CA Pradeep Jain,
CA Ridhi Anchalia and
Sukhvinder Kaur, LLB [FYIC]
Every Finance Act brings with it some new services under the purview of the Service Tax. The Associated Enterprises were also a part of those services that were brought under Service Tax Act in the year 2008 vide the Finance Act. From the beginning the service of the Associated Enterprise is walking with some uniqueness. We had earlier also written an article titled “Associated Enterprise under Service Tax’ throwing light on the unique issues related to levy of service tax on mere book entries by Associated Enterprises. Still the department has not stopped and is working on to add more new features in the uniqueness of the leviability under this service. This Article of ours discusses the latest circular of CBEC that shows that how special the service relating to Associated Enterprises is for the department.
Service Tax provisions: -
As per Section 67 of the Finance Act, 1994, the book adjustments i.e. debit or credit entries are to be included in the “gross amount charged” on which service tax is payable.
And the TRU Letter D.O. F. No. 334/1/2008-TRU dated 29.02.2008, clarified that the service tax was also payable on crediting/debiting of the amount in the books of accounts in case of transactions between associated enterprises.
Also, the Rule 6 of the Service Tax Rules, 1994 was amended to provide that any amount credited or debited to any account in the books of account will be included in the value of taxable service in case of associated enterprises.
Issue involved: -
As usual the department in the matter of the Associated Enterprises worked carefully and had clearly mentioned that when the book entry was passed the levy of service tax arises. The mere fact made this service an exception in the whole Service Tax Act. In all other services, the service tax is to be paid when the payment for the same is received. But the fact of this uniqueness has nothing to do with the department. Their purpose of levy of service tax is solved with this exceptional situation to the whole service tax act also. But what about the Cenvat credit Rules, 2004? They are not having any exceptions for the service of Associated Enterprise. The rules were the same for the associated enterprise and other services. The Rule 4(7) of the Cenvat Credit Rules, 2004 provided that credit of input service is allowed when payment is made of the value of input service and the service tax paid or payable as is indicated in invoice, bill or challan.
The transactions of Associated Enterprises were liable to service tax on mere book entries, but could not take the credit until and unless payments were made with regard to such book entries. So again a new fact that the service tax paid is available for credit as an when the service tax is paid to the government, but the credit of the same couldn’t be taken by the service recipient immediately. But, he had to wait till the payment was made for providing the service to the service recipient. Thus, an anomaly was created. The department added every provision in the service tax Act to retain the uniqueness that was created in this service but it was just and just for the sake of that portion which deals in the collection of revenue. The department had nothing to do with the credit because it was just the assessee that was affected through the credit and not the department. So why should the department react?
Recent Clarification: -
In our earlier article also we had commented that the anomaly could only be solved by amending the Cenvat Credit Rules, 2004 to allow availment of credit in respect of service tax paid by the associated enterprises on book adjustments. The assessees keen eyes were just looking forward to a clarification from the Board in this regard.
How can the Trade and Industry be quiet in this regard? They had to represent the Board in this regard, after all the loss was of them and no one else. Never has the Board came up with the helping hand to the assessees without their being vigilant, so how can it come forward now without any representations of the assessee. Finally the Board has came up with a clarification in this regard vide Circular No. 122/03/2010-ST dated 30.04.2010 and has issued following clarification: -
“(a) When the substantive law i.e. section 67 of the Finance Act, 1994 treats such book adjustments etc., as deemed payment, there is no reason for denying such extended meaning to the word ‘payment’ for availment of credit. As far as the provisions of Rule 4 (7) are concerned, it only provides that the CENVAT credit shall be allowed, on or after the date on which payment is made of the value of the input service and of service tax. The form of payment is not indicated in the same and the rule does not place restriction on payment through debit in the books of accounts. Therefore, if the service charges as well as the service tax have been paid in any prescribed manner which is entitled to be called ‘gross amount charged’ then credit should be allowed under said rule 4 (7). Thus, in the case of “Associate Enterprises”, credit of service tax can be availed of when the payment has been made to the service provider in terms of section 67 (4) (c) of Finance Act, 1994 and the service tax has been paid to the Government Account.”.
The Board has listened to the so called poor assessee and clarified that the Section 67 considers the book adjustments as deemed payments and the extended meaning of the word ‘payment’ would apply. It has been clarified that the form of payment has not been indicated in Rule 4 (7) of the Cenvat Credit Rules, 2004. And no restriction is placed by the said Rule on payment through debit in books of accounts. And, any payment entitled to be called ‘gross amount charged’ would be eligible to be availed as cenvat credit under Rule 4 (7).
Thus, it was clarified that when book entries are made in transactions between the Associated enterprises and service tax is paid on the same, the cenvat credit of the same will be available to the service recipient.
The Circular No. 922/03/2010-ST has corrected the anomaly created by the unique provisions of Service Tax governing the transactions between Associated Enterprises. The Circular is a very favorable clarification for the Associated Enterprises. But it has again carry forwarded the uniqueness available to Associated enterprises. As said earlier, there was uniqueness for such enterprises to pay service tax on book entry and not on receipt basis. The credit under Cenvat Credit Rules is allowed when the payment is made for such services. But the uniqueness to Associated Enterprises was continued here and credit is allowed on book entry only. It was not linked with payment.
Surprising!! The Board has done some favour on the assessee without leaving anything for the department to walk in a new dispute. There is no amendment in Cenvat credit rules for the same. Only this circular has been issued. Thus, this circular is not supported by the legal provisions. The Cenvat credit Rules provides the credit only when the payment is made for the services. We all are aware of the Apex Court decision in case of Commissioner of Central Excise, Bolpur v/s Ratan Melting and Wire Industries [2008 (231) ELT 0022 (SC)] and Commissioner of Customs, Calcutta v/s Indian Oil Corporation [2004 (165) ELT 0257 (SC)] that the circulars which are inconsistent with legal provisions are not binding on departmental authorities. Thus, the department can take stand against this circular and demands will be issued. Thus, if the Board really intends to give benefit of such nature then they have to amend the Cenvat credit Rules and make a provision for associated enterprises. Thus, the uniqueness of Associated Enterprises will be carry forward in Cenvat credit Rules also if the amendment is made in this respect.