SCOPE OF EXEMPTED SERVICES FOR CENVAT CREDIT

[Dr. Sanjiv Agarwal]

Exempted Services [Rule 2(e)]

Exempted services would include only services (not goods) which are taxable services but are exempt from the whole of service tax leviable thereon (such as services for which payment is received in foreign exchange or services rendered to Diplomatic Missions etc.). Exempted services will also include those services on which no service tax is leviable under the provisions of Chapter V of the Finance Act, 1994 (i.e. services out of service tax net).

Thus, exempted services should be -

(i) taxable services exempt from service tax, or

(ii) services on which service tax has not been levied.

One of the essential condition is that in case of taxable services, exemption must be from whole of service tax, and partial exemptions may not qualify for this definition. Service which are not rendered to another person but used for self use are also not subject to levy of service tax but cannot be considered as exempted services.

W.e.f. 1.4.2011 exempted service shall include trading activity vide Notification No. 03/2011-CE(NT), dated 1.3.2011.

W.e.f. 1.7.2012, it will include wholly exempt services, services under section 66B and services on which conditional abatement in allowed but excludes export of services under Rule 6A of Service Tax Rules.

In Lally Automobiles (P) Ltd v. Commissioner (Adjudication), Central Excise 2013 (10) TMI 863 - DELHI HIGH COURT assessee, a dealer of motor vehicles, took credit of rent paid on premises used for trading purposes and also engaged in repair, maintenance and servicing of motor vehicles. In some cases, premises were exclusively used for repair, maintenance and servicing only. Department sought reversal of credit pertaining to trading activity. Tribunal opined, prima facie, that amendment in rule 2(e) w.e.f. 1-4-2011 covering trading activity as exempted service was clarificatory and retrospective. Tribunal also did not consider aspect of invocation of extended period of limitation and ordered pre-deposit of entire demand with interest. It was held that a dealer of motor vehicle was not entitled to credit of rent paid for building used for trading purposes; but, in case of services used for both trading activity and taxable services, reversal of credit may be sought on pro rata basis in ratio of value of two activities or on some other just, fair and equitable basis. [Also see: Henkal Chembond Surface Technologies Ltd. v. CCE, Thane II 2014 (1) TMI 1332 - BOMBAY HIGH COURT].

In Woodward Governors India Ltd v. CCE, Delhi-IV 2014 (5) TMI 418 - CESTAT NEW DELHI, where assessee had availed Cenvat credit of input services on goods manufactured and also on trading activities undertaken, it was held that even if the services, in question, were common input services for manufacturing as well as trading activity and trading was treated as an exempted service, since Cenvat credit was available in respect of manufacture of dutiable final product or providing of taxable services, the Cenvat credit could be denied only in the proportion to the extent the input services had been used in or in relation to the trading activity. Moreover, when the assessee were filing returns in respect of their manufacturing activity as well as trading activity, prima facie, the department could not be unaware of the fact that the assessee were engaged in both the activities from the same premises and the Department could not be unaware of the fact that they had availed Cenvat credit in respect of services which could be common inputs for both the activities.

In Gulf Oil Corpn Ltd v. CCE, Vapi 2012 (8) TMI 45 - CESTAT, AHMEDABAD, wherein Cenvat credit was taken by the assessee on service tax paid for transportation of input service, it was held that trading activities could not be considered as service or exempted service .Accordingly, as registered dealer was neither a manufacturer nor a provider of taxable service, there was no force in the arguments of the assesses and Cenvat credit on the same was not available to the assessee. [Case followed: Orion Appliances Ltd. v. CST, Ahmedabad (2010 (5) TMI 85 - CESTAT, AHMEDABAD].