CAG ON A-SATYAM - CENVAT credit on input services used in non-taxable output services
THE CAG’s Report No. 20/2009-10 submitted to Parliament this month states,
M/s Satyam Computer Services Ltd., in Hyderabad II Commissionerate, engaged in providing consulting engineers services, man power recruitment agency services etc., availed of cenvat credit on several input services and used such services for rendering taxable as well as non-taxable services (i.e. software development services relating to information technology to various agencies located within and outside India). Service tax credit on input services used in IT services rendered within India/exported out of India was not admissible as IT services cannot be regarded as output services/export of taxable services within the meaning of rule 2(p) of the Cenvat Credit
Rules/rule 3 of the Export of Services Rules, 2005. However, the assessee incorrectly availed credit of the service tax paid on input services used for IT services. The credit attributable to such ineligible IT services for the period 2004-05 to 2006-07 worked out to Rs. 8.81 Crore.
On this being pointed out (December 2007), the department stated (March 2008) that a service provider who provided both taxable services and non-taxable services (i.e. not covered under service tax act) was not prohibited from availing full credit on common inputs/input services if the utilisation of credit was limited to 20 per cent of the tax payable as laid down in rule 6(3)(c) of the Cenvat Credit Rules. It also argued that availing of credit on common input goods/input services used in software development services for home consumption/export was permissible under cenvat provisions since these input services were not utilised exclusively for such exempted services. The reply of the department was not acceptable as the enabling provisions contained in section 94(2)(ccc) of the Finance Act, 1994/section 37(2)(xvia) of the Central Excise Act, 1944, under which cenvat credit rules were framed, limit the scope of cenvat benefits only to taxable services and not to services which are outside the purview of the Finance Act. The term ‘exempted
services’ as defined in rule 2(e) of the said rules covered only taxable services which were covered by section 65 of the Finance Act but were not chargeable with service tax because of exemption. The interpretation given by department for the definition of exempted services was not correct as the word ‘includes’ appearing in rule 2(e) should not be read in isolation but should be read in conjunction with the word ‘taxable services’. The provisions of the Finance Act, 1994 or the Cenvat Credit Rules could not have application to a service which was outside the scope of the Finance Act and hence the credit availed on corresponding input services used in software development services needs recovery along with interest.
Reply of the Ministry had not been received (December 2008).
Audit recommends that Government should amend the Finance Act to include ‘IT services’ in the list of services which are liable to service tax.
This is a Report submitted in July 2009. Is the CAG not aware that IT Services has already been included in the list of taxable services with effect from 16.5.2008? Maybe next year they can claim credit for its inclusion, though they are not aware of it as of now!