CENVAT credit on renting of motor vehicles
Nand Kishore (Partner) & Akash Deep (Senior Associate)
In respect of service of renting of motor vehicles, CENVAT credit is denied by the Revenue on the ground that motor vehicles involved in provision of such service do not qualify as ‘capital goods’ in the hands of the recipient and, therefore, such service falls under the exclusion clause of definition of “input service” [rule 2(l) of CCR, 2004 refers] With effect from 1.4.2012, the definition of ‘input service’ under CCR has been amended and an exclusion clause has been added. As per the exclusion clause, service of renting of motor vehicle, where the motor vehicle does not qualify as capital goods, shall be excluded from scope of ‘input service’. The relevant provisions have been reproduced below:
- “input service means any service
- (i) used by a provider of output service for providing an output service; or
- (ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products up to the place of removal, and includes but excludes
- (B) Services provided by way of renting of a motor vehicle, in so far as they relate to a motor vehicle which is not a capital goods;”
The term ‘capital goods’ has been defined under Rule 2(a) of the CCR. Relevant part of the definition has been reproduced below :
The term ‘capital goods’ has been defined under Rule 2(a) of the CCR. Relevant part of the definition has been reproduced below : vehicle designed for transportation of goods including their chassis registered in the name of the service provider, when used for
- (i) providing an output service of renting of such motor vehicle; or
- (ii) transportation of inputs and capital goods used for providing an output service; or
- (iii) providing an output service of courier agency;
- (C) motor vehicle designed to carry passengers including their chassis, registered in the name of the provider of service, when used for providing output service of-
- (i) transportation of passengers; or
- (ii) renting of such motor vehicle; or
- (iii) imparting motor driving skills;”
Clearly, motor vehicles designed for transportation of goods or passengers and used for providing an ‘output service’ of renting of such motor vehicle, would qualify as ‘capital goods’ only if the said motor vehicle is registered in the name of service provider.
Therefore, registration of motor vehicle used in the definition of service of renting of motor vehicles, in the name of service provider is a sine qua non to treat such motor vehicles as ‘capital goods’.
From a harmonious reading of the exclusion clause “B” to the definition of ‘input service’ along with definition of ‘capital goods’ vis-a-vis a motor vehicle, it emerges that services received by way of renting of motor vehicle would be treated as ‘input service’, if same has been provided by service provider using a motor vehicle which is registered in its own name. In other words, such motor vehicle qualifies as ‘capital goods’ in the hands of the service provider.
Interestingly, the above exclusion clause does not specify as to whether the status of motor vehicles as ‘capital goods’ has to be determined qua the service provider or service recipient. This has led to impending dispute between the taxpayer and the Revenue a recent decision on this issue has been discussed below.
The lurking confusion
The Revenue has adopted a view that services pertaining to renting of motor vehicles would qualify as input services, only if the motor vehicles qualify as ‘capital goods’ in the hands of service recipient.
Such a view appears to be based on the logic that while receiving input services, it is the service recipient who bears the burden of service tax, thus becoming eligible for availing Cenvat Credit of such tax. Thus, the nature of motor vehicles qua ‘capital goods’ used for provision of such input service should also be determined with reference to the service recipient only.
As a result of the above erroneous interpretation, the service recipients, comprising corporate offices, manufacturing units and other offices availing the service of renting of motor vehicle for transportation of their employees to office and back home, could not avail Cenvat Credit in respect of the said service,since the vehicle was not registered in the name of the recipient and therefore, it did not qualify as capital goods in the hands of the service recipient. However, in order to avoid litigation, the Cenvat Credit on such services was not taken by service recipients.
Recently the issue came up before the CESTAT in the case of M/s Marvel Vinyls Ltd. vs. Commissioner of Central Excise, Indore – 2016-TIOL-3071-CESTAT-DEL. In this case,the Appellant was engaged in manufacturing of PVC shipping. During August 2013 to February 2014,the Appellant received services of renting of motor vehicles for transportation of its employee from its office premises in Gwalior to its factory and return journey. The Appellant, treating such service as input services,availed Cenvat Credit of Service tax paid.
While deciding the issue in favour of appellant, the Tribunal observed that the interpretation adopted by the Revenue is flawed, as motor vehicle involved in provision of services by way of renting of motor vehicle can never be ‘capital goods’ to the recipient of said service. The Hon’ble Tribunal held that the expression- “which is not a capital goods’ appearing in said exclusion clause would require examination vis-à-vis the service provider and not vis-à-vis service recipient.”
Analysis and arguments in support by the Authors
The Revenue’s argument that Cenvat Credit of service tax paid on service of renting of motor vehicle is not available to the appellant (i.e. service recipient) because such motor vehicles do not qualify as capital goods with reference to appellant,is self-defeating. It is axiomatic that if a person who owns certain motor vehicle registered in his name and uses them for transportation of its own employees for business purposes, the whole transaction would reduce into self-service and self-service can never qualify as service. When transaction does not qualify as service itself, question of taking Cenvat Credit does not arise at all.
Further, the interpretation adopted by the Revenue imposes a condition that the motor vehicles used for provision of such service must qualify as ‘capital goods’ in the hands of the service recipient, is nothing but to put the service recipient to an impossible task. Considering the definition of ‘capital goods’ as provided under CCR, any motor vehicle can qualify as ‘capital goods’ It is obvious that a motor vehicle which is already registered in the name of the service provider cannot be simultaneously registered in the name of the service recipient.Once it is determined that the motor vehicle can never be capital goods in the hands of the service recipient, it cannot be assumed that the law (i.e. CCR) would require the service recipient to perform an impossible task or satisfy an impossible condition for enabling him to take the credit of the input services pertaining to renting of motor vehicles. The legal maxim Lex non cogit ad impossibilia – [See Raj Kumar Dey v. Tarapada Dey, (1987) 4SCC 398; Escorts Ltd. v. CIT, (2013) 11SCC 351; V.L.S. Finance Ltd. v. CIT (2007) 136 DLT 55 DEL (DB)] has been accepted by Courts in plethora of cases. Applying the maxim in current case, Hon’ble Tribunal has rightly held that in the context of availability of Cenvat Credit to the recipient of service of renting of motor vehicles, nature of motor vehicle qua capital goods must be examined with reference to the service provider and not the service recipient.
The conclusion arrived at by the Hon’ble Tribunal in the case of M/s Vinyl Marvel Ltd. (supra) can also be supported by the intent of the legislature,to treat motor vehicles as ‘capital goods’ with reference to service provider only, while conferring benefit in the form of abatement under Notification No. 26/2012-ST dated 20.6.2012). As per Entry 9, the benefit of abatement is available to the service provider, providing service of renting of motor vehicle, subject to the condition that such service provider shall not avail Cenvat Credit on ‘capital goods’, including the motor vehicle. Thus, it could be argued that in respect of services in relation to renting of motor vehicle, the said motor vehicle could qualify as ‘capital goods’ only in the hands of the service provider. In view of the above, there is no reason as to why the legislature would think differently while conferring the benefit of Cenvat Credit on ‘input service’.
No doubt, this judgment has come as a relief to the taxpayers, including corporate entities (for instance BPOs, KPOs, etc.) receiving such services by way of renting of motor vehicles for transportation of their employees from their residences to the office premises. Such taxpayers were not availing the Cenvat Credit of Service tax paid on such services owing to the flawed interpretation of provisions of the CCR by Revenue officials.
Impact on industry
The impact would be that the service providers who are providing such service by using motor vehicles,not qualifying as ‘capital goods’ with reference to them, the service recipient of such services would not be eligible to avail credit on receipt of such services.
Generally, service of renting of motor vehicle is provided by service providers by renting out motor vehicles owned and registered in their name. However, there also exists a large chunk of service providers providing same service using motor vehicles taken on rent from other service providers who hold the registration certificate of such vehicles in their respective names. As discussed above, motor vehicles taken on lease or rent and used in the provision of service of renting of motor vehicles, would not qualify as ‘capital goods’ for such service provider, the service recipient of such service provider would not be eligible to take Cenvat Credit of service tax paid.
Asa ripple effect, all the service providers using leased or rented motor vehicles not registered in their own name for providing service of renting of motor vehicles, would get pushed out of market as taking services from such service providers would be more expensive to the extent of Cenvat Credit not available to such service recipient.
As the ambiguity in provision (i.e. exclusion cause (“B”), has already been pointed out by the Hon’ble Tribunal, action from the legislature is required to put the ambiguity at rest. Insertion of words like “in the hands of service provider” or “with respect to service provider” of any other words having similar effect shall put the issue at rest.
The condition of getting motor vehicle registered in the name of service provider in order to treat them as capital goods appears to be an artificial one and serves no purpose as far as Service tax is concerned. If one would read the definition of ‘capital goods’ as a whole, one can easily determine that motor vehicles other than those falling under tariff headings (of the Central Excise Tariff Act) 8702, 8703, 8704, 8711 and their chassis, but including dumpers and tippers and used for provision of output service, shall be treated as ‘capital goods’ without being subject to any other condition.
A comparative reading of Rule 2(a)(A)(viii) against Rule 2(a)(B)(iii) & 2(a)(C)(ii) of CCR would reveal that within the same definition, certain types of motor vehicles are qualified as ‘capital goods’, whereas certain other types of motor vehicles are qualified as ‘capital goods’ subject to the additional condition of their registration in the name of service provider, even though both type of motor vehicles are used for providing output services only. It is true that legislature can always prescribe special conditions for special types of motor vehicles used for providing specific type of output services to classify them as capital goods, however, it is equally true that such distinction must be based on some intelligible differentia (i.e. difference capable of being understood) and the differentia must have a rational nexus with the object sought to be achieved by the law which has created such distinction. In case of ‘capital goods’, in the view of authors, there appears to be no intelligible differentia in treating some motor vehicle as ‘capital goods’ and prescribing additional condition (having them registered in the name of service provider) for other motor vehicles to treat them as ‘capital goods.
As the condition that motor vehicles used in provision of output service of renting of motor vehicle must be registered in name of service provider appears to bean artificial one having no nexus to the objectives of the CCR, the said condition should be withdrawn to bring parity among service providers providing services by way of renting of motor vehicles.
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