In the past, numerous show cause notices have been issued all over India by Service Tax Authorities to Restaurant Owners and Outdoor Caterers alleging non-reversal of Cenvat Credit under Rule 6(3) of the Cenvat Credit Rules, 2004 by the Restaurants and Outdoor Caterers and demanding Service Tax under Rule 14 of the Service Tax Rules read with S 73 of the Finance Act, 1994 along with interest and penalties.
As per Rule 6(3) of the CCR, 2004, it isincumbent upon the provider of taxable plus exempted output services to either pay an amount equal to six per cent of value of the exempted services or pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in, or in relation to, provision of exempted services subject to the conditions and procedure specified in sub-rule (3A) of Rule 6 of CCR, 2004. Otherwise, the provider of taxable plus exempted output services was required to maintain separate account for taxable and exempt services and take cenvat credit for taxable service only.
Misconstruing the legal provisions, the department had taken stand that while supplying service portion in an activity wherein goods, being food or drinks as part of the activity as covered in Section 66E (i) of the Finance Act, 1994, they pay service tax on 40% of the amount charged in their bill and not on the 100% of the amount charged in their bill. And as they took cenvat credit of capital goods and services in full and since 60% of the value of the Service being the non-service portion was exempted services they were liable to comply with Rule 6(3) of the CENVAT Credit Rules, 2004(CCR, 2004) referred above.
The whole array of the basis of calling for reversal of credit was drawn around misbelief that on 40% of the amount charged in bill the service tax was leviable and on the balance 60% of the value of the Service the service tax was not leviable and this non-service portion was exempted services. On this basis the Restaurants and Caterers were considered as providers of taxable as well as exempt services and consequently were considered liable to comply with Rule 6(3) of CCR, 2004.
Legal matrix of valuation of service portion for supply of food and drinks and availability of cenvat credit and basis of demand in Service Tax Notices for reversal of cenvat credit;
Under Rule 2C of SERVICE TAX (DETERMINATION OF VALUE) RULES, 2006 regarding determination of value of service portion involved in supply of food or any drink in a restaurant or as outdoor catering, it is provided that subject to the provisions of section 67, the value of service portion in an activity shall be 40% of the total amount charged for such supply wherein goods being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity at a restaurant or as outdoor catering.
Further, explanation 2 to Rule 2C clarifies that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986).
In gist, the legal position is such that service tax shall be charged on 40% of the total amount charged for supply of food or any other article of human consumption or any drink in a restaurant or as outdoor catering and CENVAT credit of duties or cess paid on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986) i.e. food items shall not be taken. CENVAT on Services and Capital Goods shall be available.
Service Tax Authorities were of the view that under sub-rule 2 of Rule 2(e) of the Cenvat Credit Rules, 2004, the portion of bill on which service tax was not to be charged under Rule 2C of the SERVICE TAX (DETERMINATION OF VALUE) RULES, 2006 was exempt services. As the service tax was chargeable on 40% of the amount of the bill, the rest 60% was considered to be the service on which service tax was not leviable and thus exempt service under Sub-rule 2 of Rule 2(e) which quotes 'exempted service' to mean a Service, on which no service tax is leviable under section 66B of the Finance Act. Sub-rule 2 of Rule 2(e) refers;
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Rule 2(e) of the CCR 2004
Rule (e)' exempted service' means a-
........
(2) Service, on which no service tax is leviable under section 66B of the
Finance Act; or
.......
But shall not include a service which is exported in terms of Rule 6A of the Service Tax Rules, 1994.
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On the misconception and extended interpretation of law, that 60% of the amount charged on the bill is the service on which service tax is not leviable, the department considered Restaurants and Outdoor Caterers to be the providers of taxable as well as exempted services on which basis it was alleged that as per Rule 6(3) of the CCR, 2004, it was incumbent upon Restaurants and Outdoor Caterers being the provider of taxable plus exempted output services to either pay an amount equal to six per cent of value of the exempted services or pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in, or in relation to, provision of exempted services subject to the conditions and procedure specified in sub-rule (3A) of Rule 6 of CCR, 2004 if they had not maintained separate account for taxable and exempt services and had taken cenvat credit for taxable service only.
The Restaurants and Outdoor Caterers who had taken full credit of cenvat of services and capital goods and paid tax on the 40% of the amount charged in the bill were issued show cause notice by treating 60% of the non-service portion as exempt service under Sub-rule 2 of Rule 2 (e) of CCR, 2004 by considering this portion of service to be the service on which service tax is not leviable.
Many of these matters are pending adjudication or are before the Appellate Authorities.
Scheme of law for levy of service tax on the activities of Supply of food or drinks in a restaurant and Supply of foods and drinks by an outdoor caterer is as follows;
• Section 66B quotes, 'There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.'
• And as per Section 65 (44) 'service' means any activity carried out by a person for another for consideration, and includes a declared service.
• Further, the activities of Supply of food or drinks in a restaurant and supply of foods and drinks by an outdoor caterer were covered under the Service Tax by virtue of Section 66E(i) as declared service, on which the service tax was leviable.
• Cumulative plain reading of the law suggests that the activities of Supply of food or drinks in a restaurant and supply of foods and drinks by an outdoor caterer are covered under Declared Services on which Service Tax is leviable.
• Activities of Supply of food or drinks in a restaurant and Supply of foods and drinks by an outdoor catereris not a service, on which no service tax is leviable under section 66B of the Finance Act; or
But contrary to the above plain legal position, the service tax authorities miscomprehending the definition of 'exempted service' considered 60% of the amount charged in Restaurant/Catering bills to be the 'exempted service' on the ground that on this 60% portion, service tax is not leviable. Though 'exempted service' has exhaustively been defined in the CENVAT Credit Rules, 2004, an attempt was being made to consider 60% of the amount charged in Restaurant/Catering bills to be the 'exempted service' by misconceiving that on 60% of the amount charged in the bill, service tax is not leviable. Summarily, the authorities considered 60% of the amount charged in Restaurant/Catering bills as a service, on which service tax is not leviable under section 66B of the Finance Act, whereas correct position of law is that the service portion in the 'activity' of Supply of food or drinks in a restaurant; and Supply of foods and drinks by an outdoor caterer on which service tax is leviable under Section 65(44), 66B and 66E(i) of the Finance Act, 1994.
It is the service portion in the 'activity' of Supply of food or drinks in a restaurant; and Supply of foods and drinks by an outdoor caterer on which service tax is leviable under Section 65(44), 66B and 66E(i) of the Finance Act, 1994. It is NOT THE PORTION OF THE SERVICE on which service tax is leviable under Section 65(44), 66B and 66E(i) of the Finance Act, 1994.
In the law, 'Exempted Service' has been defined as per Rule 2(e) of the CENVAT Credit Rules, 2004(CCR 2004) as follows;
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Rule 2(e) of the CCR 2004
Rule (e)' exempted service' means a-
(1) Taxable service which is exempt from the whole of the service tax leviable thereon; or
(2) Service, on which no service tax is leviable under section 66B of the Finance Act; or
(3) Taxable service 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;
But shall not include a service which is exported in terms of Rule 6A of the Service Tax Rules, 1994.
Unquote
As the above definition of exempted service in CCR 2004 is exhaustive definition wherein it is defined that exempted service MEANS
(1) Taxable service which is exempt from the whole of the service tax leviable thereon; or
(2) Service, on which no service tax is leviable under section 66B of the Finance Act; or
(3) Taxable service 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; But shall not include a service which is exported in terms of Rule 6A of the Service Tax Rules, 1994.
The law defines exempted service as Service, on which no service tax is leviable under section 66B of the Finance Act.
Supply of food and or drinks by restaurants and outdoor caterers by virtue of being declared service fall under the definition of service on which service tax is leviable.
Out of the whole 'activity' of supply of food or drinks in a restaurant or by an outdoor caterer, the service portion is declared as Service under Section 66E(i)on which service tax is leviable under Section 65(44), 66B and 66E(i) of the Finance Act, 1994.
But the department considered the other part of activity which is not service, as Service on which service tax is not leviable.
The department considered 60% portion of the amount charged on the bill on which service tax was not payable under Rule 2C of Service Tax (Determination of Value) Rules, 2006 as exempted service by treating it as service on which service tax was not leviable.
As discussed in above paras,the service portion in the activity of Supply of food or drinks in a restaurant; and Supply of foods and drinks by an outdoor caterer is leviable under Section 65(44), 66B and 66E(i) of the Finance Act, 1994.
The law strictly defines exempt service to mean Service, on which no service tax is leviable under section 66B of the Finance Act under sub-rule 2 of Rule 2 (e) of CCR, 2004. By the unwanted stretch of imagination, the department extended the definition of exempt service given in Rule 2(e)(2) supra to assume one portion / non-service portion (60%) of the activity of supplying of food and drinks as service, on which no service tax is leviable under section 66B of the Finance Act under Sub-rule 2 of Rule 2 (e) of the CCR, 2004.
It is to be noted that as per the principles of statutory interpretation, and as per the settled law, in construing taxing statute one has to look merely at what is clearly said. There is no equity about a tax. There is no room for any intendment. There is no presumption as to a tax. Nothing is to be read in and nothing is to be implied. One can only took fairly at the language used.
I take the honor to quote Honorable Rowlett J. in Cape Brandy Syndicate Vs. Inland Revenue Commissioners (1971) 2 WLR 39, p 42 (PC)
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'... in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.''
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In Indian Courts of law too it has at times upheld by the Honorable courts that the Court must look squarely at the words of the statute and interpret them.
Honorable Apex Court in CST Vs. Modi Sugar Mills Ltd., (2002-TIOL-977-SC-CT-CB) has held that in interpreting a taxing statute, equitable considerations are entirely out of place nor can taxing statute be interpreted on any presumptions or assumptions and the Court must look squarely at the words of the statute and interpret them.
In P. Kasilingam v. P.S.G. College of Technology (1995) AIR 1395 (SC), the Apex Court held that
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The use of the word 'means' indicates that 'definition is a hard and fast definition, and no other meaning can be assigned to the expression than is put down in definition'
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On a plain and strict interpretation of the wording of the relevant provisions, non-service portion of the activity of supplying food/drinks in a restaurant or by an outdoor caterer could not be considered as exempt service by stretching the definition of Rule 2 (e) (2) of CCR, 2004. Further, there was no need for any reversal of credit under Rule 6(3) of the Cenvat Credit Rules, 2004 and only restrictions in Rule 2C of the Service Tax (Determination of Value) Rules, 2006, thatCENVAT credit of duties or cess paid on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986) i.e. Cenvat Credit on food items cannot be availed.
Relief to the Assessees;
Much to the rescue of the Assesses, a recent clarification makes it clear that there shall not be any restriction on CENVAT Credit, other than the restriction that CENVAT credit of duties or cess paid on food items shall not be taken, AND THAT there is no need for any further reversal of credit under Rule 6(3) of the Cenvat Credit Rules, 2004.
Ministry of Finance, Department of Revenue, CBIC, Service Tax Wing on 5th July, 2019 has clarified the entire issue of requirement of reversal of cenvat credit in our matter vide their Service Tax Circular Number 213/3/2019- Service Tax, File No. 137/32/2014 - Service Tax on the subject, 'Provisions in the Cenvat Credit Rules, 2004 regarding reversal of credit.'
It has been clarified in the above Circular that on a plain and strict interpretation of the wording of the relevant provisions, other than the restrictions in Rule 2C of the Service Tax (Determination of Value) Rules, 2006, there is no need for any further reversal of credit under Rule 6(3) of the Cenvat Credit Rules, 2004. A copy of this Circular is enclosed as Annexure-I for your kind perusal.
Relevant extract of the Circular are reproduced here-in-below for your kind reference;
Quote
3.0 Issue: 'Is reversal under Rule 6(3) of the Cenvat Credit Rules, 2004 additionally required when providing the 'service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the activity.' (i.e. Section 66E (i) of the Finance Act, 1994).
Answer: on a plain and strict interpretation of the wording of the relevant provisions, other than the restrictions in Rule 2C of the Service Tax (Determination of Value) Rules, 2006, there is no need for any further reversal of credit under Rule 6(3) of the Cenvat Credit Rules, 2004.
Unquote
[Para 3.0 of Service Tax Circular Number 213/3/2019- Service Tax, dated 05.07.2019]
As above, it has been clarified that on a plain and strict interpretation of the wording of the relevant provisions, other than the restrictions in Rule 2C of the Service Tax (Determination of Value) Rules, 2006, there is no need for any further reversal of credit under Rule 6(3) of the Cenvat Credit Rules, 2004 if the Assessee during the impugned period charged service tax on 40% of the total amount charged for supply of food or any other article of human consumption or any drink in a restaurant or as outdoor catering and has not taken CENVAT credit of duties or cess paid on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986) and has taken credit of Capital Goods and Services only.
Suggested course of action to the Notice;
As this clarification makes it ostensive that there shall not be any restriction on CENVAT Credit, other than the restriction that CENVAT credit of duties or cess paid on food items shall not be taken, AND THAT there is no need for any further reversal of credit under Rule 6(3) of the Cenvat Credit Rules, 2004, noticee should file reply/additional reply to the concerned authorities with reference to the above Clarification with request to drop entire proceedings. For the convenience of the readers, I am sharing sample reply that may be assisting the readers.
Sample Reply to the SCN for Reversal of CENVAT Credit under Rule 6(3) of the CENVAT Credit Rules, 2004
Date, Place
The Assistant Commissioner,
GST Division-............,
Address,
...................................,
Regarding: M/s ABC Ltd,
Address:
Subject: Additional Reply/Reply to SCN C. No. ......... for Rs .............../- in the light of
Service Tax Circular Number 213/3/2019- Service Tax, File No. 137/32/2014 - Service Tax on the subject, 'Provisions in the Cenvat Credit Rules, 2004 regarding reversal of credit.' issued by Ministry of Finance, Department of Revenue, CBIC, Service Tax Wing on 5th July, 2019.
Honorable Sir,
We invite your kind attention to the above mentioned Show Cause Notice and our reply filed in writing vide ............. Dated........... before your honor.
It is alleged vide the above said Show Cause Notice, the Noticee has been put to notice to show cause to the Assistant Commissioner,..... as to why an amount of Rs. ....../- payable under Rule 6(3) of Cenvat Credit Rules, 2004 on exempted part of services/non-service portion of composite service should not be demanded and recovered from them under Rule 14 of Cenvat Credit Rules, 2004 read with S. 73 of the Finance Act, 1994 along with interest at the appropriate rate of interest u/s 75 and penalty u/s 78 read with Rule 15(3) of Cenvat Credit Rules, 2004 by invoking the extended period of limitation provided under the proviso thereof.
The noticee has filed reply in writing vide ............. Dated........... before your honor.
Now, Ministry of Finance, Department of Revenue, CBIC, Service Tax Wing on 5th July, 2019 has clarified the entire issue of requirement of reversal of cenvat credit in our matter vide their Service Tax Circular Number 213/3/2019- Service Tax, File No. 137/32/2014 - Service Tax on the subject, 'Provisions in the Cenvat Credit Rules, 2004 regarding reversal of credit.'
It has been clarified in the above Circular that on a plain and strict interpretation of the wording of the relevant provisions, other than the restrictions in Rule 2C of the Service Tax (Determination of Value) Rules, 2006, there is no need for any further reversal of credit under Rule 6(3) of the Cenvat Credit Rules, 2004. A copy of this Circular is enclosed as Annexure-I for your kind perusal.
Relevant extract of the Circular are reproduced here-in-below for your kind reference;
Quote
3.0 Issue: 'Is reversal under Rule 6(3) of the Cenvat Credit Rules, 2004 additionally required when providing the 'service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the activity.' (i.e. Section 66E (i) of the Finance Act, 1994).
Answer: on a plain and strict interpretation of the wording of the relevant provisions, other than the restrictions in Rule 2C of the Service Tax (Determination of Value) Rules, 2006, there is no need for any further reversal of credit under Rule 6(3) of the Cenvat Credit Rules, 2004.
Unquote
[Para 3.0 of Service Tax Circular Number 213/3/2019- Service Tax, dated 05.07.2019]
As above, it has been clarified that on a plain and strict interpretation of the wording of the relevant provisions, other than the restrictions in Rule 2C of the Service Tax (Determination of Value) Rules, 2006, there is no need for any further reversal of credit under Rule 6(3) of the Cenvat Credit Rules, 2004. As specifically pointed out in your SCN, the Noticee during the impugned period has charged service tax on 40% of the total amount charged for supply of food or any other article of human consumption or any drink in a restaurant or as outdoor catering and has not taken CENVAT credit of duties or cess paid on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986)and has taken credit of Capital Goods and Services only, the circular clearly covers my matter under Notice for the impugned period and benefit of the circular please be granted to the Noticee for dropping show cause proceedings against the noticee.
The Noticee also submits that the above Circular being beneficial circular is to be applied retrospectively;
It is also submitted that the Board's Circular shall also be applicable in respect of a case which is pending even though a clarification has come later. When Circular was issued by the department, our matter was pending for adjudication and in such cases, the clarification circulars shall be applicable in respect of case pending even though a clarification has come later.In this regards, the appellant places reliance on Honourable Supreme Court in SUCHITRA COMPONENTS LTD Vs COMMISSIONER OF CENTRAL EXCISE, GUNTUR on 17.01.20017 held that a beneficial circular to be applied retrospectively. The noticee also places reliance on the order of Mumbai Tribunal in the case of ASPI Rustomji Balsara v CCE, VAPI, 2006 (197) ELT 345 (Tri.-Mumbai) wherein it was held that the Circular merely clarifies the legal position; therefore, the lower authority is not correct in saying that it will have only prospective effect. The legal position remains the same before and after the said Circular since the law has not undergone any amendment. Therefore, the Board's Circular shall also be applicable in respect of a case which is pending even though a clarification has come later.
It is also submitted that the Circular would be binding on all field formations of the department in view of the various decisions of honorable courts;
In this regard, the Noticee submits that the Circular having been issued in terms of Section 37B of the Central Excise Act, 1994 (as applicable to Finance Act, 1994) in terms of Section 83 of the Finance Act, 1994, would be binding on all field formations of the department in view of the various decisions of honorable courts. In this regard, inter-alia the Noticee relies on CCE, Mumbai v/s M/s Rajpurohit GMP India Ltd [2008-TIOL-200-SC-CX] and Pradip J Mehta v. CIT (2008) ITR'-231 (SC), wherein it was held that Circulars are binding on the Department. Also in Paper Products Ltd v/s Commissioner of Central Excise [2002-TIOL-84-SC-CX] it was held that Circulars issued by Board under Section 37B are binding on the Department and it cannot take a stand contrary to the instructions issued by the Board.
Prayer;
As the above clarification circular, which is beneficial to the Noticee, squarely covers our matter, it is submitted that in the light of the above 'clarification', the impugned notice is liable to be vacated, with respect to entire demand of service tax, interest and penalties.
In view of above, it is prayed that notice proceedings with respect to service tax, interest and penalty may kindly be dropped and the notice please be vacated and filed.
We are confident that our request for dropping the entire proceedings with respect to the above subjected Show Cause Notice will meet your approval in the interest of justice in the light of the Clarification enclosed as Annexure-I. A line of confirmation for receipt of our reply and your kind
Thanking You,
Yours faithfully,
For ABC Ltd
A
(Authorised Signatory
Enclosed:
1. Copy of Service Tax Circular Number 213/3/2019- Service Tax, File No. 137/32/2014 - Service Tax issued by Ministry of Finance, Department of Revenue, CBIC, Service Tax Wing on 5th July, 2019 on the subject, ' Provisions in the Cenvat Credit Rules, 2004 regarding reversal of credit.'
Similarly, reply can be submitted in cases wherein Audit has been undertaken by the department and Show Cause Notice has not been served to the Assessee.
The writer of this article is a Chartered Accountant having more than 19 years of experience in the field of indirect tax. He has authored a book on Punjab Value Added Tax, 'Law and Practice of Punjab VAT'. He has to his credit many papers, published in National Level reputed tax publishers and presented at various National and State Level conferences.
The author can also be reached at rks9814214503@gmail.com
Disclaimer: The views expressed herein are the personal views of the writer. Readers are advised to act upon their own understanding /independent advice on the relevant law. This document is based on interpretation of the law. Therefore, the views expressed above are matters of opinion based on the laws prevalent at the time the view being expressed, which may change as the law evolves from time to time. We have no responsibility to update these comments for events and circumstances occurring after the date of this note, unless specifically requested. This note is for the specific purpose of serving as an informative guide and is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this presentation will be accepted by us.
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