Input credit of service tax depends on output

fe Bureaus Posted online: Friday, May 28, 2010 at 0000 hrs
Here are some queries on taxation and foreign trade regulations, addressed by Ernst & Young. Readers may mail their queries to fesmes@gmail.com

We manufacture aerated drinks. We receive GTA service from transporters as input service and provide GTA service as a deemed service provider to our customers in respect of outward manufactured goods for which we are liable to get reimbursement of service tax against proof of documentary evidence of tax payment. Please advise whether we can avail of input service credit paid under GTA as a service recipient to utilise such credit for payment of service tax liability as a deemed service provider.

As per the service tax law, input service has been defined to include transportation of inputs and capital goods to factory and outward removal of finished goods up to the place of removal only. Further, the place of removal has been defined to include a depot as well from where the goods are to be sold after their clearance from the factory. Therefore, in case goods are supplied under a ‘delivery duty paid’ (DDP) contract wherein a sale gets concluded at the premises of the buyer, credit may be admissible. The department has also confirmed the position vide a circular.

Considering the above, it may be reasonably drawn that the credit of GTA paid for delivery of inputs and capital goods to factory and delivery of goods to the buyer’s premise would be available, provided the sales get concluded at buyer’s premise.

We construct commercial complexes and let them out on rent. It has been brought to our notice that activities carried on by us have been brought under the service tax net through the Finance Act, 2010. Please tell us whether we can avail of credit of tax paid on inputs services used in the construction of a complex against our output service tax liability.

The activities performed by you are covered under the ambit of the service category ‘renting of immovable property services’. As per Cenvat Credit Rules, the definition of input services cover any service that is used by any service provider to provide output services. The services used for the construction of commerical complexes are arguably consumed specifically for constructing a building that is used for providing the output services of renting. Also, the said services are used in relation to business, thus, getting covered under the definition of input services. So, in our view, credit of such services should be admissible.

However, CBEC via circular F. No. 345/6/2007–TRU has clarified that 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’ nor ‘goods’ as referred to above, input credit cannot be taken.

The renting has been brought within the ambit of taxable service recently. Therefore, there are not many judicial precedents on this. Thus, considering the circular issued by the service tax department, it is notable that the above situation is quite litigative.

We manufacture certain parts for an automobile company. For this purpose, the moulds and dies are supplied by the automobile company and are returnable upon termination of the contract. The ownership of the moulds and dies is retained by the automobile company. Please let us know the taxability of such supplies.

The Central Excise Act, 1944 provides for inclusion in the assessable value of any additional consideration flowing from the buyer to the manufacturer in relation to the making of goods liable to excise duty. Additional consideration includes the value of tools, moulds, dies, etc supplied free or at a reduced cost by the buyer to be used in the manufacture of goods. Accordingly, you would be required to compute the ‘per-unit amortisation cost’ of the moulds and dies supplied by the automobile company and include it in the price of goods at the time of calculation of excise duty. The valuation of amortised cost of capital goods, moulds and dies acceptable to the central excise authorities would be the method prescribed under the cost accounting standard 4 published by the Institute of Cost & Works Accountants of India.