Cenvat For automobile Dealers

Brief Introduction

Generally Automobile Dealers are engaged in three main activities i.e. Selling of Vehicles, Selling of Spare parts of vehicle, and working as an Authorized Service Station on behalf of the principal. In the course of selling the cars they do provide a lot of Business Auxiliary Services to other business entities (Insurance & Finance Business Companies as the also provide business to these companies)

Type of Services Rendered:

Taxable:

1. Authorized Service Center,

2. Rent a cab (Generally Car Dealers also give Car on Rent a Cab basis)

3. Business Auxiliary Services (Insurance & Finance Business at time of Selling of Cars)

Exempt:

1. Selling of Cars (debatable)

The definition of service as per the Act

Service’ has been defined in clause (44) of the new section 65B and means –

• any activity

• for consideration

• carried out by a person for another

• and includes a declared service.

The said definition further provides that ‘Service’ does not include –

• any activity  that constitutes only a transfer in title of (i) goods or (ii) immovable property by way of sale, gift or in any other manner (which simply means Trading of goods which cannot be considered as a Service)

• a transfer, delivery or supply of goods which is deemed to be a sale of goods within the meaning of clause (29A) of article 366 of the Constitution         

• a transaction only in (iv) money or (v) actionable claim

• a service provided by an employee to an employer in the course of the employment.

• fees payable to a court or a tribunal set up under a law for the time being in force

The term ‘Trading' has not been defined in “Finance Act” but  simply means the act of buying and selling. It is selling of goods in the same form as it was purchased & no further processing is done thereupon. Credit of Cenvat is allowed only in respect of those Inputs/Input Services which are used in the manufacture of the dutiable final products or for providing the Taxable Output service.

A transfer of title in goods is excluded from the definition of “service”. Trading in goods involves a transfer of title in goods. Despite that, trading of goods is also included in the Negative list. This inclusion in Negative list effectively means that Cenvat credit in relation to trading of goods will be denied/restricted.

Look at History

Though trading activity was not an Exempted Service prior to budget, 2011 yet on the ground of proving nexus, reversal was demanded by the department if trading activity was involved. This issue arose before the Ahmedabad Tribunal in the case of Orion Appliances Limited Vs. CCE, AHMEDABAD – “2010-TIOL-752-CESTAT-AHM” wherein it was held that trading activity is not at all a service. Further the rule 6(2) of cenvat credit rules requires maintaining separate account only in respect of exempted service and dutiable service. As trading activity cannot be considered a service as trading is out of definition of Service, Rule 6 Of Cenvat Can’t be applied But the Ahmedabad tribunal has decided that,

(A) Trading activity cannot be called a service and therefore it cannot be considered as an exempted service also.”

(B) Where an assessee would not be eligible to take input Service tax credit on an output which is neither a service nor excisable goods and at the same time there is no provision to cover situations where an assessee is providing a taxable service and is undertaking another activity which is neither a service nor manufacture

Hence the tribunal has held that the since trading activity is not a service, credit cannot be taken on the same. Thus, the assessee was ordered to segregate the quantum of input service attributable to trading activity and exclude the same from the Cenvat register.

One can also read the following judgments in the relevant context: 

- Metro Shoes [2009-TIOL-1630-CESTAT-MUM] 

- Faber Heatkraft [2008 (12) STR 252] 

- BHEL GE Turbine Service [2010-TIOL-343-CESTAT-BANG] 

Also, while I personally do agree that it is not equitable to allow wholesome credit on common services to a trader cum service provider/ manufacturer but a loophole in the law exists and likely that it will be difficult to defend Revenue's case going strictly by the law. 

No Cenvat credit if no excise duty or service tax payable on output

Basic principle is that Cenvat credit is available only when excise duty is payable on final product or service tax is payable on output services [Rule 6(1) of Cenvat Credit Rules].

In order to remove the ambiguities arising out of such decisions, this budget has included the trading activity in the definition of exempted services.

The Change in Defination & position changed

The term Exempted Services as defined in rule 2(e) of Cenvat Credit Rules, 2004 prior to recent budget 2011 read as follows:-

“Exempted Services” means Taxable services which are exempt from the whole of the Service Tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act; (for being Exempted Service it first need to be a Service )

From this budget this definition has been extended as follows:-

““exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act and taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken.

Explanation- For the removal of doubts, it is hereby clarified that “exempted services” includes trading.”

IMPACT OF THIS CHANGE

Since the Trading Activity is specifically included in the exempted services, the provisions of Rule 6 of the Cenvat Credit Rules, 2004 will be attracted. The value to be taken for this calculation will be as per explanation to rule 6(3) and (3A) of the Cenvat Credit Rules, 2004 which reads as follows:-

Value of trading of cars “shall be the difference between the sale price and the cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase) or 10% of the cost of goods sold, whichever is more”

Hence in case of Car Dealers the reversal will be made on the basis of value calculated above. If he avails the same, he is required to follow the provisions of rule 6 of the Cenvat Credit Rules, 2004.

Example to Illustrate