The Cenvat Deadlock on inputs services - The genesis
DO you remember the Tribunal's order on CENVAT Credit of input services (2010-TIOL-564-CESTAT-BANG)? The CESTAT has held that the provisions of the CENVAT credit rules in allowing credit on input services “used” for providing output service are ultra vires the Finance Act, 1994 because the words used in Section 94 are “consumed” but not “used”. The above judgement has sent shock waves across the trade and the officers and there is total confusion now as to what constitutes an input service.
Actually, if we look at the history of CENVAT Credit on inputs services, it would reveal some interesting facts as to how this word consumed has crept in Section 94 of the Finance Act, 1994.
In the year 2002, for the first time credit was allowed on input services. But the condition was that both the input service and the output service should fall under the same category. Thus, Section 94 was amended vide Finance Act, 2002 to insert sub-section (ee) which reads as “the credit of service tax paid on the services consumed for providing a taxable service in case where the services consumed and the service provided fall in the same category of taxable service”. The new sub-section is effective from 16.8.2002.
Simultaneously, with effect from 16.8.2002, Service Tax Credit Rules 2002 were also notified. The definition of the input service in these rules read as
“input service" means any taxable service received and consumed by a service provider in relation to rendering of output service.
So, the rule was in perfect harmony with the Section. The usage of consumed can be understood to some extent since the input service and output service should fall under the same category.
But later, when the cross sectoral credit across goods and services was allowed, new set of CENVAT Credit Rule 2004 have been notified and poor babu just did not know that the word used in Section 94 still reads “consumed”. But all was going on well till the above referred order of the Tribunal and it will be interesting to see how this issue will be resolved.