Cenvat credit on services used for repair of factory/office relating to such factory

[Kadayam Ganapathy Subramanian]

Dear Sirs,

The definition of 'input service' includes services used in relation to modernization, renovation or repair of factory or office relating to such factory. But the said definition of 'input service' excludes service portion of works contract and construction service including service listed under Clause (b) of Section 66E of the Finance Act, 1994 used for construction or execution of works contract of a building or a civil structure or a part thereof or laying of foundation or making of structures for support of capital goods. 

Our question is whether the construction/works contract service used for modernization, renovation or repair of factory or office relating to such factory is eligible for credit in view of the above inclusive definition and further the definition of construction as specified in Explanation (II) of Section 66E (b) does not include modernization, renovation or repair of any existing civil structure.

Kindly enlighten your views by interpreting the above provisions.

Regards,

K.G Subramanian

e.mail ID: subramaniankg at the rate of microlabs.in

[Rajagopalan Ranganathan]

Sir,

                 Cenvat Credit Rules, 2004 defines

“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 up to 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 up to 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 up to 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 66 E 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]

        In view of the above definition credit of service tax paid on the construction/works contract service used for modernization, renovation or repair of factory or office relating to such factory is allowable.  However, if the above mentioned service   is used for laying foundation or making structures for support of capital goods or for modernization, renovation or repair of the said foundation or structures, the credit is not available.

Explanation II of Section 66E of Finance Act 1994 says the word "construction" includes additions, alterations, replacements or remodeling of any existing civil structure.

        In my opinion, service tax paid on works contract or construction service used for additions, alterations, replacements or remodeling of foundation or structures for support of capital goods is not allowable.

[Kadayam Ganapathy Subramanian]

Dear Sirs,

Thanks for your kind opinion.

Regards,

K.G Subramanian

Mail ID : subramaniankg at the rate of microlabs.in

[Ganeshan Kalyani]

From the Input service definition under Cenvat Credit Rules, 2004; point (ii)  second para "and includes services used in relation to modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises". Does the bold sentence would mean the Head office of such factory and the credit of service tax on renovation, repair work carried out at such Head office is eligible for cenvat credit. Would request to throw some light on this point.

[Madhukar N Hiregange]

The restriction in the exclusion clause could be for only full fledged building  or civil structure or part thereof indicating that the original works would be restricted.

Maybe all other service portion of works contract or construction services , other than original works could be eligible in so far as they relate to repair, modernisation or renovation. This may require to be tested before the judiciary.

[Ganeshan Kalyani]

Notification or circular explaining about the eligibility of credit of service tax paid on work contract of Interior work at Head office. And impact of Vat credit as well.

[Ganeshan Kalyani]

I intend to discuss if huge expense incurred to modernise an office of a factory then is it within the input service to claim cenvat credit.

[JAIPRAKASH RUIA]

Very Humbly, sharing my thoughts on the said point :

One is inclusive part which includes modernization, renovation or repair of factory or office relating to such factory, here Setting up word was removed wef ..... All these activities are making the any civil structure usable continuously without enhancing the capacity and further these expenses are debited to P&L account of the organization which ultimately included in the cost of manufacturing of the product and duty as applicable paid subsequently on the product including profit part.

Other is excluding part :

the word "construction" includes additions, alterations, replacements or remodeling of any existing civil structure.

These activities in bold (different than used in inclusive part) are performed for creation of new assets or for increasing the capacity of existing assets or changing the core structure of existing assets and of course the expenses incurred on such activity are capitalized under original work.

Whether this logic will work for credit should be available ?

AI Summary

Cenvat credit on construction services: allowed for repair/renovation, excluded where works create or support capital assets. Cenvat credit is generally allowable for service tax paid on construction or works contract services when those services are used for modernization, renovation or repair of a factory or an office relating to such factory; credit is expressly disallowed where such services are used for construction/execution of buildings or civil structures, laying foundations, making or modifying structures for support of capital goods, or for additions, alterations, replacements or remodeling that amount to capitalized works as excluded by the definition of construction.