Before we begin:
Hello friends! Greetings of the day to all of you. In this article we will be discussing some basic concepts in Cenvat credit Rules,2004…Cenvat Credit Rules is really one of the most important topic not only from exam view but also in practical life…and no need to say that most of the litigations in excise and ST is on a single question-whether Cenvat credit can be claimed or not ?This topic is also the most interesting topic in indirect taxes.
This article is written keeping in mind all beginners like me and I have tried my best to discuss the concepts comprehensively backed by suitable examples… believe that it will be useful for you…
Q-1 What is Cenvat Credit?
Ans-The word CENVAT Credit is composed of two words CENVAT and Credit, where CENVAT means Central Excise Duty or Service Tax and also Custom duty (in a few cases).
Credit means a subsequent claim of set-off of something paid earlier. Therefore, Cenvat credit means credit of ST/excise and customs(additional duty) paid on purchase of inputs , input services and capital goods…..such
credit can be used/utilized/set-off against ST/excise payable on clearance of manufactured products and rendering of services…
For Instance-Bata India Ltd. a shoe manufacturing co. use the leather as raw material which is purchased with excise duty as charged by supplier….Bata also uses the services of fashion designers to make fashionable shoes, thus it paid ST on bills raised by fashion designers…….Now Bata Ltd manufactured shoes and want to clear the same from factory, in that case Bata Ltd liable to pay excise duty on manufactured shoes…..such excise duty can be paid by utilizing the credit of input excise and input ST as paid …and still if anything left unpaid the same to be paid in cash.
Q-2 How Cenvat Credit is different from Modvat Credit?
Ans-2 In fact Cenvat is the refined version of Modvat. In Modvat system you can take credit of input excise against output excise but you cannot claim credit of input service tax against output service tax or against output excise. In short service sector was not integrated in credit system.
But in 2004 Modvat Credit Rules were repealed(withdrawn) by introduction of Cenvat Credit Rules, 2004. Under Cenvat system, you can take the credit of both input excise and input ST to pay output excise or to pay output ST that’s why Cenvat system is also termed as Cross-sectional credit system. So, obviously Cenvat is far better than Modvat.
Special Note:(But if you have noted that still many companies are in fact recording Cenvat by the name of Modvat….aur toh aur h apne tax Audit form 3CD ka clause No.-22(a) hi dekh lijiye waha bhi Modvat hi milega jo ki really mein Cenvat hi h…:-)
Q-3 What is the scope of Cenvat credit?
Ans-3 As per Rule 3(1) of Cenvat Credit Rules(CCR),2004 credit of following input tax or duties paid on purchase of inputs(raw mat.), input services and capital goods can be claimed subject to specific restrictions as
provided in Rules:
a. Excise duty or Service tax or Special/Additional duty of customs (CVD) chargeable u/3(1) or Sec3 (5) of of Customs Tariff Act(CTA), 1975 can be claimed as Cenvat Credit.
b. But here it is important to note that as per Proviso to Rule 3(1) of Cenvat Credit Rules,2004 the credit of additional/special custom duty(CVD) as paid under Sec 3(5) of CTA,1975 cannot be claimed by a service provider to pay output ST or excise. however manufacturer can claim the same to pay output excise.
Q-4 We know that Cenvat credit can be taken of Excise, ST or Additional customs, as the case may be, paid on inputs or input services or capital goods?...So explain how to identify that what qualifies as inputs , input servs and capital goods?
Ans-4 A) Inputs: Simply we can call as raw material.
As per Rule 2(k) of CCR, 2004, Inputs means and includes the following:
i) All goods used in factory by manufacturer for manufacturing final products and also includes goods used by service provider to provide output service (service provider can use the same even outside the service station/premises)
ii) Input also include goods used for generation of electricity or steam for use in factory (captive consumption) inputs may be used outside the factory i.e. at electricity plant site but electricity/steam to be used in factory only)
iii)All accessories cleared along with final product provided the value of the same is included in the value of Final
product
For Instance: Colgate Limited manufacture toothpaste but clear the toothpaste in packed box with a free toothbrush attached therewith but in reality the same is not at all free because the value of same is included
in the MRP of paste itself and thus toothbrush qualify as inputs…:-)
iv) Any goods used for providing free warranty (after sale services)
(B) Input Services: Input services means and include the following:
i) Any service used by provider of output service to provide the same
ii) Any service used whether directly or indirectly in or in relation to:
– manufacture of final products and
– clearance of final products upto place of removal and not beyond that
(Where place of removal = factory or warehouse or in some cases premises of consignee if goods were sold through consignee—See Sec 4(3)(c) of Cent Ex Act,1944)
iii) Input services also include these 18 services listed below (Inclusive clause)
These 18 services are eligible as input service for both manufacturer and service provider and these services are always deemed to be use for manufacturing/service operation:
1. Modernization/repairs & maintenance of factory or service station /premises
2. Advertisement or Sales Promotion..
3. Market Research
4. Storage up to place of removal
5. Procurement of inputs
6.Accounting
7. Auditing
8. Financing
9.Recruitment & Quality control
10.Caoching & training
11. Computer networking
12.credit rating
13.share registry
14. Security
15.Business exhibition
16.legal services
17. inward transportation
18.outward transportation up to place of removal.
The above 18 services can be remembered by remembering these 3 sentences:
(In bracket the services serial no. has been indicated)
1. Advertisement-(2) in modern(1) factory to store(4) the procured inputs(5) so that there quality(9) could be maintained and the accountant(6) may easily audit/verify(7) the stock.
2. Using Security(14) and legal services(16) to get shares registered(13) thereby getting good credit rating(14) which would help in financing by banks(8)
3. Remaining 6 services to be crammed-(See point No.3, 10,11,15,17&18)
(C) Capital goods: Capital goods means and include the following:
i) All goods specified under First Schedule of Central Ex. Tariff Act(CETA),1985
(Like machineries, boilers, various tools , spare parts and accessories of various equipments and instruments)
ii) Pollution control equipment
iii) moulds and dies, jigs and fixtures:
a. mould-a container used to design liquid in desired shape
b. dies-a device/equipment for cutting metals
c. jigs-a device that guides the tools used in any manufacturing process
d. fixtures-a piece of equipment which is in fixed position
iv) refractories and refractory materials where refractory – means lining consisting of materials with a high melting point used to line the inside walls of a furnace
v) tubes, pipes and their fittings
vi) storage tanks and
vii) Motor vehicles (other than meant for transport of goods or persons….but including dumpers, tippers , cranes and loader used for handling of machineries etc. )
However, Motor vehicles used for transport of goods shall be capital goods for those service providers who are using the same as:
1. For renting the motor vehicles and the same are used by lessee in his goods transport business
2. For transportation of inputs and other capital goods in connection with rendering of output service.
Example: Unique Techno Sales & Service is using its trucks to carry spare parts and machineries at the premises of its customer where the repairs and maintenance services are being provided, and then the trucks will qualify as capital goods for Unique Sales & Service
3. For providing courier agency services…so trucks, tempos used by First Flight couriers will qualify as capital goods for it.
Further, Motor vehicles used for transport of passengers will qualify as capital goods for the following service
providers using the same as:
1. For transportation of passengers
2. For renting the motor vehicle….so if I own some buses and give the same on hire then the same will qualify as capital goods for me.
3. Imparting motor driving training
Q-5 We have discussed what is input and input services…so now discuss which raw materials or services which seems as input or input services but actual the same are specifically excluded?
Ans- Following are not inputs (As per Explanations to Sec2 (k)
1. Light diesel Oil, High speed Oil or Petrol
2. Capital goods except when used as parts in manufacture of a final product(say very heavy machineries)
3.Motor vehicles…..in some cases motor vehicles are not capital goods(See Ans-4) so many manufacturers started to treat the same as inputs for claiming Cenvat credit …so for the same it was clarified that in no case motor vehicles will qualify as inputs…
4.Any goods used for personal consumption of employees…so if packed dry fruits gifted to employees on the occasion of Diwali will not qualify as inputs …so excise duty charged by Urmin Products Ltd(Supplier) cannot be claimed as Cenvat credit :-)
5. Any goods used for:
a. Construction or execution of works contract of a building or its part
b. Laying of foundation for support of capital goods
For Instance: Wipro Ltd.using bricks, cement for constructing a factory building…then the same will not qualify as input for Wipro Ltd…and therefore Wipro Ltd cannot claim the credit of excise.
However, if Wipro Ltd has signed a contact with Niddhi Construction to construct the building then M/s Niddhi Construction can claim the credit of excise paid on cement, bricks …and accordingly discharge its ST liability by
utilizing the credit ….. (Point 5 inserted w.e.f Apr 1,2012 to overrule the judgment of Customs, Ex. And ST Appellate Tribunal (CESTAT),New Delhi in the case of Oberoi Mall vs Commissioner of Central Excise….thank god the amendment was not retrospective)
6. Any goods which have no relation with the manufacturing of final product or providing output service cannot be considered as input.
Following are not input services as per Explanations to Sec2 (l):
1. Construction or Works contract services…continuing with the example in point 4(above)…Wipro Ltd as per agreement with M/s Niddhi Construction paid the contracted price with ST as applicable…now it’s a million dollar question that whther Wipro Ltd can claim the credit of that ST …….
The answer is NO….Wipro Ltd whether self construct or sign a contract …in both cases –no Cenvat credit….
(This point also inserted w.e.f Apr 1,2012 to overrule the judgment of Customs, Ex. And ST Appellate Tribunal(CESTAT) ,New Delhi in the case of Oberoi Mall vs Commissioner of Central Excise)
2. Input services excludes service of general insurance, repairs & maintenance in relation to motor vehicles which are not capital goods [as per Rule 2(a)-See above]. But credit is available to manufacturer for insurance , repairs & maintenance of motor vehicles manufactured by him…So Hero Motocorp can claim the credit of bikes insured with National Insurance co,…..but say Reliance Industries insured its motor vehicles, then Reliance cannot claim credit as such…..
3. Input services related to hiring of motor vehicles cannot be claimed as credit if the motor vehicles are not
capital goods as per Rule 2(a).
For Instance: Reliance Industries hiring some tempos so that the raw materials could be brought to factory from suppliers godown….in that case tempos will not qualify as capital goods therefore hiring services taken by
Reliance is not input services and therefore credit of ST paid with hiring charges cannot be claimed…
4. Servicees used primarily for personal consumption of employees like health services, beauty treatment, life insurance, travel benefits(not for business purpose) etc. are also excluded from the definition of input services…
With this we finish the discussion here only, the remaining concepts will be discussed in next articles very soon…..So Good Bye….:-)
Thanks for your reading.
For any feedbacks, queries and comments feel free to mail me.
With Warm Regards
Saurabh Maheshwari
CA Final Student
Email-saurabhchokhra92@gmail.com
The will to win, the desire to succeed and the urge to reach your full potential these are the keys that will unlock
the doors of you excellence.
Source : IDT Refrence book and others -
Hello friends! Greetings of the day to all of you. In this article we will be discussing some basic concepts in Cenvat credit Rules,2004…Cenvat Credit Rules is really one of the most important topic not only from exam view but also in practical life…and no need to say that most of the litigations in excise and ST is on a single question-whether Cenvat credit can be claimed or not ?This topic is also the most interesting topic in indirect taxes.
This article is written keeping in mind all beginners like me and I have tried my best to discuss the concepts comprehensively backed by suitable examples… believe that it will be useful for you…
Q-1 What is Cenvat Credit?
Ans-The word CENVAT Credit is composed of two words CENVAT and Credit, where CENVAT means Central Excise Duty or Service Tax and also Custom duty (in a few cases).
Credit means a subsequent claim of set-off of something paid earlier. Therefore, Cenvat credit means credit of ST/excise and customs(additional duty) paid on purchase of inputs , input services and capital goods…..such
credit can be used/utilized/set-off against ST/excise payable on clearance of manufactured products and rendering of services…
For Instance-Bata India Ltd. a shoe manufacturing co. use the leather as raw material which is purchased with excise duty as charged by supplier….Bata also uses the services of fashion designers to make fashionable shoes, thus it paid ST on bills raised by fashion designers…….Now Bata Ltd manufactured shoes and want to clear the same from factory, in that case Bata Ltd liable to pay excise duty on manufactured shoes…..such excise duty can be paid by utilizing the credit of input excise and input ST as paid …and still if anything left unpaid the same to be paid in cash.
Q-2 How Cenvat Credit is different from Modvat Credit?
Ans-2 In fact Cenvat is the refined version of Modvat. In Modvat system you can take credit of input excise against output excise but you cannot claim credit of input service tax against output service tax or against output excise. In short service sector was not integrated in credit system.
But in 2004 Modvat Credit Rules were repealed(withdrawn) by introduction of Cenvat Credit Rules, 2004. Under Cenvat system, you can take the credit of both input excise and input ST to pay output excise or to pay output ST that’s why Cenvat system is also termed as Cross-sectional credit system. So, obviously Cenvat is far better than Modvat.
Special Note:(But if you have noted that still many companies are in fact recording Cenvat by the name of Modvat….aur toh aur h apne tax Audit form 3CD ka clause No.-22(a) hi dekh lijiye waha bhi Modvat hi milega jo ki really mein Cenvat hi h…:-)
Q-3 What is the scope of Cenvat credit?
Ans-3 As per Rule 3(1) of Cenvat Credit Rules(CCR),2004 credit of following input tax or duties paid on purchase of inputs(raw mat.), input services and capital goods can be claimed subject to specific restrictions as
provided in Rules:
a. Excise duty or Service tax or Special/Additional duty of customs (CVD) chargeable u/3(1) or Sec3 (5) of of Customs Tariff Act(CTA), 1975 can be claimed as Cenvat Credit.
b. But here it is important to note that as per Proviso to Rule 3(1) of Cenvat Credit Rules,2004 the credit of additional/special custom duty(CVD) as paid under Sec 3(5) of CTA,1975 cannot be claimed by a service provider to pay output ST or excise. however manufacturer can claim the same to pay output excise.
Q-4 We know that Cenvat credit can be taken of Excise, ST or Additional customs, as the case may be, paid on inputs or input services or capital goods?...So explain how to identify that what qualifies as inputs , input servs and capital goods?
Ans-4 A) Inputs: Simply we can call as raw material.
As per Rule 2(k) of CCR, 2004, Inputs means and includes the following:
i) All goods used in factory by manufacturer for manufacturing final products and also includes goods used by service provider to provide output service (service provider can use the same even outside the service station/premises)
ii) Input also include goods used for generation of electricity or steam for use in factory (captive consumption) inputs may be used outside the factory i.e. at electricity plant site but electricity/steam to be used in factory only)
iii)All accessories cleared along with final product provided the value of the same is included in the value of Final
product
For Instance: Colgate Limited manufacture toothpaste but clear the toothpaste in packed box with a free toothbrush attached therewith but in reality the same is not at all free because the value of same is included
in the MRP of paste itself and thus toothbrush qualify as inputs…:-)
iv) Any goods used for providing free warranty (after sale services)
(B) Input Services: Input services means and include the following:
i) Any service used by provider of output service to provide the same
ii) Any service used whether directly or indirectly in or in relation to:
– manufacture of final products and
– clearance of final products upto place of removal and not beyond that
(Where place of removal = factory or warehouse or in some cases premises of consignee if goods were sold through consignee—See Sec 4(3)(c) of Cent Ex Act,1944)
iii) Input services also include these 18 services listed below (Inclusive clause)
These 18 services are eligible as input service for both manufacturer and service provider and these services are always deemed to be use for manufacturing/service operation:
1. Modernization/repairs & maintenance of factory or service station /premises
2. Advertisement or Sales Promotion..
3. Market Research
4. Storage up to place of removal
5. Procurement of inputs
6.Accounting
7. Auditing
8. Financing
9.Recruitment & Quality control
10.Caoching & training
11. Computer networking
12.credit rating
13.share registry
14. Security
15.Business exhibition
16.legal services
17. inward transportation
18.outward transportation up to place of removal.
The above 18 services can be remembered by remembering these 3 sentences:
(In bracket the services serial no. has been indicated)
1. Advertisement-(2) in modern(1) factory to store(4) the procured inputs(5) so that there quality(9) could be maintained and the accountant(6) may easily audit/verify(7) the stock.
2. Using Security(14) and legal services(16) to get shares registered(13) thereby getting good credit rating(14) which would help in financing by banks(8)
3. Remaining 6 services to be crammed-(See point No.3, 10,11,15,17&18)
(C) Capital goods: Capital goods means and include the following:
i) All goods specified under First Schedule of Central Ex. Tariff Act(CETA),1985
(Like machineries, boilers, various tools , spare parts and accessories of various equipments and instruments)
ii) Pollution control equipment
iii) moulds and dies, jigs and fixtures:
a. mould-a container used to design liquid in desired shape
b. dies-a device/equipment for cutting metals
c. jigs-a device that guides the tools used in any manufacturing process
d. fixtures-a piece of equipment which is in fixed position
iv) refractories and refractory materials where refractory – means lining consisting of materials with a high melting point used to line the inside walls of a furnace
v) tubes, pipes and their fittings
vi) storage tanks and
vii) Motor vehicles (other than meant for transport of goods or persons….but including dumpers, tippers , cranes and loader used for handling of machineries etc. )
However, Motor vehicles used for transport of goods shall be capital goods for those service providers who are using the same as:
1. For renting the motor vehicles and the same are used by lessee in his goods transport business
2. For transportation of inputs and other capital goods in connection with rendering of output service.
Example: Unique Techno Sales & Service is using its trucks to carry spare parts and machineries at the premises of its customer where the repairs and maintenance services are being provided, and then the trucks will qualify as capital goods for Unique Sales & Service
3. For providing courier agency services…so trucks, tempos used by First Flight couriers will qualify as capital goods for it.
Further, Motor vehicles used for transport of passengers will qualify as capital goods for the following service
providers using the same as:
1. For transportation of passengers
2. For renting the motor vehicle….so if I own some buses and give the same on hire then the same will qualify as capital goods for me.
3. Imparting motor driving training
Q-5 We have discussed what is input and input services…so now discuss which raw materials or services which seems as input or input services but actual the same are specifically excluded?
Ans- Following are not inputs (As per Explanations to Sec2 (k)
1. Light diesel Oil, High speed Oil or Petrol
2. Capital goods except when used as parts in manufacture of a final product(say very heavy machineries)
3.Motor vehicles…..in some cases motor vehicles are not capital goods(See Ans-4) so many manufacturers started to treat the same as inputs for claiming Cenvat credit …so for the same it was clarified that in no case motor vehicles will qualify as inputs…
4.Any goods used for personal consumption of employees…so if packed dry fruits gifted to employees on the occasion of Diwali will not qualify as inputs …so excise duty charged by Urmin Products Ltd(Supplier) cannot be claimed as Cenvat credit :-)
5. Any goods used for:
a. Construction or execution of works contract of a building or its part
b. Laying of foundation for support of capital goods
For Instance: Wipro Ltd.using bricks, cement for constructing a factory building…then the same will not qualify as input for Wipro Ltd…and therefore Wipro Ltd cannot claim the credit of excise.
However, if Wipro Ltd has signed a contact with Niddhi Construction to construct the building then M/s Niddhi Construction can claim the credit of excise paid on cement, bricks …and accordingly discharge its ST liability by
utilizing the credit ….. (Point 5 inserted w.e.f Apr 1,2012 to overrule the judgment of Customs, Ex. And ST Appellate Tribunal (CESTAT),New Delhi in the case of Oberoi Mall vs Commissioner of Central Excise….thank god the amendment was not retrospective)
6. Any goods which have no relation with the manufacturing of final product or providing output service cannot be considered as input.
Following are not input services as per Explanations to Sec2 (l):
1. Construction or Works contract services…continuing with the example in point 4(above)…Wipro Ltd as per agreement with M/s Niddhi Construction paid the contracted price with ST as applicable…now it’s a million dollar question that whther Wipro Ltd can claim the credit of that ST …….
The answer is NO….Wipro Ltd whether self construct or sign a contract …in both cases –no Cenvat credit….
(This point also inserted w.e.f Apr 1,2012 to overrule the judgment of Customs, Ex. And ST Appellate Tribunal(CESTAT) ,New Delhi in the case of Oberoi Mall vs Commissioner of Central Excise)
2. Input services excludes service of general insurance, repairs & maintenance in relation to motor vehicles which are not capital goods [as per Rule 2(a)-See above]. But credit is available to manufacturer for insurance , repairs & maintenance of motor vehicles manufactured by him…So Hero Motocorp can claim the credit of bikes insured with National Insurance co,…..but say Reliance Industries insured its motor vehicles, then Reliance cannot claim credit as such…..
3. Input services related to hiring of motor vehicles cannot be claimed as credit if the motor vehicles are not
capital goods as per Rule 2(a).
For Instance: Reliance Industries hiring some tempos so that the raw materials could be brought to factory from suppliers godown….in that case tempos will not qualify as capital goods therefore hiring services taken by
Reliance is not input services and therefore credit of ST paid with hiring charges cannot be claimed…
4. Servicees used primarily for personal consumption of employees like health services, beauty treatment, life insurance, travel benefits(not for business purpose) etc. are also excluded from the definition of input services…
With this we finish the discussion here only, the remaining concepts will be discussed in next articles very soon…..So Good Bye….:-)
Thanks for your reading.
For any feedbacks, queries and comments feel free to mail me.
With Warm Regards
Saurabh Maheshwari
CA Final Student
Email-saurabhchokhra92@gmail.com
The will to win, the desire to succeed and the urge to reach your full potential these are the keys that will unlock
the doors of you excellence.
Source : IDT Refrence book and others -
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