September, 17th 2007

The CENVAT credit scheme, designed principally to avoid the cascading effect of taxes, by
means of granting credits of duties paid on input goods and services for use towards
payments of the output taxes on goods and services, in which such inputs are used, has
been in vogue for more than two decades in respect of manufacturers. Even though service
tax was introduced on certain specified services as early as in 1994, the mechanism of
service tax credits was made available to service providers for the first time in 2002 under
the Service Tax Credit Rules, which were thereafter replaced in the year 2004 by the
CENVAT Credit Rules.
 

 
The argument is all the more incomprehensible given the Central Board of Excise and
Customs (CBEC) clarification in Circular (F.No. B/1/4/2006-TRU) dated April 19, 2006,
which clearly states that where import services are used as input for providing any taxable
output services or goods, the service taxes paid on such services can be taken as input
credits. It is relevant to note that the said circular has not been superseded by the recently
issued master circular and is therefore still in force. It is now settled that beneficial circulars
are binding on the authorities.
 
Given the clear position in law on the point, this recent initiation of litigation is unfortunate.
The point is that the objective of a pure value-added tax becomes negative through such
administrative responses, which indeed they are. A holistic, fair and even-handed
administrative approach to such matters is critical so that assessees are not required to
fight such seemingly frivolous and unproductive matters in the tax courts.