In landmark ruling, Madras HC affirms that CENVAT credit under Rule 6(5) of CENVAT Credit Rules, 2004 is allowed unless input services are exclusively used for exempted services, and clarifies that payment of VAT does not preclude liability of service tax on fit-out charges in leased immovable property.
The Madras High Court (Division Bench), in a significant judgment dated October 12, 2026, in the case of Commissioner of GST & Central Excise, Chennai South Commissionerate vs. M/s. Ascendas IT Park (Chennai) Ltd., has clarified the scope of CENVAT credit entitlement and the interplay between VAT and service tax in the context of immovable property leasing and fit-out charges.
The dispute originated from show cause notices issued to Ascendas IT Park for the periods between June 16, 2005, to June 1, 2007, and April 2009 to March 2010, questioning the legality of their claim of CENVAT credit on input services used for providing both taxable and exempt services-specifically Management, Maintenance and Repair (MMR) services and Renting of Immovable Property (RIP) services.
The Department had disallowed the credit on the ground that the credit was availed for exempted services (RIP services were exempt during the relevant period) and contended that Rule 6(5) of the CENVAT Credit Rules, 2004 was inapplicable. The Department also argued that the payment of VAT on fit-out charges should absolve the assessee from liability to pay service tax on the same.
However, the Madras High Court, after hearing contentions and analyzing the provisions, held that Rule 6(5) is a self-contained provision allowing full credit on specified input services unless such services are used exclusively in relation to exempted goods or services. Since Ascendas IT Park rendered both taxable and exempt services and did not use the input services exclusively for exempt services, the condition for disallowing credit did not arise.
The Court also took a critical stance on Board Circular No. 98/1/2008-ST dated January 4, 2008, which denied credit for input services related to renting of immovable property. It observed that the circular erroneously focused on eligibility of input services for immovable property rather than the nexus between input and output services. The Court endorsed the Tribunal's approach to disregard the circular and uphold the credit claim.
On the contentious issue of service tax on fit-out charges, the Court disagreed with the Tribunal's finding that VAT payment on fit-outs exempts the assessee from service tax liability. It emphasized that fit-outs formed an integral part of the leased immovable property and constituted part of the lease consideration. Therefore, mere payment of VAT does not exclude the imposition of service tax. The Court relied on the Supreme Court precedent in Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes, which established that VAT and service tax can be levied concurrently on the same transaction if legal and factual conditions are met.
The Court further noted that the assessee failed to produce any proof of VAT payment on fit-out charges, reinforcing the sustainability of the service tax demand.
This judgment is pivotal in reaffirming the principle that CENVAT credit can be claimed fully under Rule 6(5) unless exclusivity of use for exempt services is demonstrated and clarifies the legal position regarding simultaneous levy of VAT and service tax on transactions involving immovable property and related fit-outs.
Bottom Line:
CENVAT Credit Rules, 2004 Rule 6(5) - Full CENVAT credit on specified input services is allowable unless such services are used exclusively for exempted services - Mere use of part of credit for exempt services does not disentitle assessee where taxable services are also rendered - For fit-out charges forming part of lease of immovable property, mere payment of VAT does not bar levy of service tax.
Statutory provision(s):
CENVAT Credit Rules, 2004 Rule 6(5), Finance Act, 1994 Section 65(105)(zzg), Finance Act, 1994 (Service Tax Act), Board Circular No. 98/1/2008-ST dated 04.01.2008
