INTRODUCTIONINTRODUCTION

Credit mechanism is vital for effective operation of Value Added Tax system

Introduced for the first in 1986 as ‘Modvat credit’, initially credit mechanism was available only for ‘inputs’.

Subsequently, the credit facility was extended to ‘capital goods’ in the year 1994.

Modvat credit was renamed as ‘Cenvat Credit’ in the year 2000.

IntroductionIntroduction

Cenvat Credit Rules, 2004- Notification No.23/2004-CE dt.10.9.04 – which replaced Cenvat Credit Rules, 2002 & Service Tax Credit Rules, 2002 – unified credit on goods and services.

Unifies credit on goods and services by including the definition of ‘input services’ and widening of the definition of ‘input’. This was meant to pave way for introduction of GST.

FIRST STEP – UNIFICATIONFIRST STEP – UNIFICATIONCENVAT CREDIT RULES, 2004CENVAT CREDIT RULES, 2004

INPUTCREDIT

CGCREDIT

INPUT SERVICE

OUTPUT TAX ON

GOODS &SERVICES

INPUT BASKET OUTPUT BASKET

INPUT GOODS

INPUT SERVICES

CAPITAL GOODS

OUTPUT GOODS

OUTPUTSERVICES

INTRODUCTION

OUTPUT PROVIDERS

MANUFACTURERSERVICE

PROVIDER

BOTH MFGAND

SERVICES

INTRODUCTION

Capital Goods means – (A) the following goods, namely,

All goods falling under Chapter 82, 84, 85, 90, heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of Excise Tariff

Pollution control equipment;

Components, spares & Accessories of above goods

Moulds and dies, jigs and fixtures | refractories & refractory materials

Tubes and pipes and fittings thereof | Storage Tank

Motor vehicles other than falling under 8702,8703, 8704 & 8711 & their chassis but including dumpers and tippers and their parts Used in the factory (other than for office purpose) Outside factory for generation of power Used for providing output service

Capital Goods – Rule 2(a)

Goods which qualify as Capital goods for service providers only - Nature of goods Nature of Usage(B) Motor vehicles and

their chassis designed for transport of goods.

Renting of Motor vehicles Transportation of inputs, capital goods Providing courier agency services

(C) Motor vehicles and their chassis designed to carry passengers

Transport of passengersRenting of motor vehiclesImparting motor driving skills

(D) Components & Spares of such vehicles which qualify as capital goods

Capital Goods – Rule 2(a)

Important issuesImportant issuesCCE v. Rajasthan Spinning and Weaving

Mills Ltd. - 2010 (255) E.L.T. 481 (S.C.)◦Credit allowed on steel plates and M.S.

channels etc used for fabricating chimney for Diesel Generator

◦Chimney is a Pollution control equipment - Any equipment used for getting rid of effluents to be treated as accessory to specified capital goods and credit thereon admissible

◦User test adopted - the question whether an item falls within the purview of “capital goods” would depend upon the user it is put to

Important issues – component or Important issues – component or accessoryaccessorySaraswathi Sugar Mills, 2011 (270) E.L.T.

465 (S.C)◦Structural used for installation of sugar mill-

not capital goods ( does not qualify to be components) .

◦Iron and Steel structures would not go into composition of vacuum pans, crystallizers etc. and are not essential requirements in sugar manufacturing unit. Held that iron and steel structures are not components of capital goods used in sugar manufacturing plant.

◦Whether qualifies as accessory not examined by Supreme Court.

Cenvat credit on spares of Cenvat credit on spares of ropewayropeway

Supreme Court in the case of Birla Corporation Ltd. v CCE 2005 (186) ELT 266 (SC), dealing with this issue held that the spares of ropeway used for transporting crushed limestone from mines located 4.2 kms away to factory, the appellant is entitled to Modvat credit on the spare of ropeway.

‘‘Inputs’Inputs’InclusionsGoods used in the factory by the manufacturer Note: Clause (F) excludes any goods which have no relationship whatsoever with the manufacture of a final productEarlier definition >> All goods-……….used in or in relation to

manufacture, whether directly or indirectly, whether contained in the final product or not ……….. , within the factory of production

Goods used outside the factory:Supreme Court in Vikram Cements 2006 (194) E.L.T. 3 (S.C.) held

that goods like explosives used in mines also qualify as inputs.

Any goods which have even slightest relationship with manufacturing activity would qualify as inputs unless specifically excluded

‘‘Inputs’Inputs’InclusionsGoods including accessories cleared along with final

products If the value of such goods is included in the value of the final product.

Goods used for free warranty supply Free Warranty means a warranty provided by the manufacturer, the

value of which is included in the price of the final product and is not charged separately from the customer.

goods used for generation of electricity or steam for captive use

Such power generation need not be within factorygoods used for providing any output service•All goods used for providing any output service is

covered

InputsInputsExclusions:

ₓ LDO, HSD and Petrol

ₓ Goods used for (a) construction or execution of works

contract of a building or a civil structure or a part thereof

(b) laying of foundation or making of structures for support of capital goods, [Except for service providers who do works contract or construction service as per Declared Service u/s 66E(b)]

ₓ Capital goods except when used as parts or components in the manufacture of a final product

ₓ Motor vehicles

InputsInputsExclusions:

ₓ Any goods such as food items, goods used in a guesthouse, residential colony, club or a recreation

facility and clinical establishment, when such goods are used primarily for

personal use or consumption of any employee;

ₓ any goods which have no relationship whatsoever with the manufacture of a final product

Important issuesImportant issuesWhether inputs used for construction of /

manufacture of capital goods qualify as inputs?

Erstwhile definition specifically provided for said activity

CCE Vs. SLR Steels Ltd., 2012 (280) E.L.T. 176 (Kar.)◦Goods used for construction of storage tank

and pollution control equipment qualify as inputs even if Storage tank/ pollution control equipment is immovable property

Manufacturer vs ManufactureManufacturer vs ManufactureCCE v Rashtriya Ispat Nigam Ltd. 2011 (271)

ELT 338 (AP), High Court held that the Steel sheets and coal used for fabrication of capital goods and parts during process of repair to machinery in the factory of the manufacturer and, as such, fall within the ambit of the definition of capital goods as the same is used by the manufacturer.

High Court distinguished between the words ‘manufacturer’ which is used in the definition of capital goods and the word ‘manufacture', and has given a view that essence under the definition is used by the manufacturer within factory and not merely manufacturing activity.

Important issuesImportant issuesWhether inputs used for construction

of / manufacture of capital goods qualify as inputs?

Under present provisions only use in construction or fabrication of civil structures or support structures to capital goods is excluded.◦Construction /manufacture of storage

tank / pollution control equipment is not specifically excluded.

Important issuesImportant issues

Credit on goods used for repair of machinery

◦Certainly has relationship with manufacturing activity

Goods used for testing of finished products◦Eligible inputs :Flex Engineering -2012 (276)

E.L.T. 153 (S.C.)◦Without testing machines are not fit for sale

Important issuesImportant issuesPacking Materials:

◦Erstwhile rules specifically included ‘Packing materials’

◦Primary packing : without which goods cannot be cleared. So credit still eligible as they have relation with manufacture.

◦Kwality Biscuits 2011 (272) ELT 364 (Kar.)- without packing final products cannot be sold.

◦Secondary packing: Could it be termed as accessory. (adds benfit ).

Important issuesImportant issuesCredit on bought out items (combo pack)

◦ Prime Health Care Products 2011 (272) ELT 54 (Guj)

Credit on plastic droppers/ measurement units supplied along with drugs◦Okasa Ltd. 2009 (241) ELT 359 (Bom.)◦In terms advisory from Drug Controller of

Indiaof Without which drug cannot be soldCredit on promotional materials:

◦Perfetti Van Mele India Pvt. Ltd. v CCE 2010(254) ELT 620 (P&H) - Credit was denied

Input ServiceInput Service

Input service Means:

Service Provider

Services used for providing an output service

Manufacturer

Used by manufacturerwhether directly or indirectly in or in relation to Manufacture of Final productsClearance of final products upto the place of removal

Input ServiceInput ServiceInput service includes following services:Services used in relation to modernisation, renovation or repairs of a factory or office relating to such factoryServices used in relation to modernisation, renovation or repairs of premises of service provider or office relating such 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 serviceInput serviceExclusions:ₓ Services portion in execution of works

contract and construction services under declared service [S. 66E(b)]

to the extent the above services used in (a) construction or execution of works contract of a

building or a civil structure or a part thereof; or(b) laying of foundation or making of structures for

support of capital goods.

However, the above services are eligible as input services for providing one or more of the above specified services – i.e., Construction and Works Contract services.

×Services provided by way of renting of motor vehicle in so far as they relate to a motor vehicle which is not a capital goods

Input serviceInput serviceExclusions:

General Insurance, servicing, repair & maintenance of vehicles which are not capital goods, except when used by :a)Manufacturer of such motor vehicles in respect of motor vehicle manufactured by himb)Insurance company in respect of motor vehicle insured or reinsured by such company

Input serviceInput serviceExclusions:ₓ Services such as those 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 Travel benefits extended to employees on

vacation such as Leave or Home Travel Concession,

when such services are used primarily for personal use or for consumption of any employee

Means, includes & excludes Means, includes & excludes definitiondefinitionCCE vs. Heavy Engineering Corporation Ltd.

1990 (49) ELT 531 (Tri) – held that the inclusion clause would enjoy a broader scope whereas the exclusion clause would be restricted to the items mentioned therein.

RBI v. Peerless General Finance and Investment Co. Ltd., AIR 1987 SC 1023 – held that interpretation must depend on the text and the context as they are the bases of interpretation and when there is express exclusion clause, all such exclusions would get excluded irrespective of ‘means and includes’ part of the definition.

Effect of amendmentEffect of amendmentPhrases “construction of factory /

office”, “activities relating to business such as” were deleted w.e.f. 1.4.2011

Exhaustive definition is made more restrictive

On one hand tax everything under the sky (negative list) but on other hand more restrictive definitions on credit side

Artificial barriers are created.

Coca Cola’ case- Coca Cola’ case- 2009(15) S.T.R. 657(Bom.)2009(15) S.T.R. 657(Bom.)

Availability of input service credit on advertising of soft drinks procured by the manufacturers of ‘concentrates’.

In relation to activities of business:◦Phrase has a wider scope◦Can not be restricted to certain activities◦Legislature has not employed any qualifying

words such as ‘important activities’, ‘main activities’, ‘essential activities’

◦All services relating to business are eligible

ABB’ case ABB’ case 2011-TIOL-395-HC-KAR-ST 2011-TIOL-395-HC-KAR-ST Expression “activities relating to business”

covers transportation upto customer’s place and word “relating” widens scope.

Input service not restricted to services specified after expression “such as” as it is purely illustrative.

Definition of input service having different limbs providing independent benefit.

Credit admissible if one limb is satisfied even if others are not satisfied

Hence, outward transportation of finished goods from the place of removal is covered by the definition of 'input service' upto 31.03.2008. Calcutta High Court has taken contrary view in CCE vs Vesuvisous India Ltd 2014 (34) STR 26.

GTC Industry’s Case-GTC Industry’s Case-2008 (12) S.T.R. 468 2008 (12) S.T.R. 468 (Tri. - LB) (Tri. - LB)

credit of tax on these taxable services allowed that go to form part of assessable value for payment of excise duty

Expenses towards canteen and provision of subsidized canteen forms part of cost of production as evident from para 4.1 of CAS-4

Cost of food forms part of expenditure incurred having bearing on cost of production

CCE vs. Stanzen Toyotetsu India (P) CCE vs. Stanzen Toyotetsu India (P) Ltd. 2001 (23) STR 444 (Kar)Ltd. 2001 (23) STR 444 (Kar)

Canteen Services - Credit allowed

Facility provided as per statutory obligation under section 46 of the Factories Act, 1948 – hence becomes a condition of service as far as the employees are concerned; the expense was also considered while fixing the price of the final product. Facility was a welfare measure and not a charity provided by the employer.

Group insurance services – credit allowed

Workmen’s Compensation Act, 1923 as well as the Employees’ State Insurance Act cast an obligation on the employer to provide insurance to the employees, the same although a welfare measure is a statutory obligation cast upon the manufacturer and is hence cenvatable.

Rent-a-cab service – credit allowed

Services provided for factory workers to reach the factory on time and hence has a direct bearing on the manufacture.

Toyota Kirloskar Motor P Ltd – 2011 Toyota Kirloskar Motor P Ltd – 2011 (24) S.T.R. 645 (Kar)(24) S.T.R. 645 (Kar)

Photography & Shamiana services utilised for ‘Rajyotsava Day’ celebrations

Held that these services have nexus with manufacture of final product as well as relating to it business. The State function arranged once a year is for welfare of employees for preservation of State’s culture, hence has nexus with business of manufacture of final product.

Keeping in view the sentiments of the particular state and as a reasonable employer, if company wants satisfy the aspirations of the people in a lawful manner, he cannot be found fault with, since the assessee in no way personally benefitted from this.

Maintenance of residential Maintenance of residential colonycolony

CC & C.Ex., Hyd Vs. ITC Ltd., 2013 (32) STR 288 (A.P.) Maintenance of residential colony for its employees at

remote location is not provided, it would not be feasible to carry on its manufacturing activity. Staff colony is directly and intrinsically linked to manufacturing activity.

Therefore services like lawn mowing, garbage collection and cleaning, harvesting, swimming pool maintenance, weeding etc to be considered as ‘input services’ under Rule 2(l)

However, certain other High Courts have taken contrary view. See Bombay High Court in CCE vs Manikgarh Cement 2010 (20) STR 456.

Important issuesImportant issuesNature of input service

Eligibility

Relevant decision and discussion

Construction of building given on rent

Yes Sai Sahmita Storages (P) Ltd. 2011-TIOL-863-HC-AP-CX, Navaratna S G Highway Prop Pvt Ltd Vs CST, 2012-TIOL-1245-CESTAT-AHMPeriod under appeal pertains to period prior to amendment of definition

Insurance- employee

Yes MICRO LABS LTD-2011 (270) E.L.T. 156 (Kar.)specific restriction in the new rules. Whether credit elgible - If it could be proved has relation to manufacture or providing service

Insurance on stock, assets, cash etc. relating to business

Yes OUDH SUGAR MILLS LTD -2012 (282) E.L.T. 541 (Tri. D)No specific restriction in the new rules. Credit could be availed - If it could be proved has relation to manufacture or providing service

Important issuesImportant issuesNature of input service

Eligibility

Relevant decision and discussion

Out door catering

Under erstwhile definitions, courts allowed.Specific restriction under present rules

Renting of immovable proper

Yes No specific restriction under new definition

What about rent paid for vehicle parking area??

Security services

Yes Specifically covered under definition (includes portion)Gujarat Heavy Chemicals Ltd. 2011 (22) S.T.R. 610 (Guj.)

Hiring of equipments

Yes No restriction.Need to substantiate that said equipment has nexus with the manufacturing or service activity

Landscaping around factory

Yes Millipore India Pvt. Ltd-2012 (26) S.T.R. 514 (Kar.)It falls within concept of modernization, renovation, repair etc. of office premises or factory

Exempted Service – Rule Exempted Service – Rule 2(e)2(e)“exempted service” means a-

(1) taxable service which is exempt from the whole of the service tax leviable thereon; or

(2) service, on which no service tax is leviable under section 66B of the Finance Act; or

(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 rule 6A of the Service Tax Rules, 1994.

Output Service – Rule 2(p)Output Service – Rule 2(p)

(p) “output service” means any service provided by a provider of service located in the taxable territory but shall not include a service,-

(1) specified in section 66D of the Finance Act; or

(2) where the whole of service tax is liable to be paid by the recipient of service.’

Rule 3(1)Rule 3(1)Who are eligible to avail credit

Manufacturer / output service provider

What are the duties and taxes on which credit could be availed

Duty of exciseAdditional duties underAdditional Duties of Excise (Textile and Textile Articles) Act, 1978 , Additional Duties of Excise (Goods of Special Importance) Act, 1957 National Calamity Contingent duty Additional duty of customs under section 3Ed. Cess and SHE cessService tax and cess on such tax

What are the duties /taxes on which credit is specifically not allowed

1% / 2% duty paid in terms of Notification No. 1/2011 or serial numbers 67 and 128 of Notification No. 12/2012-C.E.,

Rule 3Rule 3(1) Inputs and inputs services consumed by job-worker who claims exemption under Ntfn.214/286

The principal manufacturer could avail credit of duty or tax paid on inputs / input services used by job worker in manufacture of intermediate products

(2) & (3) Credit on inputs lying stock

Credit on inputs lying in stock (or in process or in finished goods) on the date when finished goods become dutiable or the output services become taxable could be availed

Utilisation of Cenvat Utilisation of Cenvat Rule 3(4) – Cenvat credit may be utilised for

payment of:(a)Excise duty on final product(b)Cenvat credit reversal on removal as such of

input / CG(c)Amount payable under Rule 16(2)(d)Service Tax on output service

Explanation inserted w.e.f., 1.7.2012: “Explanation. - CENVAT credit cannot be used for payment of service tax in respect of services where the person liable to pay tax is the service recipient”

Karnataka High Court decision in M/s Aravind Fashions Ltd 2012 (25) S.T.R. 583 (Kar.)

What is position regarding ‘Joint Charge’ recipient?

Rule 3(4)-Utilization of creditRule 3(4)-Utilization of creditRestriction on utilisation of credit

Credit of additional customs duty under section 3(5) of Cus. Tariff Act not to be utilised for payment of service tax1% or 2% duty in terms of Notification No. 1/2011

Utilisation of credit for payment of service tax on reverse charge

Cenvat credit shall not be used for payment of service tax in respect of services where the person liable to pay tax is the service recipient

Amount of credit that could be utilised

Credit available as on the last day of the month / quarter to which payment relates, shall be utilised. Not the credit available on date of payment

Rule 3(5) – Removal of inputs Rule 3(5) – Removal of inputs or capital goods as suchor capital goods as such

Removal of inputs/capital goods as such

Reverse the proportionate credit availed Remove under cover of invoice person who receives such goods could avail credit on the basis of such invoice.

Exceptions

removal by service provider for provision of service outside the premises inputs removed for providing free warranty

Rule 3(5A) Removal of CG as such ‘after Rule 3(5A) Removal of CG as such ‘after use’use’

(5A) Removal of capital goods after use

Reverse the proportionate credit availed after availing depreciation on straight line method on the basis of following percentages:•Capital goods other than computers: 2.5% / quarter•Computers:

Exceptions

Where the amount calculated above is less than duty leviable on transaction value, then the duty leviable on transaction value would be payable

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

Year %

I year 10% per quarter

II Year 8% per quarter

III year 5% per quarter

IV &V 1% per quarter

Rule 3Rule 3(5B)

Inputs or capital goods Written off or providing [fully / partially] in books of accounts

Reverse credit availed

Later when used, credit could be availed back

(5C)

Remission of duty

Where duty on the goods manufactured are remitted in terms of Rule 21 of CER,2002Credit of inputs used for manufacture of such goods shall be reversed.

(6) Credit reversed / paid under Rule 3(5) or 3(5A) could be availed by person receiving such inputs or capital goods

(7) Credit on goods procured from EOU

Formula prescribed Summary is that credit to the extent of CVD is available

Important issues under Rule 3Important issues under Rule 3No one to one correlation between

input and final product: ◦HMM Limited Vs. Collector of Central

Excise, New Delhi, 1996 (87) E.L.T. 593 (S.C)

◦Bharat Litho Co. Ltd. V CCEx. Delhi, 2004 (172) E.L.T. 327 (Tri.-Delhi).

Utilization of credit relating to manufacture for payment of service tax on renting:◦Lakshmi Technology & Engineering Indus.

Ltd, 2011 (23) S.T.R. 265 (Tri. – Chennai)

Rule 4Rule 4When credit could be availed

Capital goods

50% on or after receipt of capital goods in the factory or premises of output service provider / outside factory for power generation

Balance 50% in any time after completion of financial year

Inputs Immediately after receipt of inputs factory or premises of output service provider / place where services are provided (subject to maintenance of documents)

Input services

Receipt of the invoice / challan etc.

Rule 4Rule 4When credit could be availed

100% credit on capital goods in the year of receipt

where capital goods are cleared as such in the same year credit of Additional duty of customs under sec. 3(5)Where a manufacturer is eligible to availe SSI exemption (400 Lakhs home consumption)

Credit on capital goods available even if such goods are procured on Lease, Hire purchase or loan agreement

Simultaneous availment of both credit and depreciation on such duty which is availed as credit not allowed.

Rule 4(5) –Job workRule 4(5) –Job workRemoval of inputs / capital goods for job work

Without payment / reversal

Process covered

Further processing, testing, repair, re-conditioning or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose

Time limit for receiving back the goods

Within 180 days from the date of clearance

What happens if not received

Reverse the credit. Avail credit after receipt of goods

Rule 4-JobworkRule 4-JobworkCenvat credit shall be allowed on the jigs,

fixtures, moulds and dies sent by a manufacturer to another manufacturer or a job worker

Goods sent to job worker can be removed directly from job worker’s premises with the Deputy / Asst. Commissioner’s permission – Rule 4(6)

Rule 4(7) credit on Input ServiceRule 4(7) credit on Input ServiceWhen to avail credit on input service when whole of service tax is payable by service provider

On or after receipt of invoice

if payment of value of taxable service and service tax is not made within 3 months of date of invoice

Reverse credit already availed Avail credit on after payment

If payment (part or full) is returned or credit note is issued

Reverse proportionate credit

When to avail credit on input service when whole or of service tax or part of tax is payable by service provider

On or after payment of value of service and service tax mentioned in invoice

Due date for reversals 5th of next month or quarter / 31st march

Cenvat Credit: Reverse / Joint Cenvat Credit: Reverse / Joint chargecharge

Rule 4(7) of CCR, 2004 was amended w.e.f., 1.4.2011 to provide for availing Cenvat credit on ‘input services’ immediately “on or after the receipt” of invoice / bill etc.

In case of input service where service tax is paid on ‘reverse charge’ by the recipient of service, Cenvat credit can be availed “on or after the day on which payment is made of ◦ The value of input service and◦ The service tax paid or payable as indicated in

invoiceWhere the person (manufacturer or service provider)

who avails the input service gets a refund or credit note, he would have to reverse credit in respect thereof.

R 5 – Refund of CreditR 5 – Refund of Credit

New set of Rules governing refund on export of goods and services

DOF 334/1/2012 dated 16.3.2012 states “No more will an exporter be asked whether an input service has been used in export to claim a cenvat refund.

New Rules would be applicable for exports made on or after 1.4.2012- Option to assessee to follow old rules for 1 year from 1.4.2012

Refund formula:Refund=Export turnover of goods+ Export turnover of services) X Net CENVAT creditTotal turnover

RULE 5RULE 5Terms used

Explanation

Refund amount

maximum refund that is admissible

Net CENVAT credit

Total CENVAT credit availed on inputs and input services by the manufacturer or the output service provider. However, reversal of credits on remission of duty shall be reduced

Export turnover of goods

means the value of final products and intermediate products cleared during the relevant period and exported without payment of Central Excise duty under bond or letter of undertaking

RULE 5RULE 5Term used

Explanation

Export turnover of services

Export turnover of services = Payments received during the relevant period for export services +(plus) export services whose provision has been completed for which payment had been received in advance in any period prior to the relevant period – (minus) advances received for export services for which the provision of service has not been completed during the relevant period;

RULE 5RULE 5Terms used

Explanation

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 as determined in (D) above, during the relevant period; and

(c) the value of all other services, during the relevant period

(d) all inputs removed as such in terms of Rule 3(5), during the relevant period

RULE 5RULE 5Terms used

Explanation

Other aspects

No refund where drawback is claimed on such exports

Export of services means exports as provided Rule 6A of Service Tax Rules,1994

Value of service for the purpose of this rule shall be, value as determined in Rule 6(3) and 6(3A)

RULE 5-RULE 5-Terms used

Explanation

Valuation of service for refundTaxable service

in terms of section 67 of Finance Act, 1994 read with valuation rules

Trading: shall be the difference between the sale price and the cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase) or ten per cent of the cost of goods sold, whichever is more

Other Exempted service

Actual value of service

RULE 5RULE 5Notification

Notification No. 27/2012-C.E. (N.T.), dated 18-6-2012

Provides for conditions and procedures

Simple application form and simple CA certificate provided

Other features:Quarterly applicationAmount of refund claimed shall not be more than credit balance at the end of the quarterAmount for which refund is claimed, shall be debited in the Cenvat account In case refund sanctioned is less than claimed, re-credit of such amount which is not granted as refund, could be obtained. Assessee engaged in exporting both goods as well as services may submit separate claim for good and services.

RULE 5A & 5BRULE 5A & 5BSec. Particulars

5A Refund of unutilised credit on account of clearance of goods under Notification No. 20/2007 CE [ clearance by manufacturer located in North East states]

5B Refund of Cenvat credit to service provider which are covered under reverse charge mechanism (Manpower supply, Works contract, security services, rent a cab etc.)

Notification 12/2014-ST dated 3.3.2014 issued to operationalise scheme to provide refund on half yearly application basis.

Notification No.12/2014-ST issued Notification No.12/2014-ST issued under Rule 5B:under Rule 5B:Refund available to the service providers of those

services which are subject to ‘Partial Reverse charge’ as follows:

(i) renting of a motor vehicle designed to carry passengers on non abated value, to any person who is not engaged in a similar business;

(ii) supply of manpower for any purpose or security services; or

(iii) service portion in the execution of a works contract;

s

Notification No.12/2014-ST issued Notification No.12/2014-ST issued under Rule 5B:under Rule 5B:Service providers are entitled to claim

refund of unutilised CENVAT credit taken on inputs and input services during the relevant half year for providing partial reverse charge issues.

Explanation:Unutilised CENVAT credit taken on inputs and input services during the half year for providing partial reverse charge services = (A) – (B)

Notification No.12/2014-ST issued Notification No.12/2014-ST issued under Rule 5B:under Rule 5B:

Where,

A =

B = Service tax paid by the service provider for such partial reverse charge services during the half year;

CENVAT credit taken on inputs and input services during the half year

(*) turnover of output service under partial reverse charge during the half year

total turnover of goods and services during the half year

Notification No.12/2014-ST issued Notification No.12/2014-ST issued under Rule 5B: Other conditionsunder Rule 5B: Other conditionsthe refund shall not exceed service tax liability paid

/payable by the recipient of service on the partial reverse charge services provided during the relevant half year;

the refund amount shall be debited in CENVAT credit account at the time of making the claim;

Where refund sanctioned is less than the refund claimed, then the claimant may take back the credit of the difference between the amount claimed and the amount sanctioned;

the claimant shall submit not more than one claim of refund under this notification for every half year;

the refund claim shall be filed after filing of service tax return

Rule 6- DefinitionsRule 6- Definitions

Exempted goods

-Excisable goods exempt from whole of duty of excise-NIL rates goodsGoods leviable to 1% / 2% duty in terms of Notification 1/2011-C.E.,

Exempted Services

- Service exempt from service tax- Services covered under negative list- Services which are partially exempt under

the condition of non availment of cenvat credit

- Does not include export of service

Output service

- Services provided by provider of service located in taxable territory.

- Does not include - Services covered under Negative

list- Services on which recipient is liable

to service tax to the extent of 100%

Rule 6Rule 6Sub Rule

Scope of the provisions

(1) No Credit on Inputs

• In or in relation to the manufacture of exempted goods or

• for provision of exempted services

No Credit on input services

• Used in or in relation to the manufacture of exempted goods and their clearance upto the place of removal or

• for provision of exempted services

(2) Common inputs / input services are used for manufacture of both dutiable as well as exempted goods or provides taxable as well as exempted services then separate records shall be maintained.

Avail credit only to the extent of taxable goods and services

Rule 6Rule 6Separate records

Inputs

Receipt, consumption and inventory of inputs usedin or in relation to the •manufacture of exempted goods;•manufacture of dutiable final products for the provision of •Exempted services;•Taxable services

Input services

Receipt and use of input services-In or in relation to the•manufacture of exempted goods •clearance of final products upto the place of removal;•manufacture of dutiable final products For the provision of •exempted services; and•output services

Options available under R. 6Options available under R. 6

Avail appropriate Cenvat Credit

Payment of 6% of value of exempted goods / Exempted Services

Inputs – Separate records

Input services- Follow option II

YES

NO

Reversal of appropriate credit

Follow Rule 6(3A) and reverse proportionate Credit attributable to exempted goods

Separate records

maintained

Rule 6(2)

Option I Option II Option III

Common Inputs/ input

services

Rule 6Rule 6Specific to some service providers

Banking and other financial institutions

Reverse or pay an amount equal to 50% of the Credit availed during the month

Other important points Reversal under Rule 3 would be deemed to be credit not taken no Credit on inputs/ inputs exclusively used for exempted activityRule 6(4) – No credit on CG which are exclusively used in manufacture of exempted goods or provision of exempted service. Except where final products are exempt under SSI Not

Rule 6 – Non-applicabilityRule 6 – Non-applicabilityRule 6 not Applicable to certain clearances

Clearance of goods

To EOU, SEZ, Export, ICB projects,. Certain Power projects

Rule 6 not Applicable to SEZ & Exports

Sub-rule (7)

To the taxable services provided, without payment of service tax, to a SEZ Unit or SEZ Developer for their authorised operations.

Sub-rule (8)

a service provided shall not be an exempted service when:(a)Service satisfies the conditions under Rule 6A of Service Tax Rules, 1994 and payment is to be received in convertible foreign currency; and(b)such payment has not been received for a period of 6 months or extended period allowed by RBI

RULE 7RULE 7REF Nature of Amendment

Rule 7

Provides for input service distribution Following new conditions added:(a) the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon;(b) credit of service tax attributable to service used by one or more units exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed;

REF Nature of Amendment

Rule 7

(c) credit of service tax attributable to service used wholly by a unit shall be distributed only to that unit; and(d) credit of service tax attributable to service used by more than one unit shall be distributed pro rata on the basis of the turnover of such units during the relevant period to the total turnover of all its units, which are operational in the current year, during the said relevant period.”Explanation 1.- For the purposes of this rule, ‘unit’ includes the premises of a provider of output service and the premises of a manufacturer including the factory, whether registered or otherwise.Explanation 2.- For the purposes of this rule, the total turnover shall be determined in the same manner as determined under rule 5.’

Input Service DistributorInput Service Distributor Explanation 3.- For the purposes of this rule,

the ‘relevant period’ shall be,-  (a) If the assessee has turnover in the

‘financial year’ preceding to the year during which credit is to be distributed for month or quarter, as the case may be, the said financial year; or

  (b) If the assessee does not have turnover for some or all the units in the preceding financial year, the last quarter for which details of turnover of all the units are available, previous to the month or quarter for which credit is to be distributed.”.

Substituted by Notification No. 05/2014 – Central Excise (N.T.) dated 24.02.2014.

Rule 7A – Distribution of credit on input Rule 7A – Distribution of credit on input and capital goods by service providerand capital goods by service provider

Service provider shall be allowed to take credit on input and capital goods received◦On the basis of invoice or bill or challan issued by

the office or premises of the said service provider◦Such office or premises receives invoices, issued

in terms of Central Excise Rules, 2002 towards inputs and capital goods.

Provisions of CCR, 2004 and other rules as applicable to First Stage Dealer / Second Stage Dealer shall mutatis mutandis apply to such premises or office of service provider

Other RulesOther RulesRule 8: Storage of input outside the

factory of the manufacturer. In exceptional circumstances,

Deputy Commissioner or Assistant Commissioner may permit storage inputs outside factory subject to terms and conditions

Rule 9 (1) - Cenvat credit shall be taken by manufacturer or service provider on the basis of following documents:

a) Invoice issued by(I) A manufacturer for clearance of inputs or capital

goods from factory or depot or inputs or capital goods as such

(II) An Importer(III) An importer from his depot or consignment agent of

importer registered in terms of Central Excise Rules, 2002

(IV) First Stage Dealer / Second Stage Dealer

b) A Supplementary invoice issued by the manufacturer

Cenvat Credits – Documents and Cenvat Credits – Documents and AccountsAccounts

Rule 9 – Documents and Rule 9 – Documents and AccountsAccounts(bb) A Supplementary invoice issued by

Service Provider(c) A bill of entry(d) A certificate issued by appraiser of

customs in respect of goods imported through a Foreign Post Office.

(e) a challan evidencing payment of service tax by the person liable to pay service tax

(f) An invoice or bill or challan issued by provider of input services on or after 10.9.2004.

(g) An invoice or bill or challan issued by Input Service distributor under Rule 4A of Service Tax Rules, 1994

Returns under Cenvat Credit Rules, 2004Returns under Cenvat Credit Rules, 2004Rule 9(7) – Monthly return on Cenvat credit

availed within ten days from the close of each month - in Form ER1.SSI units - Quarterly return within twenty days after the close of the quarter – in Form ER3.

Rule 9(8) - First stage dealer/ Second stage dealer, ‘Registered Importer’ shall submit the Return within fifteen days from the close of each quarter of a year to the Superintendent of Central Excise.

Rule 9(9) – Service Provider shall submit a half yearly return in form specified, by notification, by the Board to the Superintendent of Central Excise, by the end of the month following the particular quarter or half year – in Form ST3 on or before 25th of next month following the half year.

Information relating to principal Information relating to principal inputsinputsRule 9A (1) – Annual information statement in

the Form ER 5 relating to the principal inputs before 30th April of each financial year.Rule 9A(3) - A monthly return in Form ER-6 in respect of information regarding the receipt and consumption of each principal inputs reference to the quantity of final products manufactured by him before 10th day of close of each month.However, ER5 and ER6 to be filed only if:(a) the products manufactured fall under Chapters 22,28,29,30,32,33,34,38,40,48, 54.02, 54.03, 55.01, 5502, 55.03, 55.04, 72, 73, 74, 76, 84, 85, 87,90 and 94; and All goods falling under Heading Nos 54.02, 54.03, 55.01, 55.02, 55.03 and 55.04(b) the manufacturer is paying excise duty of Rs. One crore or more

Transfer of Cenvat Credit – Rule Transfer of Cenvat Credit – Rule 1010Unutilised cenvat credit can be transferred

by manufacturer or output service provider in case factory is transferred on account of :◦Change in ownership◦Sale◦Merger◦Amalgamation◦Lease ◦Transfer of factory to a joint ventureSubject to the condition that transfer is duly accounted to the satisfaction of AC/DC of CE

Transitional provision – Rule 11Transitional provision – Rule 11

Any amount of credit earned under:

a) Cenvat Credit Rules, 2002b) Service Tax Credit Rules, 2002

remaining unutilised as on 10.9.2004 shall be allowed as Cenvat Credit by the manufacturer/ output service provider

Other ProvisionsOther ProvisionsRule 12A–Procedure and facilities for LTU:

Notwithstanding anything contained in CCR, 2004:(1) A large tax payer unit (LTU) may remove inputs,

with few exceptions, without payment of an amount specified in Rule 3(5) under the cover of a transfer challan or invoice, from any of his registered premises to his other registered premises for further use in the manufacture or production of final products in recipient premises subject to condition:

(a) the final products are manufactured using the inputs and cleared on payment of excise duty leviable within 6 months, from the date of receipt of inputs in the recipient premises; or

(b) the final products are manufactured using the said inputs and exported out of India, under bond /LUT within 6 months

Rule 12A-LTURule 12A-LTUFurther LTU has to satisfy any other

conditions prescribed by Commissioner of Central Excise, Large Tax payer Unit.

Explanation 1. — The transfer challan or invoice shall be serially numbered and shall contain the registration number, name, address of the large tax payer, description, classification, time and date of removal, mode of transport and vehicle registration number, quantity of the goods and registration number and name of the consignee :

Rule 12A – LTU procedure Rule 12A – LTU procedure Where the recipient unit which manufactures

the final products using the said inputs does not clear the same on payment of excise duty or the said goods are not exported within 6 months, or such inputs are cleared as such, then recipient unit has to pay cenvat amount taken on such inputs by the sender premises with interest under rule 14 of these rules.

Provided where capital goods are used exclusively in the manufacture of exempted goods, or such capital goods are cleared as such from the recipient premises, cenvat credit taken on such capital goods by the sender premises shall be paid by the recipient premises with interest under rule 14.

However, the above procedure / exemption is not applicable to EOUs, EHTPs & STPs as well as certain exemption notifications

Rule 12A - LTURule 12A - LTUA large tax payer may transfer, CENVAT credit from

one registered manufacturing premises or premises providing taxable service to his other such registered premises by, -

(i) making an entry for such transfer in the record maintained under rule 9;

(ii) issuing a transfer challan containing registration number, name and address of the registered premises transferring the credit as well as receiving such credit, the amount of credit transferred and above referred particulars,

The recipient premises can take CENVAT credit on the basis of such transfer challan as mentioned in clause (ii) subject to the limitations prescribed under clause (b) of sub-rule (7) of rule 3 :

Rule 12AAA – Power to impose restrictions Rule 12AAA – Power to impose restrictions in certain types of cases provisionsin certain types of cases provisions

Notwithstanding anything contained in these rules Central Government is empowered impose

restriction for preventing misuse of cenvat credit provisions.

Such restrictions may be on manufacturer, first stage and second stage dealer or an exporter

specify the nature of restrictions including restrictions on utilization of CENVAT credit and suspension of registration in case of a dealer and type of facilities to be withdrawn and procedure for issue of such order by the Chief Commissioner of Central Excise.

Notification under Rule Notification under Rule 12AAA12AAA

Notification No.16/2014-CE (NT) dated 21.03.2014 - Chief Commissioner of CE may order for withdrawal of facilities or impose restrictions in the following cases: 

(a) removal of goods without the cover of an invoice and without payment of duty;

(b) removal of goods without declaring the correct value for payment of duty, where a portion of sale price, in excess of invoice price, is received by him or on his behalf but not accounted for in the books of account;

(c) taking of CENVAT Credit without the receipt of goods specified in the document based on which the said credit has been taken; CONTINUED …

Notification under Rule 12AAANotification under Rule 12AAA(d) taking of CENVAT Credit on invoices or other

documents which a person has reasons to believe as not genuine;

(e) issuing duty of excise invoice without delivery of goods specified in the said invoice;

(f) claiming of refund or rebate based on the duty of excise paid invoice or other documents which a person has reason to believe as not genuine;

(g) removal of inputs as such on which Cenvat credit has been taken, without paying an amount equal to credit availed on such inputs in terms of sub-rule (5) of rule 3 of the Cenvat Credit Rules, 2004,

Rule 13 – Power of Central Government to Rule 13 – Power of Central Government to notify goods for deemed CENVAT creditnotify goods for deemed CENVAT credit

Notwithstanding anything contained in Rule 3, Central Government by notification

Declare the input or input service on which excise duty / CVD / service tax paid, shall be deemed to have been paid at such rate or such amount as may be specified in that notification , and

Allow CENVAT credit of such duty or tax deemed to have been paid in such manner and subject to such conditions as may be specified in that notification even if the input or input service are not used directly by the manufacturer of final products, or by the provider of [output] service, declared in that notification, but contained in the said final products or used in providing the [output] service.

Recovery of Cenvat – Rule 14Recovery of Cenvat – Rule 14Where cenvat credit is taken and

utilised wrongly or erroneously refunded:

Such cenvat credit along with interest shall be recovered under the above Rule and the following provisions will be applicable: ◦ Section 11A & 11AB of CE Act, 1944

◦Section 73 & 75 of Finance Act, 1994

Confiscation & PenaltyConfiscation & PenaltyRule 15(1) – Wrong availment of Cenvat credit on

inputs without taking reasonable steps to ensure payment of duty or contravenes any provisions of Rules – Minimum Rs.2,000

Rule 15(2) – Availment or utilisation of cenvat credit of input or capital goods on account of fraud, wilful mis-statement, collusion or suppression of facts or contravention of any provisions of Rules – Section 11AC of Central Excise Act, 1944

Rule 15(3) - Availment or utilisation of cenvat credit of input service on account of fraud, wilful mis-statement, collusion or suppression of facts or contravention of any provisions of Rules – S. 78 of Finance Act, 1994

Confiscation & PenaltyConfiscation & Penalty

Rule 15A – General Penalty

A new Rule 15 A has been inserted w.e.f. 01.03.2008 which stipulates that if an assessee has contravened the provisions of the Rules and no penalty is prescribed in the Rules for such contravention, he will be liable for a maximum penalty of Rs. 5000/-

Thank you

V.RAGHURAMANB Com, FCA, LLB, ACS, Grad. CWA

Email id: vraghuraman@vraghuraman.in