By K.Prakash Babu, Advocate
The Honourable Supreme Court has pronounced its decision in the case of M/S. Sandur Micro Circuits VS Commissioner of Central Excise, Belgaum vide citation No:2008 (229) ELT 0641 (SC) that “5. The issue relating to effectiveness of a circular contrary to a Notification statutorily issued has been examined by this Court in several cases. A Circular cannot take away the effect of Notifications statutorily issued. In fact in certain cases it has been held, that the Circular cannot whittle down the Exemption Notification and restrict the scope of the Exemption Notification or hit it down. In other words it was held, that by issuing a circular a new condition thereby restricting the scope of the exemption or restricting or whittling it down cannot be imposed. The principle is applicable to the instant cases also, though the controversy is of different nature.”
With this backdrop we will analyse how far the following two circulars issued by the Govt. of India are helpful or beneficial to the Service Tax assesses relating to the (I) service recipients under reverse charge mechanism against Goods Transport Agency – Outwards and (II) services provided under Renting of Immovable Property Services.
- Circular No: 97/8/2007-ST Dated 23-08-2007 – Prescribing procedural clarification to Service recipients under reverse charge mechanism against Goods Transport Agency – Outwards & other issues.
In this Circular, in the comment for (a) under Para 8.1 following is stated:
“In terms of the CENVAT Credit Rules, “output service’ means any taxable service provided by the provider of taxable service to the service receiver. Further, the definition of ‘provider of taxable service’ includes a person liable to pay service tax. Therefore, reading the two definitions in conjunction, it is clear that, to form ‘output service’, taxable service has to be actually provided by the ‘provider of taxable service’. Even if due to a legal fiction, a consignor or a consignee qualifies to fall under the definition of ‘ a person liable to pay service tax ‘ (and consequently a ‘provider of taxable service’), it cannot be said that he has actually provided any taxable service. The service provided by a Goods Transport Agent (GTA) for which the consignor or the consignee is made liable to pay service tax does not become an ‘output service’ for such consignor or the consignee. Therefore, the service tax payable by the consignor or consignee on transportation of goods by road cannot be paid through credit accumulated by such consignor or consignee. For example, a manufacturer of steel sheets procures duty paid steel ingots as input and avails CENVAT credit of the excise duty paid on ingots. He clears his finished goods i.e., steel sheets on payment of excise duty and sends the same to the customer, engaging the service of a goods transport agency. In this case, he pays service tax on service received by him for transportation of the goods. However, the input credit taken on steel ingots cannot be used for payment of service tax applicable to goods transport agency. The reason is that the such manufacturer (consignor) is not the service provider. The transport service is being provided by the ‘goods transport agency’ and the excise assessee pays the service tax only for the reason that the liability for payment of service tax has been shifted to the service receiver. Accordingly, the consignor or the consignee has to pay service tax in cash on goods transport by road service. “
The Govt. of India has amended the definition of “output service” by excluding the GTA services received for outward transportation of the goods with effect from 01-03-2008. It implies that up to 29-02-2008, assesses can make payment of Service Tax on the above GTA services by utilization of Cenvat Credit available with them. It is indirectly conveyed that the payment of Service Tax by utilization of available cenvat credit for the availment of GTA services up to 29-02-2008 is not ultra vires as in the preface of the above circular the last sentence is the categorical statement of acceptance of the force contained in the statute, viz, “It is however, clarified that this circular is intended only to clarify the scope of the Act and rules, and therefore, in the event of any inadvertent inconsistency or contradiction between the circular and provisions of the Act or the rules, the latter shall prevail.”
Prior to the issuance of above circular by the Govt. of India, honourable Tribunals have upheld the payment made by the utilization of available Cenvat Credit by the assesses in following cases and set aside the orders of, disallowing of payment made by utilization of Cenvat Credit, the adjudicating authorities:
i) 2007 (07) STR 0026(Tri) – CCE Vs Nahar Indtl.Enterprises Ltd
ii) 2008 (08) STR 0186 (Tri) – RRD Tex Pvt. Ltd VS CCE
iii) 2008 (009) STR 0544 (Tri-Chennai) – Pallipalayam Spinners Pvt. Ltd VS CCE Salem and
iv) 2008 (087) RLT 0557 (Tri-Mum) – Mahindra Ugine Steel Co Ltd Vs CCE Raigad.
In view of above inconsistency prevailed up to 29th Feb,2008, if any assessee makes payment through utilization of Cenvat Credit for the above services in lieu of cash, department should not initiate any invocation of penal provisions and extended period of limitation.
- Circular No: 98/1/2008-ST Dated 04-01-2008 – Amendment to Circular No. 96/7/2007-ST dated the 23rd August, 2007 – Clarification in respect of renting of immovable property service and works contract service – Regarding.
The Govt. of India has brought the Renting of Immovable Property in furtherance of commerce and business into the net of Service Tax with effect from 01-06-2007.
Like any other services which are in the net of Service Tax, this service also embraced the provisions of Cenvat Credit Rules, 2004. In case any assessee gets the building constructed through contract, the service provider would be the Contractor and the assessee is the Service Receiver. The Contractor is the person eligible to take credit of excise duty paid on materials used in construction. As per rule 3 of Cenvat Credit Rules,2004, provider of taxable service is allowed to take credit for the purpose of payment of Service Tax on Output Service. The person who gets such premises constructed is service recipient for the contractor and hence, credit of excise duty paid on materials used for building is not admissible for service recipient.
But this restriction may not apply to Service Tax paid on Construction Service received by such service recipient as it can be covered under input service for providing output service of renting.
The above was the undisputed status of renting of immovable property services till 03rd Jan, 2008.
The Govt.of India has issued a clarificatory circular No:98/1/2008-ST dated 04-01-2008 imposing its views in the guise of clarification on interpretation of Acts and rules enacted statutorily, the extracts relating to renting of immovable property is reproduced below:
096.01 / 04.01..08
Commercial or industrial construction service [section 65(105)(zzq)] or works contract service [section 65(105)(zzzza)] is used for construction of an immovable property. Renting of an immovable property is leviable to service tax [section 65(105)(zzzz)].
Whether or not, commercial or industrial construction service or works contract service used for construction of an immovable property, could be treated as input service for the output service namely renting of immovable property service under the CENVAT Credit Rules, 2004?
Right to use immovable property is leviable to service tax under renting of immovable property service.
Commercial or industrial construction service or works contract service is an input service for the output namely immovable property. Immovable property is neither subjected to central excise duty nor to service tax.
Input credit of service tax can be taken only if the output is a ‘service’ liable to service tax or a ‘goods’ liable to excise duty. Since immovable property is neither ‘service’ or ‘goods’ as referred to above, input credit cannot be taken.
The clarification states that “Commercial or industrial construction service or works contract service is an input service for the output namely immovable property”. And this “Immovable property is neither subjected to central excise duty nor to service tax”.
It is true that the immovable property is not subjected to central excise duty as a building can not be manufactured or produced like any other product which is made in a factory.
It is also true that the immovable property is not subjected to Service Tax when used solely for residential purpose, for the purposes of accommodation, holiday accommodation, hostels, hotels, educational bodies, religious bodies and renting for day care centers. But if the same immovable property is given on rent/let/lease/licensed or other similar arrangements for use in the course of business or commerce, it is subjected to levy of Service Tax.
When an immovable property is used for any purpose other than in furtherance of business or commerce, it is not subjected to Service Tax and the assessee of immovable property will not be in a position to avail any cenvat credit. Whatever amount of excise duty paid on materials and the service tax paid to the contractor has to be absorbed by the Service receiver.
But when an Immovable property is given on rent/let/lease/licensed or other similar arrangements for use in the course of business or commerce, it is subjected to levy of Service Tax, then why the cenvat credit of input services/materials which have gone into formation of Immovable property are not allowed to the assessee. Can the statutory authorities levy Service Tax without the existence of Immovable Property on its renting? It is not at all possible. When an Immovable Property is subjected to Service Tax, it has lost its characteristics of an Immovable Property and has come in line with any other service activity. Hence, restricting the availment of Cenvat Credit is improper and unjust.
Instead of totally denying the benefit of Cenvat credit on this service, this can be considered on par with capital goods which help manufacturing of excisable goods. The immovable property can be treated as “ capital goods” and cenvat credit can be allowed accordingly, so that the revenue contributing assesses do feel satisfied.
As the provisions of the Act and rules relating to Service Tax are fully charged with force, the above clarification restricting the availment of Cenvat Credit, which is other wise admissible as per the provisions of Cenvat Credit Rules, 2004, is in clear contradiction and inconsistent with the prevailing statutes. Knowing fully well that this clarificatory circular is in tussle with the statutory force imbibed in the Act and Rules, why to issue with clauses stating:
“8. Views stated in the circular reflect the interpretation of the law and the current practice of the department. This circular is not to be treated as part of law and does not override the legal provisions. The relevant statutory provisions must be referred to and they will prevail”.
Above two circulars which are in clarificatory nature are revenue biased and does not stand the test of law. Assesses may have to avail the benefit by fighting for their rights/benefits which the provisions of Act and Rules are meant for.