Cenvat credit - work contract service

Entire Cenvat Credit of input services directly relating to provision of taxable service

It may be noted that rule 6(3) of Cenvat Credit Rule applies only to common input services.

Para 2 of CBEC circular No. 754/70/2003-CX dated 9-10-2003 states as follows – ‘The option to maintain the separate accounts or payment of 8% of the price of the exempted goods can be exercised only in respect of common inputs used for the manufacture of dutiable and exempted goods’.

This view has been upheld in Chennai Petroleum Corporation Ltd. In re (2012) 286 ELT 467 (Commr Appl). In this case, it was held that rule 6 is only for common inputs and input services. Rule 6(3) is only procedural. It cannot take away right to avail credit fully on inputs and input services used in dutiable goods or taxable services. Credit of service tax paid on input services exclusively used in dutiable goods is not covered under rule 6 but under rule 3 of Cenvat Credit Rules.

Thus, entire Cenvat credit should be available where there is one to one relation between input service and output service (like back to back services).

Conclusion

(a) 100% Cenvat Credit is available in case of excise duty paid on capital goods.

(b) 100% Cenvat credit can be availed of service tax paid on input services used exclusively for providing output (taxable) services.

(c) In case of common input services, on the basis of Constitutional deeming provision, it can be argued that only difference between sale price and purchase price should be taken as value of exempted services and then rule 6 should apply.

The view that entire Cenvat credit is available and rule 6 is not applicable can also be justified on basis of legal interpretation as given above.

Issue is litigation prone and hence if any of this option is to be followed, it is advisable to make full disclosure to department, where stakes are high enough and assessee is willing to contest the issue.