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Service Tax Credit - IPS - very urgent.

Sameer (.) (252 Points)

11 August 2009

We are subsidiry manufacturing company (in india) of our parent company (foreign company) and is paying service tax on royalty paid to our Parent company

Now the department in its SCN says we can't avail the credit of this service tax as we are only person liable to pay service tax in terms of rule 2(i)(d)(iv) of S.Tax Rules 1994 and is not the actual service provider (deemed service provider) Hence we are not eligible for this S.tax credit.

Please provide your views supported by some case laws

Its. urgent.

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10 Replies

Madhukar N Hiregange (Chartered Accountant) (39034 Points)
Replied 11 August 2009

First of all payment of service tax whether applicable for royalty is to be determined. Rotyalty paiod for share of profit for right to use may notbe liabel to servic etax at all.

Assuming that there is a liability when one pays the service tax as reciver of services ( in this case import of services- Sec 66A) then the same is to be paid in cash and cenvat credit cannot be used to pay for the same.

However the amount paid itslef is available for input credit for pasyment of CED or ST.

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Sameer (.) (252 Points)
Replied 11 August 2009

Departmetns contention is that rule 3 of Cenvat Credit Rule 2004 does not allows service tax credit of (service tax paid) under rule 66A. It only covers rule 66. Hence credit not eligible.. Please provide some storng arguments.. since royalty paid is very much over input service (as the same is paid for getting technical know how from our parent comapny) to manufature the final product.

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Dilip Darji (392 Points)
Replied 11 August 2009

There is only one charging Section 66 and the intension to insert section 66 is to provide the mechanism to charges Service Tax in a given situation. There fore through Service Tax has been paid by you under Section 66 a, it is presumed to be to be paid under Section 66 and you are deemed Service Provider, in terms of Section 66 A. You shall be entitled to avail Service Tax paid by you. Although there may be litigation, but you will have win win situation.

Madhukar N Hiregange (Chartered Accountant) (39034 Points)
Replied 11 August 2009

In my view there is no doubt that input service credits can be used only for ioutput services as of now. In the past there was an explanation that where ST was paid as a service reciver it would be deemed to be an output service. This argument would not hold good today.

As stated earlier the expert opinion maybe obtained by provding the agreements etc on whether the ST is liable at all since in many cases it has been held that royalty is not a subject matter of ST.

(Guest)

Tax to be paid in cash without Cenvat credit - Rule 5 of Taxation of Services (Provided from outside India and Received in India) Rules, 2006 clarifies that the taxable service will not be treated as output service of the recipient for purpose of availing of Cenvat credit of duty of excise paid on inputs or service tax paid on any input services. Thus, the recipient of service has to pay the service tax in cash by TR-6/GAR-7 challan. He cannot utilise his Cenvat credit for payment of this amount, as it is not his ‘output service’, though he is liable to pay service tax.

Service receiver avail Cenvat credit of service tax paid by him - Though the person receiving the service is liable to pay service tax, the service is his ‘input service’. Para 4.2-13 of MF(DR) circular No. B1/4/2006-TRU, dated 19-4-2006 confirms as follows ‘Where such service is used as an input for providing any taxable output, the service tax paid on such service can be taken as input credit’ (The TRU letters have not been withdrawn even when all other circulars have been withdrawn on 23-8-2007. Hence, TRU letters are still valid) [There is some controversy on this issue]

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Sameer (.) (252 Points)
Replied 11 August 2009

For clarfication...... Royalty is being paid in order to obtain continues technical know-how (and latest technical updates from the parent company (Foreign Company). This technical know how is essential for manufacturing final products. Hence the same is covered under Intellectual Property Service.

Yes I do agree with sHaiBu . But can some one please provide more inputs so that a good reply to SCN can be drafted.

Thanks to all for their valuable inputs.

CA Kingsley (Audit Manager) (470 Points)
Replied 11 August 2009

Sameer Ji,

I suggest not to waste money in litigation in this case. The act & rules are very clear. Rule5 expressly states that taxable services provided from outside India and recieved in India shall not be treated as output service for purpose of availing credit of duty of excise paid/service tax paid.

Therefore, if I were ur consultant, I would strongly recommend you to pay the tax with interest if any. If you go to litigation, then there is hardly any chance of winning.

Sameer (.) (252 Points)
Replied 12 August 2009

Dear Kingsley,

Here we are discussing the question of availment of Cenvat Credit against this payment (we have already paid the service tax.)

The department has itself issued a Trade Notice wherein it states that if such serivce is an input service we can claim the credit.

Though there is no mention of Credit u/r 3 of Cenvat credit rules 2004 it only talks about credit of s.tax paid under section 66 of the finance act 1994. and not about 66A. So far as I know Trade Notice/circulars etc. are binding on the department. They can't act against their own circular or trade notice.

Reproduced below the relevant extracts from Trade Notice No. 43/2008

1) That Department has issued Trade Notice No. 43/2008 dt 11.09.2008. In which Board vide para 4.2.13 of letter F.No.B1/4/2006 dated 19.04.2006 clarified as follows : - (re-produced below the extracts)

“4.2.13 The treatment of the recipient of service, as the deemed service

provider under Section 66A is only for the purpose of charging service tax on

the taxable services received from outside the country. Services provided

from outside India and received in India, therefore, not treated as taxable

service provided by the recipient for the purpose of Cenvat Credit Rules,

2004. However, where such service is used as an   input   for
            providing any taxable output, the service tax paid on such service
            can be taken as input credit.”

Regards

Sameer

Rajesh Kumar (Advocate- Tax) (7806 Points)
Replied 12 August 2009

It is a frivolous objection by the department. You are eligible for credit.

It is just that litigation has been imposed and you have to contest it. To add salt to the injury, the demand shall be confirmed in the departmental adjudication and you will get justice at the level of tribunal only.

There is no case law on this point, in fact it is a novel & new frivolity by the department. Yes, on the basis of various legal provision, you can develop argument (logic) to support your case.