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What are the obligations of manufacturer of dutiable and exempted goods and provider of taxable and exempted services under Cenvat Credit Rules 2004 - Rule 6?

Goods and Service Tax may prove to be a giant step to crease out the ambiguous Cenvat Credit Rules, which has always been a core issue of litigation irrespective of the assessee being into manufacturing activity or playing the role of a service provider. It's observed that in a majority of cases, a person engaged in the service industry provides a vast spectrum of services. Some of the services provided may fall under the purview of taxable services and others might be exempted or non-taxable services.

It is this situation when one is engaged in providing taxable as well as exempted services that the issue becomes complex. The moot question is how much input service credit shall be allowed to the service provider if some of the activities undertaken are taxable whereas the other activities are exempted. Rule 6 of Cenvat Credit Rules 2004 has a very vital role to play here as it defines the methodology of segregation of the Cenvat credit in such situations.

The basic principle underlying the Cenvat Credit system is that, one has to bear in mind that the Cenvat credit shall not be allowed on such quantity of input services, which are used for provision of exempted services. However, there are exceptions to every rule. If the assessee maintains separate account for taxable and exempted services, then credit on the basic input services for taxable services is allowed. By separate accounts, the department expects the assessee to maintain separate records supported by input service documents so as to enable the officers to easily verify which input service has been used for provision of a particular output service.

However, it is easier said than done. Practical feasibility of maintaining such separate account is very low in majority of the cases. The Rule provides that the service provider has an option not to maintain separate accounts; however, there are certain conditions to be fulfilled.

Prior to March 1, 2008, the system was very simple. If one opts not to maintain separate accounts, he was allowed to utilise credit only to the extent of an amount not exceeding 20% of the amount of Service Tax payable on taxable output service. However, as history of taxation shows, simple methods of taxation are replaced by complex and confusing taxation system. The department came with an extensive, complex, ambiguous formula for assessee who had not opted for maintaining separate accounts vide Notification No. 10/2008-C.E. (N.T.), dated 01.03.2008.

The change was insertion of new sub-rule 3A to Rule 6 of CCR 2004. The rule now gives the assessee (who doesn't want to maintain separate account) two options: (i) Service provider to pay an amount equal to 6% of the value of the exempted services, or (ii) Pay an amount equivalent to the Cenvat credit attributable to inputs and input services used for providing exempted services or for manufacturing exempted goods as per the formula / method indicated.

It is pertinent to note that such option once exercised shall not be withdrawn during the remaining part of the financial year. If we shift our focus on the assessee's obligations, before going for such method under Sub-Rule 3A of Rule 6, the assessee who opts for ascertaining the credits on a provisional basis, the following particulars will have to be intimated to the superintendent of central excise: (i) Name, address and registration no. of the manufacturer of goods or provider of output service; (ii) Date from which the option under this clause is exercised or proposed to be exercised; (iii) Description of dutiable goods or taxable services; (iv) Description of exempted goods or exempted services; (v) Cenvat credit of inputs and input services lying in balance as on the date of exercising the option under this condition;

It has been observed that the service provider many a times has no option but to use certain services, which are common services used in provision of exempted as well as taxable services. For example, a BPO or a call centre cannot segregate services provided by the security agencies. Similarly, banking and financial services are not easy to segregate.

Keeping all these difficulties in view, the Cenvat Credit rules exclude certain categories of services wherein the conditions of keeping separate records are not to be followed. Taxable services under Section 65(105) - (g) are consulting engineer, architect, interior decorator, management or business consultant, real estate agent, security agency, scientific or technical consultancy, banking and other financial services, life insurance business, erection, commissioning and installation agency, management, maintenance or repair, technical testing and analysis, technical inspection and certification, foreign exchange broker, authorised money changer, commercial or industrial construction service, intellectual property right shall be allowed unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services.

In other words, total amount of input service tax paid on abovementioned services shall be available even if exempted as well as taxable services are provided. In all other cases, one has to maintain either separate records or follow the methodology as per sub-rule 3A of Rule 6 of the Cenvat Credit Rules, 2004.

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