The definition of 'input service' is always a mystery to the trade and business and the concept of 'works contract' is even more disturbing. This article attempts to deal with the two promising issues when they get in touch with each other, that is to say whether the credit of service tax paid towards the 'works contract' services shall be eligible for Cenvat Credit as input service.
Before examining the issue, it is very important for the reader to note the changes that have taken place in the definition of 'input service' as laid down vide Rule 2(l) of Cenvat Credit Rules, 2004. Earlier to 2011, the definition of 'input service' is very wide enough to cover all the services in its ambit to claim as Cenvat Credit for the service provider. This definition has led to a huge revenue loss to the exchequer and hence there was an amendment to the definition of 'input service' post 2011 which has restricted the scope of such definition, which shall be discussed in detail in the later part of the article.
The amended definition which was effective from 01.04.2011 has made the definition of 'input service' into 3 parts.
1st Part – 100% nexus with the provision of the output services provided by service provider;
2nd Part – Irrespective of the Nexus theory, the credit stand eligible;
3rd Part – Specifically Excluded from the ambit of the definition.
As laid above, the first part of the definition deals with eligibility of the credit of services, which are having nexus with the provision of output services. Hence, all services which are having intimate nexus shall be eligible vide this part of the definition except specifically excluded (vide third part of the definition). The second limb of the definition of the said input service deals with eligibility of the credit of services irrespective whether they having nexus with the provision of output services. To be more lucid, once the services procured falls in the second limb, they are eligible for availment of credit irrespective of having nexus with the output services.
The third limb of the definition of the said input service deals with exclusion category. If the services procured fit into the third limb of the definition, the credit on such services cannot be availed unless the service provider fits into the eligibility criterion laid down by such limb. To be precise, the credit of the services shall be allowed only if the service procured and service provided falls in the same category. One of the services that appear in the 3 limb is 'works contract services' which this article aims to deal with it.
Let us put down the exact lines spelt out by the definition when it comes to exclusion of the credit on works contract services, so that we have a clear picture of the same. The relevant part is extracted as under:
(l) "input service" means any service –
(a) construction or execution of works contract of a building or a civil structure or a part thereof; or
(b)laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services
From the above part of the definition, it is evident that the credit of service tax paid on input services pertaining to the works contract services and construction services are excluded and shall be allowed only if they are used for providing the specified services. That is to say the service provider engaged in construction or execution of works contract of a building or a civil structure or part thereof or laying of foundation or making of structures for the support of capital goods can only avail credit of service tax paid on any such services received from either sub-contractors or any other person.
Now with the above background of the law, the question for consideration is whether the said exclusion shall be applicable only for 'original works' in the works contract services or 'all works contract services'?
Let us take an example of a service provider who is engaged in provision of chartered accountant services. The chartered accountant wishes to renovate/repair his office for provision of effective services and thus hires a contractor for renovating/carrying the repairs works of his office. The contract was awarded with material and labour to the account of the contractor and thus making the contract as 'works contract' services as per Section 65B (54) of the Finance Act, 1994. The contractor has provided renovation/repair services and charged service tax in his invoice. The chartered accountant has paid the same to the contractor and was in doubt whether the said service tax paid is eligible for the availment of cenvat credit and utilisation thereof against the liability towards chartered accountant services?
On the detailed examination of the definition of the 'input service', the second limb allows the credit of service tax pertaining to the renovation of the premises of the service provider. The relevant part of the second limb states as 'and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises'. As stated above, once the service falls under the second limb, there is no question of looking for nexus and stands eligible. However, the third limb specifically excludes the credit of the 'works contract' services except the service provider is a 'works contracts' service provider, which is not the fact in the instant case. Hence, there is a contradiction between the 2 limb and 3 limb. When 2 limb specifically includes repair/renovation services, the 3 limb allows such credit to only works contract service providers.
It can be argued that the 2 limb only covers such services where material is not involved that is to say if the contract is purely for labour, then the credit of such services is eligible vide 2 limb and if the contract is for both material and labour, then it does not fit into 2 limb and gets excluded by virtue of 3 limb since the later uses the phrase 'works contract' which means material and labour in the same contract. In my view, the above argument is not logical since the credit of services procured shall be decided to be eligible or not depending upon the definition of the 'input service' and not based on the method of agreement/contract entered in the context.
Hence, I am of the view that when the 2 limb specifically allows the credit of service tax paid on services pertaining to the modernisation, renovation or repairs of a premises of provider of output service provider or an office relating to such premises, there cannot be an exclusion carved out in 3 limb. If the intention of the legislature is to exclude such services then there shall not be in any mention of` the same in the 2 limb. Hence, the credit of such services stands eligible for the chartered accountant.
Then that leads us to a question, what are the services that are covered under 3 limb of the definition to stand out of the definition of the 'input services'. In my view, the 3 limb covers services in the nature of 'original works' namely the new constructions or substantial constructions and not the petty works. Let us assume that Chartered Accountant instead of renovation/repairs to his office intends to construct a new office, in such a case whether the credit of service tax paid to the contractor is eligible? The answer is no , since the 3 limb covers such instances and also the above reasoning is in alignment with the in tention of the legislature because of the removal of phrase 'setting up' from the 2 limb of the definition of 'input service' with effective from 01.04.2011.
To conclude, the 3 limb covers contracts which are in the nature of the original works and not the petty works or other than original works which stands includible in the 2 limb. It is very important to note that all credits of work contract services are not sprightly ineligible or eligible. It has to be carefully examined in the light of definition of 'input service' before availment and pre-utilisation.
This article is contributed by Sri Harsha, Partner at SBS and Company LLP, Chartered Accountants. The author can be reached at firstname.lastname@example.org