Cenvat Credit Rules from scratch Part-2

Hello friends, Greetings of the day to you all!

 In continuation with the previous article the next part is ready, so let’s begin discussing the remaining topics.

The link for first part: Cenvat CreditRules from scratch

Q-1 What are the timing, manner and conditions for availment of CENVAT credit on inputs, input services and capital goods?

 Ans-1 Availment of CENVAT credit means booking/claiming /taking CENVAT credit…..once the credit has been so booked can be utilized for payment of output excise and ST….

A. Booking of credit in respect of inputs (Rule 4(1) CCR,2004)

i. Timing in case of manufacturer-

The credit may be taken immediately on receipt of inputs in the factory of the manufacturer.

ii. Timing in case of service provider-

a. The credit may be taken immediately on receipt of inputs in the premises of service provider. OR

b. On delivery of inputs to service provider (at any place) provided that invoice of the same evidencing location of inputs and their delivery has been maintained by service provider.

(Clause (b) in short says that a s.provider can take credit even if inputs are delivered to a place other than premises/service station subject to maintenance of invoice evidencing their delivery and location……..the logic of  clause (b) is that in many cases s.provider has to carry inputs to different places so as to render services therefore the rule provides liberty that you can receive inputs at any premises but just maintain proper records…)

 B. Booking/Taking credit in respect of capital goods-

 i. In case of manufacturer -

The credit may be taken on receipt of capital goods in the factory of manufacturer.

But in case of capital goods used for generation of electricity which is to be consumed by the factory, the credit may be claimed even if the capital goods are received outside the factory (i.e at electricity plant site)

(ii) In case of s.provider-(Copy of the Rule 4(1) except that inputs to be replaced by capital goods)

(a) The credit may be taken immediately on receipt of capital goods in the premises of service provider. OR

(b) On delivery of capital to service provider (at any place) provided that invoice of the same evidencing location of capital goods and their delivery has been maintained by service provider……

Quantum of credit in respect of capital goods-

Credit to be allowed in 2 shots (2 FYs)…..i.e 50% credit in the FY of receipt/delivery of capital goods and balance 50% in the next FY but in next FY credit can be taken only and only when the capital goods are in the possession of manufacturer/s.provider…..so if the capital goods are sold in 1st FY then the balance 50% will not be available in next FY….

But say if such capital goods are sold in 2nd FY but after taking balance 50% credit then what to do????(in such a case some part of credit to be reversed as per Rule 3(5)/3(5A) to be discussed later on….. )]

Exceptions to conditions (as above) for claiming credit in respect of capital goods:

1.100% credit to be allowed in 1st FY itself to a manufacturer eligible for Small Scale Industries(SSI) exemption as per Notification No.8/2003…..But here it is important to note that such 100% credit is ‘not allowed’ to a service provider availing Small Scale Service Provider exemption in terms of Notification No. 33/2012.

 2. No need to have the possession of capital goods in next FY for claiming balance 50% credit …..such capital goods are components, spares & accessories , refractory materials, moulds & dies etc…

 Other Points to be noted in respect of credit of capital goods-

 1. Capital goods acquired on lease/hire purchase are also eligible for credit.[Rule 4(3)].

 2. No credit of duty if such duty component has been capitalized in books and depreciation has been claimed on the same u/s 32 of I.T Act,1961……so no double benefit of CENVAT credit and depreciation…[Rule 4(4)]

 (Also if we cross refer I.T Act, Explanation 9 to Sec 43(1) is very clear that cost of capital goods will not include the portion of duty of which credit is allowed and being claimed under CCR, 2004).

3.The credit of whole of duty to be allowed on capital goods removed as such (i.e without being used) from factory/premises of s.provider in the same FY….(in fact first of all 100% credit is given then  the same is asked to be reversed as per  Rule 3(5).

C. Booking/Taking credit in respect of input services [Rule 4(7)]

Common conditions for both manufacturer and s.provider:

The credit is allowed on receipt of invoice (i.e even if input service not paid) but credit to be reversed if payment of value of input service and ST chargeable is not paid within 3 months from date of invoice…..

Example- X Ltd. a s.provider received invoice/bill raised by Airtel dated Oct 31 (for month of October….in such case the credit may be claimed by X Ltd to discharge its ST liability for month of Oct…..but X ltd is supposed to pay that bill with ST before Feb 1…if fails to pay then the credit so claimed to be reversed (balance if any) otherwise to be paid in cash.

 But here also suppose X ltd fails to pay the bill by Feb 1…and thereafter pays it March, in that case the reversed credit can be taken back in March.

 Some important points in relation to credit of input services:

 1. A s.receiver who is liable to pay ST under RCM (full/partial) is also entitled to claim the credit ‘of ST as paid under RCM’…but such credit allowed only on payment basis…i.e pay ST under RCM then only credit …

 [Note- s. receiver can claim credit of ST paid under RCM only and only when the services on which he is paying tax qualifies as input services for him….and not otherwise-Rule 9(1)(e) CCR,2004]

 2. Credit already taken to be reversed if the value of input services refunded wholly or partly to the person claiming credit(s.provider/s.receiver)…if a part of value is refunded then proportionate credit to be reversed.

Q-2 What is meant by Utilization of CENVAT credit, also what are related conditions subject to which credit to be utilized? [Rule 3(4)+Rule 3(7)]

Ans-2 The CENVAT credit may be utilized for payment of excise duty, ST and other amounts (like credit to be reversed in some cases etc.)

But credit balance available at the end of the month/quarter can only be used to discharge tax/duty liability for that month.

For Instance: Various invoices received upto Nov 30,2013 for input excise and input ST can only be used to pay ST/excise liability for Nov 2013…..In short invoices received b/w Dec 1 to date of payment of excise ST cannot be used for paying ST/excise for Nov 2013(they can be used for paying ST/excise for Dec 2013)….

S.receiver and CENVAT credit:

Further as per Explanation to Rule 3(4) , a s.receiver liable to pay ST under RCM cannot use the credit of ST/excise to discharge its ST liability under RCM….such s.receiver required to pay ST under RCM only in cash(i.e. cash/bank/net banking)…

Example- Wipro Ltd. is providing I.T software services, a manufacturer of lighting products and also a s.receiver receiving Goods Transport services on which it is liable to pay 100% ST as per RCM as per Notification No. 

25/2012….

 So, here Wipro cannot pay ST on GTA services by using CENVAT credit balance…so such Reverse charge ST to be paid in cash only….

  But here an option available to Wipro is to take the benefit of Rule 9(1)(e) and claim the credit of ST paid under RCM on GTA services by justifying GTA as input service,…..so Wipro can as such use credit of ST as paid under RCM to discharge its ST liability in respect of I.T software services or can use that credit for discharging excise liability on manufacture of lighting products.

 Restrictions to utilize CENVAT credit in certain cases:

 1. Credit of Education cess(EC) as charged in addition to ST/excise/CVD u/s 3(1) or Special CVD u/s 3(5) of Customs Tariff Act, 1975 can be used only to pay EC on goods or services….In short credit of  EC cannot be utilized to pay Basic Excise or Basic ST (12% element )

 Similarly, SHEC cannot be utilized to pay Basic Excise/ST …and can only be used to pay SHEC on goods & services. But here it is important to note that that Basic ST/excise can be used to pay both EC/SHEC payable on goods& services…..

 2. Credit of Special CVD as chargeable u/s 3(5) of Customs Tariff Act,1975 cannot be utilized to pay ST and EC/SHEC on  services….but can be freely used to pay excise and EC/SHEC on goods.

3. No Credit of any duty or tax can be utilized to pay Clean Energy Cess(CEC) as chargeable under Sec 83 of Finance Act,2010…..so CEC to be paid in cash only……Till date CEC is chargeable on coal, lignite and peat.

4.No credit shall be used to pay duty on goods which are enjoying exemption u/Notification

No.1/2011(exemption here means that duty is chargeable only @2% on goods covered by such notification) … therefore concessional duty of 2% to be paid only in cash and no credit can be used to pay the same.

Q-3 What are the provisions relating to payment of excise on inputs and capital goods removed?

Ans-3 In many cases manufacturer/s.provider after taking the  credit of inputs and capital goods removes(sale, sending to job worker or removing for any other purpose ) such inputs or capital goods from the factory or premises of s.provider.

Here CCR says that since you have already claimed the credit of excise and as such clearing inputs/capital goods out you are actually not putting them to use for manufacturing/service operations…..and since you are not as such using so reverse the credit already taken..

A. Cases of Reversals:

1. Removal of inputs or capital goods “as such”(i.e. without being used)-[Rule 3(5)] -Higher of  (a) or (b) to be reversed

a) 100% credit of excise as already taken to be reversed  OR

b) duty payable on transaction value(transaction value =Sale price+other amounts as paid/payable to manufacturer-See Sec 4(3)(d) of CE Act,1944)

Note-If capital goods are removed as such(without use) in 1st yr. itself then 100% credit can be taken and the same to be reversed also as per Rule 3(5)

2. Writing off inputs or capital goods before being put to use [Rule 3(5B)] 

--The entire CENVAT credit which has been availed of has to be reversed….

[Generally inputs are w/off when they gets damaged or otherwise not considered as fit for use, capital goods are w/off in case of under revaluation or impairment as per AS-28….but w/off capital goods by charging depreciation is not to be considered as w/off for the purpose of Rule 3(5B)]

 Notes-

a) No reversal is required if inputs are w/off fully or partially after being used.

b) If such inputs after being w/off  are subsequently used in manufacture of final products or for provision of taxable services ……..In such a case  credit reversed  earlier as per Rule 3(5B) can be re-taken.

 3. Reversal of credit under Rule 3(5C) -

  

--If excise duty payable on final product is remitted(waived) u/Rule 21 of Central Excise Rules,2002 then credit taken on inputs used in manufacture of such final products to be reversed u/Rule 3(5C) of CCR,2004.

  

[Excise duty payable on final products is remitted u/Rule 21 by the Asst/Deputy Commissioner of Central Excise when the manufactured goods are lost or destroyed by natural causes or unavoidable accidents or otherwise claimed by manufacturer as unfit for consumption due to any other reason…..But in case duty is not remitted by AC/DC then no need to reverse credit u/Rule 3(5C)]

Note: No reversal is required for credit taken in respect of ST paid on input services used in the manufacture of final products on which duty has been remitted.

 4. Removal of capital goods after being used[Rule 3(5A)]

 --After use capital goods can be removed as in fit form or as waste/scrap….in both cases a part of CENVAT credit taken on them to be reversed

  

[Note: capital goods removed without use, such case covered by Rule 3(5)-see point no.-1(above)]

 Exceptions: No credit to be reversed in following cases:

 a) If capital goods or inputs are removed by s.provider for providing taxable services.

b) If inputs are removed outside the factory to provide free warranty services (after sale services)

 Capital goods removed in fit form(i.e. as capital goods only) or as waste

It has    2 parts A and B….Credit to be reversed to be worked in the following manner:

 Part A. For capital goods other than computer and other computer peripherals:

-- Higher of Parameter -1 or Parameter -2 to be reversed

Example:

Shri Sai Ltd. purchased capital goods(non-computer) worth Rs. 5 lacs plus 12.36% excise duty on Apr 1,2013. CENVAT credit on same has been taken as per Rules(i.e in 2 installments)…..What will be the consequences if the capital goods are removed(sold to XYZ Ltd) on Nov 2,2014 for Rs. 6 lacs?

Solution- Excise duty paid on purchase = Rs. 61,800

(5 lacs*12.36%)

Credit claimed = 61,800 (i.e 30,900 in FY 13-14 and 30,900 in FY 14-15)

Credit to be reversed as per Rule 3(5A) to be worked as under:

Part B. For computer and other computer peripheral: 

Higher of Parameter -1 or Parameter -2 to be reversed

With this we finish our discussion here only, still many topics to be covered…so in next article we will be discussing refund of CENVAT credit, reversal in case of exempted goods and services and passing of credit by dealers and Input service distributors.

 So good bye…meeting soon in next part :-)

 For any feedbacks, queries and comments you are most welcomed. Thanks for you reading

With Warm Regards
Saurabh Maheshwari

Email-saurabhchokhra92@gmail.com 

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Cenvat Credit Rules from scratch

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 upto place of removal……list thodi lambi ho gayi na…

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 services……

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. 

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