We have a commercial property in Delhi, which we lease out to various companies. We constructed the building in 2010. We availed of Cenvat credit of services received for the construction and have utilised it for paying the service tax on lease rentals collected by us. We have been informed that we are not entitled to the credit of input services used in the construction of building against the service tax payable on lease rentals. Kindly advise.
As per the Cenvat Credit Rules, 2004, Cenvat credit of tax paid on input services can be availed of by a provider of taxable services. Further, up to February 28, 2011, the definition of input service, inter alia, includes the service used in relation to setting up premises of the provider of output service.
In Circular No. 98/1/2008?ST dated January 4, 2008, the service tax authorities have clarified that input credit of service tax can be taken only if the output is a service liable to service tax or goods liable to excise duty. Therefore, since the immovable property per se is neither liable to central excise duty nor service tax, no credit of the service tax paid on the services availed of for the construction of immovable property shall be available.
In various judicial pronouncements, the courts have interpreted the definition of ?input services? having a very wide ambit to include any kind of services used in the business of the services provider. However, there is no judicial pronouncement which specifically upheld the availment of Cenvat credit of service tax paid on the input services availed of for the construction of immovable property against the output service tax liability on the service of renting/leasing of immovable property.
It can be argued that only post-construction of the building, the company can engage itself in manufacturing activities or provision of output services. Thus, the construction of a building plays an essential part for the provision of output services (i.e. renting in the instant case) and considering the wide ambit of the definition of input services, the credit of service tax paid should not be denied to the company.
However, in view of the above circular, the authorities may deny Cenvat credit availed of by you in respect of such input services. Please note that post February 2011, the definition of input services has been amended.
Interest on excess credit
In December 2011, we inadvertently availed of the excess Cenvat credit than what we were eligible to. However, we have reversed the credit as soon as we realised the mistake. We have been made to understand that we need to pay interest for payment of duty. Please let us know the legal position.
As per the Cenvat Credit Rules, 2004, where Cenvat credit has been taken or utilised wrongly or has been erroneously refunded, the same along with interest shall be recovered from the manufacturer or the provider of the output service. The CBEC issued circular No. 897/17/2009-CX dated September 3, 2009 to clarify that interest would be recoverable from the date of availment of credit even if the credit has not been utilised. Further, the Supreme Court in the case of Union of India vs M/s Ind-Swift Laboratories Ltd. (2011-TIOL-21-SC-CX) held that Cenvat credit is recoverable along with interest upon wrong availment of or utilisation of Cenvat credit.
Subsequent to the Supreme Court?s decision, the CBEC has issued a circular No. 942/03/2011-CX dated March 14, 2011 and clarified that interest was payable from the date of erroneous availment of credit even if the credit had not been utilised at all to discharge any tax liability on any account.
Recently though, the Karnataka High Court in the case of CCE vs Bill Forge Pvt. Ltd. (2011-TIOL-799-Kar-CX) has held that where an assessee reverses credit before utilisation, it is as good as not taking credit at all. The court held that?Section 11AB expressly provides that interest is payable from the day the duty is payable, in order to compensate the revenue for the loss sustained on account of delayed payment of duty. Thus, when an entry is made in the account books showing that assessee is entitled to take credit of the duty paid on inputs or capital goods or input services the assessee is not benefitted to any extent. It is only when that credit is taken or utilised to discharge the liability to pay duty the assessee is benefitted. It is only when the assessee had taken credit, i.e. if the assessee had not paid the duty which is legally due, the government would have sustained loss. In such cases, the liability to pay interest arises.
In our view, in the Bill Forge judgement, the court logically analysed the provisions in relation to interest, keeping in mind the overall intent of the legislature and the basic purpose of levying ?interest?. In doing so, it has correctly come to the conclusion that interest is compensatory in character and accordingly its applicability should not be invoked in a situation of a mere incorrect availment of credit.
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