Change in definition of "Input Service" under Cenvat Credit Rules, 2004

Change in definition of “Input Services” under Cenvat Credit Rules, 2004

Prepared By: -
CA. Pradeep Jain
Sukhvinder KaurLLB[FYIC]

Introduction: - This year budget has seen a major change in definition of inputs and input services. Through this piece of articulation we intend to study the impact of change in definition of input services.

Old definition:-The earlier definition of ‘input services’ is given in Rule 2 (l) which reads as under:

(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,

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 upto the place of removal;

New definition: - Now, vide Budget 2011-12, the definition of input services is amended and will read as under:

(l) “input service” means any service, -

(i) used by a provider of taxable 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, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal; but excludes services,-

(A) specified in sub-clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act (hereinafter referred as specified services), in so far as they are used for-

(a) construction 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; or

(B) specified in sub-clauses (d), (o), (zo) and (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods; or

(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee;”

Changes in definition:-

Hence, there is lot of change in definition of “inputs services”. We are discussing the changes in the same and their impact in following paras:-

Business Expenditure:- First visible change is deletion of words “relating to business”. There was a lot of litigation on the point whether a particular service was an input service for the assessee or not. In the case of the Commissioner of Central Excise, Nagpur v/s Ultra Tech Cement Ltd [2010-TIOL-745-HC-MUM-ST] it was held that

Cenvat Credit – Service Tax – input service – extends to all services used in relation to the business of manufacturing the final product – the definition of “input service” is very wide and covers not only services, which are directly or indirectly used in or in relation to the business of manufacture of final products, be it prior to the manufacture of final products after the manufacture of final products. To put it differently, the definition of input service is not restricted to services used in or in relation to manufacture of final products, but extends to all services used in relation to the business of manufacturing the final product.

It was further held that:

In Relation to Business: The expression “activities in relation to business” in the definition of “input service” postulates activities which are integrally connected with the business of the assessee. If the activity is not integrally connected with the business of the manufacture of final product, the service would not qualify to be a input service under Rule 2 (1) of the 2004 Rules.

Thus, the outdoor catering service was held by the Hon’ble High Court to be an input service for the assessee therein as being integrally connected with the business of manufacturing cement and therefore, credit of service paid on outdoor catering services would be allowable.

Similarly in the case of Coca Cola India (P) Ltd v/s CCE, Pune-III {[2009] 22 STT 130 (BOM.)} it was held as under:

Rule 2(l) of the Cenvat Credit Rules, 2004 - Cenvat credit -Input service - Whether services of advertising and marketing procured by an assessee-manufacturer in respect of advertisements for aerated waters are covered by definition of term ‘input services’ as defined in rule 2(l) when admittedly assessee manufactures concentrates which are exclusively used for manufacture of respective aerated waters which are advertised by assessee - Held, yes -Whether, therefore, service tax paid on expenditure incurred by assessee on advertisement, sales promotion, market research, etc., will have to be allowed as input stage credit more particularly if same forms a part of price of final product of assessee on which excise duty is paid - Held, yes [Paras 38 and 44]

Thus, all the services which were utilised in or in relation to business expenditure of the assessee were treated as input services and cenvat credit was held to be admissible in the said cases.

Now, in the amended definition the words “activities relating to business, such as” have been deleted. Now the credit of services utilised in the business activities if not mentioned in the definition would not be eligible input services for availing cenvat credit facility. The definition of input service has been narrowed down. The effect of the judgment in the cases of Coca Cola India (P) Ltd and Ultra Tech Cement has been nullified. But will it has the same effect. It is due to the fact that all the services are still listed in the definition of “input services”. Further, the definition still uses the words “includes”. Thus, it is inclusive definition and is not complete list of services to be covered in input services.

Construction services: - Another change in the definition is that an exclusion clause has been added excluding certain services used for specified construction activities. By the addition of the exclusion clause more conflict has been created.

In the main part of the definition it has been provided that input services will include 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. And cenvat credit has been allowed not only on the renovation, repairing etc. of factory or premises of output service provider but it went further to allow the same for office also.

But the exclusion clause excludes the commercial construction services, architect service, residential construction service and works contract services from the purview of input services. Thus, the litigation will arise as to the main part of the definition will prevail or the exclusion clause.

Port services: - Further, there was dispute on admissibility of service tax paid on port services and other port services used after clearance of goods from the factory but the department has never objected on service tax paid on port services used for clearance of inputs. But the cenvat is being denied on all port service, other port services and services provided at the airport. Further, it says that it will be denied to the extent it is used for construction of building or civil structure or for laying foundation or making of structure for support services. We are not able to understand as to how port services are used in construction of laying foundation.

Addition of legal services and business exhibition:- This is welcome step and these are included in definition of inputs. The credit will be available on the same.

Specific exclusions: - the definition has clearly excluded the services of outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of club, health and fitness, life insurance, health insurance, travel benefits. This is clearly stated that these are used for employees for personal use then the same will not be allowed. Out of above, there is lot of litigation on outdoor catering. The larger bench has allowed the cenvat credit on outdoor catering services in GTC industries. Further, the same was travelled to High Court and decision in case Ultratech Cement cited supra has come and credit was allowed. But now the department has changed the definition. The Board should have done at earlier stage only so that litigation has not taken place.

Conclusion: - The board has amended the definition to reduce the litigation but exact outcome will be known in times to come. But this is true that amendment has unsettled the things once again which were already settled.

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Change in definition of "Input Service" under Cenvat Credit Rules, 2004

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