Cenvat Credit Availment

[Asked by Guest]

Dear experts,
Pls resolve the following problems related to service tax and share the case laws associated to it, if any.
1. Whether cenvat credit of service tax can be availed on rental paid by company during the pre-operative period to owner whose premises would be used by service provider for providing restaurant services. The service tax relates to pre-operative period ranging from 4-5 months???
2. Whether cenvat credit would be available to service provider involved in providing renting of immovable property services for which he has received maintenance services in relation to impugned property during the period when his property was vacant.......??

Thanks in advance

Abhishek

[Vijay kumar]

Dear Mr.Abhishek,

As per Rule 2(l) of CCR, 2004 -

“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]"

Accordingly, during pre-operative period, it cannot be said that input service is used in the provision of output service. When there is no output service and when service tax is not paid on the renting of immovable property (premises vacant), in my view, no input credit can be availed, as per the above definition. Even "output service" has been defined as-

“output service” means any service provided by a provider of service located in the taxable territory but shall not include a service,-

(1) specified in section 66D of the Finance Act; or

(2) where the whole of service tax is liable to be paid by the recipient of service.]

Accordingly, when you are not providing any service at all, the question of availing cenvat credit does not arise. Even though Karnataka High Court has held in the case of Service Tax - mPortal India Wireless Solutions (P.) Ltd. Versus Commissioner of Service Tax - 2011 -TMI - 208750 - KARNATAKA HIGH COURTService Tax - mPortal India Wireless Solutions (P.) Ltd. Versus Commissioner of Service Tax - 2011 -TMI - 208750 - KARNATAKA HIGH COURT that S.Tax registration is not required to avail cenvat credit, I do not think that the same will be applicable on facts nor that the issue is far from resolved.

[KASTURI SETHI]

Sh.Vijay Kumar Ji,

Your views are full of substance (logical as well as legal). Actually, you have ratified my views on merits. Thanks a lot.

Dear sir,
Thanks for ur response, as we are all very well aware that the facts and circumstances of the case my lead to different opinions, fully respecting ur view and further supporting you. In the present case, as I discussed above previously, though the input service is not utilised in the same period when the premises is under preparation but it is also a basic fact that till the premises is prepared for the said purposes.....it cannot be used to provide the main output services.....further the benefits from the services availed in pre-operative period are prolonged.
Thanks & regards,
CA Abhishek Ghai

[KASTURI SETHI]

Dear Sh.Abhushek Ghai Ji,

Legal position has already been explained above by the experts. If huge amount is involved, then take risk. 10% chances are in favour of the assessee, that too, depending upon "sheer luck".

[bhart b sharma]

The relevant law has been quoted unreservedly by my friend, Shri Vijay Kumar. but the analysis shows that the crucial words in Rule (l) of CCR, 2004 are: input service

(i) used "BY A PROVIDER OF OUTPUT SERVICE {Restaurant Service in this case} for providing an output service"

now the question arises as to why the company paid rental during pre-operative period? obviously with the aim of providing Restaurant Service to clients. It is an essential pre-requisite for providing the output service. without this, the output service could not have been provided at all. therefore, the cenvat credit of input service of rental paid by the company cannot be denied to the output service provider. it is obvious that the credit so taken would be utilized at a later date when payment of service tax on output service becomes due.

NOW, the second question, I do not see any reason to deny cenvat credit to the person who provided service of renting of immovable property. Revenue cannot deny it because the amount of service tax is collected and accounted for.

[KASTURI SETHI]

Dear Sir,

The possibility of litigation cannot be ruled out.

AI Summary

Cenvat credit timing: pre operative input services may be claimable if nexus to future output exists, but risk of challenge remains.
Availability of Cenvat credit for rent and other pre operative services hinges on Rule 2(l) of the Cenvat Credit Rules, 2004: input services must be "used by a provider of output service for providing an output service." Forum contributors split: some accept credit for preparatory rent and renovation, with utilization deferred until output tax liability arises; others insist no credit where no taxable service was provided during the pre operative period. Jurisprudence is unsettled and reliance on central excise precedents is problematic; litigation risk is emphasized.