Cenvat 10062010

Sushil Aggarwal

9560196060

Cenvat Credit Rules

04/07/23 2ASAP & Associates, CAs

Features of VAT

VAT is designed to be a WOMB to TOMB indirect tax mechanism boasting of multiple stages of taxation without cascading tax effect. It is a domestic consumption tax and not a transaction or a business tax.


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Cascading Effect: Why

CENVAT and state VATs clubbed with CST present a grim tax scenario having cascading tax effects.

The Centre is restrained by the constitution from collecting tax on goods beyond the point of manufacture. Similarly States are restrained by the constitution from levying tax on services and interstate transactions.





Neither VAT nor Excise or Service Tax is a comprehensive tax. With each one encroaching upon the domain of the other, inefficiencies, complexities and duplicity are order of the day.

Tangibility is no more a criteria to define goods thereby making copyrights and trade marks as tradable goods.



Real estate transactions are outside the scope of both VAT and CENVAT. Both authorities see a tax potential here without appropriate constitutional rights.

The exempt sectors are not allowed to claim any credit for the CENVAT or the service tax paid on their inputs.

Answer to many of these problems lies in GST


CONCEPT OF VALUE ADDED TAX STRUCTURE

Single and double entry system of accounting : Distinguish

Two Nails Theory : Match

No entity based exemptions

Provision of refund for embassies and exporters SEZs.

CONCEPT OF CREDIT

Credit is hard currency : immediately available

Credit affects bottom lines: Credit lost is money lost

Credit affects purchase decisions

Credit is a business booster

Wrong Credit : Large Penalty

Step Towards Integration

In the budget 2004-2005 the idea to extend credit of service tax and excise duty across goods and services was mooted. Zero charge by sub-contractor - credit same category - credit under different categories – present system.

The CENVAT Credit Rules, 2004 came into force from 10-9-2004, and have replaced the CENVAT Credit Rules, 2002 and Service Tax Credit Rules, 2002.


Who is eligible to credit

Credit is available to the “Provider of Taxable Service”.

Provider includes “person liable to pay service tax” - recipient in specified cases.

But credit not available unless “input”, Capital Goods” or “Input service” has been used for provision of output service.

Credit not available on reverse charge mechanism. However tax deposited under reverse charge mechanism can be claimed as credit .


What is available as credit

Excise duty (+ additional excise duty etc.) service tax Education Cess & SHE

paid on: Excisable goods and taxable services, which are:

1. Inputs 2. Input Services 3. Capital Goods


What are inputs

All goods used in or in relation to the manufacture of final product whether directly or indirectly and whether contained in the final product or not.

All goods used for providing an output service,

Goods used for manufacture of capital goods which are further used in the factory for manufacture. Exclude: Cement, Angles, TMT CTD bars, material for construction of shed/ supporting structure, foundation.


What are not inputsExclusions from Inputs:

LDO, HSD, Petrol, Motor Vehicles whether or not used for manufacture or provision of services, including:

lubricating oils, greases, cutting oils, coolants

Accessories of the final products cleared along with the final products,

goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production.


When credit is available for Inputs

The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in the premises of the provider of output services.


What is input service

“Input service” means any service used by -

provider of taxable service for providing an output service, ormanufacturer, whether directly or indirectly, in or in relation to

• manufacture of final products and • clearance of final products upto the place

of removal,Continue…InputsInputs



and includes: Services used in relation to setting up, modernization,

renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises,

advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business such as accounting,

auditing, financing, recruitment and quality control, coaching and training,



computer networking credit rating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal


•Input service must be directly related to provision of output service.

•Apparently strict definition.

•Inclusive definition and use of words “such as” soften it substantially.

•While the intended use of service is important to be related to the output, direct relation to manufacture and restriction up to pre-production stage is not compulsory as far as provider of service is concerned.


Outdoor Catering to provide meals to employees at subsidized rates

CCE, Mumbai-V Vs. GTC Industries Ltd. 2008 (12) STR 468 : Credit was admissible even when a part of the expenditure incurred was recovered from the employees. The tax paid shall form part of expenditure towards manufacture.

Group Medical Policy for Workmen

CCE &C Aurangabad Vs. Endurance Systems (P) Ltd. , cenvat credit of service tax paid on group medical policy is allowable.


Mobile Phone and Landline phone at Directors’ / officials’ residence

Keltech Energies Ltd. Vs. CCE, Mangalore

Where the bills were paid by the company as expenditure, the same was eligible to be treated as input service.

CCE Vs. Excel Crop Care Ltd. 2008(12) STR 436 (Guj)

Revenue’s appeal that credit for service tax paid on telephone bill could be allowed if the phone was not installed at the factory premises, was dismissed.

Group Medical Policy for Workmen

CCE &C Aurangabad Vs. Endurance Systems (P) Ltd. , cenvat credit of service tax paid on group medical policy is allowable.


Extended place of removal

Metro Shoes (P) Ltd. Vs. CCE Mumbai I 2008 CESTAT - MUM

Where the company manufactured shoes and also had its own showrooms from where the shoes were sold, the cenvat credit in respect of expenses like telephone, internet, insurance, courier, warehousing etc could be allowed even though the same was post manufacture, as the showrooms were extended place of removal.

CCE, Rajkot Vs. Rolx Rings (P) Lt. CESTAT AHM

A sale is completed on transfer of property in goods. Delivery and payment are not germane to a sale transaction. In case of exports the place of removal is the custom frontiers. Where the sale takes place at the destination of the buyer the place of removal shall get extended accordingly.


Extended place of removal

Ambuja Cement Ltd. Vs. Union of India and Others 2009 P&H HC

Asssessee supplied cement to customers on FOR Destination basis. Freight up to the place of the customer is borne by the assessee and so is the service tax thereon. Board Circular no. 97/6/2007 dt. 23.08.07 clarifies that in case of a destination base sale if (i) the ownership of goods and the property in the goods remained with the seller of the goods till the delivery of the goods in acceptable condition to the purchaser at his door step; (ii) the seller bore the risk of loss of or damage to the goods during transit to the destination; and (iii) the freight charges were an integral part of the price of goods, then credit for service tax on transportation up to that place shall be allowable. The definition of sale and transfer of property in goods as per sale of goods Act shall be more relevant that the definition of place of removal of goods as per excise laws.


Address on Invoice

General Electric International Inc Vs. CCE, Delhi 2009 CESTAT DEL

Invoice was addressed to the office of the appellant outside India and the cenvat credit was denied by the commissioner on that ground. The tribunal rejected the contention of the department.

Relevance of premises of manufacturer

CCE, Vapi Vs. Alidhara Textool Engineers (P) Ltd. 2009 CESTAT AHM

Erection & Commissioning service availed by the manufacturer and seller of machinery at the buyer’s premises through a subcontractor. The tribunal held that credit could not be denied on the ground that service not availed in manufacturer’s premises.


An advertisement is undertaken not for the promotion of concentrates but for promotion of sales of aerated water manufactured out of concentrates which are manufactured by bottlers and not the appellant. The tribunal held that this cannot be considered to be covered by the definition as being input services used by the manufacturer whether directly or indirectly in or in relation to the manufacture of final products. [Coca Cola India Pvt. Ltd. v CCE, Pune 2007-TIOL-723-CESTAT-MUM; Pepsi Foods Limited v CCE- 1996(82) ELT 33 (Tri.)]

Similar view has been taken by the Hon’ble Supreme Court in the case of CCE, Mumbai v Parle International Limited 2006 (198) E.L.T. 486 (S.C.).

Cases regarding ‘Input Service’


Inclusive and broad definition

• Income tax law of the country allows deduction for all expenses incurred to earn the income. Tax Auditor identifies personal and non-business expenditure for the purpose of disallowance. While department may take an adverse stand on allowing credit for service tax paid on disallowed expenditure, as a corollary service tax paid on all allowable expenditure can not be denied.

• Transportation incurred on after sales maintenance and free replacements is an allowable expense and credit should therefore be allowed.

• Credit for input service in respect of commission expenditure incurred for making sales should also be allowed as the same is an allowable business expenditure.

• FBT is personal tax compensation of benefit passing on to an employee. Even when the benefit is expressly provided to employee as part of salary the same is allowable business expense though taxable in hands of employee. Any personal element can thus not be used to deny tax credit.


Payment of input service is pre-condition

The credit is allowed only after the payment of service tax as indicated in invoice. [sub-rule (7) of Rule 4].

There is no express provision for partial allowance based on part payment or settlement for a lower value.

Contrarily liability of tax on output service arises even on receipt of advance or a part of payment.

A logical presumption is that credit should be available on proportionate basis.


Capital Goods “Capital goods" means:-

(A)(i) all goods falling under Chapter 82 (Tools, Implements, Cutlery) , Chapter 84 (Nuclear Reactors, Boilers, Machinery etc.), Chapter 85(Electrical Mach. Sound Recorders, etc.), Chapter 90 (Optical, Photographic, Medical, Surgical apparatus etc.), heading No. 68.05 grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to the Excise Tariff Act;

(ii) pollution control equipment;

(iii) components, spares and accessories of the above;

(iv) moulds and dies, jigs and fixtures;

(v) refractories and refractory materials;

(vi) tubes and pipes and fittings thereof; and

(vii) storage tank,04/07/23 27ASAP & Associates, CAs

used-

(1) in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or

(2) for providing output service;

(B) motor vehicle registered in the name of provider of output service for providing taxable service as specified in sub-clauses (f)(courier), (n)(tour operator), (o)(rent a cab), (zr)(cargo handling), (zzp)(GTA), (zzt)(outdoor caterer) and (zzw)(pandal-shamiana contractor) of clause (105) of section 65 of the Finance Act;


• Removal of capital goods attracts surrender of cenvat claimed. However, removal for providing out put service does not attract this if the time limit of 180 days for return of goods is adhered to.

• Removal after partial use also attracts surrender but adjustment at 2.5 per cent of the cenvat credit for each quarter of a year or part thereof from the date of taking the Cenvat Credit, will be allowed;

• If the capital goods are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty leviable on transaction value.


• 50% of the cenvat credit allowed in the first year when asset is received in premises. Balance in subsequent year(s).

• Hire Purchase / finance options do not disturb the claim

• Income Tax Depreciation benefit not allowable in respect of value claimed as cenvat.


Impractical condition for availing CENVAT Credit for input on capital

goods

The assessee company utilized area outside the factory for laying pipeline connecting factory to a river situated around 12 kms away for the purpose of drawing water for the factory. The court held this was only an extension of the pipeline inside the factory and hence Modvat /Cenvat Credit is permissible. [M/s Pepsico India Holding Ltd. v CCE, 2001 (130) E.L.T. 193 (T); and Hindustan Coco Cola Beverages Pvt. Ltd. v CCE, Thane-I, 2005 (190) ELT 287 (Tri-West Zonal Bench, Mumbai)]


Utilization / Application of credit

When to utiliseThe CENVAT credit may be utilized for payment of service tax on any output service, but the CENVAT credit shall be utilized only to the extent such credit is available on the last day of the month or quarter, as the case may be [sub-rule (4) of Rule 3].

A question may arise, whether CENVAT credit can be used to pay interest and penalty.

Refund of unused credit shall not be allowable under any circumstances. (Rule 4(2))

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Reversal / utilization of Credit

The CENVAT credit may be utilized for payment of-

An amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed’ or

an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such’ or

service tax on any output service:



Availing of credit is subsequent to recording of credit. Recording and reversing amounts to not availing the credit and no penalty can be invoked.

credit can be denied to an assesse under the rule only on two grounds, firstly for having failed to use the inputs in the manufacture of goods and secondly for having removed the inputs as such. The credit cannot be denied to the assessee for having failed to utilize the inputs for a long time or for having written off the value of the inputs in the books. (CCE, Indore v. M/s Kinetic motors Co. Ltd.)



However Rule 3 (5B) requires reversal of credit if the value of input or capital goods is written off before they are put to use.

The credit in such a case shall be re-available when such inputs or capital goods are put to use.


The expression “in the manufacture of goods” should normally encompass the entire process carried on by the dealer, converting raw material into finished goods. It was also held that where any particular process is so integrally connected with the ultimate production of goods but for that process, manufacture or processing of goods would be commercially inexpedient, goods required in that process would fall within the expression “in the manufacture of goods”. [J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v Sales Tax Officer, Kanpur reported in 1997 (91) ELT 34 (SC)]

Credit for inputs used in exempt services


Credit for inputs or input services used exclusively for exempt services not allowable. Same way credit for inputs or input services used exclusively for taxable services shall be allowable in full.

Prior to April 1,2008 credit in respect of common inputs was restricted to 20% of output tax and balance was eligible to be carried forward indefinitely. Though the brought forward balance shall be eligible for credit but further availability of credit shall get restricted.

Common inputs: Taxable and Exempt services


Separate books of accounts be kept where both taxable and non-taxable services are being rendered. Record of receipt, consumption and inventory should be maintained.

In the absence of separate record the provider of service shall pay 6% (8% up to 07/07/2009) of service tax on the value of exempted service. OR

Pay back/ reverse an amount equal to the Cenvat credit claimed on the inputs or input services used for exempted services. Rule 6(3A)



The option of payment or reversal of credit is to be chosen by the Assessee and shall not be thrust upon him.



Procedure to exercise option

Intimate to the Superintendent the intention to exercise this option along with other details and balance of cenvat credit unused.

Pay provisionally, every month, the cenvat credit pertaining to exempt services. This shall be calculated with a formula E/F*G where G is the total of cenvat credit taken during the month and E and F are the exempt and total services rendered respectively in the preceding financial year.



Pay the differential, if any, on completion of year along with interest at 24%, based on actual figures of the whole year. Where the full year yield a lesser figure, the amount excess paid can be adjusted as part of cenvat credit under intimation to the Superintendent.

For this purpose export of service shall be treated as taxable service and shall form part of denominator.

Where capital goods are used partly for taxable purpose full credit shall be allowable.


Withdrawal of circular : Unjust Enrichment

Possible to charge Service Tax from Client

Where option to pay 6% on exempted services is exercised, the service provider can charge tax on the client, mentioning specifically “amount paid under rule 6 of the cenvat credit rules.”

Provisions of unjust enrichment shall not apply.



Where: Assessee providing many services, For some services, separate input record is

maintained For others common inputs are used Earlier law did not prohibit use of different method

of claiming credit in respect of different services Now the rules clearly specify that same method

shall be used for all services and option once exercised shall apply to the whole year.


CA / CWA CertificateWhere the assessee maintains separate records it may not be possible to accurately bifurcate all inputs.

The basis of calculation of CENVAT Credit amount attributable to inputs used in or in relation to the manufacture of exempted goods shall be:

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CA / CWA CertificateActual consumption of inputs used and for this purpose quantification shall be based upon the stores / production records maintained by the manufacturer.

Certificate from Cost Accountant/Chartered Accountant may be submitted at year end specifying various detail.

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Trading activities covered under exempted services under

Rule 2(e)

“The question whether a given activity is one of sale or service is a vexed question…… it is possible that an activity may be service for purposes of one Act and sale for purposes of another Act. It may also be that in a given case …. a particular activity can be treated as service but in a different fact situation the same could be sale under the same Statute”. [State of Uttar Pradesh v Union of India 2004 (170) ELT 385 (SC): 2006 (3) STR 98 (S.C.) : (2004) 170 ELT 385 (SC)]


Trading activities covered under exempted services under

Rule 2(e)

If Trading could be service it could have also been subjected to service tax. Constitution does not allow centre to tax sale of goods. Trading can not be treated as exempt service. Taxing provisions that get attracted in the absence of separate books should not be invoked where service is rendered with trading of goods.

However to avoid litigation assessee may be forced to chose one of the two options.


Input Service Distributor

An input services distributor can not go for the options and shall have to maintain proper accounts only because he is like a trader who distributes the service tax but does not provide any service as such.

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Full Credit for Sixteen Services

Law provides for full credit for 16 input services unless they are inputs, exclusive to exempt services. Following services are included here.

• Consulting Engineer

• Architect

• Interior Decorator



• Management, Maintenance or Repair

• Foreign Exchange broker other than Banking & Financial Institution with NBFC & Body Corporate

• Intellectual property service other than copy right

• Management Consultant

• Real Estate Agent



• Security Agency

• Technical Testing and Analysis

• Scientific or Technical Consultancy

• Banking & Other Financial Services

• Erection, Commissioning or Installation

• Technical Inspection or Certification

• Construction services in respect of Commercial or Industrial Buildings or Civil Structures



• How to claim full credit of these services while applying proportionate formula:• Exclude these services for the purpose of

calculation.


Abetments and exemptions

a service provider who claims an abetment shall not be eligible to input credit.

Where a construction job is sub-contracted the contractor will not be able to claim credit of input service tax charged on the bill of the subcontractor simultaneous to his claim for abetment. Abetment relates to value of goods used while providing services and thus has no relation to the eligible credit.


Credit under composition scheme

Rule 3(2) of the Works Contracts (Composition Scheme for payment of Service tax Rules 2007 provides that the provider of taxable service opting to pay service tax under the scheme is not entitled to take CENVAT credit of duty on inputs used in or in relation to the said works contract.

There is no restriction under notification N. 32/2007 dated 22.05.07 to take CENVAT credit of duty paid on capital goods and service tax paid on input services. Master circular 96/7/2007 dt. 23-08-2007.


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