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CENVAT CREDIT RULES, 2004 (Notification NO.23/2004 dated 10.09.2004)

Introduction :- These rules issued in supersession of Cenvat Credit Rules, 2002 and Service Tax Credit Rules, 2002 have brought merger of credit of “Service Tax” with credit of “Central Excise” duty.

RULE 1 : These rules coming to force on 10.09.2004 extend to the whole of India , but the provisions relating to the availment and utilization of credit of Service Tax shall not apply to the State of Jammu and Kashmir .

NOTE:- Excise Law is applicable to Jammu and Kashmir and not Service Tax Law. There is no restriction at all in regard to availment and utilization of CE Credit.

RULE 2 : DEFINITIONS:

2(a) Capital Goods : Capital goods means (A) Following goods namely (i) Hand Tools (Ch.82), Machinery (Ch.84), Electrical and Electronic Equipment (Ch.85), Optical and Photographic equipments (Ch.90), Abrasive Cloth (Ch.68.02) and Grinding Wheel (Ch.6801.10); (ii) Pollution Control equipment; (iii) Components, spares and accessories of the above-mentioned goods i.e., (i) & (ii); (iv) Moulds and Dies; (v) Refractories and Refractory materials; (vi) Tubes and pipes and fittings thereof; (vii) Storage Tank (viii) Motor Vehicles (Other than those falling under the following Tariff headings)

8702 (10 or more persons)

8703(Less than 10 persons)

8704 (Transport of goods)

8711(Motor cycle)

- but including dumpers and tippers.

End use :- CG Shall be used (1) inside the factory of the manufacturer of Final Product (FP) (otherwise than as equipment/appliance in office) or (1-A) Outside the factory for generation of electricity for captive use within the factory (1-4-2011), (2) for providing Out Put Service (OPS).

B. Motor vehicles

•  designed for transportation of goods

•  including their chasis

•  registered in the name of the Service Provider

•  when used for

(i) providing an output services of renting of such motor vehicle or

(ii) transportation of inputs and capital goods used fro providing an output service

(iii) providing an out put service of courier agency

(C) Motor Vehicles

- designed for carry passengers

- including their chasis

- registered in the name of the Service Provider

- when used for providing output service of

(i) transportation of passengers or

(ii) renting of such motor vehicle or

(iii) imparting motor driving skills.

(D) Components, spares and accessories of motor vehicles which are capital goods for the assessee.

2(d) : Exempted Goods : means goods exempt from the whole of Excide Duty (ED) (u/s 5-A) and includes NIL duty goods.

Goods falling under Notifn. 1/2011-CE dated 1-3-2011. [1% duty without Cenvat Credit] are also treated as exempted goods even though they suffer duty @ 2% [1-4-2012].

2(e) Exempted services : (1) taxable service which is exempt from the whole of the service tax leviable thereon. (2) Service, on which no Service Tax is leviable under S.66-B of Finance Act, 1994. (3) taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken – but shall not include a service which is exported in terms of Service Tax Rule 6A.

Explanation:- “Exempted Services” includes “Trading” also (1-3-2011)

2(h) Final Products (FP) means excisable goods manufactured or produced from inputs (IP) or using IPS (input service) [FP may be dutiable or non-dutiable, but not non-excisable)

2(i) First Stage Dealer means dealer who purchase goods directly from the manufacturer/depot/consignment agent/any other place of sale under cover of “Excise” invoice or dealer who purchases goods directly from an importer/depot/consignment agent under cover of an invoice.

2(k) Inputs (IP) means {1-4-2011} :

(i) all goods used in the factory by the manufacturer Credit is admissible only if the IPs are used inside the factory

(ii)   - all goods including accessories cleared along with the FP, the value of which is included in the value of FP.

- goods used for free warranty for FP

Credit is admissible on

• bought out items including accessories (supplied with FP and value
included in FP) and also goods issued as warranty period free supply.

(iii) all goods used for generation of electricity or steam for captive use.

•  power generated may be electricity or steam

•  Place of generation has not been mentioned. Generation of power may take place outside the factory also.

•  But the power generated should be used in the factory

•  Purpose of use has not been mentioned. Use may be for production or in lighting the factory also.

•  power generated should not go out of the factory on any count.

•  Credit is admissible only if all the conditions are fully satisfied.

(iv) all goods used for providing OPS

•  place of use has not been mentioned. Therefore use of the goods may be in the premises of Service Provider/Service Receiver or any where else. But the purpose should be for providing OPS

•  This provision is meant for Service Provider

Exclusion from Inputs (IP)

(A)  LDO (Light Diesel Oil) HSD (High Speed Diesel Oil) and Petrol (Motor Spirit)

•  The indiscriminate use of these three previous items is guarded against by the denial of credit through this exclusion from definition.

•  Govt. has the right to deny or reduce credit.

(B) Any goods used for

•  construction or execution of works contract of a building or a civil structure or a part thereof

•  laying of foundation or making structures for support of capital goods

•  Goods used for these two civil works are not eligible for credit

(C) Capital goods except when used as parts or components in the manufacture of FP

•  Capital goods are not per se inputs (Credit is available as CG as not as IP

•  That means, 50% credit only is available in the year of receipt

•  However, capital goods that go into the FP as components qualify as IP. Hence eligible for 100% credit in the year of receipt itself.

(D) Motor vehicle

•  Motor vehicle do not have any relationship with the manufacture of FP. Obviously they do not qualify as IP

•  Motor vehicles constitute capital goods for only seven services mentioned under Rules 2(a)(B) above.

(E) Any goods such as food items

•  goods used in a guest house, residential colony, club or a recreation facility and clinical establishment.

•  when such goods are primarily used for personal use or

•  consumption of an employee

•  Items meant for personal use are not eligible for Cenvat credit

•  Same position in IPs also.

(F) Any goods which have no relationship whatsoever with the manufacture of a final product

Inputs should have some nexus with manufacture for credit eligibility. Office located inside the factory premises is part of factory. Furniture, computers, computer peripherals etc., used in the office may be considered to have connection with manufacture and hence eligible for credit.

Explanation : Warranty is assurance for goods. Guarantee is assurance for persons.

What is “free warranty” ?

  Price of product includes the value of warranty

•  Warranty is not charged separately

•  Goods meant for free warranty are eligible for credit

•  When warranty charged separately cenvat credit is not available.

2(l): Input Service (IPS) means (i) in the case of Service provider , IPS means, any service used by a provider of taxable service for providing an OPS (Usage may be anywhere)

(ii) in the case of manufacturer , IPS means, any service used by a manufacturer •  whether directly or indirectly •  in or in relation to manufacture of FP (Nexus to manufacture is necessary •  and clearance of FP up to the place of removal (Factory gate, Warehouse or Depot)

Inclusion

•  Service used in relation to

-  modernization, renovation or repairs of a factory, premises of provider of OPS, or an office relating to such factory or premises.

- advertisement or sales promotion, market research

- storage upto place of removal (Storage Tank may be outside the factory also)

-  Procurement of IP

-accounting, auditing, financing, recruitment and quality control

-  coaching and training, computer networking, credit rating, share registry, business exhibition, legal services.

- inward transportation of IP or CG (Till the goods enter the factory)

- Outwards transportation upto place of removal (Factory/Warehouse/Depot)

Exclusion

(A) Service portion in the execution of a works contract and construction services including service listed U/s 66-E)b) in so far as they are used for –

•  Construction or execution or works contract of a building or a civil structure or a part thereof; or

•  Laying of foundation or making of structures for support of capital goods except for the provision of one or more of the specified services; or

(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; or

BA. Service of general insurance business, servicing, repair and maintenance, in so far as they relate to a motor vehicle which is not a capital goods except when used by –

(a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by him; or

(b) an insurance company in respect of a motor vehicle insured or reinsured by such person.

(C) Services provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits.

•  extended to employees on vacation

•  such as Leave or Home Travel Concession

•  when they are used primarily

•  for personal use or Consumption of any employee.

2 (m): IPS distributor means :

•  an office of the manufacturer or produce of FP, or provider of ` OPS.

•  which received invoices under Service Tax Rule 4-A towards purchase of IPS and

•  issues invoices/bill/challan for the purpose of distributing the credit of Service Tax paid on the said services to such manufacturer, producer ;or provider of OPS.

2(n): Job Work means : processing or working upon of raw materials or semi- finished goods supplied to the job worker,

•  so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or

•  any process which is essential for the aforesaid process

•  any the expression “Job Worker” shall be construed accordingly.

2(p): Output Service (OPS): Any service provided by a Service provider located in a taxable territory but shall not include a service (i) specified in S-66D (Negative list) (ii) Where the whole of Service tax is liable to be paid by the Service Recipient.

2(q): Person liable for paying Service Tax: Service Provider rarely service receiver.

2(r): Provider of taxable service : This persons includes a person liable for paying Service Tax.

2(s): Second Stage Dealer : means a dealer who purchases the goods from the First Stage Dealer defined in Rule 2 (ij)

RULE 3: CENVAT CREDIT :

3(1): A manufacturer/producer of FP or a provider of taxable service shall be allowed to take credit (called Cenvat Credit) of ?

(1) Cenvat (But no credit on 2% duty paid on 130 goods covered by Notn. No. 1/1-3-2011)

(2) NCCD

(3) Edn. Cess

(4) CVD i.e., ACD = ED (but limited to 85% for “ship breaking”)

(5) Spl. CVD (ACD = VAT) (not available to Service Provider)

(6) Service Tax U/s 66 and 66-A of Finance Act

(7) Edn. Cess on Service Tax

•  IP or CG received in the factory of manufacturer of FP or a provider of OPS, and

•  IPS received by the manufacturer of FP or by the provider of OPS

Similar credit may be availed in respect of OP or IPS used in manufacture of IMP by a Job Worker (availing the benefit of exemption under Notfn. 214/86 dated 25-.3.1986) and received by the manufacturer for use in or in relation to manufacture of FP (Because of JW Cenvat chain breaks. Yet credit is admissible)

Proviso : CG can be imported and kept in EOU without payment of Customs Duty for a maxium period of five years. EOU is treated as customs bonded warehouse. Thereafter the EOU is debonded and the unit enters into DTA. Accordingly as per Notfn. NO. 22/2003-CE dt. 31.3.2003, Excise Duty is payable on the debonded CGs on their depreciated value at the rate prevalent on the date of debonding. The Excise Duty thus paid can be availed as Cenvat Credit.

3(2): Cenvat credit on the IP in stock or IP in process or IP contained in FP in stock may be taken on the date on which FP ceases to be exempted goods or FP becomes excisable.

This is a case of taking credit in lump sum (manufacturer)

3(3): Cenvat Credit on the IP received on or after 10-09.2004 and lying in stock on the date on which OPS ceases to be exempted service may also be taken and used for providing such service.

This is a case of taking credit in lump sum (Service Provider)

3(4): Cenvat Credit may be utilized for the payment of ?

(a) ED on FP

(b) Amount equal to Cenvat Credit when IP is removed as such or after partial processing.

(c) Amount equal to Cenvat Credit when CG is removed as such

(d) Amount under CE Rule 16(2) (FP received back, repaired and removed)

(e)  Service Tax on OPS.

While paying ED or Service Tax Cenvat Credit shall be utilized to the extent it is available on the last day of the month/quarter (to which the ED relates) only.

Illustration 1:- Credit from 1 st to 5 th November is not available for the duty of October payable on 5 th of November.

Illustration 2:- Goods covered by Notfn. No.1/2011-CE d. 1-3-2011 (130 goods paying duty at the nominal rate of 1% without availing Cenvat Credit) : Credit is not available for paying duty on these goods.

Certain goods manufactured in NE States, Sikkim, Kutch , J & K are exempt from payment of cash component of ED. They enjoy exemption in peculiar fashion by getting back the duty paid in cash as refund. The buyers of these inputs can utilize the credit for paying duty under these exemption notifications only. In other words credit under “NE states, etc., exemption category” can be utilized for debit under that category only. The credit is not available for utilization elsewhere.

Credit pertaining to Special CVD (VAT equivalent @ 4%) levied on imported goods under Section 3(5) of Customs Tariff Act shall not be utilized for paying Service Tax on Output Service.

Credit pertaining to NCCD (National Calamity Contingent Duty) also shall be utilized for paying NCCD on mobile phones.

Credit pertaining to AQED (Pan masala) alone shall be utilized for paying the said AED

Credit is not available for paying ‘Clean Energy Cess'

NOTE: This new cess is levied on coal, lignite, and peat w.e.f. 1-7-2010. It is like

‘Excise Duty'. Tariff Rate is Rs.50 per Tonne and is payable on the 5 th of the second month after the month of removal.

Cenvat Credit is not available for paying Clean Energy Cess. Therefore it has to be paid through PLA only.

3(5): When the manufacturer or provider of OPS removes IP or CG as such, then he shall pay an amount equal to the credit taken and the removal shall be under cover of invoice referred to in Credit Rule 9.

[IP/CG(Out) Debit=IP/CG(in) Credit [Manufacturer/Provider of OPS]]

The provider of OPS need not make such a payment if he removes IP or CG for providing OPS.

Inputs removed outside the factory for providing free warranty for final products. [No need to pay an amount equal to credit taken. In other words, no credit reversal]

Rule 3(5A) : Removal of Capital Goods after use

•  if the CG on which credit has been taken

•  is removed after use – as CG/Scrap/Waste

•  do credit reversal

for the credit originally availed reduced by the percentage points indicated below or for the duty payable on the transaction value whichever is more.

Percentage Points:

•  Computers and Computer Peripheral (w.e.f. 27-2-2010)

I year 10% Per Quarter or Part thereof

II year 8% Per Quarter or Part thereof

III year 5% Per Quarter or Part thereof

IV year 1% Per Quarter or part thereof

V year 1% Per Quarter or Part thereof

- Other Capital Goods(already exists) All years 2.5% per Quarter or part thereof.

Calculation of Quarters/Year :

•  Ignore d/o purchase, d/o erection etc

•  Reckon from the first d/o availment of credit (When not more than 50% in the year of receipt is availed).

•  The rule refers to year as “year” only and not as “financial year” or “Calendar Year”.

•  Therefore count exactly one year from the actual d/o taking first time credit.

•  Ignore the d/o taking of subsequent instalments of credit.

3(5B): If the IP/CG on which credit has been availed but written off fully or partly(or provision made therefor) before being put to use, then the credit availed initially shall be reversed. On the IP/CG being put to use, the reversed credit shall be restored. This provision, hitherto applicable to manufacturers has been extended to Service Providers also.

3(5C): When duty on the FP destroyed/lost is remitted under CE Rule 21, the Cenvat credit on the IP used in the manufacture of FP shall be reversed. 

3(6): Even though the amount paid under Rule 3(5) and 3(5A) is ED equivalent and not ED proper, yet the receiver can take credit.

3(7)(a) : How to calculate Cenvat Credit on goods procured from EOU? EOU to DTA= Pay ED equal to CD

CD=BCD(10%) + CVD(10%) + Spl CVD(4%) EOU to DTA -> BCD enjoys 50% exemption Therefore Effective BCD =5% only

Calculate CVD and Spl CVD taking the BCD to be 5%. Add Education Cess (2%+1%). The end-use in DTA can avail credit for the amount so calculated.

3(7)(b) : Cenvat Credit may be utilised for the payment of Excise Duty and Service Tax in the manner indicated in the table below:-

 

CREDIT

DEBIT

 

 

 

1.

Cenvat

Any ED/S.Tax/E.Cess

 

 

 

2.

Service Tax

Any ED/Service Tax/E.Cess

 

 

 

3.

E.Cess on ED

E.Cess on ED/S.Tax

 

 

 

4.

E.Cess on Service Tax

E.Cess on ED/S.Tax

 

 

 

5.

SAHE.Cess on ED

SAH E.Cess on ED/S.Tax

 

 

 

6.

SAHE.Cess on S.Tax

SAHE.Cess on ED/S.Tax

 

 

 

7.

Other E.Ds

NCCD, AED(Spl)

 

(e.g) NCCD, AED(spl)

 

•  CVD contents on imported Same as above. goods

Note: 1. SED and AED(GSI) exempt w.e.f. 1.3.2006[Cr/Dr does not arise]

2. Credit not available for paying Clean Energy Cess(Coal, lignite & Peat)

3(7)(c): Cenvat Credit in respect of ACD equal to ED u/s 3 of CTA on marble slabs and tiles shall be limited to Rs.30/Square metre.

Explanation :- An exemption notification says:- “Take exemption. But forgo CENVAT credit on IP, CG or IPS”. Can an assessee say :- “I shall take CENVT credit any pay ED or Service Tax. I do not want this conditional exemption”!

Yes! He can say so … Why? Availment of exemption is left to his choice. C.E.Rules, Service Tax Rules and exemption notifications are primary and Cenvat Credit Rules take a back seat.

Cenvat benefit is available to goods liable to duty on advalorem basis as well as specific rate basis. No specific denial for the latter.

Rule 4 : Conditions For Availing Cenvat Credit :

4(1) : When can the credit of I.P be taken ? CENVAT credit for I.P can be taken immediately on receipt of I.P in the factory of the manufacturer or in the premises of the provider of OPS. The goods should physically enter the said factory or premises. [ The word ‘immediately' signifies availment before utilization.]

Proviso 1 : The principal manufacturer can take credit on receipt of inputs in his premises though they are sent to a job worker for making jewellery.

Proviso 2 : A provider of OPS can avail credit on IPS delivered to him, subject to maintenance of documentary evidence of delivery and location of the IPS.

4(2)(a) : What about Capital Goods ? Availment of CENVAT credit for C.G is as follows :- The C.G should have been actually received in the factory of manufacturer or premises of provider of OPS. The C.G might have been received at any point of time in a financial year. The receipt need not be on April 1 st . It may be on March 31 st too. In other words credit is permissible for the year of receipt irrespective of the date of receipt. But credit is not 100%. Not more than 50% of the duty paid on the Capital goods in the same financial year can be taken as CENVAT credit. In the case of capital goods meant for generation of electricity for captive use within the factory, the capital goods need not come inside the factory. They may be kept outside the factory. Eventhough they are kept outside the factory, yet credit is available to the manufacturer.

4(2)(a) Proviso 1: 100% credit can, however, be taken on capital goods received in a financial year if they are cleared as such in the same financial year. What is the significance of this proviso? Maximum credit for CG(in)=50% (at the time of receipt). Debit for CG(out)=50% (Debit=Credit) (Clearance in the year of receipt). The buyer cannot take 100% credit for the C.G. This is the reason for allowing 100% credit in respect of C.G received and cleared in the same financial year.

4(2)(a) Proviso 2: 100% Credit of Spl.CVD i.e. ACD(=ST, VAT, etc.,) u/s 3(5) of CTA may be taken immediately on receipt of CG in the factory of the manufacturer. [i.e. 50% ceiling does not apply]. Note : This credit is not available to service provider.

4(2)(a) Proviso 3 : SSI(falling under Notification No.8/2003 or not) are eligible for 100% credit in the year of receipt of capital goods.

4(2)(b) : In the year of receipt, CENVAT credit has been taken upto 50% only. What about the balance? Credit for the balance can be taken in any subsequent year. It is not compulsory that the balance should be availed in the next year only. It can be availed at any future time. At the time of availment of credit in future years, the capital goods must be in the possession of the manufacturer. Possession only and NOT use. The condition of possession is, however, not applicable to components, spares and accessories, refractories and refractory materials, moulds & dies, abrasive cloth and grinding wheel.

4(3) : The manufacturer or provider of OPS might not have bought the CG outright. He might have acquired them on lease, hire purchase or loan agreement from a financing company. Even then he can avail CENVAT credit. Remember, Whatever be the mode of purchase, the fact remains that the goods are undoubtedly duty paid and hence this provision.

4(4) : No CENVAT credit on the ED component of the value of C.G., if the manufacturer claims depreciation u/s 32 of the Income Tax Act on that part of the value which represents E.D.

4(5)(a) : Sometimes the manufacturer or the provider of OPS sends the IP or CG as such, or after partial processing to a job worker for further processing, testing, repair reconditioning or for manufacture of IMP necessary for manufacture of FP or for any other purpose. He is able to establish with documentary evidence (Challan movement procedure) that the goods have been received back within 180 days. Then he can avail CENVAT credit on the IP and CG received by him. In practice he would have taken credit on the very date of receipt of IP or CG normally when IP or CG goes out he has to debit CENVAT A/c. This rule saves him from such debiting. If the goods are not returned within 180 days the manufacturer shall pay an amount equivalent to the CENVAT Credit attributable to the goods by debiting CENVAT credit or otherwise.

4(5)(b) : Jigs, Fixtures, Moulds and Dies : CENVAT credit has been taken by the manufacturer when these were received in his factory. The manufacturer send them to another manufacturer or Job Worker. Normally he has to debit CENVAT A/c. This rules saves him from such debiting. But there are conditions. What are they? 1. The job Worker or manufacturer shall use them for the production of goods 2. The production shall be exclusively on behalf of the manufacture and 3. The goods shall be according to the specification of the manufacturer. Please note that the condition of return within 180 days prescribed for IP and CG in Rule 4(5)(a) has not been prescribed here.

4(6) : Normally IP goes to Job worker, gets processed and finally comes back as FP to the manufacturer. Thereafter F.P is cleared by the manufacturer on payment of duty. This rule enables clearances to DTA directly from the premises of Job Worker. Duty is obviously paid by the job worker. But there are certain conditions they are 1) There should be a special permission for enabling such clearance by the job worker 2) The permitting authority is the jurisdictional AC/DEC of the manufacturer 3) He shall

pass an order in this regard. 4) The order shall be valid for a financial year 5) He may impose conditions in the interest of revenue and 6) The conditions may include the manner of payment of duty.

4(7) : Cenvat Credit in respect of IPS may be availed on receipt of bill [upto 31-3-2011, payment of bill was a condition for the availment of Cenvat Credit] In reverse charge cases, credit can be availed after paying the bill only

If the service receiver, who has availed credit on receipt of bill, has not paid the bill within three months from the date of bill, then he shall reverse the credit availed. Later, when the bill is paid, the credit reversed may be availed again.

If the manufacturer/service provider refunds the payment received from the service receiver (partly or wholly), then credit availed shall be reversed corresponding to the amount got refunded.

In respect of pre 1-4-2011 bills credit can be availed after payment only.

Explanation I,II & III : Credit reversal may be done by debit to Cenvat A/c on the due dates for paying duty as per CE Rule 8 (e.g. 5 th of next month). If not done, recovery action shall be taken as per Cenvat Credit Rule 14.

Rule 5 : Refund of CENVAT Credit :

(1) FP/IMP/OPS exported without paying ED/Service Tax. Refund is allowed as per the following formula

Refund amount =( (Export Turnover of goods + Export Turnover of Service)/Total Turn Over )) X net cenvat credit.

(A) Refund amount = Maximum Permissible refund.

(B) “Net Cenvat Credit” = Total Credit availed (IP & IPS) (-) CCR 3(5)(c) reversal during the relevant period.

(C) Export Turnover of goods = Value of FP and IMP exported without paying duty during the relevant period.

(D) Export Turnover of Services = Payments received during the relevant period for export services (Plus) Advance payments received for completed export services (minus) Advance payments received for future export services.

(E) Total Turnover = Sum Total of the Value of

(a) all excisable goods cleared during the relevant period including exempted goods, dutiable goods and excisable goods exported

(b) Export Turnover of services determined under clause (D) above and the value of all other services, during the relevant period, and

(c) All inputs removed against proper invoice under CCR 3(5) during the relevant period.

(2) This new rule for refund for the export of goods/services applies for exports made on or after 1.4.2012.

Proviso 1 : Refund for Pre 1.4.2012 period may be claimed within one year from 1.4.2012.

Proviso 2 : No refund if drawback or export rate has been claimed.

Refund is available for IP and IPs only; not for CG Refund is available to manufacturer/Service Provider

Refund is available for actual exports only (other than exports to Nepal and Bhutan ) Refund is not available to removals to EOU/EHTP/STP

Refund is not available to removals to SEZ[Refund for Physical export Only]

Rule 5-A : Refund of Cenvat Credit to Units in Specified areas : Units located in the State of Assam, Tripura, Meghalaya, Mizoram, Nagaland, Arunachal Pradesh or Sikkim are eligible for the refund of duty paid through PLA.

Rule 5-B : Refund of Cenvat Credit of Service Provider providing services taxed on revrse charge basis.

Credit availed on inputs and input services

•  by a Service Provider

•  but remaining unutilized

•  can be refunded to him.

Rule 6 : Obligation of a manufacturer or producer of Final Products and a provider of Taxable services

Exempted Categories

6(1) : No cenvat credit on IP used in or in relation to (1) manufacture of exempted goods or (2) for provision of exempted services. IPS used in or in relation to (1) manufacture of exempted goods and their clearance upto the place of removal or (2) for provision of exempted services.

6(2): When the IP/IPS is used for taxable as well as exempted FP/OPS, Separate accounts are to be maintained for

INPUTS

(a) The receipt, consumption and inventory of IP used

(i) In or in relation to the manufacture of exempted goods

(ii) In or in relation to the manufacture of dutiable FP excluding exempted goods

(iii) For the provision of exempted service

(iv) For the provision of OPS excluding exempted services, and

Input Services

(b) The receipt and use of IPS

(i) In or in relation to the manufacture of exempted goods and their clearance upto the place of removal

(ii) In or in relation to manufacture of dutiable FPs, excluding exempted goods and their clearance upto the place of removal

(iii) For the provision of exempted services

(iv) For the provision of OPS, excluding exempted services

IPs falling under CCR 6(2)(a)(ii)&(iv) Credit is available

IPS falling under CCR 6(2)(b)(ii)&(iv) Credit is available

IPs falling under CCR 6(2)(a)(i)&(iii) Credit is not available

IPS falling under CCR 6(2)(b)(i)&(iii) Credit is not available

6(3) : IP & IPS are used to provide taxable as well as exempted FP and OPS; but separate accounts are not maintained. Then the assessee have three options. He can choose any of them.

(i) Option I : Pay an amount equal to 6% of value of exempted goods and exempted service

(ii) Option II : Actual based reversal. Pay an amount as determined under CCR 6(3-A)

Do credit reversal (provisionally) on a monthly basis as per the ratio of previous year i.e. on how much percentage of exempted categories the IP/IPS was used last year After the end of the current year, find out the ratio of the current year Do necessary adjustments (plus or minus) between the provisional amount reversed and the final amount to be reversed within three months.

(iii) Option III

Inputs : Keep Separate inventories. Take credit in respect of taxable categories only Do not take credit in respect of exempted categories

Input Services : Keep Common inventory. Take credit irrespective of enduse. Do credit reversal as per CCR 6(3A).

Some more concessions under Option I:

CCR 6(3) Proviso 1: Inputs : Exempted goods includes 1% goods covered by Notfn 1/2011 dated 1.3.2011 also. The amount of reversal to be made @6% of the exempted categories, shall be abated by ED paid 2% ibid.

CCR 6(3) Proviso 2 : Input Services : Exempted services includes services enjoying exemption in the form of abatement in the A.V, subject to non-availment of cenvat credit. In such cases, 6% reversal amount shall be calculated on the exempted value only and not on the full value.

Restrictions in Option

6(3) Explanation 1 : The options offered by CCR 6(3) shall be exercised for all exempted goods/services and not limited to any exempted goods/services. No withdrawal of the option till the end of the financial year. Change is possible next year only if desired.

6(3) Explanation 2 : (1) IPs used exclusively for exempted goods/services. (2) IPS used exclusively – for the manufacture of exempted goods, for their clearance upto the place of removal(Factory, Depot, Warehouse) and for exempted services.

6(3) Explanation 3 : No credit on goods that are not IPs. No credit on services that are not IPS.

CCR 6(3-A) : Calculation of reversal amount under CCR 6(3)(ii) – Option II 6(3A)(a) : Intimation : Intimate the option to the Superintendent of Central Excise with particulars of date of option, exempted FP/OPS, outstanding Credit of IP/IPS on the date of option , etc.

6(3-A)(b) : Provisional reversal : Do reversal on monthly basis. Due date is as per CE Rule 8. Basis for the formula is the ration between exempted FP/OPS and the total FP/OPS of the previous financial year.

(i) Inputs(Manufacturer) : Reverse the credit of IP attributable to exempted goods

(ii) Inputs(Service Provider) : Reverse the credit of IP attributable to exempted services.

(iii) Input Service (Manufacturer and Service Provider) : Reverse credit of IPS attributable to – exempted goods, clearance of exempted goods upto the place of removal an exempted services.

6(3A)(c) : Final reversal amount : Based on the figures of the current financial year, the total amount to be reversed for the last financial year shall be determined for the three categories viz. (i) Inputs (Manufacturer) (ii) Inputs (Service Provider) (iii) Input Service (Manufacturer and Service Provider)

6(3A)(d) : Final reversal amount is more than provisional reversal amount : Pay the differential amount on or before 30 th June of succeeding financial year.

6(3A)(e) : Payment of interest : If the differential amount is not paid by 30 th June. Interest is payable @ 24% P.a from 30 th June upto the actual date of payment.

6(3A)(f) : Final amount < Provisional amount: If the final reversal amount is less than the provisional reversal amount, the assessee has paid more. He is, therefore, entitled to refund of excess amount paid. The assessee can take credit of the excess amount paid.

6(3A)(g) : Intimation : Send intimation of the adjustment of difference between the final reversal amount an the provisional reversal amount within fifteen days of adjustment.

6(3A)(h) : Provisional amount not determinable : No taxable outputs last year. Only exempted outputs last year. Therefore, no ratio for last year. Accordingly, provisional reversal amount not determinable. What to do ? No need to do provisional reversal on a monthly basis. Calculate the current year ratio. Do one time final reversal(annual basis) by 30 th June.

6(3A)(i) : Payment of interest : If the one time(annual) final reversal is not made by 30 th June interest accrues. Interest is payable @24% p.a from 30 th June till date of credit reversal.

6(3B) : Reversal rate for Banks

(zm) Banking and other Financial Services : Pay for every month an amount equal to fifty per cent of the cenvat credit availed on IP and IPS in that month. In other words credit reversal is for 50% of credit (IP&IPS) availed in a month.

6(3D) : Deemed non-availment of Cenvat Credit

There are notifications u/s 5-A wherein exemption from payments of Excise Duty has been granted subject to non-availment of Cenvat Credit on IP and IPs. Payment of an amount under CCR 6(3) shall be deemed to be credit not availed for the purpose of getting exemption. In other words exemption is available.

Explanation I : Value for credit reversal. For purposes of Credit reversal under CCR 6(3) and 6(3-A), value shall be as follows :

•  Value of outputs : (in general) – As per CE Law and Service Tax Law

•  Value of Outputs : When Composite rates are availed under Service Tax Rules 6(7), 6(7-B), or 6(7-C) or Works Contract (Composition Scheme)

•  Value Shall be the value on which TR u/s 66, read with any exemption notification relating to such rate, when applied for Calculation of Service Tax results in the same amount of tax as calculated under the option availed.

Illustration :

(zzzza) Works Contract (4% concessional rate) AV= Rs 10,000

Tax @ the concessional rate of 4%=10,000X(4/100)=Rs 400

If tax is Rs 400 and TR is 10%, what will be the value for purpose of credit reversal under CCR 6(3) and 6(3-A) ?

Value=400X100/10=Rs 4,000/-

(c) “Trading” is treated as “exempted service”. What is the value for purpose of credit reversal under CCR 6(3) and 6(3-A)?

Value = Sellling Price – Cost of goods sold Or

10% of the cost of goods sold whichever is more

Cost of goods shall be determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase.

Explanation II : Due date for credit reversal (Monthly)

Due date for credit reversal under CCR 6(3)(3-A),(3-B),(3-C) is the due under CE Rule 8 (say 5 th of next month).

Explanation III : Recovery action

Failure to do credit reversal ibid will call for recovery action under CCR 14.

Explanation IV : Due date for credit reversal (Quarterly)

SSI (manufacturer) and Individual & Firm(Service Provider) à Quarterly credit reversal (say 5 th of the month following the quarater)

6(4) : Credit on Capital Goods

Non cenvat credit is available on capital goods used exclusively in the manufacture of exempted goods or in providing exempted services. This denial does not apply to goods exempt from duty by notification on the basis of annual clearance value/quantity. In other words SSI does not suffer this handicap. That means SSIs can take credit on capital goods eventhough they do not pay duty upto Rs 150 lakhs. But the credit availed can be utilized after crossing the exemption of Rs 150 lakhs.

6(5) : Special treatment for seventeen input services – Removed

For seventeen input services, full credit was allowed though used for mixed services. This concession has been removed w.e.f 1-4-2011 by deleting CCR 6(5).

6(6) Zero duty clearances with credit eligibility

No duty on the following clearances; yet no denial of credit. That means eventhough FPs are removed without paying duty yet cenvat credit can be availed on IP, CG & IPS.

•  SEZ Clearances

•  EOU Clearances

•  EHTP/STP Clearances

•  UN clearances

•  Embassy Clearances

•  Export Clearances

•  Gold/Silver arising in the manufacture. Copper/Zinc by smelting

•  Goods exempted from Customs duty when supplied

•  against international competitive bidding

•  to a power project from which power supply has been tied up through tariff based competition bidding

•  to a power project awarded to a developer through tariff based competitive bidding.

6(6-A) : Zero tax service to SEZ, Yet Cenvat Credit is available [1-4-2011]

No Service tax on services rendered to a unit in SEZ or to a developer of SEZ. Though the tax is zero, yet Cenvat Credit is available to the IP, CG an IPS.

Rule 7 : Manner of Distribution of Credit By IPS Distributor :

The IPS distributor may distribute Cenvat Credit of Service Tax paid on IPS to its manufacturing/service providing Units.

Conditions: (a) Cenvat Credit passed on should not be more than the Service Tax paid

•  No credit to a unit wholly engaged in exempted goods/services

•  Credit wholly attributable to a unit shall be distributed to that unit only.

•  Credit attributable to multiple units on the basis of the turnover during the relevant period shall be distributed pro-rata on the basis of the total turnover of all the units for the same period.

Rule 7A : Distribution of Credit on Inputs by the office or any other premises of

output service provider : A provider of OPS shall be allowed to take credit of inputs/capital goods received on the basis of invoice/bill/challan issued by an office/ premises of the said provider of OPS. This is similar to Fir/Second Stage Dealers and the procedure prescribed for them in Central Excise law shall apply mutatis mutandis.

Rule 8 : Storage of Inputs Outside the factory of the manufacturer : We have already learnt that credit on IP can be taken, only if the IP is brought into the factory. Can IP be stored outside the factory and still credit taken? The answer is in this rule. In exceptional circumstances, having regard to the nature of goods and shortage of storage space inside the factory, the AC/DC can permit the manufacturer to store the IP (on which CENVAT credit has been taken) outside the factory. However, if the IP so stored outside the factory is not used in manufacture, then the manufacturer shall pay an amount equal to the credit taken on the IP. The concession is for IP only and not for CG.

Rule 9 : Documents and Accounts:

9(1) : Cenvat credit shall be taken by the manufacturer or the provider of OPS or IPS distributor on the basis of any of the following documents :-

•  Imported goods :-

•  Bill of Entry

•  Invoice by the importer/from his depot, consignment agent, etc

•  Invoices by I stage and II Stage dealers

•  Supplementary invoice for duty short levied (But the short levy shall not be attributable to fraud, suppression, etc.)

•  Certificate of Customs appraiser in the case of imports by post.

•  Indigenous goods :-

•  Invoice from factory, depot, consignment agent, etc. (products made by the manufacturer)

•  Invoice for IP or CG removed as such(Products not made by manufacturer)

•  Invoice by I stage and II Stage dealers

•  Supplementary invoice for duty short levied [Short levy not attributable to fraud, suppression, etc.]

•  Services

•  GAR-7 Challans evidencing payment of Service Tax [e.g Insurance auxiliary service, sponsorship service to corporate, service received from outside India, Goods Transport service to factory]

•  Invoice, Bill or Challans of provider of IPS.

•  Invoice, Bill or Challans of IPS Distributor

•  Supplementary invoice for Service Tax short paid if the short payment is not attributable to fraud, suppression, etc.

•  GAR 7 Challan of Service Recipient[Reverse charge case]

9(1) Proviso : Credit of Spl.CVD [@4% towards level paying for VAT] shall not be allowed, if the invoice bears an indication about its non-avilability

9(2) : Deficiencies in the above-mentioned documents may be condoned by the AC/DC, if they reflect the required information. The AC/C shall record the reasons for not denying credit after satisfying himself about the correctness of documents.

9(4) : Credit on purchase from I/II Stage dealers shall be taken under the following conditions:- (i) Supplying dealer maintains proper Cenvat A/c, (ii) Supply is from duty paid stock (Duty paid by his suppliers) and (iii) Duty has been passed on by the supplier on a pro rata basis.

9(5) : The manufacturer of FP or provider of OPS shall keep proper Cenvat A/c for the receipt, disposal, consumption, inventory etc., of IP/CG procured. The burden of proof for the admissibility of Cenvat credit lies with the manufacturer/provider of OPS.

9(6) Similar Cenvat A/c shall be maintained for IPS received also.

9(7) The manufacturer of FP shall file monthly return in Form ER-1 within 10 days from the close of each month to the Range Officer. SSIs shall file quarterly return in Form ER-3 within 10 days (1-3-2011) after the close of the quarter to the Range Officer.

9(8) : Quarterly returns shall be filed electronically by I Stage/II Stage dealers in Form ER-3 within 15 days after the close of the quarter. (No monetary limit for e-filing)

9(9) : Provider of OPS shall file half yearly return to the Range Officer by the end of the month following the half year in Form ST-3.

9(10) : Similarly the IPS distributor shall file half-yearly statement in form ST-3(giving details of credit received and distributed) to the Range Officer by the end of the month following the half year.

9(11) : Revised returns may be filed within 60 days from the date of original return. (For Service Providers only; Not for manufacturers)

Rule 9-A : PRINCIPAL IPs : Assesses who in the previous year, has paid ED of Rs 100 lakhs or more shall file (i) a declaration of information relating to the principal IPs in Form ER-5 by April 30 th every year and (ii) a monthly return in Form ER-6 by 10 th of next month for the principal IPs received an consumed w.r.t the quantity of F.P manufactured. Principal Inputs=10% or more raw materials. W.e.f. 1.10.2011 ER 5 & ER6 are to be filed electronically by all the assesses.

Rule 10 : Transfer of Cenvat Credit : Factory of manufacturer or premises of provider of OPS are shifted to another site say from Gujarat to Maharashtra – Physical shifting or

there is transfer on account of change in ownership or sale, merger, amalgamation, lease, joint venture, with specific provision for transfer of liabilities.

In the above mentioned circumstances, Cenvat credit lying unutilized in the old set up shall be allowed to be transferred to the new set up, if the AC/DC is satisfied that all old balances have been transferred lock, stock an barrel (i.e without any omission).

Rule 11: Transitional Provisions :

11(1) : These Rules, viz. CCR, 2004 came to force on 10.09.2004. Till the Cenvat credit was provided by the Cenvat Credit Rules, 2002 and Service Tax credit by Service Tax Credit Rules, 2002. Through this rule, the credit on those two counts as on 10.09.2004 is permitted to be carried over as Cenvat Credit on 10.09.2004.

11(2) : SSI can either pay duty an avail Cenvat or enjoy exemption (upto a T.O of Rs 150 lakhs) and forgo Cenvat. An SSI falling under the former category in 2010-2011, may switch over to the latter category in 2011-12. It is eligible for such option. Let us see the effect in Cenvat A/c. On 31-3-2011 the Cenvat A/c ends up with some credit balance. Till 31-3-2011, the SSI was availing credit and paying duty. It is OK. But with effect from 1-4-2011 it is not going to pay duty. It will also not take credit from that date. But what about the credit taken till 31-3-2011 that remains unutilized? What about the credit in the IP lying in stock and IP used in the FP lying in stock on 31-3-2011? The prescription of this rule in this regard is as follows:- (i) Find out the credit in IP and the IP in IMP and FP as on 1-4-2011 the date of option, (ii) Deduct this amount from the credit balance as on 1-4-2011 and (iii) the balance shall lapse. It is not available for utilization. In case the amount payable is more than the credit balance, exhaust this credit balance and pay the balance by debit to PLA.

11(3) : If a manufacturer opts for exemption on FP or if the FP is exempt absolutely u/s 5-A, then the credit of IP in stock and IP in IMP/FP in stock is deducted from the Cenvat Account and the balance shall lapse.

11(4) : If a Service Provider opts for exemption from payment of tax on his output service, then the credit of IP in stock or IP contained in the taxable service pending to be provided is deducted from the Cenvat Account and the balance shall lapse.

Rule 12 : Special Dispensation in Respect of inputs manufactured in factories located in specified areas of north east region, kutch district of Gujarat, State of Jammu and Kashmir and State of Sikkim : Through certain notifications issued u/s 5-A(1) of CE Act, 1944, factories in (i) the North East region viz. Assam, Arunachal Pradesh, Tripura, Meghalaya, Mizoram, Nagaland and Manipur, (ii) the Kutch district of Gujarat State, (iii) the State of Jammu and Kashmir and (iv) the State of Sikkim have been granted exemption from payment of duty in cash after availing Cenvat credit, on their products for 10 years. This is with a view to give economic boost to these areas. The manner of granting exemption is, however, very peculiar. We are aware that manufacturers pay duty on a monthly basis. The manufacturers covered by this rule follow the same procedure upto payment stage. Thereafter the assessee submits a statement of duty paid in cash after availing Cenvat credit, for the previous month. After verification, the department refunds the amount to the assessee. This exemption procedure is for 10 years. In effect, the products made in these areas, do not suffer the cash component of duty at all. As such the end-user cannot avail CENVAT credit on them. In that case, there will be no takers for the goods, thus vitiating the very purpose behind the grant of exemption. In the circumstances, this rule provides that credit on such IP/CG is admissible as if the goods have not been exempted from payment of cash component of duty [ Regarding manner of utilization, read credit rule 3(4)]. The exemption referred to here is by means of refund of ED paid by debit to PLA after availing the credit available in Cenvat A/c. However, this exemption is limited to duty payable on the value addition only. Consequently refund amount gets limited. In view of the exemption from duty available to the goods manufactured in NE states etc., Rule 18 Export Rebate is not admissible to them.

12-A: Procedure and Facilities for Large Tax Payer :

IP, IMP & CG may be transferred from one LTU to another LTU without payment of duty. The removal shall be under transfer challan. The credit on IP&CG may also be transferred. LTU has not spread to the whole of India .

12-AA: Power to Impose Restrictions in certain types of cases:

In fraudulent cases, with a view to prevent evasion of duty, Central Government may impose restrictions on assesses including suspension of RC an also withdraw facilities.

Rule 13 : Power of Central Government to Notify Goods For deemed Cenvat Credit :

On certain “declared IP/IPS” “deemed credit” is allowed by Central Government through notifications published in the Official Gazette.

It is not necessary that the “declared IP/IPS” is used directly by the manufacturer/

Service provider

•  It is enough that the “declared IP” is contained in FP

•  In credit Rule3, credit is based on documents in support of IP/IPS receive

•  In Credit Rule 13, “deemed credit” is based on documents in support of FP

removal/OPS provided.

Rule 14 : Recovery of Cenvat Credit wrongly taken or Erroneously Refunded :

Cenvat credit availed/utilized/refunded wrongly shall be recovered along with interest as per S 11-A and S 11-AA of CE Act, 1944. S 73 & 75 of Finance Act 1994. What is the rate of interest?

Manufacturers : 18% p.a

Service Providers : Last year T.O not more than Rs 60 lakhs =15%. Last year T.O more than Rs 60 lakhs = 18%

Rule 15 : Confiscation and Penalty

15(1) : Taking/Utilising of credit on IP/CG/IPS wrongly: What is the punishment?

•  Confiscation of all such goods, i.e. ineligible IP or CG and

•  Penalty not exceeding the duty on IP or CG or Service Tax on service involved in the contraventions or Rs 2,000/- whichever is greater.

15(2) : In case credit has been fraudulently taken on IP or CG (i.e with mens rea to evade duty), penalty as in S.11-AC is also attracted. Penalty=Duty sought to be evaded (This is for manufacturers only)

15(3) : If the offence has been committed with mens rea, to evade Service Tax then there shall be penalty u/s 78 of F.A 1994, i.e 100% to 200% of Service Tax sought to be evaded.

15(4) : All the above mentioned penal actions may be taken after following the principles of natural justice i.e. after SCN action.

Rule 15-A : General Penalty : For offences not otherwise specified

Penalty = Not more than Rs 5,000/-

Rule 16 : Supplementary provision :

16(1) : There are already notifications, circulars, instructions, standing orders, trade notices and other orders issued under Cenvat Credit Rules, 2002 and Service Tax Credit Rules, 2002 by the CBEC, CCCE or CCE. All of them as in force on 9-9-2004 shall, to the extent they are relevant and consistent with these rules, be deemed to be valid and issued under the corresponding provisions of these rules i.e. CCR, 2004.

16(2) : Reference to Cenvat Credit Rules, 2002 or Service Tax Credit Rules, 2002 in any notification, circular etc., issued thereunder shall be construed as reference to CCR, 2004.

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