CAG recommends that Government should introduce appropriate provision in CENVAT Credit Rules to require reversal of CENVAT credit on input services used for written off output services.
THE CAG in its report to Parliament has stated that:-
The CENVAT Credit Rules, 2004, allows credit on input services used by a service provider for rendering of output service and utilise such credit towards payment of service tax on output service. The amounts billed for by the service provider against customer but not realised are not liable to service tax under the Finance Act, 1994, as the basis for payment of service tax is actual realisation of cost of service. However, where the cost of service billed for became irrecoverable for any reason and the same was written off fully in the books of accounts of an assessee, the CENVAT Credit Rules do not provide for recovery of the input service credit attributable to such write off.
Rule 3(5C) of the CENVAT Credit Rules, 2004, provide recovery of CENVAT credit on inputs contained in final products destroyed or damaged due to natural cause (prior to this recovery was made under Board's circular of 22 February 1995).
M/s Vodafone India Ltd., (Hutchison Essar South Ltd.), M/s Bharti Airtel Ltd., and M/s Karvy Stock Broking Pvt. Ltd., in Hyderabad II Commissionerate and M/s Vodafone Essar Cellular Ltd., Ernakulam, M/s Idea Cellular Ltd., and Bharti Airtel Ltd., in Cochin Commissionerate, engaged in rendering of cellular phone services and stock broking services, had fully written off unrealised amount of service charges of Rs. 124.76 crore pertaining to the period from April 2004 to March 2007. The corresponding CENVAT credit of Rs. 2.60 crore, attributable to input services against the above write off was not paid back even though the services to that extent did not suffer service tax.
On this being pointed out (between October 2007/May 2008), the department in respect of assessees in Hyderabad II Commissionerate stated (February/March 2008) that as per rule 3(5B) of the CENVAT Credit Rules, reversal of credit was warranted only when inputs or capital goods were written off fully before being put to use, whereas the input services in the instant cases were already consumed in taxable services and input services, unlike inputs or capital goods being intangible, reversal provisions were not applicable to these. The department in respect of assessees in Commissionerate stated (July 2008) that the restriction of utilisation of CENVAT credit was applicable only if the final service was exempt.
The reply of the department was not acceptable as cases of write off of output services could not be dealt with differently either because the input services were intangible in nature or because such services were already consumed in the taxable services rendered. Since output goods and output services stand on same footing under CENVAT Credit Rules, CENVAT benefits could not be extended to a service on which service tax was not realisable/paid.
Reply of the Ministry had not been received (December 2008).
BPL Mobile Communications Ltd., and M/s Vodafone India Ltd., in Mumbai Commissionerate of service tax, engaged in rendering cellular phone services had shown an amount of Rs. 142.97 crore as dues pertaining to post paid cellular services billed against customers but not realised for the period 2004-05 to 2006-07. Further, the assessees had fully written off such dues. The corresponding credit attributable to input services against the above write off was Rs. 1.84 crore which was required to be recovered with interest.
On this being pointed out (May 2008), the department stated (September 2008) that there was no provision in the rules to restrict the CENVAT credit for written off amount.
Reply of the department was not acceptable as the assessee had fully written off the amount billed as it had become irrecoverable, therefore, service tax was not payable on those output services and hence credit availed on input services used for such output services was recoverable.
Reply of the Ministry had not been received (December 2008).
So CAG has recommended that Government should introduce appropriate provision in the CENVAT Credit Rules to require reversal of CENVAT credit on input services used for written off output services.