenvat credit' and ‘export refund' so as to ensure that the cascading effect of the taxes is neutralized. Hence it is high time for the government to suitably amend the statute and rules retrospectively to effectuate the objects and purpose of the legislation and to ensure that the spirit behind the legislation is not defeated.

(The author is associated with Khaitan & Co)