GUEST COLUMN
Cenvat Credit on Construction Services
By CA Madhukar N. Hiregange & CA Roopa Nayak
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There has been a lot
of confusion in the minds of assesses on whether to avail such construction
and related project setting up credit. This has led to missing out to avail
eligible credit by assessee. Further with the time limit on availment of credit having been put in place, the
assessee who does not avail credit stands to face a situation whereby
eligible credit could be time barred due to the lapse of 1 year from invoice
date. In this article the paper writer has sought to examine eligibility to
credit on the construction services. |
Cenvat Credit is a beneficial scheme wherein the duty paid at earlier stage on inputs and input services is allowed to be set off against the liability on manufactured goods or output services provided. As a result what is taxed is only the value addition made by the manufacturer or the output service provider.
Cenvat Credit Rules 2004 at the same time specifically provides for denial of credit of tax paid on certain specified inputs, input services and capital goods. The restrictions lead to break in the credit chain and consequent cascading effect leading to sticking of taxes on goods and services. When the taxes become a cost, such costs are recovered by the manufacturers and service providers from the final consumers of their goods and services, leading to increase in costs of goods and services to end customer.
The paper writers have examined legality of availment of credit on construction and its related credit in light of the input service definition as applicable wef 1.7.12.
Input service definition
The definition of input service as per Rule 2 (l) of CCR w.e.f 1.7.2012– means any service-
(i) used by a provider of output service for providing an output service or
(ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal,
and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises,……
But excludes
(A) Service portion in the execution of works contract, and construction services including service listed under clause (b) of section 66E of the Finance Act(hereinafter referred as specified services) in so far as they are used for-
(a) construction or execution of works contract of a building or a civil structure or a part thereof; or
(b) laying of foundation or making of structures for support of capital goods,
EXCEPT for the provision of one or more of the specified services…………
The Cenvat credit on ‘setting up’ a factory, premises of provider of output service was not restricted till 1.4.11 and was specifically covered in the earlier input service definition applicable till 31.3.2011. There have been a number of decisions starting from Navaratna S G Highway Prop Pvt Ltd vs CST Ahmedabad 2011-VIL-29-CESTAT-AHM-ST, Oberoi Mall vs CST-II Mumbai 2013-VIL-50-CESTAT-MUM-ST, Vamona Developers Pvt Ltd vs Commr of Cus, CE and ST, Pune III 2013-VIL-51-CESTAT-MUM-ST and recently in Laxmi Enterprises 2014-VIL-394-CESTAT-AHM-ST where held that the input service credit on construction of immoveable property, can be availed. It needs to be noted that these decisions are in context of earlier input services definition applicable till 1.4.11.
Post 1.4.11 due to specific exclusion in input service definition, there is a perception that the cenvat credit cannot be availed on construction and related cenvat credit on input services such as architect, interior decorator, consulting engineer services. Consequently several assesses are not availing any construction and other credit related to projects.
The credit on the input service of construction service and works contract service used for construction or works contract of new building, civil structures, laying foundation or making structures for support of capital goods is excluded. But the manufacturer of final products or provider of output service may not be hit by the exclusion and could avail the credit on works contract and construction service for the following reasons:
a. As the contractor of manufacturer could be executing works contract or construction service for the manufacturer. The works contract service or construction service may not be said to be used by manufacturer of final product, for
i. construction or execution of works contract of building or structures.
ii. laying foundation or making support structures of capital goods.
b. As the contractor of provider of output service could be executing works contract or construction service for the manufacturer. The works contract service or construction service is not used by provider of output service for
i. construction or execution of works contract of building or structures.
ii. laying foundation or making support structures of capital goods.
On the other hand, the construction service and works contract service are being used by
a. the manufacturer of final product for example for construction of factory building, ie used in relation to manufacture of final product.
b. Used by the service provider for example for construction of office used for providing output service.
c. These credits are specifically eligible as per the input service definition.
In other words, the works contract service or construction service are used for
i. construction of building or structures or
ii. for laying foundation or making support structures of capital goods
iii. only by the contractors executing such specified works either for a manufacturer or for service provider.
The contractors executing such specified works are specifically eligible to the said credit as per input service definition.
An opposite view is equally possible that the intention was to restrict the credit related to construction of new building, civil structures, laying foundation or making structures for support of capital goods.
This is supported by fact that the ‘setting up’ limb of the earlier definition of ‘input service’ is omitted in the substituted definition wef 1.4.2011. This may also be the view favoured by revenue. Revenue could contend construction and works contract service credit is restricted and cannot be availed either by a manufacturer of final product or provider of taxable service. Therefore cannot be availed except when used for providing construction service or works contract service.
Prima facie the decision of Bangalore Tribunal in Infosys Ltd vs CST Bangalore 2014-VIL-37-CESTAT-BLR-ST also set out that after 1.4.2011, the services used for setting up of ‘global training centre' would not be input service but services used for repairs, renovation or modernization would be admissible;
We highlight that there is no judicial clarity on this aspect and if stance to avail such credit were taken, the same maybe intimated to department by RPAD letter seeking confirmation of understanding on such eligibility to credit. The credit could face dispute on whether eligible or not. Assessee could take a call on availment.
If manufacturer or service provider decides not to avail the credit due to possible dispute, the alternative could be to avail the credit on these now for the past 1 year and reverse the same under protest in writing. One protest letter duly acknowledged by the revenue is sufficient. Subsequently it may avail the credit and reverse till some judicial clarity emerges.
Whether allied credit to construction credit can be availed?
As per the input service definition, the manufacturer of final products or provider of output service could avail credit on services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises.
Next we examine what is the scope of term ‘relating to’. In this connection reference may be made to 76 Corpus Juris Secundum at pages 620 and 621 where it is stated that the term “relate”’ is also defined as meaning to bring into association or connection with. It was also held in Doypack Systems (Pvt) Ltd vs. UOI 1988-VIL-02-SC that the expression “in relation to” is a very broad expression, which pre-supposes another subject matter.
These are words of comprehensiveness which might both have a direct significance as well as an indirect significance depending on the context. In other words, the term ‘in relation to’ used for a particular subject expands the coverage of the subject to cover other connected or linked subjects. In other words, the phrase ‘relating to’ used has wide connotation.
If this view were taken, then the credit on services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises could be availed.
The credit such as on architect, interior decorator, project management consultant, landscaping services for renovation repair would be eligible and could be availed being services used in relation to modernization, renovation or repair of a factory, premises of provider of output service.
Further in our considered view, the credit related to new construction of factory or of office premises could be availed. This covers credit such as on architect, interior decorator, project management consultant, landscaping services used for new factory or premises.
Conclusion
In this article paper writer has sought to cover aspects faced by the assessee in respect of availment of cenvat credit related to construction services. There is a chance of department objecting in the same lines for all construction related credit, and assessee may have to undergo such proceedings if initiated. Further it is suggested to intimate the fact of availment of eligible credit to avoid any penal consequences.
For any further queries mail at madhukar@hiregange.com, roopa@hiregange.com
Disclaimer: Views are strictly personal. The content of this document are solely for informational purpose. It doesn’t constitute professional advice or recommendation.