Cenvat Credit of Ser Tax paid on Works Contract Services

[R MUTHURAJ]

Hi,

A Company viz., X engages another company viz., Y for construction of new factory. The company Y (Service provider) constructs the building and issues bill to X (Service Receiver) indicating the VAT & Service Tax on materials and labour respectively .

The question is whether the X (Service Receiver) is eligible to take credit of the VAT and the Service Tax paid.

Kindly clarify with the supportive views.

 

Regards,

R.Muthuraj

[Brijesh Verma]

My clarification shall be limited only to the Service Tax issue since I am not an expert in VAT (Though I am not an expert of ST Too, but I think I can handle this one).

As far as construction and allied services are concerned, w.e.f. 01.04.2011, there is a clear provision under Rule 2 of the Cenvat Credit rules 2004 which states that No cenvat can be taken by any person in respect of WC service except a person who himself is engaged in construction service as a service provider.

 

Please see Rule 2 (l) of Cenvat Credit Rule, 2004::

(l) “input service” means any service, -

            (i) used by a provider of ²⁶[output service] for providing an output service; or

            (ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal,

            and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal; ²⁷[but excludes],-

                      ²⁸[(A) service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act (hereinafter referred as specified services) in so far as they are used for -

                    (a)  construction or execution of works contract of a building or a civil structure or a part  thereof; or

                    (b) laying of foundation or making of structures for support of capital goods,

                    except for the provision of one or more of the specified services; or]

[Brijesh Verma]

Only for construction there is still a one to one corelation

[MANDAVILLI RAMAKRISHNA]

my opinion is

service tax input can be taken on construction service of a factory 

BUT SHOULD NOT BE used to set off against central excise duty on removal of 

the produced goods 

BUT CAN BE set off against the service tax ( not central excise ) payable in respect

of providing rental service using the immovable property

so better to account for it and carry forward if you anticipate rental income from 

the factory premises.

Dear Mr. Vermaji, what is your opinion?

[Brijesh Verma]

Pls visit circular no 96 & circular no 97  issued in August 2007

AI Summary

Cenvat credit restriction on works contract services limits service tax credit eligibility for service receivers. The Cenvat Credit Rules exclude the service portion in execution of a works contract and construction services from the definition of input service, so cenvat credit cannot be taken by a person in respect of works contract service except where that person is itself a provider of construction services; service tax credit on factory construction cannot be used against central excise on goods removal but may be set off against service tax on rental services, with carry-forward recommended.