Cenvat credit on input services

[sunil mehta]

1)whether a trader in computer hardware and also providing computer repairs services can avail cenvat credit on input services (other than mentioned in rule 6(5)i.e.100% items)w.e.f.1/4/08 ? In other words whether trading turnover will be considered in 'exempted' services turnover? OR he will have to pay 8% on trading turnover value? OR he will have to follow prescribed formulae for availing cenvat credit on input services? 2)Similarly whether income on interest on advances recd.by a co-op. bank will constitute 'turnover' for new rule 6 (3)provisions?whether it is to be clubbed under 'exempted'services turnover ?

[Surender Gupta]

(1) turnover of trading of hardware will be treated as exempted services for the purpose of rule 6. However, you are eligible for 100% for the input services used commonly in taxable and exempted services for the services mentioned in sub-rule(5). (2)regarding banking, interest on advances along with other income, will constitute turnover for the purpose of rule 6(3).

[sunil mehta]

Thanks for the reply.Pl. clarify whether trading turnover,in above case, will form part of the 'total turnover' in the formulae given in rule 6(3) of c.c.rules,2004?(i.e whether it will form part of the 'denominator' in the formulae?)

I differ from the views of Shri D Gupta. CENVAT Credit Rules talks only about taxable/exempted 'service' and a trading activity which is a 'sale' activity under VAT provisions cannot be categorised as service. Similarly, 'interest on advances' also should not form part of 'value of exempted service' as CENVAT Rules applies Rule 6(3) only in the case of provision of 'exempted service' and not on 'excluded value of taxable service' as loan activity is anyway taxable under Banking and other financial services and only 'interest' is excluded from tax. Thus, in my view, both the above turnover viz. Trading and 'interest on loans' should not form part of 'exempted service' for the purpose of CENVAT Credit Rules. While saying so, we must admit that the department holds the view as expressed by Shri Gupta and hence the issue may head for fresh spate of contraversy.

[Surender Gupta]

I agree with the views of Mr. D Gupta, you should not read the meaning of terms as defined in the Cenvat Credit Rules, 2004 in a narrow sense. Credit of service tax paid on input services which is not used for providing taxable services can not be used at all, except as provided in rules 6. Therefore, you should not avail cenvat credit on input services services used for trading activity and Interest on which neither central excise is being paid not service tax is being paid.

AI Summary

Cenvat credit on input services: trading turnover and interest income may be treated as exempted services, limiting credit availability.
A dispute exists whether trading turnover and interest on advances constitute exempted services for apportioning Cenvat credit. One position treats trading and interest receipts as part of exempted-service turnover affecting the allocation formula and preserves 100% credit for specified commonly used input services; an alternative position excludes sale/trading proceeds and interest from the exempted-service base, limiting credit availability to the extent rules permit.