Value Addition thru Cenvat Credit -Service Tax

Value Addition thru

Cenvat Credit

-Service Tax

- CA. Madhukar N Hiregange

Introduction

• 1978- Jha Comm -> 1986 Profroma Credit -> Movdat

Expanded yr after yr -> 1994 Capital Goods +

Dealers Passing on -> 2000 CENVAT credit-> CR-

2004 Cross sectional -> list contracted yr after yr ->

2014 - 6 Months Restriction

CA Madhukar N Hiregange 3

Outline Of Cenvat Credit

• Cenvat Credit is a beneficial piece of legislation –

unless specifically excluded – cannot be denied.

• Final product is dutiable – Cenvat on inputs used is

to be allowed as credit cannot be denied – Formica

India division V/s CCE 1995 (77) E.L.T. 511 (S.C.)- Arti

265

Utilization Of Cenvat Credit

• All taxes and duties specified in rule 3(1) of Cenvat Credit Rules

form a ‘pool’.

• This credit can be utilised by manufacturer of excisable goods

or provider of taxable service.

• Cross utilisation

• The credit can be used for the payment of any tax or duty as

specified in rule 3(4) of Cenvat Credit Rules.

• One to one relation not required.

Capital Goods – Rule 2(a)• All goods falling under

• Pollution control equipment;• Components, spares and accessories• Moulds and dies, jigs and fixtures;

Chapter 82 Chapter 84Chapter 85 Chapter 90 Heading 6805 Grinding wheels and parts

thereof falling under heading 6804

Outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory

Capital Goods – Rule 2(a)

• Refractories and refractory materials• Tubes and pipes and fittings thereof• Storage tank and……

Capital Goods – Rule 2(a) Motor Vehicle other than CETA 8702, 8703, 8704 & 8711

chassis (but including dumpers and tippers)

Used in the factory of manufacturer–equipments/appliances

used in office excluded

Used for providing output service

Motor Vehicle and its components/spares/accessories–

Restricted to specific purposes- motor vehicle designed for

transport of goods/carry passengers etc

Capital Goods – Rule 2(a)• motor vehicle designed for transportation of goods including their

chassis registered in the name of the SP, 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;]

When Can The Credit Be Availed On

Capital Goods? 50% on receipt of the goods in the factory on the basis of

Excise Invoice

Bill of Entry (in case of import of goods)

Any other documents as per Rule 9 of CCR, 2004

Internal records (GRN receipt note).

Balance in the subsequent Financial Year.

SSI - can avail 100% Cenvat credit on the CG

Capital Goods – Some Random

Thoughts CGs do not include office appliances - in factory

Used for providing output services – SP can take such credit

Procured on hire purchase/lease/loan eligible for Cenvat - 4(3)

of CCR, 2004.

Capital Goods – Some Random Thoughts

Used exclusively for exempted final products and output

services - Ineligible.

Depreciation cannot be availed on Cenvat portion.

Eg: Cost of the capital asset - Rs.10K including duty of Rs.1K

Depreciation to be claimed only on Rs.9K.

Capital Goods - Benefits

• On spare parts credit can be taken – it is just like capital

goods-what if used for providing services-AMC printers?

• Dealer – more competition – credit will be passed on – benefit

same at lesser price.

• Credit can be taken on AC, Computer – proof– used for

manufacturing purpose or providing services

• Partial usage of capital goods – full credit available.

Capital Goods – Issues

• SSI Exemption Vs Cenvat Credit availment.

• Capital goods not covered under specified chapter heading as

per the definition-parts of the CG such as of heading 84/85??

• Rule 6 of CCR Vs Capital Goods Credit.

Input – Rule 2(k) - Inclusions:

All goods used in the factory by the manufacturer of the final

product

Any goods including accessories cleared along with the final

product and goods used for providing free warranty.

Goods used for generation of electricity or steam for captive

use also constitute inputs.

All goods used for providing any output service.

Light/ high speed diesel oil, Motor spirit,-petrol

Any goods used for

(a) Construction/execution of WC of a building/civil structure

Or,

(b) laying of foundation/making of structure for support of

CG

(c) except for provision of specified services

Input – Rule 2(k) - Exclusions:

Input – Rule 2(k) - Exclusions:

CGs except - parts and components in manufacture of final

products

motor vehicles.

Goods - personal use or consumption of any employee incl.

food items etc-uniforms?.

Goods- no relationship with manufacture of final product.

Eligible Inputs For Service Providers

Duty paid on inputs by service provider while providing the

taxable service

Used directly for providing taxable services

Chemicals/paper??

Inputs - Benefits

• Reduction in purchase cost.

• No Cascading - From start to finish.

• Includes cap goods-can treat as inputs + spares.

• SSI planning.

• Job Work Planning.

• Initial setting up.

• Centralized registration.

Input Service – Rule 2 (l) ANY SERVICE

i. Used by a provider of output service for providing output service; or

ii. Used by a manufacturer, whether directly or indirectly, in or in relation to Manufacture of final product and Clearance of final products upto the place of

removal

Input Service - Inclusions• 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 upto the place of removal,

• and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory /premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal;

Input Service - Exclusions

(A) Following declared services: Service portion in the execution of works contract, Construction services including services listed under clause (b) of

section 66E of the Finance Act in so far as they are used for

Construction/execution of WC of a building/civil structure/ part thereof; of

laying of foundation/making of structures for support of CG,

EXCEPT for the provision of one or more of the specified service.

(B) Following specified services:Renting of motor vehicle -to extent MV is not CGGeneral 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: Manufacturer of a motor vehicle. Insurance company in respect of motor vehicle insured or

reinsured.


(C) Services such as those provided in relation to: Outdoor catering, Beauty treatment, health service, cosmetic and plastic surgery, Membership of a club, Health and fitness centre, Life insurance, Health insurance and Travel benefit is extended to employees on vacation such as

leave or home travel concession

When such services are used primarily for PERSONAL USE or consumption of any EMPLOYEE.


As Such Removal Of Capital

Goods/Inputs – Rule 3(5) Availed once the goods are received in to the factory/premises.

When inputs and capital goods are

Removed as such

After partial processing Sale or Disposal from factory or premises

Shall pay an amount equal to the credit availed in respect of such inputs or capital goods

Such removal be made under cover of an invoice as per Rule 9 of CCR, 2004.

or

Whenever the inputs or capital goods are removed outside the premises of SP for providing the output service no payment is required

Removal Of Capital Goods After Use

Are removed after being used

If capital goods, on which Cenvat credit has been taken

Shall pay an amount (not excise duty)

As capital goods As scrap As waste

By a manufacturer or provider of output services

If capital goods, equal to Original Cenvat Credit taken, as reduced by prescribed percentage on the basis of number of years used

Equal to excise duty payable on transaction valueW.E.H

OR OR

Cenvat Credit – Job Work

• Goods cleared under job work exemption are not exempted goods,

as ultimately duty is paid by the principal manufacturer.

• The job worker is permitted to use his own capital goods / inputs /

input services in the job work.

• When the job worker uses his own capital goods / inputs / input

services in job work, he is entitled to take credit of duty.

• In this case, final product should not be exempted goods.

Disputes In Cenvat

Common Disputes in

Cenvat

CENVAT credit availability on free issue of material

CENVAT credit availed on photocopy of invoice

CENVAT credit availed on courier Bill of Entry

Common Disputes in Cenvat

CENVAT credit availed on invoice where buyer and consignee

are different

CENVAT credit on goods directly delivered to job worker/

depot from the supplier

Avoiding Disputes in Cenvat

All items checklist on eligibility, disclosure, Prompt availment,

Prudence- 5% on possible personal use, valid invoice ( bank

charges), system to ensure no duplication/ completeness,

written clarifications in case of doubt.

Reconciliation &

regular verification

before/ post filing of return.


Value Addition under CCR, 2004

Inputs / Input Services

• Credit on inputs – on receipt of the inputs in the

factory or on delivery to the service provider

• Credit on input services – to be allowed on or after

the receipt of the invoice or bill. On payment at times

of vendor + ST. RC- on payment of ST only



Inputs / Input Services

• Time limit for availment of credit on inputs and input

services – No TL at present.

• W.e.f., 1st September 2014 - Credit on inputs or input

services shall not be allowed after the expiry of six

months from the date of invoice or bill.



Input Services

• Credit of tax paid on input services under RCM- Credit

allowed on or after the date of payment of value of input

service + service tax – Current provision

w.e.f., 1st September 2014

ST payable under RCM- credit allowed after ST

payment.

ST payable under JCM- credit allowed after

payment of value + ST.



Input Services

• Credit on input service to be reversed- on failure to

pay value of input service + ST within 3 months.

• Credit to be re-taken on making of payment.

• Distribution of input service by ISD under Rule 7 of

CCR, 2004- effective from 17.05.2012.



Inputs

• Removal as such - duty to be reversed on inputs.

• Write off of inputs- duty to be reversed on inputs.

• On remission of duty on final products u/r 21 of CER,

2002- Credit on inputs to be reversed.


Options- R 6(3)

A. Separate Records of Inputs/ IS- actual- bestB. If not possible then:(i) 6% reversal on removal of exempted goods

or provision of exempt service.(ii) Separate for Inputs + IS- Proportion 3A.


Reversal R 6(3)

• Inputs – Only that used in manufacture of dutiable goods eligible.

• Input services:-> Exclusively used for taxable – 100%-> Exclusively used for non taxable – 0%-> Commonly used for taxable/ non- Proportion-> Traded goods = SP- COGS or 10% higher is

exempted. Then apply proportion


• To avail credit- Ownership of Capital goods not

required.

• Goods procured under HP/ lease- Credit could be

availed.

• Equipment or appliance used in an office – Not eligible

unless it is part of factory or used for providing taxable

services.

Value Addition under CCR, 2004- CG



• Credit on “Capital goods” or “Inputs”- To be

examined.

• Only 50% of the credit allowed in the year of

purchase.

• Balance 50% credit allowed in the subsequent

year.



• Restriction of availing 50% credit- do not apply to the

assessees claiming SSI exemption or on removal as

such.

• Balance 50% credit allowed- subject to the

possession of capital goods.

• Exception: components, spares, accessories, moulds,

tools, dies, refractories and refractory material.



• Removal of Capital Goods in the year of purchase-

100% credit allowed in the same financial year.

• Construction of Malls- eligibility of credit on capital

goods [escalators, lifts, DG sets, A/c Unit, CCTV, Fire

Protection equipment .... etc]???- Judicial

confirmation awaited.



Capital goods exclusively used for manufacturing

exempted goods or providing exempted service-

Credit not eligible.

• Partial usage of capital goods for manufacturing

excisable and exempted goods, or for providing

taxable and exempted service- Full credit eligible-

unlike Inputs.


Best Practice – Availment of Credit

• Credits that can be availed & not availed- a list to be

prepared every year- reason also- case law?.

• Credits objected by the revenue or/ doubtful credits-

to be availed but not utilised.

• Option to pay tax and avail the credits or/ Exemption

notification?- to be examined.



SAD -Additional duty under section 3(5) - Service

providers not eligible to take credit. No restriction for

manufacturers.

• Inputs or input services used in the manufacture of

intermediate products by a job worker- Credit

allowed subject to the utilisation by manufacturer for

further use in relation to manufacture.



• Reverse charge and Joint charge credits- missed (as

they are paid by the assessee himself).

• Clearance of goods for direct exports- not exempt

sales- Credit can be availed on inputs used for

manufacture of goods cleared for direct exports.

• Credit for inputs [beyond chap. 22], input services &

capital goods- Restaurants can avail.



• Mot.veh.- allowed if used for providing output

services: motor driving school, mining, transp. of

passenger/ goods, construction, courier, logistics,

freight forwarders or mere renting of MVs.

• Supplies to contracts under International competitive

bidding, SEZ, 100% EOU are without payment of

duty- Credit can be retained.



• Inputs used as consumables in service contracts-

Credit to be examined. Paper credit for photography

or in study material for coaching classes.

• Credit of duty paid on inputs and input services to be

availed within six months (w.e.f., 1-09-2014)- System

to be in place to ensure credits are taken.


• Exporter of Services & Goods- two refund claims to

be submitted for each quarter.

• In refund for manufacturers the method of payment

of duty using cenvat has been found fastest.

• Manufacturers claiming drawback of customs/

procure under Adv Lic + Cenvat credit refund eligible.



• Failure to file statutory returns (like ER-1, ST-3) or

wrong filing of returns- Incomplete application -

Refund may be denied.

• For service providers there is a lot of delay/ red tape

and use of RTI along with massive follow can only

lead to a little faster realisation.


Value Addition – Job Work

• Job workers working under Not.214/86 - Credit on

consumables and capital goods/ spares can be

retained.

• Exemption to Job workers- only an option – they can

avail the credit and discharge the duty on the

finished goods. [Comm. v. Aries Dyechem Industries -

2014 (299) E.L.T. A88 (Guj.)]


Value Addition – Job Work

• Job workers can choose to pay service tax on

processes not amounting to manufacture where the

manufacturer can avail credit against his final duty

payment.

• There are implications of scrap to the job workers

end if not returned- Quantity reconciliation are

imperative.


Value Addition – Other Aspects

• Reversal of credit on oral instruction of visiting officers

or audit without due verification- cause issues in re

credit. If being forced, to be paid under protest.

• Dealers can also pass on cenvat credit of imported or

duty paid goods selectively.

• Proper classification of goods & services- is of utmost

importance for not losing the credits.



• Exempted goods -not include the portion on

which abatement claimed unless credit is

restricted for both inputs as well as input

services. They would also not include inputs/

input services used for export.

• Transfer of credit in case of shifting, merger etc.


Action Prior to 1st Sep- 14

• Confirm that excess reversals not done• Any audits where Co has reversed credit or has not

availed credit due to lack of clarity• Any disputes still in progress• Post removal credits??• GTA Outwards credit• RC/JC credits• Branches/ ISD credits• …. Could be many more


[email protected]@hiregange.com

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Documents

Value Addition thru Cenvat Credit -Service Tax