JULY 17, 2015

By Vishwanath K ACA, Grad CS

POST introduction of negative list, the definition of "Output services" under Rule 2(p) in the CENVAT Credit Rules, 2004 ("CCR") has been amended by Notification no. 28/2012-CE (N.T) dated 20.06.2012 which reads as follows:

"output service" means any service provided by a provider of service located in the taxable territory but shall not include a service,-

(1) specified in section 66D of the Finance Act; or

(2) where the whole of service tax is liable to be paid by the recipient of service.

On a careful reading of the above rule, one can deduce that in order to construe a service to be an output service, it must be a "service" provided by the service provider who is located in the taxable territory i.e. India except the State of Jammu and Kashmir but excludes two kinds or types of services.

The second exclusion clause makes interesting reading as it provides that where the whole of the service tax is liable to be paid by the recipient of service then such service does not qualify as output service. Basically, the quintessence here is to exclude the services where the service taxis liable to be paid under reverse charge mechanism basis from the ambit of output service definition similar to the erstwhile Rule 5 of the Taxation of Services (Provided from outside India and received in India) Rules, 2006.

However, the exclusion clause construes the other way for the below reasons:

The incongruity

The incongruity arises when the second exclusion clause is read to mean or to cover only those services where the entire service tax is liable to be paid by service receiver i.e. It covers only100% reverse charge payment (for eg. import of services, legal services etc.)reason being the legislature has consciously in its wisdom used the expression "whole of service tax" and not "whole or any part of service tax". Normally, the expression whole of service tax connotes the entire service tax paid on the total value of service irrespective of who makes the payment i.e. service provider or receiver.

By implication, the exclusion clause in the said definition does not exclude services where the service tax is liable to be paid under partial reverse charge basis and therefore, all the services where service tax is liable to be paid under partial reverse charge would, by implication, get covered under the definition of "output services". For eg: Rent-a-cab services and works contract services. (-ve x-ve = +ve)

Probable consequences

The consequence of such a construction could be that in terms of Rule 3(4) of the CCR, the CENVAT credit may be utilized for payment of service tax on any output service. Hence, the cenvat credit can be utilized for the payment of service tax under partial reverse chargeas well. However, the explanation to Rule 3(4) restricts the utilization of cenvat credit for the payment of service tax in respect of services where the person is liable to pay tax is the service recipient.

Another aspect to this is that the ratio of reversal of cenvat credit attributable to exempted goods / services as per formula under Rule 6(3A) of CCR would also differ as the denominator in the ratio includes "output services" and such output services when construed to include partial reverse charge payments as well would lead to a lower reversal of Cenvat credit and result in higher eligible cenvat credit for utilization.

It would also have to be borne in mind that the Cenvat Credit before reversal may also include such partial reverse charge payments, if eligible. Then it would lead to double benefit to the assessee where in the first instance the cenvat credit is included before reversal and at the same time, it is also included in the denominator of the ratio that has an impact of lower reversal.

Before parting…

The Board vide Letter F.No. B1/4/2006-TRU dated 19.4.2006 during the pre-negative list regime had clarified that the legal fiction provided in Section 68(2) of the Finance Act, 1994 to deem the service provider under section 66A is only for the purpose of charging service tax on taxable services received from outside the country and the services provided from outside India and received in India, therefore, are not treated as taxable service provided by the recipient for the purpose of CCR.

Further, the erstwhile definition of output services was also amended w.e.f. 01.03.2008 to exclude services provided by a Goods Transport Agency in relation to transport of goods by road in a goods carriage.

It would be interesting to wait and watch whether any clarification would be issued by the Board to clarify that services in the nature of the partial reverse charge payments would also get covered in the exclusion clause of the definition of "output services" or whether there will be an amendment either to include "any part of service tax" or to exclude the expression "whole" in the definition of Output Service.

Or is the Board waiting for the field formations to issues those elephantine SCNs?

(The author is associated with Lakshmikumaran and Sridharan, Bangalore)