FRIDAY, FEB 29, 2008

By Joseph Prabakar, Advocate

THE controversy on eligibility to avail Cenvat credit on service tax paid on outward transportation is sought to be put to rest.  The definition of the term ‘Input Service’ has been amended by substituting the words ‘Clearance of the final products from the place of removal’ with the words ‘Clearance of final product up to the place of removal’. 

The definition of ‘Input Service’ under Rule 2(l) of the Cenvat Credit Rules, 2004 would, on and after April 1, 2008, read as follows.

‘(l) "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 upto 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.’

Presently, the matter is before the Larger Bench of Tribunal (referred to in the case of India Cements Ltd).  This amendment has got wide implications on the position up to 31st March 2008 and after April 1, 2008. 

The dispute on this issue before the proposed amendment would now have to resolved in favour of the assessee in as much as the Government has by implication accepted that there was indeed an issue of interpretation of the definition of the term ‘Input Service’.   In other words, if there was no ambiguity on this issue, there would have been no necessity for the present amendment.  Therefore, the fact that an amendment has been proposed now would only go to prove that the Cenvat on outward transportation is definitely available before the amendment.  On this point, the Supreme Court had consistently held that when there are two possible interpretations the interpretation which is in favour of the assessee should be preferred to the one in favour of the Revenue.

The other issue is the time limit regarding availment of CENVAT credit on outward transportation. It is pertinent to note here that the CENVAT Credit Rules 2004, do not prescribe any time limit for availing CENVAT credit on input services.  Therefore, it is still open to the assessees who have not availed CENVAT credit on outward transportation so far to avail the credit now for the period from January 2005 onwards.  Also, credit can be availed for GTA services rendered up to 31st March 2008. 

Though the amendment would benefit the assessee for settling the dispute for the past period, going forward, the benefit would not  be available from April 1, 2008. The intention of the Government to curtail the benefit from April 2008 is not in the right spirit.  Even today, the Finance Minister reiterated the commitment towards achieving Goods and Services Tax in year 2010. In that context, the amendment would be seen as a retrograde step towards achieving GST.  Also, having now admitted the flaw in drafting of CENVAT Credit Rules, 2004, the Government should now come forward to issue a circular clarifying the position that the credit can be availed up to 31st March 2008, so as to save time and money on avoidable disputes pending in various forums for the past period.