After the introduction of Negative list of services from 01-07-2012 there are many issues arising with respect to Cenvat Credit availment, utilization and also applicability of Rule 6 of Cenvat Credit Rules’2004 for reversal of credits pertaining to exempted services or goods. In this article I have discussed and analysed the applicability of Rule 6 of Cenvat Credit Rules’2004 i.e. ‘Obligation of Manufacturer or Service Provider who are manufacturing or providing exempted goods or services’ with regard to Interest Income earned from Loans including intercorporate loans, deposits etc.
Chargeability
In terms of Section 66B of Finance Act’1994, there shall be levied a tax at the rate of fourteen percent on value of all taxable services other than those services specified in the negative list provided or agreed to be provided.
As per charging section Service tax shall be levied on all services except for those which are covered under section 66D i.e. Negative list of services.
Negative List Entry
As per Section 66D(n) Services by way of “extending of deposits, loans or advances in so far as the consideration is represented by way of interest or discount” would be outside service tax net.
As per above entry services by way of extending of deposits, loans or advances for which consideration is received by way of interest or discount is not liable for service tax as referred in Section 66B i.e. Charging Section.
Exempted Services
As per Rule 2(e) of Cenvat Credit Rules’2004 ‘Exempted Services’ means:-
1. Taxable services which are exempt from the whole of the services tax leviable thereon or
2. Service on which no service tax is leviable under Section 66B of Finance Act or
3. Taxable service whose part of the value is exempted on the condition that no credit of inputs or input services used for providing such services shall be taken
But shall not include a service which is exported in terms of Rule 6A of Service Tax Rules’1994.
As per clause (2) above ‘Service on which no service tax is leviable under Section 66B of Finance Act’ includes services which are covered under Negative list of services as per Section 66D of Finance Act’1994. As stated in earlier paragraph Interest Income is covered under Negative List of services therefore the same will be construed as Exempted Services.
Loans, Deposits and Advances:-
Now there is a need to understand what is loan, advance and deposits referred in clause (n) of Section 66D of Act. Above said terms are not defined under Section 65B and hence there is a need to refer to common understanding of above terms.
‘Loan’ or ‘Advance’ means a thing (money) borrowed, especially a sum of money that is expected to be paid back with interest.
‘Deposit’ means a sum of money lodged in a bank or corporate for the purpose of earning Interest.
From the above definition one can understand that any ‘Loan or Advance’ which is given to another party with an intent to earn an interest will be regarded to as Service under Section 65(44) of act.
Loan Vs Transaction in Money
There is another interpretation and that is, lending of money in the form of Loan or Advance will be merely ‘Transaction in Money’ as referred to in exclusive part of definition of Service as defined under Section 65B(44).
As per Section 65B (44) Service means any activity carried out by a person for another for consideration and includes a declared service but shall not include “a transaction in money or actionable claim”.
There is a difference between transaction in money and granting of loan. This is because of the fact that the loan granting process does not include mere transfer of money and includes exercising of judgment as to credit worthiness on part of the lender in trying to confirm the repaying capacity in the hands of the borrower and as such no granting of loan without due diligence on part of the lender is usually undertaken. Therefore, there is clear difference between extending of loan and transaction in money.
As per Harmonised Rule of Interpretation, when the words of a statutory provision bear more than one meaning and there is a doubt as to which meaning should prevail, then such meaning should be adopted by which the words best harmonize with the subject and the object of the enactment.
In case of “British Airways Plc Vs. Union of India” it was held that an effort should be made to give effect to all the provisions of statute and for that any provision of the statue should be construed with reference to the other provisions so as to make it workable. A particular provision can’t be interpreted to defeat the provision made in that behalf under the statue. The similar view was expressed in case of “Sarabjit Rick Singh Vs. Union of India”.
This would perhaps explain the reason why there is an exclusion for extending of loan in the negative list despite transaction in money being outside purview of definition of service
Analysis of Applicability of Rule 6 of CCR’2004
As per definition of Exempted Service defined under Rule 2(e)(2) which includes “Service on which no service tax is leviable under Section 66B of Finance Act” since Interest Income derived out of loans, advance or deposits is excluded under Negative list from payment of service tax, the same is construed as “Exempted Service” for the purpose of Cenvat Credit Rules.
As per Rule 6 if a manufacturer or service provider is having both taxable as well as exempted turnover there would be a requirement to reverse the credit pertaining to exempted turnover.
Application of Rule 6 in different Scenarios:-
The application of Rule 6 has been analysed in two scenarios i.e. when main Business of assessee is Lending as Banking or Non-Banking Financial Company and the other is when the main Business is not one of Lending. In the above two scenarios there are different methods available under Rule 6 for reversal of credits which has been explained in paragraphs provided below.
Main Business is Lending
If the assessee is engaged in extending of loans, deposits and advances as a banking company or Non-Banking financial company, then he is required to reverse fifty percent of total Cenvat credit availed every month on input and input services in terms of Rule 6(3B) of CCR’2004.
Even here we could have some issues where a banking or non-banking financial company has some other service income apart from Interest i.e. income from Business Auxiliary services, Business Support Services etc. In such scenarios there is no clarity with respect to possible adoption of any other procedure for availment and reversal of credits pertaining to common input services since Rule 6(3B) requires assessee to reverse fifty percent of total Cenvat credit availed.
Main Business is not one of Lending
When main business of the assessee is not one of lending i.e. they are into manufacture of dutiable goods or provider of taxable services and in addition to that, if they earn interest income out intercorporate deposits then i need to examine the applicability of Rule 6 of CCR for reversal credit.
Here question arises whether assessee needs to apply Rule 6(3B) stated above considering the interest income or Rule 6(2) or 6(3) of CCR’2004 for reversal of credits pertaining to exempted services i.e. interest income.
In author’s point of view, assessee would be required to reverse the credit by referring Rule 6(2) (Maintenance of Separate Books of accounts for exempted services and reversing credit pertaining to such services) or 6(3) (Reversal of seven percent on exempted services or reversal based on turnover) and not by going through the 6(3B). This is because of the fact that main business of the assessee is not one of lending and such assessee generally would not be regarded as ………. (Please review whether such entities would be regarded as bank or NBFC at all. This would be relevant) In other words, Rule 6(3B) applies only to a banking or non-banking financial companies who are engaged in providing services of by way of extending of deposits, loans or advances.
This would mean segregation of credits based on turnover of exempted service relative to total turnover of the business where payment of seven percent of value of exempted turnover is not preferred or found to be impractical. This would be required to be followed by assessee especially where input services common to the business as a whole are received and credit of service tax thereon is claimed by him. Examples of such services are Audit fees, Consultancy, Security etc.
Conclusion
The Reversal of Cenvat Credit considering the Interest Income as an Exempted Service income is something which would continue to be debated till such time there is judicial review of the same. There are different views among professionals with respect to treatment of Interest Income as Exempted Service income. Assessee could consider the option of reversing the credit pertaining to Interest Income by following Rule 6 of CCR’2004 to be on safer side until there is a clarification from CBEC or a judicial review of the same.
By CA Nagabhushan J
The author may be reached at bhushan@rceglobal.com or nagabhushan.rce@gmail.com
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