Section 66A – Setoff
Issue
The subject matter of this paper is – Whether Cenvat credit can be setoff against liability on import of services?
Argument of the Department against set-off is - Provision of Rule 5 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, which postulates that the services received would not be an output services for the purpose of availment of Cenvat credit.
The background on the advent of Cenvat and other attendant legal aspects on why setoff is permissible forms the matter of discussion in this paper.
Introduction of Modvat now Cenvat
Modvat / Cenvat scheme in our country owes its birth to the Indirect Taxation Enquiry Committee formed in 1976. This Committee was popularly/commonly known as the Jha Committee. The Committee made the following suggestions:
¨ The Long Term Fiscal Policy suggested extension of proforma credit to all excisable commodities to overcome the vexatious question of cascading effect tax on commodities.
¨ Modvat allowed a manufacturer to obtain instant and complete reimbursement of all excise duty paid on components and raw materials.
¨ The scheme provided transparency disclosing full taxation on a product.
¨ The scheme’s introduction was a measure of cost reduction of the final product.
¨ The scheme avoids payment of duties on earlier duties paid.
¨ It benefited consumers.
Object of the Cenvat Credit Scheme
The object of the Cenvat Credit scheme can be gathered from the decision of the Supreme Court in CCE Vs. Dai Ichi Karkaria Ltd., 1999 (112) ELT 353 (SC). The essence of the decision is:
¨ Credit available on receipt of inputs in a factory.
¨ Entitlement to use the credit any time thereafter.
¨ No provision that provides for reversal of credit except when it has been illegally availed.
¨ Its benefit is available without limitation in time.
¨ The credit is indefeasible.
¨ No co-relation of raw material and final product.
Purpose of Cenvat credit scheme
The scheme is a beneficial scheme implemented to avoid the cascading effect of taxes. It is a scheme that provides definitions of various expressions like, inputs, capital goods, exempted goods, exempted services, input service, output service etc. It also specifies various types of duties that can be availed as Cenvat credit. It specifies when such types of duties can be setoff against what type of liability. This is the scheme that governs the availability and utilization of Cenvat credit since the time of its inception.
Import of goods and payment of Customs Duty:
Import of goods into the territorial jurisdiction entails payment of Customs duties on clearance of goods from the warehouse. The amount of duty paid as CVD on import of goods is eligible as Cenvat credit to manufacturers and service providers. This is to maintain a level playing field between assessees’ manufacturing goods in India and those importing same/similar goods. Point being that the amount of CVD paid as duty is available as Cenvat credit.
However, this is not equitable to the present situation because though economically speaking there is no difference between goods and services, for the purposes of the charge to be attracted under Customs Act, 1962 and Finance Act, 1994, what is to be examined is the charging section and not the actual transaction. This is because of creation of deeming fictions in the charging sections.
Further, there is no uniform GST in India.
Eligibility to avail Cenvat Credit
Eligibility to avail Cenvat credit is in terms of Rule 3 of the Cenvat Credit Rules, 2004. In terms of which twelve types of duties are allowed to be availed as credit on inputs, capital goods and input services. At serial no.(ix) service tax leviable u/s 66 of the Finance Act, 1994 is allowed to be availed as credit. Sub Rule (4) to Rule 3 provides that Cenvat credit may be utilized for payment of (e) service tax on any output service. Output service is defined in Rule 2(p) and input service in R.2 (l).
Advent of Service Tax on Import of Service:
As per section 68 of the Finance Act, 1994 liability to pay service tax is on the person providing the taxable service. However, as per section 68(2) the Government has to notify services for which any person other than the service provider is made liable to pay the tax. The Service Tax Rules framed by the Government of India, in rule 2(1)(d)(iv) of the said Rules, 1994 (as amended from time to time) envisages that the liability to pay service tax is on the recipient of service when taxable service is provided by a non-resident or a person who is outside India and does not have any office in India w.e.f. 16.8.2002. However, such persons who were made liable to pay service tax as per the above rule were not notified in the “official gazette” as mandated under section 68(2) of the Act. A rule cannot override the provisions of the Act and provide for something, which the Act does not envisage. The Government therefore could not have framed rules in August 2002, without first notifying the relevant scheme under section 68(2) by describing the categories of service providers in respect of whom the Government could frame rules to require the receivers of services to discharge service tax, payable by the provider of service. The Government of India officially notified such services for the purposes of section 68(2) only in the year 2004 vide notification no.36/2004-ST, dt.31.12.2004. In law there could not have been any liability of whatsoever nature on the service recipient to pay service tax before 31.12.2004. That the issuance of notification no.36/2004-St itself is enough proof that postulates of section 68(2) had to be fulfilled before the service recipient could be made liable to pay service tax.
Section 66A is now the charge in terms of which service tax is imposed on import of services with effect from 18.04.2006. Notification 11/2006-St was issued in terms of sections 93 & 94 of the Finance Act, 1944 read with section 66A. This notification was the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.
Legal Position – Charging section
An examination of the charging section entails that the charge on import of service is in terms of section 66A which necessarily leads one to section 66 (the charging section for domestic service providers). The relevant part of the provision is extracted below for better comprehension:
“Section 66A postulates in sub-section (1) that “Where any service specified in clause (105) of section 65 is (b) received by a person (hereinafter referred to as the recipient) who has his usual place of business, fixed establishment, permanent address or usual place of residence, in India, such service shall, for the purpose of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India and accordingly all the provisions of this chapter shall apply”.
Section 66A has three corollaries:
¨ Services imported are treated as taxable services.
¨ Such services are deemed to be provided in India by the service recipient and
¨ All provisions of Chapter V & VA of the Finance Act, 1994 (including the Cenvat Credit Rules) are made applicable.
This means that when a service recipient receives any service from abroad, the services are treated as if they were provided in India deeming such service as a taxable service rendered in India.
To appreciate the charging section on import of services (RCM) S.66A and its necessary linkage to S.66 it is imperative to understand the importance of the charging section and the effect of a deeming fiction in law. Both these aspects are addressed below:
The Charging section (in the present case S.66A r/w S.66) provides for the levy of service tax on import of service. It creates a charge and defines the nature of the charge. Service tax is primarily on rendering of taxable services. It is an indirect tax which the provider of service passes on to the ultimate consumer. The tax can be levied at any convenient stage so long as the character of the impost, that is, it is a tax on the provision of services, is not lost. The method or time or the person from whom it is collected does not affect the essence of the tax, but only relates to the machinery of collection for administrative convenience. In the context of import of services merely because the tax is collected from the recipient of services (which in fact would be an input service), it does not lose its nature of being an impost on the rendering of taxable services. In other words a charging section is a section which enables charging of tax or creating the liability to pay tax.
There is a distinction between the object of tax, the incidence of tax and the machinery for the collection of the tax. The distinction is important but is often confused. Legislative competence is to be determined with reference to the object of the levy and not with reference to its incidence or machinery. There is a further distinction between objects of taxation in our constitutional scheme. The point at which the collection of the tax is to be made is a question of legislative convenience and part of the machinery for realization and recovery of the tax. The manner of the collection has been described as “an accident of administration; it is not the essence of tax”. It will not change and does not affect the essential nature of service tax. Subject to legislative competence tax can be imposed at the stage which the authority finds to be convenient and the most effective, whatever stage it may be. The Central Government is therefore legally competent to evolve suitable machinery for collection of the service tax subject to the maintenance of a rational connection between the tax and the person on whom it is imposed.
The argument that recipient of services are not connected with the service since the service is rendered to them would be farfetched and untenable because of the fiction in section 66A that - the services received are treated as if the recipient had himself provided the service in India.
Section 68 is a machinery section in that it provides for the incidence of taxation and is not the charging section which is Section 66. The amendments to Section 66 brought about in 2000 changed the point of collection of tax from the provider of the service to “such manner as may be prescribed”. Section 68(1-A) as it stood in 1997 provided for the collection and recovery of service tax in respect of the services referred in sub-clauses (g) to (r) of Section 65(41), from such person and in such manner as may be prescribed. The 1998 Finance Act maintained this. Now, the Service Tax Rules, 1994 provided for the collection and recovery of tax from the users or payers for the services. This was the prescribed method. All that the proviso to Section 68(1-A) did was to prescribe the procedure for collection with reference to services of goods transport operators and clearing agents which services had already been expressly included under the Finance Act, 2000 in the definition of taxable service.” The above averments are the findings of the Supreme Court in CCE Vs. Acer India Ltd., 2004 (172) ELT 289 (SC), KSEB Vs. CCE, 2008 (9) STR 3 (SC).
The Supreme Court in All India Federation of Tax Practitioners Vs. UOI, 2007 (7) STR 625 (SC), held that “Finance Act is passed every year to fix the rate of tax. This is the primary object for enacting the Finance Act. But it does not mean that a new distinct charge cannot be introduced by the Finance Act. For example, what is not “income” under the Income Tax Act (“IT Act”) can be made income by the Finance Act. This is, however, subject to the Finance Act complying with the Constitutional limitations. Additional tax revenue can be collected either by increasing the rate or by levy of a fresh charge. All levies through the medium of the Finance Act may either enhance the rate or levy a fresh charge. The Finance Act can also make an extensive modification in an Act”.
Fiction – applicability – what is?
To appreciate the delicate point being made here, an examination of what exactly is a fiction and how law treats a fiction is important. A legal fiction is defined in P. Ramanatha Aiyar’s Advanced Law Lexicon – 3rd Edition Re-print 2009 at page no.1814 & 2681. The Latin equivalent is Fictio juris. A fiction of law is a supposition of law that a thing is true without enquiring whether it be so or not. A legal assumption that a thing is true which is either not true, or which is probably false. The Supreme Court in Bengal Immunity Co Vs. St of Bihar, AIR 1955 SC 661 in the context of Article 286(2) held that a legal fiction presupposes the correctness of the state of facts on which it is based and all the consequences which flow from that state of facts have got to be worked out to their logical extent. If the purpose of a legal fiction is for some specified purpose, one cannot travel beyond the scope of that purpose. In sum a fiction of law has to be given its due play and necessarily has to be taken to its logical end and all facts required for such a conclusion, if not present, have to be assumed.
Setoff Issue
As stated above input service credit is allowed to be setoff against any output service liability, except in the case of GTA 65(105)(zzp), which taxable service has been specifically excluded from the definition of “output service” in Rule 2(p) of the Cenvat Credit Rules, 2004.
Reason of doubt:
Rule 5 of the Taxation of Services (Provided from outside India and received in India) Rules, 2006, provides that the taxable services provided from outside India and received in India shall not be treated as output services for the purpose of credit of duty of excise paid on any input or service tax paid on any input services under Cenvat Credit rules, 2004.
However, the self-same rules in its definitions postulates that Output service shall have the meaning assigned to it in clause (p) of Rule 2 of the Cenvat Credit Rules, 2004.
(There is an apparent contradiction here – i.e. which definition ought to be given precedence. The one in CCR or the one in Rule 5).
The Commissionerates of Jamshedpur and Madurai in their wisdom have also issued two Trade Notices in No.43/2008 & 21/JAM/2008 clarifying (which they hardly do) that the taxable service is an output service only for the limited purpose of charging service tax and not for the purpose of Cenvat Credit Rules, 2004. That the payment for such services could be made in cash and input service tax can be availed as Cenvat credit.
Due to this clarity in the ambiguous provision of law (sarcasm intended) the trade and industry pay tax by cash and avail service tax as an input service.
The above provisions i.e. Rule 5 and the definition of an output service in the Taxation of Services (Provided from outside India and received in India) Rules, 2006 coupled with the two trade notices have had an effect of treating a deemed output service (in terms of the charging section 66A) as an “input service” negating the use of accumulated Cenvat credit to setoff the liability on import of service. The Question that comes up is whether the charging section has to be read down in line with the Taxation of Services (Provided from outside India and received in India) Rules, 2006 or vice-versa. The answer to this question would, in my opinion, resolve the issue. What has been missed out (whether deliberately is not known) is that both Rule 5 and the trade notices advance a theory that is conflicts with the effect of charging section 66A.
Open Issues:
The issues that arise from the above are: -
- What is the nature of services received from abroad?
- Is it Input service or Output service?
- What is the legal position on import of service given the deeming fiction in section 66A?
- Should a legal fiction be given effect to even if it results in absurdity?
- What was the purpose of Taxation of Services (Provided from outside India and received in India) Rules, 2006?
- Can the Taxation of Services (Provided from outside India and received in India) Rules, 2006 postulate on what would be output service?
- Can the rule making authority go beyond the purpose of the delegation?
- What is the sanctity of the definition of output service in the Cenvat Credit Rules, 2004?
- What prohibited the legislature from incorporating Rule 5 of Taxation of Services (Provided from outside India and received in India) Rules, 2006 in the definition of output service in the Cenvat Credit Rules, 2004?
- Whether the express omission of import of services in the definition of output service would still have the effect of negating the fiction in the charging section 66A?
- When the provision of a rule is not in accordance with the provision of the charging section – how is it to be resolved?
- Can a limited interpretation be given to the charging section?
- Can it be argued that the charging section is only for the purpose of payment of tax?
- Are rules sub-servient to the provisions of a statute?
- What is the principle of reading down?
- Should the principle of reading down be applied in the present situation?
- Is’nt it a fact that Rules are framed to advance the purpose of the statute?
Alternative reason why import of service is an output service
Another aspect by virtue of which import of service would be an “output service” without placing reliance on the charging section are two definitions i.e. “person liable for paying service tax and provider of taxable service” in the Cenvat Credit Rules, 2004 read with section 68(2) of the Finance Act, 1994.
The definition of provider of taxable service includes a person liable for paying service tax and the definition of person liable for paying service tax has the meaning assigned to it in Rule 2(1)(d) of the Service Tax Rules, 1994. The relevant provision of Rule 2(1)(d) is extracted below to better appreciate this discussion:
Person liable for paying service tax” means, -
(iv) in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under section 66A of the Act, the recipient of such service.
The point being made here is this - that a provider of taxable service includes a person liable for paying tax i.e. service recipient. In other words a service recipient is a person liable to pay tax and therefore a service provider of output services. Reading section 68(2) also leads one to the above conclusion. This is because output services are defined to mean any taxable service, excluding the taxable service referred to in sub-clause (zzp) of clause (105) of section 65 of the Finance Act, provided by the provider of taxable service, to a customer, client, subscriber, policy holder or any other person, as the case may be, and the expressions ‘provider’ and ‘provided’ shall be construed accordingly. This analogy cannot be defeated by insertion of a rule in rules providing for taxation of import of services because the purpose of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 was only to provide for taxation of import of services and not to curtail the ambit of benefit extended by the Cenvat Credit Scheme and the deeming fiction created in terms of section 66A.
Factually the recipient is a service receiver and therefore the service received would be an input service but for the deeming fiction in section 66A. Because of the legal fiction created through section 66A, recipients pay service tax as if they are the “output service provider”. The rights and obligation of the ‘deemed service provider’ have been clearly stated in Section 68(2) of Finance Act, 1994 itself as: ........the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in Section 66 and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service. Thus for the purpose of payment service tax, the service recipient has to be a treated as a service provider in respect of import of service and the two trade notices and Rule 5 of the Import of Service Rules have to be read down to bring them in line with the effect of section 66A.
This is also because when a Section of the Act creates a legal fiction as clear as the one created in section 66A, there is no room for doubt whether a manufacturer or service provider can or cannot be treated as a “service provider” under Rule 2(p) of CCR, 2004, irrespective of the effect of the fiction on the CCR.
Cenvat availability for setoff
It is equally settled that a service provider is entitled to pay output tax by adjustment of Cenvat credit; there is no provision in the entire scheme of the Cenvat credit rules that a “deemed service provider” is barred from this entitlement.
I therefore do not find any bar on the part of a service recipient in paying service tax through their Cenvat credit account. The question of availing Cenvat credit on a deemed output service is alien to the concept of availment and eligibility to Cenvat Credit in terms of Rule 3 of the Cenvat Credit Rules, 2004. This is the reason that the Government would stand to loose in the long run because the tax paid on an output service is being allowed to be availed as input tax credit. The analogy adopted is disturbing also because it brings to the fore the understanding (mis-understanding actually) of the limb administering the law relating to service tax, of the basic concepts of the provisions of the Service tax law and the Cenvat Scheme.
Judicial pronouncements
In CCE & C Vs Phil Corporation Ltd., 2008 (223) ELT 9 (SC), it was held that the Courts have to make serious efforts to ascertain the spirit and intention of the Parliament in enacting deeming fictions. Once the legislative intent is gathered, then the bounden duty and obligation of Courts is to decide the cases in consonance with the legislative intent.
Hon’ble Justice Markandey Katju in Ispat Industries Ltd., Vs. CC, 2006 (202) ELT 561 (SC), held that if two interpretations of a rule are possible, one which would uphold its validity while the other which would invalidate it, the former should be preferred. It was further held in this decision that Rule 9(2) of Customs (Valuation) Rules, 1988 - Gunpradhan principle is fully applicable - Rule 9(2) ibid is subservient to Section 14 of Customs Act, 1962, hence, to be interpreted in such a way as to make it in accordance with main object that is contained in Section 14 ibid - Object of Section 14 ibid is ‘primary’ whereas conditions in Rule 9(2) ibid are ‘accessories’.
CONCLUSION
The manner in which section 66A has been framed leaves no room for doubt that the services rendered from abroad and received in India are deemed to have been provided in India by the recipient of service. The effect of this legal fiction is that the recipient is the provider of taxable service. When we examine as to what services are normally provided by a provider of taxable service the only logical answer a man of ordinary prudence can arrive at is “output service”.
"Loved reading this piece by Anirudha R J Nayak?
Join LAWyersClubIndia's network for daily News Updates, Judgment Summaries, Articles, Forum Threads, Online Law Courses, and MUCH MORE!!"
Join LAWyersClubIndia's network for daily News Updates, Judgment Summaries, Articles, Forum Threads, Online Law Courses, and MUCH MORE!!"
Tags :Taxation
