CE - Clearances of inputs as such - Whether Credit of input services to be reversed?
THE CAG raised an interesting issue.
Although rule 3(5) provides for reversal of credit taken on inputs or capital goods removed as such, there is no corresponding provision under the Rules requiring payment of the amount equal to the credit of Service Tax paid on input services. These services could include custom house agent's services, clearing and forwarding agents' services, transportation availed for procurement/transportation of inputs or capital goods etc. Non-existence of such provision resulted in unintended benefit to the manufacturer.
The Department stated that in a few cases, clearance of inputs by this assessee to third parties, was treated as an exempted service and the assessee is reversing proportionate Cenvat credit as per rule 6(3) of Cenvat Credit Rules.
Audit is not happy with this reply and suggested that a provision has to be inserted in Cenvat Credit Rules, to reverse the proportionate Cenvat credit of input services at the time of clearance of input/capital goods ‘as such'.
CBEC Member (Central Excise) observed that quantification of input services requiring reversal would be a tedious process and may not be significant enough to warrant such inclusion.
We should be grateful to the Member for this very pertinent observation, but will Audit rest at that? Most probably this will be a change that we can expect in the next budget.
Incidentally, even before CAG's expedition, the Departmental officers have noticed this great issue and Show Cause Notices and Adjudication Orders were issued in several parts of the country. The Tribunal as early as in 2008 in had held that the credit of input services need not be reversed and the P&H High Court in , held the same view.
Based on this Audit object objection, fresh Show Cause Notices must have been issued notwithstanding the Member's wise counsel.