FEBRUARY 10, 2011

Eligibility of Input Service credit under Cenvat Credit Rules, 2004 for clearance of final products upto place of removal

By P G James

THE controversy regarding the admissibility of credit of Service Tax paid as recipient under Section 66A of the Finance Act. 1994 due to its noninclusion under Rule 3 of Cenvat Credit Rules has reached finality only with the issue of letter bearing No F.No.354/148/2009-TRU dated 19th July, 2009 by Ministry of Finance. Statutory liability of Service Tax for import of services is fastened on the assesses through Section66 A only effective from 18.04.06 and that too for rectification of the earlier anomaly since it is provided only in Service Tax Rules. But simultaneous amendment was not made in Cenvat Credit rules, 2004 and hence at many places, CERA has objected such credit availment since the eligibility of credit as per Rule 3 (1) (ix) is for Service tax leviable under Section 66 of the Finance Act. Finally Govt has come out with the clarification that the tax collected from the recipient in terms of Section 66A is also tax chargeable under section 66 of the Finance Act, 1994 and hence credit of tax paid on imported services should be allowed if they are in the nature of input services.

Similar anomaly could be seen in Rule 2 (1) which reads 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 upto the place of removal,

‘clearance of final products upto the place of removal' has been substituted for‘ clearance of final products from the place of removal' by Notification 10/2008 C.E. (N.T.) dated 01-03-2008

Cenvat Credit Rules, 2004 has been introduced in exercise of the powers conferred by Section 37 of the Central Excise Act, 1944 (Not 23/2004-CE (N.T) dated 10th Sept, 2004)

The powers conferred under Section 37 of the Central Excise Act, 1944 are as follows:

Section 37(1) - The Central Govt may make rules to carry into effect the purposes of this Act

(2) – In particular, and without prejudice to the generality of the foregoing power, such rules may-

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(xvia) -  provide for the credit of duty paid or deemed to be have been paid on the goods used in or in relation to the manufacture of excisable goods

(xviaa) – provide for credit of Service Tax leviable under Chapter V of the Finance Act, 1994 (32 of 1994) paid or payable on taxable services used in or in relation to the manufacture of excisable goods

Cenvat Credit Rules, 2004 is made as per the powers conferred by Sec 37 of CEA, 1944

Rule 2(l) of CENVAT Credit Rules defines input service as any service used by the 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

Here the moot point is that without corresponding amendment in the relevant Sections of the Act, is it proper to enlarge the scope by amendment in Rules .Will it be ultravires since Cenvat Credit Rules extends the scope of input service to the clearance of final products also whereas it is restricted only to manufacture of final products only under the Act?