CENVAT CREDIT OF CONSTRUCTION SERVICES USED FOR PROVIDING RENTING OF IMMOVABLE PROPERTY SERVICES— A HOSTILE DISCRIMINATION
Levy of service tax on renting of immovable property service came into effect from 01.06.2007. Ever since the introduction of this service, there was huge litigation on the validity of levy and the matter is presently pending before Supreme Court. Now we can look into another swirling issue associated with this service. It is about availment of CENVAT Credit on construction services received by these service providers.
Position from 01.04.2011 to 30.06.2012:
With effect from 01.04.2011, there is a specific restriction on availment of CENVAT Credit of the following services.
a) Commercial or Industrial Construction services
b) Residential Complex services
c) Works Contract Services
d) Architect services
CENVAT Credit was allowable for these services only when these services are used in providing one of more them. CENVAT Credit was restricted when the same were used for providing any other service other than the above. Because of this specific restriction, it was not possible to take CENVAT Credit of the construction services including architect services used in providing construction of a commercial building which in turn used for providing renting of immovable property service.
Position from 01.07.2012 onwards:
With effect from 01.07.2012, the CENVAT Credit Rules, 2004 have been revamped in align with the changes made in Finance Act for negative list based taxation. The aforesaid restriction was given only with respect to construction services and works contract services. Architect services are not covered. So it is possible to take CENVAT Credit of these services used in construction of building which is used for providing renting of immovable property services. Wait! Take a call after knowing the legal position prior to 01.04.2011.
Position prior to 01.04.2011:
Prior to 01.04.2011, there was no specific restriction in the definition of ‘input service’ in order to avail CENVAT Credit on construction related services. However CBEC vide its Circular No.98/1/2008-ST dated 04.01.2008 has clarified that as follows.
“Right to use immovable property is leviable to service tax under renting of immovable property service Commercial or industrial construction service or works contract service is an input service for the output namely immovable property. Immovable property is neither subjected to central excise duty nor to service tax. 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.”
But it is indisputable fact that the service provider cannot provide his service unless he leases a building. Hence eligibility of CENVAT Credit on construction services has resulted into litigation. In the case of Com. of C.EX vs Sai Sahmita Storages (P) Ltd, 2011 (023) STR 0341 (A.P), the issue examined was whether assessee is entitled to claim CENVAT Credit of cement and TMT bars used in construction of storage facility. It was held that without use of this facility, the assesse could not have provided storage and warehousing facility. Held that assessee is entitled to claim CENVAT Credit.
Relying on the said case, the larger bench of Ahmedabad Tribunal in the case of Navaratna S.G. Highway Prop. Pvt. Ltd vs CST, 2012(028)STR0166(Tri-Ahmd) wherein it was held that a list of services including constructions would qualify as input services in order to take CENVAT Credit since these are used in providing renting of immovable property services.
During similar time, the same Ahmedabad Tribunal (single member bench) in the case of Venus Investments vs CCEx, 2012(28) STR 174 has taken a contrary view and held that CENVAT Credit was not available on the construction services used in providing renting of immovable property services. Subsequently an application has been made for revision of this judgment in the case of Venus Investments vs CCEx, 2013(029) STR 0072(Tri-Ahmd) by relying on the decision of Navaratna S.G. Highway Prop. Pvt. Ltd vs CST, 2012(028) STR 0166(Tri-Ahmd). The said application was considered and held that CENVAT Credit was allowable.
Thus it is non-deniable fact that construction services are those input services which have direct nexus with output renting services. Further in the case of Home Solutions Retail (India) Ltd vs UOI, 2011(024) STR 0129(Del) where in the Delhi High Court while examining the issue whether renting of immovable creates value addition to lessee has held as follows;
“Appreciated in this context, economic rent is a surplus which arises on account of natural differential advantages and can be treated as ‘service’. That apart, scarcity of premises, the pressure of demand and the increase of population are also contributory factors. Consequently, any land or building situated in a particular place does possess certain inherent quality which distinguishes it from land or building at other places. The factors which really weigh are location, accessibility, goodwill, construction quality and other advantages. A land or building in one area may fetch more rent than in another area.”
Thus it is irrefutable fact that as long as there is value addition by way of renting of immovable property to service receiver, construction services has direct nexus with the renting services. The amount of rent demanded is directly proportional to the quality of construction and the strategic location of the immovable property. The construction services received by these services providers are akin to construction services received by construction service providers, rent a cab services received by rent a cab service providers.
But those service providers are given the benefit of claiming CENVAT Credit of the said input services when the same are not open to others. When compared to those service providers, renting of immovable property service providers are kept at a different footing and there seems to be a hostile discrimination in this regard. So one can take this forward for suitable representation before Finance Ministry and may even proceed to file a writ petition.