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Cenvat credit on set top box

CA PIYUSH KAPOOR 
on 03 May 2016

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INTRODUCTION

Service providers have at least a Telephone in their office. They are paying service tax on the telephone charges. The service tax on telephone charges becomes a part of the cost for the service provider. When he collects service tax from the customer it becomes tax on tax which increases the actual rate of tax payment.  This phenomenon of tax on tax is called the cascading effect. The government does not want this to happen.  Therefore the system of Cenvat credit was introduced by the Government. This allows the service provider to take the credit of tax paid for the service received. 

Therefore the tax paid does not become part of the cost of the service provided and cascading effect is avoided. This system of taking credit on the tax paid  and using the credit for the tax payable is called Cenvat credit

DOCUMENTS UNDER WHICH CENVAT CREDIT CAN BE TAKEN

invoice issued by a manufacturer, importer, importer's depot,  consignment agent, first stage or second stage dealer, supplementary invoice, Bill of entry, certificate issued  by an appraiser of customs, invoice/ bill/ Challans issued by a provider of input service, Invoice / bill / Challans issued by an input service distributor are the prescribed documents. The prescribed documents should also contain the necessary particulars  in the invoice as prescribed.

CONDITION FOR AVAILING CENVAT CREDIT

On inputs- Credit can be taken immediately on receipt of the material. Credit is allowed only for those inputs which are used in providing output service. When inputs on which credit has been taken are removed equal credit should be reversed except in cases where the inputs are removed to job worker or removed for the purpose of providing output service.

On capital goods- Only 50% of credit is eligible in the first year of receipt. The balance 50%can be taken in the next financial year. Credit is not allowed for the amount of duty  which has been claimed as depreciation. When capital goods are removed outside, credit availed must be reversed except under some circumstances.

On input services- Credit is allowed only after the payment is made for the input service.

SET TOP BOX

A box-shaped device that converts a digital television signal to analogue for viewing on a conventional set, or that enables cable or satellite television to be viewed.

"Set top box"(STB) is a device, which is connected to a television set at the subscribers’ premises and which allows a subscriber to view encrypted channels of his choice on payment. The basic function of the Set Top Box is to decrypt/decode the signals of those channels which the subscriber has been authorized by the multi system operator to receive and to convert the digital signals into analogue mode for viewing on television sets.

A SMART CARD OR VIEWING CARD

A smart card or a viewing card essentially functions like an ATM Card and comes along with the Set Top Box and allows the signals of only those channels to be seen which the subscriber has contracted to pay for a particular period.

MULTI SYSTEM OPERATOR

"Multi-System Operator ( MSO )" means a cable operator who receives a programming service from a broadcaster and/or his authorized agencies and re-transmits the same or transmits his own programming service for simultaneous reception either by multiple subscribers directly or through one or more local cable operators (LCOs), and includes his authorized distribution agencies by whatever name called.

CABLE OPERATOR

Cable Operator" shall have the meaning assigned to it in clause (aa) of Section 2 of the Cable Television Networks (Regulation) Act, 1995 (7 of 1995);

(Section 65(21) of the Finance Act, 1944)

SERVICE TAX ON CABLE OPERATOR SERVICE

Date of Introduction: 16.08.2000 vide Not.No.8/2000 dated 01.08.2000 

Taxable event and scope of services :

“Taxable Service” means any service provided to a customer, by a cable operator in relation to cable services. (Section 65 (90)(ZS) of Finance Act, 1994 as amended by the Finance Act,2002). 

The taxable service in this case is the cable services provided by the cable operators. The programme broadcast by television channel is received either by Multi System Operator (MSO) or directly by cable operators in the forms of signals. Where MSO receives the signals, the first retransmit signal to the cable operator who is turn retransmits the same to the viewers through the cable net work provided by the cable operator. Service Tax is liable to be paid by the cable operator providing service to ultimate subscriber of cable services 

(Ministry’s Circular No.B.11/1/2000-TRU dtd.01.08.2002) 

THE ROLE OF MULTI SYSTEM OPERATOR (MSO)

Introduction of addressable systems requires large investments in equipment such as Headed, encryption, Subscriber management system and set top boxes. This level of investment cannot be done by the local cable operator. Hence an MSO sets the platform to receive signals from the broadcasters, adapts it to provide for addressability, keeps the consumer database, ensures compliance of quality of service and other regulations of TRAI and through Local cable operators or in some cases directly provides channels to subscribers. Thus the local cable operator is supposed to enter into an agreement with one of the permitted MSOs.(As per TRAI guidelines)

MSO-LCO REVENUE SHARE

The July 2010 Tariff Order provides that revenue share between the MSO & LCO shall be based on mutual negotiations. (TRAI TARIFF ORDER & INTERCONNECTION REGULATIONS FOR DIGITAL ADDRESSABLE CABLE TV SYSTEMS)

CAPITAL GOODS UNDER CENTRAL EXCISE

Rule 2(a) of Cenvat Credit Rules defines 'capital goods' as follows – A. All goods classified as – • Falling under chapters 82, 84, 85, 90, heading 6805, grinding wheels and the like, and parts. thereof falling under heading 6804 of the First Schedule of the Central Excise Tariff Act.

WETHER SET TOP BOX IS CAPITAL GOODS 

As per Chapter/Heading no 85 17.80 Set top box come under Capital goods. Set top boxes having a communication function: A microprocessor based device incorporating a modem for gaining access to the Internet and having a function of interactive information exchange.

CENVAT CREDIT ON CAPITAL GOODS

Cenvat credit is available on input goods, input services as well as capital goods. Some provisions are common while there are some specific provisions in respect of Cenvat on Capital goods. General Provisions applicable to both inputs and capital goods are as follow:

Rule 2(a) of CENVAT Credit Rules, 2004 (‘Rules’ for short) defines the term ‘capital goods’.   According to this rule the term ‘capital goods’ means- 

(A) the following goods, namely:-

(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to the Excise Tariff Act;

Set top Box Cover Chapter no 85.

ELIGIBILITY OF CENVAT TO BE DECIDED ON THE BASIS OF DATE OF RECEIPT OF GOODS

Eligibility of Cenvat Credit on Capital goods is required to be decided on the basis of Eligibility on date when goods were received in the Factory. Subsequent eligibility does not revive question of admissibility of Cenvat on Capital goods.

CCE V ANERI CONSTRUCTION (2013) 42 GST 155=31 TAXMANN .COM 394 (CESTATE SMB)

USE OF CAPITAL GOODS BY SERVICE PROVIDER

In case of output service provider, the capital goods should be used for providing output services. The use may be anywhere. Part use for providing taxable output service is sufficient, exclusive use is not required.

  • CCE V JINDAL VIJAYANAGAR STEEL LTD 2006 (199) ELT 668 (CESTAT)
  • CCE V INDIA CEMENTS 2005 (182) ELT 398 (CESTAT)
  • CCE V VIKRAM CEMENT 2006(197) ELT 145 (SC)
  • MAIHAR CEMENT UNIT NO 2 V CCE (2013) 293 ELT 239 (CESTAT)

CAPITAL GOODS IN CASE OF SERVICE PROVIDER

The eligible capital goods should be used for providing output services. There is no requirement that theses should be brought in the premises or used within the premises of service provider himself. Documentary evidence of delivery and location of capital goods should be maintained.

Fourth Proviso of Rule 4(2)(a) of Cenvat Credit Rules inserted w.e.f 01.04.2012

BSNL V CCE (2013) 39 STT 317 = 29 TAXMANN .COM 282 (CESTAT)

VALUATION OF SET TOP BOX

In Jabil Circuit India Pvt Ltd v CCE (2014-TIOL-991-CESTAT-MUM), the Mumbai Tribunal held that the value of remote control, smart card and software supplied free of cost to buyers was includible in the value of Set Top Box (STB) as these items formed an essential part of the STB.

ASSESSEE CAN TAKE FULL CREDIT IN SECOND YEAR, IF HE DOES NOT TAKE ANY CENVAT CREDIT IN FIRST YEAR

Rule 4(2)(a) of Cenvat Credit Rules provides that in respect of Capital Goods Cenvat Credit shall be taken only for  an amount not exceeding 50% of duty. As per rule 4(2)(b), balance may be taken in any subsequent financial year. Thus, it is not that any credit must be taken in first year. Assessee can choose to take credit in any subsequent year, as even if he takes NIL credit in the first year, he satisfied the requirement rule 4(2) (a), as obviously ‘Nil” does not exceed 50%.

INTEREST IF ASSESSEE TAKES FULL CREDIT

If Assessee takes entire credit in an year (instead of 50%), interest is payable for wrongly availed credit, but if it was not deliberate, penalty is not imposable. Even 100% credit is taken, demand can be only for interest for the period during which excess of 50 % was availed.

  • CCE V VIJAY TANKS (2009) 235 ELT 107 (CESTAT)
  • CCE V SANGAI INDUSTRIES (2013) 294 ELT 303 (CESTAT SMB)
  • CCE V INDIA GATWAY TERMINAL (2011) 33 STT 72 (MAG) = 15 TAXMANN .COM 55 (CESTAT)

SALE AS PER M P VAT ACT 2002 CHAPTER 1 SECTION 2 (u)

Sale” with all its grammatical variations and cognate expressions means any transfer of property in goods for cash or deferred payment or for other valuable consideration and includes -

i. a transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

ii. a transfer of property in goods whether as goods or in some other form, involved in the execution of works contract;

iii. a delivery of goods on hire purchase or any system of payment by installments ;\

iv. a supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

v. a supply, by way of or as part of any service or in any other manner whatsoever, of goods being food or any other article for human consumption or any drink (whether or not intoxicating) where such supply or service is for cash, deferred payment or other valuable consideration;

vi. a transfer of the right to use any goods including leasing thereof for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and purchase of those goods by the person to whom such transfer, delivery or supply is made, but does not include a mortgage, hypothecation, charge or pledge;

CENVAT CREDIT ON SET TOP BOX

We are submitting herewith on case decided by the Service tax Commissionerate Delhi for availment of Cenvat Credit, it is clear that if Transaction is not cover under Sale Cenvat can be availed.

MONTHLY AUDIT BULLETIN – OCTOBER, 2013-CENTRAL EXCISE

GIST OF OBJECTION: Wrong availment of CENVAT Credit on Set Top Boxes COMMISSIONERAT: Service Tax Commissionerate, Delhi CONTRAVENTION OF PROVISION: Rule 2(A) read with Rule 3 of the CENVAT Credit Rules, 2004

The Assessee is providing Cable Operator, MMR, BAS, Supply of Tangible goods and Broadcasting Service. The Assessee had imported STBs during the financial year 2008-09 under its decentralized Service Tax registration at Mumbai. The books of accounts of the Delhi office, on being audited, did not indicate import of STBs during the said period. However, after obtaining centralized registration, the Assessee availed 50% of the CENVAT Credit in Delhi on the capital goods imported during the said period in Mumbai. Accordingly, the documentation and other records were maintained at Mumbai. The returns filed at Delhi didn’t disclose the CENVAT Credit on capital goods separately. After requisitioning the documents from Mumbai, the invoices, bills of entry and other documents were examined. It was observed that the Assessee had paid CVD on import of STBs from different countries. The STBs were thereafter issued to the cable operators for further issuance to the customers. In terms of the guidelines issued by TRAI in this regard, the Assessee charges a rent from the customers for a period of 5 years. After the said period, the STB stands transferred to the customers. The Assessee had taken a position that STBs are integral to provision of services by the Assessee. Without STBs, its services cannot be provided. They further stated that Service Tax had been paid on subscription income and carriage income by Assessee which would have not been possible without such STBs. The Assessee had also stated that STBs remains the property of the Assessee and had been treated as capital goods of the Assessee in its books of accounts. Thus only a constructive possession is transferred to the subscribers. Accordingly, it is eligible to avail CENVAT Credit of the CVD paid on import thereon. The Assessee had also stated that such activity amounts to ‘transfer of the right to use goods’ and hence chargeable to VAT. The Assessee had also submitted returns filed in Delhi and Mumbai evidencing payment of vat on such rentals.

Rules, CENVAT As per the Credit on Capital goods can be availed only when capital goods have been used by a service provider for output services. In the present case, the STBs (capital goods) are sold by the Assessee to the customers on payment of VAT. Clearly the Assessee is not using the STBs for providing taxable service. Moreover the STBs are no longer in the possession and registered premises of the Assessee.

Assessee can claim the CENVAT Credit for the same only if used in the provision of output service and Service Tax is paid on the rental income from these STBs. But Assessee had treated this transaction as deemed sale and paid VAT in respect of the STBs provided on rent. Since Service Tax had not been paid on the rental receipts, the Assessee cannot claim CVD on these STB for payment of Service Tax. The Assessee is liable to reverse credit on STB’s. The amount of CENVAT Credit claimed by the Assessee during each of the financial years 2008-09 and 2009-10 amounts to Rs. 106.82 lacs.

Accordingly, the Assessee is liable to reverse CENVAT Credit amounting to Rs. 213.64 lacs along with interest thereon.

During the financial year 2011-12 as well, the Assessee had imported STBs and availed CVD credit amounting to Rs. 206.98 lacs on such imported STBs. However, out of the total STBs imported by the Assessee, the Assessee sold the STBs pertaining to CVD amounted to Rs. 105.83 lacs on payment of VAT. Accordingly the Assessee had reversed the CENVAT Credit of Rs 105.83 lacs. However, the Assessee had utilized CENVAT Credit of Rs. 50.57 lacs (50% of Rs. 101.15 lacs) during the year 2011-12 on the ground that these STBs are utilized in the provision of service.

As stated above, the Assessee can claim the CENVAT Credit for the same only if used in the provision of output service and the Service Tax is paid on the rental income from these STBs. But Assessee had treated this transaction as deemed sale and paid VAT in respect of the STBs provided on rent. Since Service Tax had not been paid on the rental receipts , the Assessee cannot claim CVD on these STB for payment of Service Tax. The amount of CENVAT Credit claimed by the Assessee during the financial year 2011-12 amounts to Rs. 50.57 lacs.

Accordingly, the Assessee is liable to reverse CENVAT Credit amounting to Rs. 50.57 lacs along with interest thereon.   

During the financial year 2011-12 as well, the Assessee had imported STBs and availed CVD credit amounting to Rs. 206.98 lacs on such imported STBs. However, out of the total STBs imported by the Assessee, the Assessee sold the STBs pertaining to CVD amounted to Rs. 105.83 lacs on payment of VAT. Accordingly the Assessee had reversed the CENVAT Credit of Rs 105.83 lacs. However, the Assessee had utilized CENVAT Credit of Rs. 50.57 lacs (50% of Rs. 101.15 lacs) during the year 2011-12 on the ground that these STBs are utilized in the provision of service.

As stated above, the Assessee can claim the CENVAT Credit for the same only if used in the provision of output service and the Service Tax is paid on the rental income from these STBs. But Assessee had treated this transaction as deemed sale and paid VAT in respect of the STBs provided on rent. Since Service Tax had not been paid on the rental receipts , the Assessee cannot claim CVD on these STB for payment of Service Tax. The amount of CENVAT Credit claimed by the Assessee during the financial year 2011-12 amounts to Rs. 50.57 lacs.

Accordingly, the Assessee is liable to reverse CENVAT Credit amounting to Rs. 50.57 lacs along with interest thereon.

Total in-admissible CENVAT Credit comes to Rs. 264.21 lacs which stands recoverable from the Assessee along with interest.

POINTS SHOULD BE KEPT IN MIND:

  • Purchased Set Top Box from Out of Country.
  • CVD should be paid on Set Top Box.
  • MSO /LCO give Set Top box on Delivery Challans Basis without charging any cost.
  • MSO/LCO will use Set Top Box for Output Services.
  • All control of Set Top Boxes through MSO/LCO system, without activation and operation from MSO/LCO it can’t run.
  • MSO/LCO has not charge any amount from end user against Set Top Box.
  • MSO/LCO has shown Set Top Box in their Fixed Assets and takes Depreciation on it.
  • The value shown in Financial Statement is exclusive of Cenvat Credit availed.

CONCLUSION

The Cenvat credit rules are clear that capital goods used for providing the service are eligible. If the control and possession of the set top boxes are given to the customer then as there is a transfer of goods, the same is outside the scope of service and therefore would not be liable to service tax on that value. If the control or possession is with MSO and the same remains in books and the same is used for providing the cable services then only would the credit be available. Also in that case the value recovered for the same would be included in the value of the service. If sold then the credit would not be available.


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