FEBRUARY 23, 2016

By Lakshmi Ratna K

THIS article analyses the issue pertaining to credit of "inputs" for works contract service and construction of complex service.

Construction Service and "Inputs"

Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority is a declared service under Section 66E(b) of the Finance Act, 1994 (hereinafter referred to as 'Finance Act').

Insofar as construction of complex service is concerned, the service provider can discharge the service tax in either of the following ways viz.,

+ Entire value of the service and avail the credit of the excise duty paid on inputs, capital goods and service tax paid on input services subject to the conditions prescribes under the CENVAT Credit Rules, 2004 (hereinafter referred as 'Credit Rules') or

+ Claim abatement under Sl. No.12, Notification No.26/2012-ST dated 20.06.2012 (as amended from time to time) subject to the condition that credit of the excise duty paid inputs has not been taken and if the value of the land is included in the amount charged from the service receiver.

Rule 2(k) of the Credit Rules, inter alia inputs is defined to mean all goods used for providing output service.

In terms of Rule 2(k)(B) of the Credit Rules, the credit of excise duty paid on inputs for the goods for construction/execution of works contract of a building or a civil structure or a part thereof or goods used for laying of foundation or making of structures for support of capital goods is allowed as long as the service provider is engaged in construction services or in the execution of works contract service.

Works Contract and Credit of "Inputs"

The service portion in the execution of works contract is a declared service under Section 66E(h) of the Finance Act.

In terms of Rule 2(k)(B) of the Credit Rules, the credit of excise duty paid on inputs for the goods for construction/execution of works contract of a building or a civil structure or a part thereof or goods used for laying of foundation or making of structures for support of capital goods is allowed as long as the service provider is engaged in construction services or in the execution of works contract.

To sum up, Rule 2(k)(B)of the Credit Rules provides that service providers engaged in the activity of providing works contract service under Section 66E(h) and construction service under Section 66E(b) can avail credit of the excise duty paid on the goods used for construction/execution of works contract of a building or a civil structure or a part thereof or goods used for laying of foundation or making of structures for support of capital goods.

Rule 2A of the Valuation Rules provides the method of ascertaining the service portion in the execution of works contract. Rule 2A does not prescribe any method of valuation for construction service.

Rule 2A has two methods of ascertaining the service portion in the execution of works contract viz.,

 i. Determine the actual value of service and

ii. If it is not possible to determine the actual value of the contract then depending on the type of contract the service provider can pay service tax on a part of the value of the contract.

Explanation 2 to Rule 2A of the Valuation Rules provides that the service provider shall not be eligible to take the credit of the duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of the Credit Rules. In effect, irrespective of the method of valuation followed by the service provider to ascertain the value of works contract as per Valuation Rules, credit is not allowed. Any service provider engaged in provision of works contract shall be required to ascertain the value of the works contract by resorting to Rule 2A of the Valuation Rules. In such a situation, credit of the excise duty paid on inputs is not admissible which is in contrast to the provisions under Rule 2(k) of Credit Rules.

Issue & Suggestion

In light of the apparent difference in the legal position and conflicting position as regards cenvat credit according to the Credit Rules and the Valuation Rules respectively, we are to find a method to read the provisions harmoniously.

Explanation below Rule 3(7)(c) of the Credit Rules provides that where the provisions of any other rule or notification provide for grant of whole or part exemption on condition of non-availability of credit of duty paid on any input/ capital goods, or of service tax paid on input service, the provisions of such other rule/notification shall prevail over the provision of these rules.

It is pertinent to note that Rule 2A of the Valuation Rules is only a method to ascertain the service portion in the execution of works contract. This rule, in categorical terms, provides that no cenvat credit of the duty paid on inputs is admissible to the service provider.

In effect, though there is no bar in taking credit as per the Cenvat Credit Rules however, in view of the Explanation below Rule 3(7)(c) and the bar of taking credit under the Valuation Rules, the service provider engaged in providing works contract service will not be entitled to take credit of the excise duty paid on inputs .

Insofar as construction of complex service is concerned if the service provider opts to pay on an abated value the Explanation below Rule 3(7)(c) of the Credit Rules would have an overriding effect and the conditions under the abatement Notification would take precedence.

In view of the above analysis it is recommended that appropriate clarification be given by the Department by harmoniously reading the provisions of the Cenvat Credit Rules with the Valuation Rules as applicable to works contract, regarding admissibility of cenvat credit of the duty paid on inputs in the above situation to put to end any issue for the future.

This would offer a big relief to all those engaged in the trade! Hopefully, this Budget would have some answers to it.

(The author is Senior Associate, Lakshmikumaran & Sridharan, Bangalore.)