Sec 66A of Finance Act, 1994 triggers undesired controversy
MAY 18, 2010
Sohan Dabral
RULE 3 of the Cenvat Credit Rules, 2004 ('the Credit Rules') provides that a manufacturer of excisable goods or provider of taxable service is allowed to take credit of specified duties including service tax leviable under Section 66 of Chapter V of the Finance Act, 1994 ('the Finance Act'). In terms of this provision manufacturer of excisable goods and provider of taxable output services had been availing Cenvat credit of service tax paid on the input service received and used by them in or in relation to manufacturer of excisable goods or for providing taxable output services.
Effective from May 18, 2006, section 66A has been inserted in the Finance Act casting obligation of payment of service tax on recipient who receives taxable service from a service provider located outside India but not having any office/establishment in India .
After insertion of the section 66A in the Finance Act, revenue auditors took a view that service tax paid in terms of section 66A is different than the service tax paid under Section 66 of the Finance Act. Accordingly, the audit officers of revenue are raising objections for irregular utilisation of Cenvat credit taken for service tax paid in terms of Section 66A of the Finance Act with the plea that the Credit Rules allow Cenvat credit of service tax paid under section 66 of the Finance Act, only. The revenue officers thus, have created controversy leading to issuance of demand notices by central excise authorities to assessees for denial and recovery of Cenvat credit taken for service tax paid on input services in terms of section 66A of the Finance Act.
Section 65 of the Finance Act defines'service tax'as tax leviable under the provisions of Chapter V of the Finance Act, 1994 . Section 66 of the Finance Act provides for levy of tax to be referred as'service tax' at rates specified therein on taxable services referred under various sub-clauses of clause (105) of Section 65 of the Finance Act. As such, the term'service tax'by all mean is to be treated as a tax levied under section 66 of the Finance Act. In other words, term'service tax'referred to in the context of the Finance Act means a tax levied and paid under section 66 thereof. Section 66A of the Finance Act only provides that where taxable service is provided or to be provided by a person located outside India and received by a recipient in India , the recipient of the service is deemed service provider for complying with the provisions of the Finance Act in respect of such services. Section 66A of the Finance Act nowhere mentions the terms'levy'and'service tax'in its text.
At the time of insertion of section 66A in the Finance Act, the Central Board of Excise and Customs ('the Board') vide para 4.2.13 of letter F.No. B1/14/4/2006-TRU dated April 19, 2006 has clarified as under:
"4.2.13 The treatment of the recipient of service, as the deemed service provider under section 66A is only for the purpose of charging service tax on taxable services received from outside the country. Services provided from outside India and received in India , therefore, not treated as taxable service provided by the recipient for the purpose of CENVAT Credit Rules, 2004. However, where such service is used as an input for providing any taxable output, the service tax paid on such service can be taken as input credit."
In view of scheme of the Finance Act and clarification issued by the Board, as discussed above, it is clear that service tax is a tax leviable under Section 66 of the Finance Act. The view taken by the authorities to the effect that service tax paid in terms of Section 66A of the Finance Act is different than the service tax paid or payable under Section 66 thereof and accordingly not eligible for Cenvat credit under the Credit Rules has created an avoidable controversy. Surprisingly, it is not only the auditors of revenue department who have created this controversy, the authorities competent to issue notifications on behalf of the Government of India have also created similar controversy in as much as opening paragraphs of Notification Nos. 41/ 2007-ST dated October 6, 2007; 17/2009-ST and 18/2009-ST both dated July 7, 2009 mention as under:
"In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) from the whole of the service tax leviable thereon under section 66 and section 66A of the said Act , subject to the conditions ."
As discussed above, section 66A of the Finance Act nowhere contains the terms'levy'and'service tax'in its text. Interpretation thereof otherwise has created controversy and compelled assessees to face undesired litigation causing loss of time and money to them.
In view of above, it is high time for the Central Government to consider the matter for necessary amendment/ clarification so as to provide relief to assessees from undesired litigation resulted from the aforesaid created controversy.
(The author works as a Senior Consultant with J. Sagar Associates)
