Eligibility of Cenvat Credit on Advances paid towards taxable service

Input service” is defined in Rule 2(l) of Cenvat Credit Rules, 2004 as “service used by the manufacturer or service provider”. Wherever the word “input service’ appears in Cenvat Credit Rules, it would connote the meaning as “input service used”. Being so, Service Tax on advances, inasmuch as it relates to a service provided and not used by the manufacturer or service provider , availment of such credit poses problem and is prone to litigation.

As per Rule 4(7) of the Cenvat Credit Rules, credit in respect of Input Service shall be allowed on or after the day on which the Invoice, bill or, as the case may be, Challan referred to in rule 9 is received

“ Rule 4 .Conditions for allowing CENVAT credit.

(7) The CENVAT credit in respect of input service shall be allowed, on or after the day on which the invoice, bills or, as the case may be, challan referred to in Rule 9 is received.

Provided that in case of an input service where the service tax is paid on reverse charge by the recipient of the service, the CENVAT credit in respect of such input service shall be allowed on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to in Rule 9”

From the plain reading  of the above sub rule to Rule 4 , lot  many  assesses are availing Cenvat credit of Service Tax charged towards advance under the impression that credit is eligible as soon as the Invoice is received

It is true that there is a liability towards Service Tax on services provided, to be provided (with effect from 16.05.05) and agreed to be provided (with effect from 1.07.12). Accordingly, when a consideration is  to be received or received towards a service to be provided or agreed to be provided, Invoice as prescribed under Rule 4 A of Service Tax Rules have to be raised within the specified time period of 30 days and Service Tax  to be discharged within the time limit prescribed. In most of the construction contracts, works contracts etc, ‘mobilization advance’ is being paid for the initial start up of services, which are being adjusted in subsequent billings. 

Simply by getting an Invoice charged with Service Tax do not give an entitlement of Cenvat credit to the service recipient unless the input service is used.

Now let us anlayse the relevant statutory provisions under Finance Act:

“Offences and penalties

89. (1) whoever commits any of the following offences, namely-

(a) provides any taxable service chargeable to service tax under sub-section (1) of section 68 or receives any taxable service chargeable to tax under sub-section(2) of said section, without invoice issued in accordance with the provisions of this Chapter or the rules made there under; or

(b) avails and utilizes credit of taxes or duty without actual receipt of taxable service or excisable goods either fully or partially in violation of the rules made under the provisions of this Chapter; or

xxx

xxx

shall be punishable ,-

(i)             In the case of an offence where the amount exceeds fifty lakh rupees, with imprisonment for a term which may extend to three years

               Provided that in the absence of special and adequate reasons to the contrary to be  

              recorded in the judgement of the court, such imprisonment shall not be for a term of less

             than sixmonths

(ii)           In any other case, with imprisonment for a term which may extend to one year”

This was reintroduced by the Finance Act, 2011 with effect from 8.04.11. Earlier, Sec 89 was omitted by Finance Act, 1998 wef 16.10.98.

 Even if the credit on Service Tax paid on advances is taken by taking the shelter of Rule 4 (7) disregarding the definition of input service as per Rule 2(l),  it will not sustain legally view of the specific provisions contained in Section 89(1)b as mentioned above.

Hon’ble Supreme Court in the case of Gujarat Urja Vikash Nigam Ltd vs Essar Power Ltd (Civil Appeal No 1940 & 1941 of 2008) held that:

'except where there is a conflict, express or implied, between a provision in this Act and any other law, in which case the former will prevail'.

In the famous case of Laghu Udyog Bharati Vs UOI (1999 (7) TMI 1 - SUPREME COURT OF INDIA) Hon Supreme Court upheld that Rules cannot override the Act

In the case of CCE vs Standard Drum & Barrel Mfg. Co,(2005 (12) TMI 109 - HIGH COURT OF JUDICATURE AT BOMBAY) Hon Bombay High Court held that even if the Rule was made later than the Act on the issue, the provisions of the Act will always prevail in the absence of the Rule.

 The well accepted maxim,“Generalia specialibus non derogant”means that when there is conflict between a general and special provision, the latter shall prevail. This has been dealt with in the case of NAFED VsAlimenta S.A by Hon Delhi High Court as follows:

  “Generalia specialibus non derogant, or, in other words, where there are general words in a later Act capable of reasonable and sensible application without extending them to subjects specially dealt with by earlier legislation, you are not to hold that earlier and special legislation indirectly repealed, altered, or derogated from merely by force of such general words, without any indication of a particular intention to do so. In such cases it is presumed to have only general cases in view, and not particular cases which have been already otherwise provided for by the special Act”