Cenvat Credit on Renting of Motor Vehicle-An issue gone unnoticed

[Akash Deep]

Budget 2017, being presented in the backdrop of demonetisation and high hopes of implementation of GST at the earliest, has neglected various issues which very well deserves the attention of legislature. Eligibility of Cenvat Credit on service of renting of motor vehicle is one such issue where credit availed on such service has always denied by the Revenue on the ground that motor vehicles involved in provision of such service do not qualify as ‘capital goods’ in the hands of the recipient and, therefore, such service falls under the exclusion clause of definition of “input service” as defined in Cenvat Credit Rules, 2004 (“CCR”). As the relevant provisions are ambiguous, service provider are helpless and have chosen to forego the Cenvat Credit on such service just to avoid the litigation.

With effect from 1.4.2012, the definition of ‘input service’ under the CCR was amended by way of insertion of exclusion clause. As per the exclusion clause, service of renting of motor vehicle, where the motor vehicle does not qualify as capital goods, shall be excluded from scope of ‘input service’. From a harmonious reading of the exclusion clause “B” to the definition of ‘input service’ along with definition of ‘capital goods’ vis a vis motor vehicle, it emerges that services received by way of renting of motor vehicle would be treated as ‘input service’ if same has been provided by service provider using a motor vehicle which is registered in its own name. 

Interestingly, the above exclusion clause does not specify as to whether the status of motor vehicles as ‘capital goods’ has to be determined qua the service provider or service recipient.  This has led to disputes between the service receivers and the Revenue.

The exclusion clause in the definition of input service is being misconstrued by Revenue to deny Cenvat Credit on the services received by a taxpayer by way of renting of motor vehicles. The Revenue has adopted a view that services pertaining to renting of motor vehicles would qualify as input services only if the motor vehicles qualify as ‘capital goods’ in the hands of service recipient.

As a result of the above erroneous interpretation, the service recipients comprising corporate offices, manufacturing units and other offices availing the service of renting of motor vehicle for transportation of their employees to office and back home, could not avail Cenvat Credit in respect of the said service since the vehicle was not registered in the name of the recipient and therefore it did not qualify as capital goods in the hands of the service recipient.  However, in order to avoid litigation, the Cenvat Credit on such services was not taken by service receivers.

Recently the issue came up before the Customs Excise & Service Tax Appellate Tribunal, New Delhi (“Tribunal”) in case of M/s Marvel Vinyls Ltd. v. Commissioner of Central Excise, Indore, 2016 (11) TMI 1126 - CESTAT NEW DELHI . In this case, the Cenvat Credit of service tax paid on the service of renting of motor vehicle was availed by the revenue and same was denied by the revenue on the ground that motor vehicle must qualify as ‘capital goods’ in the hands of service receiver.

While deciding the issue in favour of appellant, the Tribunal observed that the interpretation adopted by the Revenue is flawed as motor vehicle involved in provision of services by way of renting of motor vehicle can never be ‘capital goods’ to the recipient of said service. Hon’ble Tribunal held that the expression- “which is not a capital good’ appearing in said exclusion clause would require examination vis-à-vis the service provider and not vis-à-vis service recipient.”

The argument taken by the Revenue that Cenvat Credit of service tax paid on service of renting of motor vehicle is not available to the appellant (i.e. service recipient) because such motor vehicles do not qualify as ‘capital goods’ with reference to appellant, is self-defeating. It is axiomatic that if a person who owns certain motor vehicle registered in his name and use them for transportation of its own employees for business purposes, the whole transaction would reduce in to self-service and self-service can never qualify as service. When transaction does not qualify as service itself, question of taking Cenvat Credit does not arise at all.

Further, the interpretation adopted by the Revenue imposes a condition that the motor vehicle used for provision of such service must qualify as capital goods in the hands of the service recipient, is nothing but to put the service recipient against an impossible task. Considering the definition of capital goods as provided under CCR, any motor vehicle can qualify as ‘capital goods’ only if it is registered in the name of service provider and used for providing service of renting of motor vehicle. It is obvious that a motor vehicle which is already registered in the name of the service provider cannot be simultaneously registered in the name of the service recipient. Further, it cannot be assumed that the law (i.e. CCR) would require the service recipient to perform an impossible task or satisfy an impossible condition for enabling him to take the credit of the input services pertaining to renting of motor vehicle. The legal maxim Lex non cogit ad impossibilia- (“the law does not compel a man to do what he cannot possibly perform”), has been accepted by Courts in plethora of cases. Applying the maxim in current case, Hon’ble Tribunal has rightly held that in the context of availability of Cenvat Credit to the recipient of service of renting of motor vehicle, nature of motor vehicle qua capital goods must be examined with reference to the service provider and not service recipient. 

No doubt, this judgment has come as a relief to the taxpayers including corporate entities (for instance BPOs, KPOs, etc.) receiving such services by way of renting of motor vehicle for transporting their employees from their houses to the office premises. As the ambiguity in provision (i.e. exclusion cause (“B”), has already pointed by the Hon’ble Tribunal, action from the legislature is required to put the ambiguity at rest. Insertion of words like “in the hands of service provider” or “with respect to service provider” of any other words having similar effect shall put the issue at rest for once and all. However, it appears that issue has not been proved grave enough to attract the attention of the Legislature in the whirlwind of correcting aftermath of demonetisation and GST uproar. Author sincerely hopes that legislature should give its attention at the earliest, to the issue causing illegal denial of otherwise eligible CENVAT Credit.           

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Akash Deep

Author is a law graduate from NALSAR University of Law, Hyderabad and practicing Indirect Taxation Laws

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Discussions to this article

[Ganeshan Kalyani]

Dear Akash Deep Sir, Nice article. It is true that lot of cenvat credit becomes a cost due to non-availability of cenvat credit. If an amendment comes to clarify the issue, then it will be a relief to assessees. Thanks.

[Akash Deep]

Thank you Ganeshan kalyani Ji..

[KASTURI SETHI]

Sh.Akash Deep Ji,

Very happy to see you again on the forum of TMI.

Read your article deeply. There is a lot of substance in your reasoning on the issue. Your efforts would not end in smoke. This problem may come to the notice of GST Council. We can hope it may be solved at the time of enactment of GST. So many meetings are to take place with GST Council.

Thanks & regards

K.L.SETHI

[Akash Deep]

Thank you Kasturi Ji..i was never away..just help up with things...

I Will be in Chandigarh on 23 rd of February..had a matter in tribunal..if possible would like to meet you in person.