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 Credit Rules 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 s.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