The loosely-worded definition of input service is generating needless and repetitive litigation over service tax credit claims.
Plato once remarked that "When there is an income-tax, the just man will pay more and the unjust less on the same amount of income." In a very broad manner, this clause seems to be applicable to the Service Tax law in its present form.
The initial cases under Service Tax focused on the constitutional validity of the levy, the subsequent ones focused on waiving penalties, the next set saw some landmark decisions of the Supreme Court as in the Tamil Nadu Kalyana Mandapam case and the last set got specific, to define services. Having come a full circle, it appears now that disputing input tax credits is the flavour of the season.
Input tax credit?
There appeared to be no dispute when there was the Service Tax Credit Rules. But after they morphed with the Cenvat Credit Rules, complications appear to have set in. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) recently heard a couple of disputes. In Gujarat Ambuja Cements (GAC) vs CCE, Ludhiana (2007-TIOL-539-CESTAT-DEL), the CESTAT heard a service tax complication on outward freight.
The dispute was over the service tax paid on the freight incurred in the transportation of cement sold by GAC. The sale was on FOR (free-on-rail) destination basis and the freight was paid by GAC. GAC also paid the service tax on the freight and claimed input service credit on it.
That claim was rejected by the Central Excise stating that there was no basis for treating `transportation' as part of `clearance'. It was pointed out that transportation and clearance are entirely separate activities and one cannot take the place of other.
The CESTAT ruled that the interpretation sought of GAC does not flow from the definition of input service.
The main clause in the definition states that the service in regard to which credit of tax is sought should be used in or in relation to clearance of the final products from the place of removal.
Another case, Colgate Palmolive India Ltd (CP) vs CCE, Mumbai (2007-TIOL-485-CESTAT-MUM), raised a different contentious issue regarding input tax credit. CP had three factories of which one manufactured goods exempt under Excise.
There were certain common input services used for the manufacture of both dutiable and exempted products for instance, advertisement, market research, recruitment, clearing house agent, goods transport agency, and maintenance or repair services. The invoices for these services were raised in the name of Head Office that made the payments and took credit for the service tax paid in respect of such services. This service tax was then distributed only to the duty-paying units.
TheDepartment contended that as the services were used in respect of both exempted and dutiable products, they were liable to maintain separate accounts of the services used in the manufacture of dutiable final and exempted products and in the absence of the same, they were required to make payment equal to 10 per cent of the total price excluding sales and other taxes on the exempted final product at the time of clearance of fully exempted final products in terms of Rule 6(3) of the Cenvat Credit Rules, 2004.
The Tribunal did not agree with the CP's argument that the services referred to in the inclusive definition of input services under Rule 2(1) need not be used in or in relation to the manufacture of final product. The services had to be used in or in relation to the manufacture of final product and inclusive definition only suggests that some services may seemingly not appear to be used in relation to the manufacture of final product would nevertheless deemed to be so used and ruled in favour of the Department.
The problem appears to be in the loosely-worded definition of input service which is defined as used by a provider of taxable service for providing an output service or used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal, and includes services used in relation to setting up, modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises.
It took a T. K. Rustagi Committee report to advise the Government to remove needless and repetitive notifications and circulars under Service Tax. One wonders if another committee is needed to suggest removal of clauses leading to needless and repetitive litigation.
Mohan R. Lavi (The author is s Hyderabad-based chartered accountant.)