KPMG Flash News 18 February 2011

Transcription

1 KPMG IN INDIA KPMG Flash News 8 February 20 TAX Availability of credit of expenses Background With the introduction of Cenvat Credit Rules in 2004 ( the Credit Rules ), cross credit between Service tax and Excise duty was allowed for the first time. While the intention of introducing these Rules was to prevent the cascading effect of taxes, the manner in which these Rules have been worded resulted in a lot of interpretational ambiguities. One of such ambiguities is the scope of the term input services (services with respect to which credit/ set-off can be taken) especially in cases where the expenses are not directly linked to the provision of output services/ manufacturing activity. These include expenses pertaining to employees, catering, telephones installed at the residence of the employees, sales promotion, insurance, consulting, etc. The purpose of this Flash News is to summarize the ratio of the key judicial pronouncements in this respect during the last one year. Analysis On a perusal of the rulings issued during the past one year, it appears that the key criteria applied by the judiciary in determining the admissibility of credit of Service tax paid is that whether the underlying expense is in relation to business activity. If the answer is in affirmative, the Courts, by and large, have allowed the credit. The other key observations made by the judiciary are as under: Definition of input services is much wider than the definition of inputs and unlike the latter, the former should include in its scope, any expense relating to a business activity whether directly used in provision of output service/ manufacturing activity or not.

2 The expression such as in the inclusive part of the definition of input services is only illustrative and not exhaustive. Credit of Service tax paid on any promotional activity that increases the sales of a business should be available. Service tax paid on any expense that is required to be incurred to fulfil any statutory requirement should be available as credit. Credit of Service tax paid on expenses that form part of the assessable value on which Excise duty is charged should be available. Service tax paid on any expense without which, it would not be feasible to undertaken the operations, should be available as credit. Credit of Service tax paid on expenses recovered by the assessee from its employees should not be available. Applying the above principles, illustrative list of expenses/ services with respect to which credit has been allowed are as under: Insurance Services, Telecommunication Services, Cab Services; House Keeping Services, Pest Control Services; Security Services, etc. The notable exceptions (where credit has been disallowed) include expenses pertaining to shifting of household goods of employees, amusement expenses, auditorium expenses, etc. The same has been disallowed primarily on the ground that services are not connected with business activity of the assessee. Further, there are contrary rulings on services like Outdoor Catering Services, Garden Maintenance Services, etc. List of relevant rulings has been enclosed as Annexure to this Flash News. In this respect, it would also be worthwhile to mention the ruling of Bangalore Tribunal in case of Kbace Tech Pvt Ltd & others V/s CCE/CST, Bangalore 2. In this case, the Tribunal effectively questioned the validity of the Credit Rules to the extent it provide for availability of credit with respect to services covered under the inclusive part of the definition of input services. 2 Extract of the inclusive part and includes services used in activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security AIT CESTAT 2

3 Having stated the above, we would like to highlight that this ruling has been an exception since, as mentioned above, credit of expenses falling under the inclusive part of the definition have mostly been allowed. Conclusion As evident from the above, if the recent trend is any indication, it appears that judiciary, by and large, has been taking a rather liberal view on this issue. However, inspite of this, there have been regular instances of authorities (especially at the lower level) raising disputes on this front. Accordingly, the Industry would be hoping that the Department issues a Circular on this matter so as to bring in more clarity. Further, it is expected that most of these disputes should be put to rest upon the introduction of Goods and Service tax regime, wherein the provisions pertaining to input credit are expected to be liberal, in line with the practices followed internationally. In case you need any further information/clarification, please contact: Sachin Menon Pratik Jain Executive Director Executive Director sachinmenon@kpmg.com pratikjain@kpmg.com Phone: Phone: Disclaimer The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 3

4 Annexure S. No. Nature of Expense Citation Decision Cab rentals Semco Electrical Pvt. Ltd. V/s CCE, Pune [200 (8) S.T.R. 77 (Tri. - Mum.)] Telecommunication Semco Electrical Pvt. Ltd. V/s CCE, Pune [200 (8) S.T.R. 77 (Tri. - Mum.)] 2 Telephones installed in residence of General Manager/ Company Monnet Ispat & Energy Ltd. V/s CCE, Raipur [200 (9) S.T.R. 47 (Tri. - Del.)] Guest House 3 Chartered Accountants Service CCE, Visakhapatnam V/s Andhra Pradesh Paper Mills Ltd. [200 (254) E.L.T. 354 (Tri. - 4 Management Consultant Service Cadila Pharmaceuticals Ltd. V/s CCE, Ahmedabad [200 (7) S.T.R. 3 (Tri. - Ahmd.)] 5 Garden Maintenance Service Factory L oreal India Pvt Ltd V/s CCE, Pune-I [20-TIOL-95-CESTAT-MUM] Garden Maintenance Service Staff Colony CCE, Trichy V/s Grasim Industries [20-TIOL-72-CESTAT-MAD] 6 House Keeping Service L oreal India Pvt Ltd V/s CCE, Pune-I [20-TIOL-95-CESTAT-MUM] 7 Pest Control Services Hindustan Coca Cola Beverages P. Ltd. V/s CCE, Hyderabad [200 (9) S.T.R. 93 (Tri. - 8 Event Management Service Celebration by Employess Hindustan Zinc Ltd. V/s CCE, Jaipur-II [200 (8) S.T.R. 33 (Tri. - Del.)] 9 Airport Service Force Motors Ltd. V/s CCE, Pune [200 (8) S.T.R. 50 (Tri. - Mumbai)] 0 Air Travel Agency Services Semco Electrical Pvt. Ltd. V/s CCE, Pune [200 (8) S.T.R. 77 (Tri. - Mum.)] Overseas Commission for sale promotion CCE, Jalandhar V/s Ambika Forgings [200 (259) E.L.T. 593 (Tri. - Del.)] 2 Employee Insurance Services Monnet Ispat & Energy Ltd. V/s CCE, Raipur [200 (9) S.T.R. 47 (Tri. - Del.)] 3 Insurance of Plant and Machinery Monnet Ispat & Energy Ltd. V/s CCE, Raipur [200 (9) S.T.R. 47 (Tri. - Del.)] 4 Vehicle Insurance CCE, Raipur V/s H.E.G. Ltd. [200 (20) S.T.R. 32 (Tri. - Del.)]

5 S. No. 5 Nature of Expense Citation Decision Insurance of cash used for business purpose Monnet Ispat & Energy Ltd. V/s CCE, Raipur [200 (9) S.T.R. 47 (Tri. - Del.)] 6 Outdoor Catering Services L oreal India Pvt Ltd V/s CCE, Pune-I [20-TIOL-95-CESTAT-MUM] CCE, Chennai V/s Sundaram Brake Linings [200 (9) S.T.R. 72 (Tri. - Chennai)] 7 LPG used to run Canteen CCE, Mumbai V/s Bajaj Auto Ltd [20-TIOL-62-CESTAT-MUM] 8 Custom House Agent Services CCE, Mysore V/s Chamundi Textiles (Silk Mills) Ltd. [200 (258) E.L.T. (4) (Tri. - Bang.] Clearing and Forwarding Services CCE, Raipur V/s H.E.G. Ltd. [200 (20) S.T.R. 32 (Tri. - Del.)] Authorised Service Station CCE, Mysore V/s Chamundi Textiles (Silk Mills) Ltd. [200 (258) E.L.T. (4) (Tri. - Services Bang.] Repair and Maintenance of Plant CCE, Raipur V/s H.E.G. Ltd. [200 (20) S.T.R. 32 (Tri. - Del.)] Management Consultant service for logistic activities Cadila Healthcare Ltd. V/s CCE, Ahmedabad [200 (7) S.T.R 34 (Tri. - Ahmd.)] Maintenance of Staff colony ITC Ltd. V/s CCE, Hyderabad [200 (7) S.T.R. 46 (Tri. - CCE, Trichy V/s Grasim Industries [20-TIOL-72-CESTAT-Mad] 23 Security Services CCE, Raipur V/s H.E.G. Ltd. [200 (20) S.T.R. 32 (Tri. - Del.)] 24 Security service provided in the wind farms 25 Car Rental 26 Services for installation of plant and machinery CCE, Trichy V/s Grasim Industries [20-TIOL-72-CESTAT-Mad] Hindustan Coca Cola Beverages P. Ltd. V/s CCE, Hyderabad [200 (9) S.T.R. 93 (Tri. - Monnet Ispat & Energy Ltd. V/s CCE, Raipur [200 (9) S.T.R. 47 (Tri. - Del.)] 27 Courier Service CCE, Vapi V/s Apar Industries Ltd. [200 (20) S.T.R. 624 (Tri. - Ahmd.)] 28 Commission Agent Service Cadila Healthcare Ltd. V/s CCE, Ahmedabad [200 (7) S.T.R 34 (Tri. - Ahmd.)] Shifting of household goods of Hindustan Coca Cola Beverages P. Ltd. V/s CCE, Hyderabad [200 (9) S.T.R. 356 (Tri employees 2

6 S. No. Nature of Expense Citation Decision 30 Computer networking VST Industries Ltd. V/s CCE, Hyderabad [200 (262) E.L.T. (749) (Tri. - 3 Certification audit 32 Picnic activity L oreal India Pvt Ltd V/s CCE, Pune-I [20-TIOL-95-CESTAT-MUM] 33 Swimming pool maintenance 34 Civil works at the auditorium CCE, Trichy V/s Grasim Industries [20-TIOL-72-CESTAT-Mad] 35 Plantation activity ITC Ltd. V/s CCE, Hyderabad [200 (7) S.T.R. 46 (Tri Club Membership Fees- Director Jai Corporation Ltd V/s CCE, Aurangabad [20-TIOL-06-CESTAT-MUM] 37 Certification of pollution level in Factory Ultratech Cement Ltd V/s CCE, Nagpur [20-TIOL-82-CESTAT-MUM] 38 Business Auxiliary Service- Non resident commission agent M/s Aarti Industries Ltd V/s CCE, Vapi [20-TIOL-87-CESTAT-AHM] 3

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