Background
Once a booming industry, the current phase through which
the real estate industry is passing through can be at least said be a slow-down
phase if not exactly recession phase.
The lack of clarity in the tax treatment of various
transactions also add to the distress of the industry going through a slow-down
phase. One of such transaction is reversal of service tax credit (availed till inception of project till completion)
on unsold inventory on receipt of completion
certificate by a developer. The department has been sending
Notices to reverse
the Cenvat Credit pertaining
to unsold units at the time of
receipt of completion certificate which was availed in the pre-GST regime.
The controversy arises in the backdrop of intention of
Government to not allow any tax credit in respect of unsold units on which no
tax is payable and the way in which the law has been drafted.
Provision
related to reversal of credit in GST
Before dwelling into this issue,
it is also imperative to note the provisions related
to reversal of GST credit. The provisions under the
CGST Act, 2017 and the CGST Rules, 2017 have made it abundantly clear that the
credit which pertain to non-taxable supplies has to be reversed.
Rules 42 and 43 provides detailed, extensive and
unambiguous rules for reversal of input tax credit and they should be strictly
followed. Further, vide amendments1 in Rule 42 and 43, the
provisions for reversal of ITC pertaining to unsold inventory have been
specifically introduced.
The specific rules under the GST regime has not left
much scope of any arguments regarding non-reversal of credit pertaining to
unsold inventory.
Whether service tax credit is required to be reversed?
Unlike the specific provisions related to real estate
under rule 42 and 43 of the CGST
Rules, 2017, the erstwhile
Cenvat Credit Rules,
2004 had not any specific
provision requiring reversal of credit which pertains to
unsold inventories.
In Authors view, the entitlement to Cenvat credit is determined at the time of receipt
of service and not on the
basis of what transpires subsequently. The developer was lawfully entitled to
take the credit at the time the same was availed. The immediate consequence of
such lawful availment of credit is that the same becomes an indefeasible right
at the hands of the developer.
Hence, the same cannot be denied later
on the ground of subsequent developments (albeit with retrospective effect) in the absence
of a specific provision which authorizes such an action. In support of the
above proposition that Cenvat credit rightly availed is an indefeasible right
in the hands of the assessee, the author places reliance on the following case laws:
A.
CCE, Pune v. Dai-Ichi Karkaria Ltd. 1999 (112)
E.L.T. 353(S.C.)
B.
H.M.T. V. CCE, Panchkula 2008 (232)
ELT 217 (Tri-LB) affirmed by the P&H HC
in CCE, Panchkula v. HMT Ltd 2010 TIOL 316 HC
P&H.
C.
Hindustan Zinc Ltd. V. UOI 2008 (223) ELT 149 (Raj)
D.
CCE & Cus, Cochini v. Premier Tyres Ltd 2008
(223) ELT 149 (Raj)
Further, in M/s
Alembic Ltd 2018-VIL-708-CESTATAT-AHM-ST and M/s Shreno Limited Vs
C.C.E & ST, the
issue involved was whether the appellant was required to reverse proportionate
credit out of the valid input service credits availed by them during the period
till obtaining completion certificate, i.e. availing
during the time when whole of output
service of construction of residential complex
was taxable. The Hon’ble tribunal
held that the appellant
were not required to reverse the proportionate credit for the past period when
at the time of availment of such credit, output
services of the developer were taxable. Relevant
extract of the judgment is as under:
“13. We agree with such plea raised by the Appellant. While the law does not intend to allow any undue
benefit to a service provider in terms of Cenvat Credit of Service Tax paid on
input services used in providing non-taxable output activity, however, as held
by the Hon'ble Apex Court in the case of Dai IchiKarkaria 1999(112) ELT 516(SC)
- 1999-VIL-02-SC-CE, Modvat
/ Cenvat Credit is a vested right. Once
it is legally and validly availed, the same cannot be denied and/or
recovered unless specific provisions exist for the same. The
Appellants have also correctly relied upon the decisions / judgments in the
case of HMT Ltd., TAFE, Ashok Iron & Steel Fabricators (supra) wherein an
identical situation qua "inputs" used in production of dutiable finished
goods was involved,
where on a particular date, the
said Finished goods became exempt and the issue involved
was as regards credits availed
at a time when such Finished goods was otherwise
dutiable.
14. It has been a
consistent judicial view, including that of the Hon'ble Apex Court in such
cases, that credit entitlement is on the date of receipt of inputs when the output
activity was wholly
dutiable. Merely because the
finished goods eventually became exempt later on, the credit availed on inputs
which were contained in semi-finished / finished goods state was held as not deniable. The present case
is squarely covered vide such ratio laid down by higher courts.
…………………………
16. This being the case, a harmonious reading of Rule 3 of the CCR, 04 read with Rule 6 and Rule 11 of
the said Rules will suggest that eligibility / entitlement to credit has
to be examined only at the time of
receipt of input service and once it is found to be availed at a time when output
service is wholly
taxable, and the said credit is availed legitimately, the same cannot be denied and/or recovered
unless specific machinery provisions are made in this regard. As per
above TRU clarification dt.28.2.07, even if one assumed sale of immovable property
after Completion Certificate to be "exempt service" even going by the findings
in the impugned order, even then there is no legal requirement to reverse any credit availed on "input services" in
the past (prior to obtaining Completion Certificate) at all.”
On appeal by the department, the Hon’ble Gujarat High Court
upheld the decision of the tribunal in Principal Commissioner Vs. M/s Alembic Ltd 2019-TIOL-1495-Ahm-ST.
In Prajapati Developers vs CCT 2019-TIOL-806-CESTAT-Hyd, the assesse was issued SCN for reversal of Cenvat credit under rule 6
holding that the input services were used both for provision of taxable
services and also for activities which do not amount to service.
It was held that since there was no provision during the
relevant period for reversal of credit where common inputs or input services
were used for provision of taxable services and also activities which do not
amount to services at all, the assesse is entitled to credit of service tax paid
or duty paid in view of rule 2(l) and rule 3 of the Cenvat Credit Rules, 2004. Accordingly,
as during the relevant period
rule 6(1) did not provided
for reversal of Cenvat credit
in respect of input services
used both in provision of taxable services and for activities which do not amount to service, the judgment was
pronounced in favour of the assesse.
The Hon’ble Gujrat
High Court in the Principal
Commissioner Vs M/s Shreno Ltd 2019-TIOL-
1546HC-Ahm-ST relying on its earlier
decision in Alembic
(supra) held that the question
of law as proposed
by revenue i.e. reversal of Cenvat credit
availed on account
of unsold units in view of provision of rule 6 of the Credit
Rules is no more res-integra. It was held that in view of the ratio of M/s
Alembic the assesse is not required to reverse any credit availed on valid
input services availed during 2010 till obtaining of completion certificate.
The appeal of the revenue was accordingly dismissed.
In authors view, the above presents very good grounds to
argue that once credit was lawfully availed it becomes a vested right and
cannot be made to reverse on account of a subsequent development.
Further in respect of cenvat credit availed and utilised
in pre-GST regime and the transitional unutilised credit being brought forward,
in authors view, there is no requirement of reversal under Section 17(2) of
CGST Act as it deals with the reversal of input tax credit.
The term “input tax credit” has been defined under
section 2(63) as credit of input tax. Input tax in relation to a registered
person, means the central tax, State tax, integrated tax or Union territory tax
charged on any supply of goods or services or both made to him.
Since the cenvat credit and transitional credit
relates to taxes paid under pre-GST regime
such as excise duty service tax etc, which does not satisfy the above definition of input tax, the reversal of same cannot be governed by
Section 17 of the CGST Act.
Illustration
The implications on
reversal of Cenvat credit and ITC can be understood with the help of the
following illustration.
|
S.
No.
|
Description
|
Amount
in crores
|
|
1.
|
Total Cost of construction
of the Project
|
100
|
|
2
|
Service tax cenvat credit
availed in pre
GST regime
|
10
|
|
3
|
ITC (GST) availed from
1.07.2017 to
31.03.2019
|
3
|
|
4
|
Date of OC
|
31.3.20190
|
|
5
|
Are unsold on date of OC
|
33%
|
|
Reversals
|
||
|
6
|
Cenvat Credit to be reversed
|
0 (In Authors View)
|
|
7
|
ITC (GST) to be reversed
on receipt of OC
|
(3) x 33% = 1
|
Conclusion
In the light of the specific provisions related to reversals of unsold inventory, ITC
availed in the GST regime
which pertain to unsold inventory
has to be compulsorily reversed. However, in the absence of specific provisions in respect of
Cenvat credit availed in the pre-GST regime and supporting judgments in favour
of the assessee, the developer has a very good case to defend where the
department seek to enforce them to make reversals.
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