Input Service for Cenvat

Input Service
Manufacturer as well as service provider will be eligible to get Cenvat credit of ‘input services’. Rule 2(1) of
Cenvat Credit Rules reads as follows –
(i) Insofar as a service provider is concerned, the term ‘input service’ means any service used by a
provider of taxable service for providing an output service. In other words, if a provider of taxable
service avails the services of another service provider, the services provided by such ‘other service
provider’ will fall under the definition of ‘input service’, provided those services have been availed of
by the provider of taxable service exclusively for the purpose of providing output service to the
ultimate consumer (client, customer etc.)
(ii) Insofar as a manufacturer is concerned, the term ‘input service’ means (a) any service used by the
manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and
(b) clearance of final products from the place of removal (upto 31-3-2008) or clearance of final products
upto the place of removal (from 1-4-2008).
In either case, the service in question can be ‘any service’ and not necessarily be a ‘taxable service’ as
defined in provisions relating to service tax.
(iii) Certain services are specifically included, both in respect of manufacturer and provider of taxable
service.

Clearance –
This word has specific meaning in Central Excise, where ‘clearance’ means removal from the factory. Thus,
expenses incurred for removal of final product from factory like loading final products in vehicles will get
covered. Place of removal – The words are not defined in Cenvat Credit Rules, but are defined in section 4(3)(c)
of Central Excise Act as follows –

“Place of removal” means—
(i) a factory or any other place or premises of production or manufacture of the excisable goods;
(ii) a warehouse or any other place or premises wherein the excisable goods have been permitted to be
deposited without payment of duty;
(iii) a depot, premises of a consignment agent or any other place or premises from where the excisable
goods are to be sold after their clearance from the factory from where such goods are removed. In
Mangalam Cement v. CCE (2007) 8 STR 639 (CESTAT), strong prima facie view was held that if services
relate upto the depot, service tax credit will be available. Port/airport is place of removal in case of export – In case of exports, the place of removal isport where export documents are presented to customs office – Kuntal Granites v. CCE (2007) 74 215 ELT 515 = 2007 TIOL 930 (CESTAT) – quoted and followed in Rajasthan Spinning & Weaving Mills v. CCE (2007) 8 STR 575 (CESTAT).

Hence, all expenses upto that place should be considered as ‘input service’. Activities relating to business
All services relating to business will be eligible for service tax credit. The words used are ‘activities relating to
business, such as – – – – – ’. The activities specifically mentioned are as follows –
• Accounting, auditing, financing
• Recruitment and quality control
• Coaching and training
• Computer networking
• Credit rating
• Share registry
• Security
• Inward transportation of inputs or capital goods and
• Outward transportation upto the place of removal.
However, these are only illustrations, as the words used are ‘such as’. The illustrations do not mean that only
these services are covered under ‘activities relating to business’. For example, the words used are ‘outward
transportation upto the place of removal’. It does not mean out-ward freight after place of removal is excluded.
Meaning of ‘such as’ – The words ‘such as’ are used only to illustrate the scope. It is not restrictive.

Mobile phones eligible for Cenvat Credit –
Earlier Service Tax Rules required ‘installation’ of telephones in the business premises. Hence, CBE&C had
clarified vide circular No. 59/8/2003ST dated 20-6-2003 that Cenvat credit will not be available in case of mobile
phones. Now there is no such requirement. Hence, service tax paid on mobile phones will be eligible for Cenvat
credit w.e.f. 10-9-2004, so long as these are used for ‘activity relating to business’ – view confirmed in Indian
Rayon v. CCE 2007 (6) STT 328 = 4 STR 79 (CESTAT SMB).

Internet services eligible –
Cenvat credit is available in respect of internet services, as it is utilised for information relating to manufacture,
sale and despatch – Universal Cables Ltd. v. CCE (2007) 7 STR 310 (CESTAT).
Outward freight after place of removal is not ‘input service’?– One of the illustrations given in inclusive part of
definition of ‘activities relating to business’ is ‘outward freight upto place of removal’. Hence, a doubt is expressed
that freight paid after place of removal is not ‘input service’. This is not correct. As already explained, ‘such as’
means what follows are only illustrations. These are not limitations. It does not mean outward freight after
place of removal is excluded from definition of ‘input service’. It should be eligible if it is in relation to activities
of business. In CCE v. KTMS Engineering (2007) 7 STR 274 (CESTAT), a prima facie view was expressed that
service tax paid on outward freight from place of removal is eligible for Cenvat credit – same view in Gujarat
Sidhee Cement v. CCE (2007) 7 STR 571 (CESTAT).

Mere payment of service tax to service provider is not sufficient –
Suppose the invoice is for Rs. 100 and service tax is Rs. 12.36, can you avail Cenvat credit if you pay only Rs. 12.36 to the input service provider? The answer is no, as the words used are ‘value of input services and the service tax payable on it’.

The specifically included services
The following services are specifically included in the definition of ‘input service’ :
Services used in relation to :
(i) setting up, modernization, renovation or repairs of a factory, premises of provider of output service or
an office relating to such factory or premises,
(ii) advertisement or sales promotion,
(iii) market research,
(iv) storage upto the place of removal,
(v) procurement of inputs,
(vi) activities relating to business, such as accounting, auditing, financing, recruitment and quality control,
(vii) coaching and training,
(viii) computer networking,
(ix) credit rating,
(x) share registry,
(xi) security,                                                                                                                                                                                    (xii) inward transportation of inputs or capital goods; and
(xiii) outward transportation upto the place of removal.

Credit only after payment is made to service provider
Credit of input services can be availed only after the output service provider makes payment of value of input
services and the service tax payable on it, as shown in invoice of input service provider. [Rule 4(7)]. [In case of
excise duty, credit is available as soon as goods are received in the factory. There is no condition that credit can
be availed only after payment is made to supplier of goods].

Output service
Who is ‘input service distributor’ – As per rule 2(m), “input service distributor” means an office managing the
business of manufacturer or producer of final products or provider of output service, which receives invoices
issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services
to such manufacturer or producer or provider, as the case may be.

Rule 2(p) defines an ‘output service’ as a service which satisfies the following requirements :
• It must be a taxable service. Section 65(105) of the Service Tax Act spells out the taxable services. The
service in question must fall under the category of one of those specified taxable services.
• With effect from 1-3-2008, it excludes transport of goods by road service.
• It must be rendered by the ‘provider of taxable service’ to a customer, client, subscriber, policy holder,
subscriber or any other person as the case may be. In contrast to an ‘input service’ which is rendered
only to a manufacturer or another service provider; an ‘output service’ must be one that is rendered to
other persons for final consumption.

Document Eligible For Cevat Credit –
As per rule 9(1)(g); ‘invoice, bill or challan’ issued by an ‘input service distributor’ under rule 4A of Service Tax
Credit Rules is an eligible document for purpose of taking Cenvat credit.

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