AUGUST 31, 2014

By Krishnasamy Jeyaram

THE recent amendment in CENVAT Credit Rules 2004 by notification 21/2014-Central Excise (NT), Dated: July 11, 2014 hasthe followingadverse impact on the assesse. With effect from 1st of September 2014, CENVAT Credit on input services will not be available if the credit is availed after six months from the date of invoice. It is a general practice in industry, where a fixed portion of amount charged by the vendors in invoice is always retained till fulfillment of contractual obligations. Normally the services performed by vendors like Construction, Erection and Commissioning etc.spread for few years.

In such event, it is not possible to pay the retention amount to the vendors within six months from the date of invoice. Under this circumstance the manufacturers or service providers who receive the above discussed services will be forced to forego the service tax amount subsequent to amendment in Rule 4(7) of CENVAT Credit Rules 2004. This is going to be a big blow for the assessees.

To overcome this issue, everyone needs to revisit the payment terms mentioned in agreements/contracts entered with the vendors by asking them to raise the invoice excluding the retention amount. Once the contractual obligations aremet, the vendor can raise the invoice for claiming the final retention amount. However if the vendors raise the invoice as discussed above, the department may question them by referring to Rule 3 (a) of Point of Taxation Rules, 2011 as weapon. The said clause is reproduced below

For the purposes of these rules, unless otherwise provided, ‘point of taxation' shall be,-

(a) the time when the invoice for the service provided or agreed to be provided is issued:

“Provided that where the invoice is not issued within the time period specified in rule 4A of the Service Tax Rules 1994, the point of taxation shall be date of such completion of provision of the service”

As per the above clause, the invoice should have been raised within 30 days from the date of completion of job read with Rule 4A of Service Tax Rules 1994. It is pertinent to note that any service which is provided continuously for a period exceeding three months is classified as “Continuous Supply of Service” under Rule 2(c) of Point of Taxation Rules, 2011. In this case, the date of completion of event as mentioned in the contract has to be construed as date of completion of service as per proviso (b) (i) mentioned under Rule 3 of Point of Taxation Rules, 2011. The said clause reads -

(b) in a case, where the person providing the service, receives a paymentbefore the time specified in clause (a), the time, when he receivessuch payment, to the extent of such payment.

"Provided that for the purposes of clauses (a) and (b), -

(i) in case of continuous supply of service where the provision of thewhole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the receiver of service to make any payment to service provider, the date of completion of each such event as specified in the contractshall be deemed to be the date of completion of provision of service;

Hence the vendors can make use of the above provision as a shield against the queries raised by the Department.

In view of the above it may be concluded that it is imperative for both the service providers and receivers for getting amended the payment terms in their existing contracts/ agreements to get rid of this draconian change in the CENVAT Credit Rules 2004.

(The author is working as Assistant Manager (Indirect Taxes) with Flsmidth Private Limited, Chennai)