modvat
This query is : Resolved
20 February 2009
Modvat is replace by cenvat
Background of CENVAT
Cenvat (Central Value Added Tax) has its origin in the system of VAT (Value Added Tax), which is common in West European Countries. Concept of VAT was developed to avoid cascading effect of taxes. VAT was found to be a very good and transparent tax collection system, which reduces tax evasion, ensures better tax compliance and increases tax revenue.
Modvat (modified value added tax) was introduced in India in 1986 (Modvat was re-named as Cenvat w.e.f. 1-4-2000). The system was termed as Modvat, as it was restricted upto manufacturing stage and credit of only excise duty paid on manufacturing products (and corresponding CVD paid on imported goods) was available.
System of VAT was introduced to service tax w.e.f. 16-8-2002.
VAT was not extended to sales tax, as sales tax is under jurisdiction of State Governments. However, State Governments have agreed to introduce sales tax VAT and it is likely to be introduced from April 2005. Haryana Government has introduced sales tax VAT in April 2004 and the experience is reported to be good.
Integration of goods and service tax - A task force was formed under Chairmanship of Shri Vijay Kelkar on Implementation of Fiscal Responsibility and Budget Management Act. The Kelkar Committee submitted its report in July 2004. The Committee has strongly recommended ‘Goods and Service Tax’ (GST).
Full integration of goods and service tax will take considerable time, as it can be achieved only after political consensus is achieved. However, a beginning has been made by proposing to make credit of service tax and excise duty inter-chargeable. Finance Minister Shri P Chidambaram, in para 148 of his budget speech on 8-7-2004, stated as follows, ‘I propose to take a major step towards integrating the tax on goods and services. Accordingly, I propose to extend credit of service tax and excise duty on goods and services. Accordingly, I propose to extend credit of service tax and excise duty across goods and services’.
To give effect to this proposal, Cenvat Credit Rules, 2004 have been issued and made effective from 10-9-2004.
Basic Concept of VAT
Generally, any tax is related to selling price of product. In modern production technology, raw material passes through various stages and processes till it reaches the ultimate stage e.g., steel ingots are made in a steel mill. These are rolled into plates by a re-rolling unit, while third manufacturer makes furniture from these plates. Thus, output of the first manufacturer becomes input for second manufacturer, who carries out further processing and supply it to third manufacturer. This process continues till a final product emerges. This product then goes to distributor/wholesaler, who sells it to retailer and then it reaches the ultimate consumer.
If a tax is based on selling price of a product, the tax burden goes on increasing as raw material and final product passes from one stage to other. For example, let us assume that tax on a product is 10% of selling price. Manufacturer ‘A’ supplies his output to ‘B’ at Rs. 100. Thus, ‘B’ gets the material at Rs. 110, inclusive of tax @ 10%. He carries out further processing and sells his output to ‘C’ at Rs. 150. While calculating his cost, ‘B’ has considered his purchase cost of materials as Rs. 110 and added Rs. 40 as his conversion charges. While selling product to C, B will charge tax again @ 10%. Thus C will get the item at Rs. 165 (150+10% tax). As stages of production and/or sales continue, each subsequent purchaser has to pay tax again and again on the material which has already suffered tax. This is called cascading effect.
Cascading effect of conventional system of taxes - A tax purely based on selling price of a product has cascading effect, which has the following disadvantages - (a) Computation of exact tax content difficult (b) Varying Tax Burden as tax burden depends on number of stages through which a product passes (c) Discourages Ancillarisation (d) Increases cost of production (e) Concessions on basis of use is not possible (f) Exports cannot be made tax free.
VAT to avoid the cascading effect – VAT was developed to avoid cascading effect of taxes. In the aforesaid example, ‘value added’ by B is only Rs. 40 (150–110), tax on which would have been only Rs. 4, while the tax paid was Rs. 15. In VAT, the idea is that B will pay tax on only Rs 40 i.e. value added by him. Then, it makes no difference whether a product passes through 5 or 10 stages or even 100 stages, as every person will pay tax only on ‘value added’ by him to the product and not on total selling price.
Tax credit system - VAT removes these defects by tax credit system. Under this system, credit is given at each stage of tax paid at earlier stage.
Illustration of tax credit system - In the example we saw above, ‘B’ will purchase goods from ‘A’ @ Rs. 110, which is inclusive of duty of Rs. 10. Since ‘B’ is going to get credit of duty of Rs. 10, he will not consider this amount for his costing. He will charge conversion charges of Rs. 40.00 and sell his goods at Rs. 140. He will charge 10% tax and raise invoice of Rs. 154.00 to ‘C’. (140 plus tax @ 10%). In the Invoice prepared by ‘B’, the duty shown will be Rs. 14. However, ‘B’ will get credit of Rs. 10 paid on the raw material purchased by him from ‘A’. Thus, effective duty paid by ‘B’ will be only Rs. 4. ‘C’ will get the goods at Rs. 154 and not at Rs. 165 which he would have got in absence of Cenvat. Thus, in effect, ‘B’ has to pay duty only on Rs 40, which is the value added by him.
Following example will illustrate the tax credit method of Cenvat.
Transaction without VAT
Transaction With VAT
Details
A
B
A
B
Purchases -
110
-
100
Value Added
100
40
100
40
Sub–Total
100
150
100
140
Add Tax 10%
10
15
10
14
Total
110
165
110
154
Note - 'B' is purchasing goods from 'A'. In second case, his purchase price is Rs 100/- as he is entitled to Cenvat credit of Rs 10/- i.e. tax paid on purchases. His invoice shows tax paid as Rs 14. However, since he has got credit of Rs 10/-, effectively he is paying only Rs 4/- as tax, which is 10% of Rs 40/-, i.e. 10% of 'value added' by him.
Advantages of tax credit system - The ‘Tax Credit Method’ has following advantages - (a) Audit control is much better, which helps in controlling tax evasion. It acts as a self-policing mechanism (b) Flexibility in applying varying tax rates to different commodities (c) Useful in giving tax benefits on exports or other preferred end-uses like uses by common man etc. Most of the countries have adopted ‘tax credit’ method for implementation of VAT.
Meaning of ‘Value added’ – In the above illustration, the ‘value’ of inputs is Rs 110, while ‘value’ of output is Rs 150. Thus, the manufacturer has made ‘value addition’ of Rs 40 to the product. Simply put, ‘value added’ is the difference between selling price and the purchase price.
Advantages of VAT - Advantages of VAT are as follows : (a) Exports can be freed from domestic trade taxes (b) It provides an instrument of taxing consumption of goods and services (c) Interference in market forces is minimal (d) Aids tax enforcement by providing audit trail through different stages of production and trade. Thus, it acts as a self-policing mechanism (e) Neutrality i.e. with minimum distortion in tax structure - as there are few variations in tax rates and exemptions from taxation are very few.
The disadvantage is that paper work required increases considerably and it is not as simple as a single point sales tax.
New Cenvat scheme
MODVAT credit scheme was introduced in 1986 vide rules 57A to 57U. Since rules can be amended easily by Central Government, the scheme remains flexible and hence can be modified quickly as per changing requirements. Cenvat was introduced in place of Modvat w.e.f. 1.4.2000, vide new set of rules 57AA to 57AK. Later, separate Cenvat Credit Rules were introduced w.e.f. 1-7-2001. These were replaced by Cenvat Credit Rules, 2002. These are now replaced by Cenvat Credit Rules, 2004 w.e.f. 10-9-2004.
Section 94(2) of Finance Act, 1994 empowers Central Government to make rules for – (i) credit of service tax paid on services consumed for providing a taxable service in case where the services consumed and the service provided fall in the same category [clause (ee)] (ii) credit of service tax paid on the services consumed or duties paid or deemed to have been paid on goods used for providing taxable service [clause (eee)] (iii) provisions for determining export of taxable services [clause (f)] (iv) Rebate of service tax paid or payable on taxable services consumed or duties paid or deemed to have been paid on goods used for providing taxable services which are exported out of India [clause (h)].
Service Tax Credit Rules, 2002 were issued effective from 16-8-2002, which are now merged with Cenvat Credit Rules, 2004 w.e.f. 10-9-2004.
Merging of Cenvat and Service Tax Rules - Cenvat Credit Rules, 2004 have been issued by superseding Cenvat Credit Rules, 2002 and Service Tax Credit Rules, 2002. The new rules are effective from 10-9-2004.
Rule 16(2) of Cenvat Credit Rules, 2004 states that any reference in any notification, circular, trade notice, rules etc. to Cenvat Credit Rules, 2002 or Service Tax Credit Rules 2002, shall be construed as reference to Cenvat Credit Rules, 2004.
General highlights of Cenvat scheme – General highlights of the scheme (except those related to integration of service tax and excise duty credit) are as follows :
Credit of duty paid on input and input services - The Cenvat scheme is principally based on system of granting credit of duty paid on inputs and input services. A manufacturer or service provider has to pay excise duty and service tax as per normal procedure on the basis of ‘Assessable Value’ (which is mainly based on selling price). However, he gets credit of duty paid on inputs and service tax paid on input services.
Input goods eligible for Cenvat to manufacturer - Credit will be available of excise duty paid on (a) raw materials (excluding few items) (b) material used in or in relation to manufacture like consumables etc. (c) Paints, packing materials, fuel etc. used for any purpose. However, duty paid on high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol) is not available as Cenvat credit, even if these are used as raw materials or as fuel.
Input may be used directly or indirectly - The input may be used directly or indirectly in or in relation to manufacture. The input need not be present in the final product.
Inputs goods eligible for Cenvat to service provider - Credit will be available of excise duty paid on inputs used for providing output services, except high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol).
No input credit if final product/output service exempt from duty/ service tax - No credit is available if final product is exempt from duty or final service is exempt from service tax. If a manufacturer manufactures more than one product, it may happen that some of the products are exempt from duty. Similarly, in case of service provider, some services may be taxable while some services may not be covered. In such cases, duty paid on inputs and service tax paid on input services used for manufacture of exempted products/services cannot be used for payment of duty or tax on other final products/services which are not exempt from duty/tax. If the manufacturer/service provider uses common inputs both for exempted as well as un-exempted goods/services, he should maintain separate records for inputs/input services used for manufacture of exempted final products and should not avail Cenvat on such inputs/input services. However, if he does not maintain separate records and inventories of inputs/input services used in exempted final products/services, he has to pay an ‘amount’ of 10% of price of exempted goods. - - As per section 91 read with section 93 of Finance (No. 2) Act, 2004, education cess is payable only on ‘duties of excise’. ‘Amount’ is not ‘duty’. Hence, education cess is not payable on such ‘amount’.
In case of exempt services, he can utilise Cenvat credit only upto 20% of service tax payable on output service.
Credit on basis of specified documents - Credit is to be availed only on the basis of specified documents as proof of payment of duty on inputs or tax on input services.
Credit available instantly - Credit of duty on inputs can be taken up instantly, i.e. as soon as inputs reach the factory is received. In case of capital goods, upto 50% credit is available in current year and balance in subsequent financial year. In case of input services, credit is available only after the amount of Bill is paid to person who had provided the service.
No cash Refund - In some cases, it may happen that duty paid on inputs and service tax paid on input services may be more than duty payable on final products. In such cases, though the Cenvat credit will be available to the manufacturer/service provider, he cannot use the same and the same will lapse. There is no provision for refund of the excess Cenvat credit. However, the only exception is in case of exports where duty paid on input material or services used for exported goods is refundable. Other exception is Tribunal can order refund when Cenvat credit could not be availed due to fault / wrong action of the department. Refund may also be granted if assessee could not utilise credit for some other reason.
One-to-one correlation not required - Cenvat Credit Rules do not require input-output correlation to be established.
Cenvat on Capital Goods - Credit of duty paid on machinery, plant, spare parts of machinery, tools, dies, etc., is available. However, upto 50% credit is available in current year and balance in subsequent financial year or years.
Cenvat to manufacturer available only if there is 'manufacture' - Cenvat on inputs or input services is available only if the process is 'manufacture'. Otherwise, Cenvat is not available. [In fact, in such cases, no duty is payable on the final product and question of Cenvat does not arise at all].
Cenvat credit is indefeasible - In CCE v. Dai Ichi Karkaria Ltd. 1999(112) ELT 353 = 1999 AIR SCW 3205 = (1999) 7 SCC 448 = AIR 1999 SC 3234 (SC 3 member bench), it was held that Cenvat credit validly taken is indefeasible. It was also observed that co-relation between final product and raw materials is not required in Cenvat scheme. - - However, Cenvat credit balance at the year end is not income of assessee – CIT v. Indo Nippon Chemicals (2003) 130 Taxman 179 = 155 ELT 452 = 261 ITR 275 (SC).
Integration of Excise duty and service tax credit - The highlights of scheme of integration are as follows –
Wide definition of ‘input service’ – A manufacturer/service provider will be entitled to credit of service tax paid by him which are used by him directly or indirectly in or in relation to manufacture of final product/provision of output services. This would include even services which are received prior to commencement of manufacture/provision of output services. Even input services relating to setting up a factory will be eligible.
In addition to this, services like advertising, activities relating to business like accounting, auditing, storage, transport etc., which are not directly related to manufacture/provision of output services but are related to the sale of manufactured goods/provision of output services would also be permitted for credit. In fact, all input services relating to all activities relating to business are eligible for Cenvat credit.
Full credit of tax paid on input services - Full credit of service tax on services (such as telephone, security, construction, advertising service, market research etc.) which are received in relation to the offices pertaining to a manufacturer or service provider would be allowed, even if these are partly used in exempted final product/output services.
Credit of duty paid on capital goods – Capital goods used for manufacture of final product and/or used for providing output taxable service will be available. A service provider can take out capital goods from his premises, provided that he brings them back within 180 days. This period can be extended.
Restriction on credit of capital goods - The restriction of 50% on credit on capital goods would continue for manufacturers as well as service providers, i.e. in case of capital goods, 50% credit will be available in first year and balance 50% in subsequent year/s. It may be noted that in case of some service providers, motor vehicle has been defined as ‘capital goods’.
credit of goods as inputs used by service providers – Goods used for provision of output services will be treated as inputs even in respect of service provider. A service provider will be entitled to credit of excise duty paid on raw materials/consumables used by him while providing output service. It may be noted that as per notification No. 12/2003-ST dated 20-6-2003, a service provider is not required to pay service tax on goods and materials used by him for providing output services. This notification makes it clear that this exemption is not available if Cenvat credit of duty paid on inputs is taken. If such credit is taken, it should be reversed.
Credit on motor vehicles used to provide output service – Motor vehicles are not ‘capital goods’ for purpose of ‘manufacture’, but credit on motor vehicles would be allowed as ‘capital goods’ only to the service providers of courier, tour operator, rent-a-cab scheme operator, cargo handling agency, outdoor caterer, pandal and shamiana operator and goods transport agency. Motor vehicle will not be treated as ‘capital goods’ for manufacturers or other service providers.
Services Billed/received at Head Office/Regional Offices - In some cases, the bill/invoice is raised in the name of head office/regional office etc., but services are actually received in the factory (or factories) or premises of service provider. In addition, the Head Office/Regional Offices receive services which are not specific for any factory/premises or service provider, such as advertising, market research, management consultancy etc. Bills in respect of such services would be received only in these offices. To enable the manufacturer/service provider to avail credit of such input services, a concept of “input service distributor” has been introduced. The HO/Regional Office will have to register as ‘Input Service Distributor’ with Excise department. The HO/Regional Office will have to issue Invoice to the factory/office providing service. The factory/service provider can avail credit on basis of such invoice. It would be left to the assessee to decide as to how he distributes the credit among various factories or service providing units. He has to ensure that the total credit allowed does not exceed the eligible credit amount. Such offices which distribute the credit would have to obtain service tax registration.
Manufacturer making exempted as well as un-exempted final products - Manufacturers making both exempted and non-exempted goods can maintain separate account in respect of inputs used in exempted and un-exempted final products. A manufacturer not maintaining separate accounts would pay 10% (increased from 8% as credit of service tax is being allowed) of the price of exempted goods.
Service provider providing exempted as well as un-exempted services – A service provider of exempted and non-exempted services not maintaining separate accounts would be eligible to avail Cenvat credit only to the extent of 20% of service tax payable on output services [Till 10-9-2004, it was 35%].
Full credit in case of specified input services - In case of specified services such as construction, erection/ commissioning/ installation etc. credit would be disallowed only when they are used exclusively in relation to manufacture of exempted goods/ services. Otherwise full credit would be allowed
Persons eligible for credit
Rule 3(1) of Cenvat Credit Rules states that a manufacturer or producer of final products and a provider of output service shall be allowed to take credit (hereinafter referred to as the Cenvat credit). EOU units can also avail Cenvat credit.
The Cenvat Credit is of specified duties (basic, special, AED, NCCD, education cess, service tax, CVD on imported goods etc. as discussed later) paid on inputs or capital goods received in the factory or premises of service provider, and also service tax paid on input services.
Manufacturer eligible for Cenvat credit – Cenvat credit can be availed by ‘manufacturer or producer’ of final products. ‘Manufacture’ or ‘production’ means new and identifiable product known in the market. Thus, ‘manufacturer’ or ‘producer’ is the person who actually brings the final product into existence.
Final products eligible under the Cenvat scheme - Cenvat has been extended to all items included in CETA.
As per rule 2(h), ‘Final Product’ means excisable goods manufactured or produced from inputs, or using input service.
Cenvat scheme has been extended to all manufactured final products. These goods cover food products, chemicals, plastics and rubber products, tobacco products, leather and wood articles, textile articles, paper, metals, engineering goods, matches, textile products, electrical and electronic goods and automobile sector.
EOU are entitled to Cenvat credit – EOU units have been allowed to avail Cenvat credit w.e.f. 6-9-2004, by amending rule 17(1) of Central Excise Rules – confirmed in CBE&C Circular Nos. 799/32/2004-CX dated 23-9-2004 and 54/2004-Cus dated 13-10-2004.
Waste and scrap is final product for Cenvat - As per Cenvat provisions, waste or scrap is treated as a final product within definition of rule 57AA(c) [Now new rule 2(h)] and its clearance is as if it is a final product. - MFDR TRU No. 345/2/2000-TRU dated 29-8-2000.
No Cenvat if goods exported and exporter claims duty drawback – An assessee can get export incentives only once. Thus, if he avails Cenvat credit, he cannot claim excise portion of All India duty drawback rate. However, he can avail customs portion of duty drawback rate even if he avails Cenvat.
No Cenvat if no ‘manufacture’
Cenvat credit is available only when 'manufacture' takes place. Cenvat provisions are available when there is ‘manufacture’ i.e. new and identifiable product known in the market emerges. However, if the processing does not amount to ‘manufacture’ Cenvat credit on inputs is not available.
Service Provider eligible for Cenvat credit
As per rule 3(1), provider of output service shall be allowed to take Cenvat credit of specified duties and taxes.
As per rule 2(p), “output service” means any taxable service provided by the provider of taxable service, to a customer, client, subscriber, policy holder or any other person, as the case may be, and the expressions ‘provider’ and ‘provided’ shall be construed accordingly.
Thus, only a person who is providing taxable output service will be eligible to take Cenvat credit.
The words client, customer, subscriber etc. are used in definition of each taxable service under section 65(105) of Finance Act, 1994. Those words will be applicable for purpose of this definition.
Input Goods for Cenvat
Inputs which are goods are eligible for Cenvat credit by both manufacturer as well as service provider.
Statutory definition –Rule 2(k) defines ‘input’ as follows –
Rule 2(k) “Input” means –
(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production;
(ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service.
Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.
Explanation 2.- Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer.
Input for a manufacturer – Definition of ‘input’ as far as manufacturer is concerned, is in two parts –
(a) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not.
(b) ‘Input’ includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production.
This has following implications – (1) Second part of the definition is independent of the first part. In other words, requirement of ‘used in or in relation to manufacture’ is not applicable to ‘inputs’ included in second part of definition, as the words used are ‘or for any other purpose’ (2) ‘Inputs’ as defined in second part of definition will be eligible as long as they are used within the factory of production (except accessories of final products cleared along with the final product, as obviously, these cannot be used within factory of production). The purpose for which these are used is immaterial. (This would be so, even if it is held that the words ‘for any purpose’ apply only to goods used for generation of electricity or steam. The reason is rules do not state the purpose for which these are required to be used in the factory).
In Ballarpur Industries v. CCE 2000(116) ELT 312 (CEGAT 3 member bench), it was observed that inclusive definition expands the scope of the expression and cannot be treated as restrictive in any sense. Once a particular item is covered by the definition of ‘input’, one need not proceed further and examine the question as to whether the goods (fuel in this case) are used in or in relation to manufacture of final product.
Inputs eligible for Cenvat under first part of definition
The definition of ‘input’ covers following -
· All goods [except High Speed Diesel Oil (HSD), Light Diesel Oil (LDO) and petrol] used in, or in relation to, the manufacture of the final products. The input may be used directly or indirectly in or in relation to manufacture of final product. The input need not be present in the final product (first part of the definition)
· Input includes * lubricating oils, greases, cutting oils and coolants * accessories of final products cleared along with the final product * Goods used as paint * Packing material * Fuel * Goods used for generation of electricity or steam used in or in relation to manufacture of final products or for any purpose. - - These can be used ‘for any purpose’. (second part of the definition)
· Input also includes goods used in manufacture of capital goods which are further used in the factory of manufacturer (Explanation 2 to the definition).
Inputs should be ‘used’ – mere intention to use is not sufficient – Rule 2(k)(i) which defines ‘inputs’ for manufacturer states that these should be ‘used in the factory’. Thus, mere intention to use is not sufficient to avail Cenvat credit.
In or in relation to manufacture of final product - The input must be used in or in relation to the manufacture of final product, in respect of inputs which are not covered in second part of the definition of ‘inputs’. Thus, if an input is used ‘in the manufacture’ or ‘in relation to the manufacture’, it is eligible for claiming Cenvat credit.
‘In the manufacture’ means the input is actually used in the manufacture of finished product, either directly or indirectly. It may be present in the ‘final product’ in same or similar or identifiable form or it might have got converted during process and may not be seen or identified in the final product. ‘In relation to the manufacture’ means, the input has been used during a process while manufacturing the product like consumable. The input need not form part of final product. Thus, the term 'in relation to manufacture' is a very wide term and covers all inputs which have direct nexus with the manufacturing process. 'Manufacture' includes all processes incidental or ancillary to manufacture. Thus, the term 'inputs' is much more wider than mere 'raw materials'.
The expression ‘in relation to’ (so also ‘pertaining to’) is a very broad expression, which pre-supposes another subject matter. These are words of comprehension which might both have a direct significance as well as an indirect significance depending on the context. -. - ‘Relating to’ is equivalent to or synonymous with as to ‘concerning with’ and ‘pertaining to’. The expression ‘pertaining to’ is an expression of expansion and not of contraction - Doypack Systems P Ltd. v. UOI (1988) 2 SCR 962 = 1988 2 SCC 299 = (1989) 65 Comp Cas 1 = 1988 (36) ELT 201 (SC) = AIR 1988 SC 782 * Tamil Nadu Kalyana Mandapam Association v. UOI 2004 (167) ELT 3 = 135 STC 480 (SC).
'In relation to' are words of comprehensiveness which might have both a direct significance or indirect significance depending on the context. They are not words of restrictive content. - State Waqf Board v. Abdul Azeer Sahib (1967) 1 MLJ 190 = AIR 1968 Mad 79.
The expression ‘in relation to’ is of widest import. – Thyssen Stahlunion GMBH v. Steel Authority of India 1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999 (6) SCC 334.
Small Illustration - A small example will illustrate the position. While manufacturing wooden table, wood, nails and paints are used ‘in the manufacture’ of table, while sandpaper for polishing the table may be said to be used ‘in relation to manufacture’ of the product. Carpenter’s instruments are ‘capital goods’. While cooking food, the vegetables, oil, wheat flour etc. are used ‘in the manufacture’. Cooking gas and kerosene can also be said to be ‘used in manufacture’. However, electricity used in mixer or refrigerator can be said to be used ‘in relation to manufacture’. The electricity for tube-light in kitchen may facilitate cooking, but it cannot be said to be ‘used in or in relation to manufacture’ of food.
One to one correlation not necessary
Rule 3(4)(a) states that Cenvat credit may be utilised for payment of any duty of excise on any final product. Thus, there is no requirement of establishing relation between inputs/input services and final product.
There is no correlation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related - CCE v. Dai Ichi Karkaria Ltd. 112 ELT 353 = AIR 1999 SC 3234 = 1999 AIR SCW 3205 = (1999) 7 SCC 448 (SC 3 member bench).
Input goods in respect of service providers
Duty paid on input goods used by service providers is also eligible for Cenvat credit, but in a restricted way.
As per rule 2(k)(ii), all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service is ‘input’.
Input Service for Cenvat
Manufacturer as well as service provider will be eligible to get Cenvat credit of ‘input services’. Rule 2(l) of Cenvat Credit Rules reads as follows –
Rule 2(l) - “Input service” means any service –
(i) used by a provider of taxable service for providing an output service; or
(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal;
and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal
Wide coverage of input services – The words used in the definition in relation to manufacturer are ‘in relation to’.
Input services Used for providing output services – In case of service provider, the words used in definition of input service in rule 2(l)(i) are ‘used by a provider of taxable service for providing output service’. This appears to limit scope of ‘input service’ in respect of output service providers. However, as discussed later, the scope has been further widened by ‘adding ‘inclusive definition’ to the rules, i.e. even to input services which have only remote or insignificant nexus with output services will get covered as long as these are related to activities of business.
Service need not be received in factory or premises from where output service provided – In case of inputs and capital goods, Cenvat credit is eligible to manufacturer only if these are received in the factory. However, in case of input service, there is no such requirement. Input service need not be received in factory or premises of service provider.
In case of service provider, even there is no requirement that inputs and capital goods should be received in premises of service provider.
Coverage beyond manufacturing/service provision stage
Inclusive definition clause of rule 2(l) extends scope of ‘input services’ even beyond stage of ‘manufacture’ or ‘provision of service’. The inclusive clause makes it clear that services much earlier to manufacture or even after manufacture will be eligible as service tax credit.
Credit only after payment is made to service provider
Credit of input services can be availed only after the output service provider makes payment of value of input services and the service tax payable on it, as shown in invoice of input service provider. [Rule 4(7)]. [In case of excise duty, credit is available as soon as goods are received in the factory. There is no condition that credit can be availed only after payment is made to supplier of goods].
Input Service Distributor
A manufacturer or service provider may have head office/regional office at different place/s. The services may be received at head office/regional office, but ultimately, these will be indirectly used for manufacture or providing output service. Provision has been made to avail Cenvat credit of services received and paid for at head office/regional office. Such head office/regional office will be registered with central Excise and it will have to issue invoice on the manufacturer or producer or service provider.
Who is ‘input service distributor’ - As per rule 2(m), “input service distributor” means an office managing the business of manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be.
Document eligible for Cenvat credit - As per rule 9(1)(g); ‘invoice, bill or challan’ issued by an ‘input service distributor’ under rule 4A of Service Tax Credit Rules is an eligible document for purpose of taking Cenvat credit.
Capital goods for Cenvat
'Capital Goods' for Cenvat
Cenvat credit is available on inputs as well as capital goods. Some provisions are common while there are some specific provisions in respect of Cenvat on capital goods.
Capital Goods Eligible to a manufacturer or service provider – Manufacturers and service providers are eligible to avail Cenvat credit of capital goods used by them.
Following are the ‘capital goods’, vide Rule 2(a)(i) of Cenvat Credit Rules -
(i) * Tools, hand tools, knives etc. falling under chapter 82 * Machinery covered under chapter 84 * Electrical machinery under chapter 85 * Measuring, checking and testing machines etc. falling under chapter 90 * Grinding wheels and the like goods falling under sub-heading No 6801.10 * Abrasive powder or grain on a base of textile material, falling under chapter heading 68.02.
(ii) Pollution control equipment.
(iii) Components, spares and accessories of the goods specified above.
(iv) Moulds and dies.
(v) Refractories and refractory material.
(vi) Tubes, pipes and fittings thereof, used in the factory.
(vii) Storage Tank.
USE OF CAPITAL GOODS - The capital goods should be used – (a) in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office ; or (2) for providing output service.
Capital goods used exclusively for exempted final products and output services not eligible – Capital goods used exclusively for manufacture of exempted goods or providing exempt service are not eligible [rule 6(4)]. [Thus, partial use of capital goods for manufacture of exempted goods or provision of exempt output services is permissible, i.e. in such case, Cenvat credit on capital goods will be allowed].
Use of capital goods by manufacturer
Rule 2(a) provides that capital goods should be used – (a) in the factory of manufacturer of the final products or (b) for providing output service.
Capital goods manufactured within the factory
As per Explanation 2 to rule 2(k) of Cenvat Credit Rules, ‘input’ includes goods used in manufacture of capital goods which are further used in the factory of manufacturer. Thus, if a manufacturer manufactures some capital goods within the factory, goods used to manufacture such capital goods will be eligible as ‘inputs’. [i.e. 100% Cenvat credit will be available in the same financial year]. - - It may be noted that capital goods manufactured within the factory and used within the factory are exempt from excise duty vide notification No. 67/95-CE dated 16-3-1995.
Conditions for availing Credit on Capital Goods
The conditions for eligibility of Credit are as follows :
· Duty paying documents eligible are same for Cenvat on inputs
· Depreciation under section 32 of Income Tax Act should not be claimed on the excise portion of the Capital Goods. – Rule 4(4) of Cenvat Credit Rules (Otherwise, the manufacturer will get double deduction for Income Tax - one credit as Cenvat and another credit as depreciation)
Utilisation of Cenvat Credit
Duties eligible for credit
Assessee can avail credit of duty/ service tax paid on inputs and input services. This credit is known as ‘Cenvat Credit’.
Meaning of Cenvat Credit - Rule 3(1) states that following duties/taxes will be available as credit (hereinafter referred as Cenvat Credit).
The term ‘Cenvat Credit’ used in various rules means aggregate of following duties and taxes [Rule 3(1)].
(a) Basic excise duty on indigenous inputs [Paid on goods specified in first schedule to CETA]. Corresponding CVD on imported goods is allowable.
(b) Special excise duty [paid on goods specified in Second Schedule to CETA]. Corresponding CVD on imported goods is allowable.
(c) Additional Customs Duty paid u/s 3(5) of Customs Tariff Act w.e.f. 1-3-2005. This credit will not be available to service providers [This duty is payable @ 4% on imports of ITA (Information technology Agreement) bound items and on specified inputs/raw materials, for manufacture of electronic/information technology items, which are exempt from customs duty. This duty will not be charged on information technology software.
(d) Additional Excise Duty paid under Additional Duties of Excise (Goods of Special Importance) Act [AED(GSI)]. If these are imported, credit of corresponding CVD on imported goods can be availed [AED(GSI) on textile articles has been abolished w.e.f. 9-7-2004].
(e) Education cess on manufactured excisable goods and CVD equal to education cess on imported goods. This credit can be utilised only for payment of education cess on final product or output services.
(f) Additional Excise Duties paid on textile and textile articles [AED(TTA)]. If these are imported, corresponding CVD paid is also eligible [AED(TTA) has been abolished w.e.f. 9-7-2004].
(g) National Calamity Contingent Duty (NCCD) leviable under section 136 of Finance Act, 2001 and corresponding CVD paid on imported goods. This credit can be used for payment of NCD on outputs only and not for any other duty.
(h) Additional Customs Duty paid u/s 3(5) of Customs Tariff Act. This duty on imports is payable under clause 72 of Finance Bill, 2005 w.e.f. 1-3-2005. This credit will not be available to service providers, as provided in second proviso to rule 5 of Cenvat Credit Rules. Proviso to rule 4(2)(a) of Cenvat Credit Rules makes it clear that even if the goods on which this duty is paid are ‘capital goods’, full 100% credit will be available in first year itself [This duty is payable @ 4% on imports of ITA (Information technology Agreement) bound items and on specified inputs/raw materials, for manufacture of electronic/information technology items, which are exempt from customs duty. This duty is not levied on information technology software].
(i) Additional Excise Duty (Tea and Tea Waste) levied under section 157 of Finance Act, 2003. This credit can be utilised only for payment of AED(TTW) on final product. This duty has been abolished w.e.f. 1-3-2005.
(j) Service tax on input services.
(k) Education cess paid on service tax. This credit can be utilised only for payment of education cess on final product or output services.
(l) Additional Excise Duty paid under clause 85 of Finance Bill, 2005. This duty is payable w.e.f. 1-3-2005 on pan masala and certain tobacco products, as specified in seventh schedule to Finance Bill, 2005 [Credit of Additional Excise Duty paid under clause 85 of Finance Bill can be used for payment of this duty. Any other credit cannot be utilised and balance amount is required to be paid in case only].
Credit of basic duty, AED(GSI), special excise duty and service tax can be utilised for payment of basic excise duty on final products and vice versa.
Basic duty, SED, service tax on inputs, Additional Customs Duty paid u/s 3(5) of Customs Tariff Act and AED(GSI) are inter-changeable, i.e. Credit of duty paid under one head can be utilised for payment of duty under other head.
Credit of basic duty, SED, service tax, Additional customs Duty paid u/s 3(5) of Customs Tariff Act and AED(GSI) can also be utilised for payment of Education Cess, AED(TTA), AED(TTW) and NCCD, but not vice versa.
Education Cess paid on goods and paid on services is inter-changeable.
Restrictions on Cenvat credit in certain cases
Credit of any duty can be utilised for payment of any duty on final product. However, some exceptions are provided in rule 3(7).
Taking and Utilisation of credit
Credit of the duty paid on eligible inputs can be taken by the manufacturer immediately on receipt of inputs in the factory of manufacturer or in the premises of provider of output services - Rule 4(1) of Cenvat Credit Rules.
In case of capital goods, upto 50% credit only can be taken at any point of time in a financial year and in any succeeding year or years. – Rule 4(2) of Cenvat Credit Rules.
Payment of duty through Cenvat credit is almost as good as payment of duty through PLA and refund is permissible (if otherwise eligible) even if duty was paid through Cenvat credit.
Credit can be taken as soon as goods are received in the factory or premises of service provider. It is not necessary to wait till the inputs / capital goods are actually utilised in production [Rule 4(1) of Cenvat Credit Rules].
Manufacturer/service provider should maintain record of Cenvat credit availed and of credit utilised. (The record should be similar to PLA where credit is taken of duty paid by Challan in Bank and when finished goods are cleared, debit entry is made in PLA).
Utilisation of Cenvat credit – The Cenvat Credit [as defined in rule 3(1)] can be utilised for payment of any excise duty on :
· Any duty on any final product manufactured by manufacturer [Rule 3(4)(a)]
· Payment of ‘amount’ if inputs are removed as such or after partial processing [Rule 3(4)(b)]
· Payment of ‘amount’ on capital goods if they are removed as such [Rule 3(4)(c)]
· Payment of ‘amount’, if goods are cleared after repairs under rule 16(2) of Central Excise Rules [Rule 3(4)(d)]
· Payment under Cenvat Credit Rule 6 of 10% ‘amount’ on exempted goods or reversal of credit on inputs when common inputs or common input services are used for exempted as well as dutiable final products – Explanation I to Cenvat Credit rule 6(3)
· Reversal of Cenvat credit, if assessee opts out of Cenvat – Rule 11(2)
· Payment of ‘amount’ if goods sent for job work are not returned within 180 days – Rule 4(5)(a).
If by-product, scrap or waste is dutiable as ‘excisable goods’, duty will be payable on these as if it is a 'final product'.
Duty paying documents for Cenvat
As soon as a manufacturer/service provider receives an input, he can avail Cenvat credit of the duty paid on the inputs. However, in case of input service, he is entitled to service tax credit only when he makes payment to service tax provider. Documentary evidence is required regarding payment of duty on inputs/tax on input services.
Rule 9(1) of Cenvat Credit Rules prescribes that Cenvat Credit can be taken on the basis of -
· Invoice of manufacturer from factory
· Invoice of manufacturer from his depot or premises of consignment agent
· Invoice issued by registered importer
· Invoice issued by importer from his premises or consignment registered with Central Excise
· Invoice issued by registered first stage or second stage dealer
· Supplementary Invoice
· Bill of Entry
· Certificate issued by an appraiser of customs in respect of goods imported through foreign post office
· Challan of payment of tax where service tax is payable by other than input service provider
· Invoice, bill or challan issued by provider of input service on or after 10-9-2004
· Invoice, Bill or Challan issued by input service provider under rule 4A of Service Tax Rules.
Essential requirement of invoice –As per rule 9(2) of Cenvat Credit Rules, Cenvat credit cannot be denied as long as the document contains essential aspects of duty/tax payment i.e. –
(a) payment of duty or service tax
(b) description of goods or taxable service
(c) assessable value
(d) name and address of the factory or warehouse or provider of input service.
Thus, Cenvat cannot be denied if the documents contains these details and no permission/condonation is required if the invoice/bill/challan contains these basic details
Note that Serial Number or name of user-manufacturer is not a essential detail specified in rule 9(2) of Cenvat Credit Rules.
Exempted final products/output services
As per basic principle of VAT, credit of duty or tax can be availed only for payment of duty on final product or output services. As a natural corollary, if no duty is payable on final product or output services, credit of duty/tax paid on inputs or input services cannot be availed.
As per Rule 6(1) of Cenvat Credit Rules, Cenvat credit is not admissible on such quantity of input or input service which is used in manufacture of exempted goods or exempted services.
Thus, if inputs and input services are partly used in exempted final product/output service, Cenvat credit of that portion of input/input service will not be available.
Partial manufacture/provision of exempted products/services
It may happen that same inputs/input services are used partly for manufacture of dutiable goods/taxable services and partly for exempted goods/services. In such cases, the manufacturer/service provider has two options –
Maintain separate inventory - Maintain separate inventory and accounts of receipt and use of inputs (except fuel) and input services used for exempted final products/exempted output services. In such cases, he should not avail Cenvat credit of the inputs and input services which are used in exempted final services at all – Rule 6(2) of Cenvat Credit Rules. In CCE v. Padmini Polymers 2003(151) ELT 358 (CEGAT), it was held that there is no requirement that these must be stored separately. It is not necessary to maintain separate account in respect of ‘fuel’ used as inputs.
Pay 10% ‘amount’ if separate inventory and records not maintained - If the manufacturer/service provider opts not to maintain such separate accounts, he has to pay an amount equal to 10% of the ‘price’ of such exempted final products. Such payment can be made by debit to Cenvat credit account or PLA [rule 6(3)(b)].
As per section 91 read with 93 of Finance (No. 2) Act, 2004, education cess is payable only on ‘duties of excise’. ‘Amount’ is not ‘duty’. Hence, education cess is not payable on such ‘amount’.
Credit of service tax limited if service provider does not maintain separate accounts - In case of output service, if he does not maintain separate accounts, he can avail Cenvat only to the extent of 20% of service tax payable on final product.
Meaning of 'exempted goods' - As per Rule 2(d) of Cenvat Credit Rules, 'exempted goods' means goods which are exempt from whole of duty of excise leviable thereon and includes goods which are chargeable to 'Nil' rate of duty. Thus, 'exempted goods' for purpose of Cenvat cover (a) Goods chargeable to 'Nil' duty as per Tariff and (b) Goods which are exempt by a notification issued under section 5A.
Exempted goods do not mean non-excisable goods - Goods which are not mentioned in Tariff are not ‘exempted goods’ as they are neither ‘goods chargeable to 'Nil' duty as per Tariff’ nor ‘goods which are exempt by a notification issued under section 5A’.
Meaning of ‘exempted services’
As per rule 2(e), “exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of Finance Act.
Services on which no tax is payable are also ‘exempt services’ - - For purpose of the definition of ‘exempted services’, services on which no service tax is leviable are also ‘exempted services’. Thus, if a particular service is not taxable under present provisions of Finance Act, 1994, it will be ‘exempted service’ for purpose of rule 6.
Payment of ‘amount’ on exempted final products
If assessee opts not to maintain separate accounts in respect of inputs and input services utilised for exempted final products/exempted output services, he has to pay ‘amount’ of 10% of total price (excluding taxes) of exempted final product [rule 6(3)(b)].
When payment of ‘amount’ is not required
In certain cases, payment of ‘amount’ or reversal of Cenvat is not required.
Export of goods, deemed exports or gold manufacture - As per rule 6(6), a manufacturer can avail Cenvat credit on inputs when final product is despatched without payment of duty, in following cases –
(a) Final product is despatched to SEZ, EOU, EHTP or STP.
(b) Final product is supplied to United Nations or an international organisation for their official use or supplied to projects funded by them, which are exempt from duty.
(c) When final product is exported under bond without payment of duty
(d) Gold or silver arising in course of manufacture of copper or zinc by smelting.
(e) Goods supplied against International Competitive Bidding in terms of Notification No. 6/2002-CE dated 1-3-2002, if such goods are exempt from customs duty when imported in India
In such case, assessee need not reverse Cenvat credit or pay any ‘amount’. In other cases, the manufacturer is not entitled to avail Cenvat credit on inputs when final product is cleared without payment of duty.
This provision does not apply to service providers. See discussions in a subsequent paragraph.
No payment of amount if intermediate product cleared for subsequent export - If intermediate products are cleared to another manufacturer for manufacture of final products (and then final products are exported by that another manufacturer), no duty is payable as per notification No. 43/2001-CE(NT) dated 26-6-2001. In such cases, the intermediate products cleared are not ‘exempted goods’. Hence, ‘amount’ is not payable. This view has been confirmed in CBE&C circular No. 785/18/2004-CX dated 17-5-2004. It is clarified in the circular that exporter of final product will not be entitled to duty drawback of excise portion, as he has obtained inputs without payment of excise duty.
Inputs used in manufacture of capital goods used within the factory – Notification No. 67/95-CE exempts capital goods manufactured within the factory and used within the factory. In such case, a view is possible that ‘amount’ is payable on such capital goods. However, since the goods are not sold, there is no question of any ‘price’ and hence no ‘amount’ should be payable.
Input/services used for exempted as well as taxable services
If input services are partly used for taxable services and partly for exempted services assessee should maintain separate accounts of input and input services meant of exempted services and taxable services. He should take credit only of inputs and input services intended for use of taxable output service [rule 6(2)].
Limit on Cenvat credit if assessee does not maintain separate accounts - If assessee does not maintain separate accounts, he can avail Cenvat only upto 20% of tax payable on taxable output service. [The limit was 35% upto 10-9-2004].
For example, assume that service tax payable on output service is Rs 100. Service tax paid on input service is Rs 15. These input services are used both for taxable output services and exempt/non-taxable output services. In such case, assessee can avail and utilise credit of entire Rs 15. However, if tax paid on input services is Rs 75, and these are used both for exempted and taxable services, then assessee can actually utilise credit of only Rs 20. He will have to pay balance in cash, even if credit of Rs 55 is still available in his books.
He may take credit of Rs 75 in his Service Tax (Receivable) Account, but can utilise credit of Rs 20.
The balance may remain in his Service Tax Credit Account. He can utilise it in future if opportunity arises.
Removal of goods ‘as such’
A manufacturer/service provider who obtains the inputs / capital goods gets immediate credit of the duty paid by supplier on the inputs used by him.
The manufacturer/service provider uses these inputs / capital goods for manufacture of final products. However, occasionally, he may have to remove the inputs from his factory or premises of output service provider for -
(a) sale or disposal if these are not required by him or
(b) job work/processing in an outside factory and return
(c) rejected inputs for rework and return. Since credit has been taken on the inputs, control over their removal is necessary.
Removal of inputs / capital goods ‘as such’ for sale/disposal - If the manufacturer/service provider is not able to use the inputs (on which he has availed Cenvat credit) for any reason (like rejection, quality problems, excess supply, change in production plan, exports etc.), he can clear the inputs as such or after partial processing or capital goods as such, from factory/premises of service provider after payment of an ‘amount’.
Amount payable equal to Cenvat credit availed – The inputs or capital goods can be removed as such from the factory of manufacturer or premises of service provider on payment of an ‘amount’ equal to Cenvat credit availed when the credit was taken. In other words, it amounts to reversal of Cenvat credit taken [rule 3(5)].
If originally, education cess was paid, equivalent ‘amount’ would be payable. If originally, no education cess was paid, question of its payment does not arise even if goods are cleared now, as ‘amount’ is not ‘excise duty’.
Removal of capital goods after use
Provisions of rule 3(5) apply when inputs or capital goods are removed ‘as such’. The rules make no provision for removal of capital goods after use.
Rule 2(a)(A) states that capital goods should be ‘used’. Duration is not specified. Hence, even if the capital goods are used for one day, Cenvat eligibility of capital goods is established.
As per Concise Oxford Dictionary, ‘as such’ means ‘in the exact sense of the word’. In the present context, ‘as such’ can only mean ‘as it is’.
If capital goods are used and then sold/cleared, it cannot be said that these are removed ‘as such’. Hence rule 3(4) cannot apply. This will be particularly so if some parts were replaced during use or the capital goods was removed after dismantling.
Thus, rule 3(5) does not apply and capital goods can be removed without payment of any ‘amount’ after use. ‘Duty’ cannot be demanded, as assessee has certainly not manufactured the capital goods. Selling old machinery cannot by any stretch of imagination be termed as ‘manufacture’ and no excise duty is payable. Thus, neither ‘amount’ nor ‘duty’ is payable.
Often department insists on payment of ‘amount’ on your selling price or depreciated value. This has no legal basis. It is observed that some assessees even mention the amount as ‘duty’ in their invoice, which is totally incorrect.
Removal for job work/repairs/testing
In modern manufacturing technology, a manufacturer usually does not carry out all the processes himself. It is common that some manufacturing processes are carried out by him from other manufacturer or subcontractors on job-work basis.
Similarly, a manufacturer or service provider may also have to remove inputs as such or after some processing for test, repairs etc. In such cases, he can clear the inputs received by him for further processing/test/repairs etc. and obtain the same back after processing/test/repairs is carried out.
He can clear inputs/capital goods as such or after carrying out partial processing, without payment of duty/amount.
Procedure also available for goods under DEEC scheme - In case of inputs received under DEEC scheme, CVD has been paid on the inputs. Hence, the inputs should be recorded as per Cenvat procedures and these can be sent to job work as per usual Cenvat procedures - Hyderabad Commissionerate Trade Notice No. 71/95 dated 5-7-1997 - Para 3.
Provisions for sending inputs / capital goods for job work/testing/repairs - Provisions contained in Rule 4(5)(a) of Cenvat Credit Rules for this purpose are as follows :
Removal for processing/test - The inputs / capital goods can be removed as such or after partial processing to job worker for further processing, testing, repairs, reconditioning or any other purpose.
Job work and job worker – As per rule 2(n) of Cenvat Credit Rules, Job Work means processing or working upon of raw materials or semi-finished goods supplied to job worker, so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for the aforesaid process, and the expression ‘job worker’ shall be construed accordingly. [The definition of ‘job work’ is same as given in Notification No. 214/86-CE dated 25-3-1986]
Goods Should be returned to factory/premises of service provider - After carrying out the operation/test/repair etc., the goods should be returned to the factory or premises of service provider within 180 days. If these are not received back within 180 days of their being sent out, manufacturer/service provider should pay an ‘amount’ equivalent to Cenvat credit attributable to inputs / capital goods. Payment can be through Cenvat credit or PLA. If the inputs / capital goods come back after 180 days (say after 220 days), manufacturer/service provider can take Cenvat credit of duty paid by him - rule 4(5)(a).
Procedures and Records for Cenvat
The main procedures are—
· Maintaining records of inputs and capital goods
· Maintaining records of credit received and utilised
· Submit returns of details of Cenvat credit availed, Principal Inputs and utilization of Principal Inputs in forms ER-1 to ER-6 (Discussed in earlier chapter)
· Returns by dealer/service provider/input service distributor
Record of inputs and capital goods - The manufacturer of final products or provider of output service or input service distributor shall maintain proper records for the receipt, disposal, consumption and inventory of the inputs and capital goods.
The record should contain relevant information regarding (a) value (b) duty paid (c) the person from whom inputs / capital goods have been procured.
Burden of proof regarding admissibility of Cenvat credit is on the manufacturer or provider of output service taking the credit – Rule 9(5) of Cenvat Credit Rules.
Record of input services – The manufacturer of final products or the provider of output service shall maintain proper records for receipt and consumption of the input services. The record should contain relevant information regarding –
(a) Value of service
(b) Tax paid
(c) Cenvat Credit taken and utilised
(d) Person from whom input service has been procured
The burden of proof regarding the admissibility of Cenvat credit shall lie upon the person taking such credit. [rule 9(6)]
Cenvat Credit Record - Cenvat Credit record should be maintained, which is similar to PLA. It is a current account of Cenvat credit received, credit utilised and credit balance. This should give details of (a) credit availed against each input / capital goods (b) credit utilised against clearance of final products or removal of input as such or after processing or removal of capital goods as such (c) Balance credit available.
Returns – A manufacture has to be submit returns to Range Superintendent of Central Excise in the prescribed forms ER-1 to ER-6 in respect of Cenvat Availed, Principal Inputs, utilization of Principal inputs etc.. These are discussed in earlier chapter and hence not reproduced here. Others have to submit returns as follows -
· Quarterly return by first stage/second stage dealer within 15 days from close of quarter [rule 9(8)]
· Half yearly return within one month from close of half year, by provider of output services [rule 9(9)]
· Half yearly return within one month from close of half year, by Input Service Distributor [rule 9(10)]
Modvat is replace by cenvat
Background of CENVAT
Cenvat (Central Value Added Tax) has its origin in the system of VAT (Value Added Tax), which is common in West European Countries. Concept of VAT was developed to avoid cascading effect of taxes. VAT was found to be a very good and transparent tax collection system, which reduces tax evasion, ensures better tax compliance and increases tax revenue.
Modvat (modified value added tax) was introduced in India in 1986 (Modvat was re-named as Cenvat w.e.f. 1-4-2000). The system was termed as Modvat, as it was restricted upto manufacturing stage and credit of only excise duty paid on manufacturing products (and corresponding CVD paid on imported goods) was available.
System of VAT was introduced to service tax w.e.f. 16-8-2002.
VAT was not extended to sales tax, as sales tax is under jurisdiction of State Governments. However, State Governments have agreed to introduce sales tax VAT and it is likely to be introduced from April 2005. Haryana Government has introduced sales tax VAT in April 2004 and the experience is reported to be good.
Integration of goods and service tax - A task force was formed under Chairmanship of Shri Vijay Kelkar on Implementation of Fiscal Responsibility and Budget Management Act. The Kelkar Committee submitted its report in July 2004. The Committee has strongly recommended ‘Goods and Service Tax’ (GST).
Full integration of goods and service tax will take considerable time, as it can be achieved only after political consensus is achieved. However, a beginning has been made by proposing to make credit of service tax and excise duty inter-chargeable. Finance Minister Shri P Chidambaram, in para 148 of his budget speech on 8-7-2004, stated as follows, ‘I propose to take a major step towards integrating the tax on goods and services. Accordingly, I propose to extend credit of service tax and excise duty on goods and services. Accordingly, I propose to extend credit of service tax and excise duty across goods and services’.
To give effect to this proposal, Cenvat Credit Rules, 2004 have been issued and made effective from 10-9-2004.
Basic Concept of VAT
Generally, any tax is related to selling price of product. In modern production technology, raw material passes through various stages and processes till it reaches the ultimate stage e.g., steel ingots are made in a steel mill. These are rolled into plates by a re-rolling unit, while third manufacturer makes furniture from these plates. Thus, output of the first manufacturer becomes input for second manufacturer, who carries out further processing and supply it to third manufacturer. This process continues till a final product emerges. This product then goes to distributor/wholesaler, who sells it to retailer and then it reaches the ultimate consumer.
If a tax is based on selling price of a product, the tax burden goes on increasing as raw material and final product passes from one stage to other. For example, let us assume that tax on a product is 10% of selling price. Manufacturer ‘A’ supplies his output to ‘B’ at Rs. 100. Thus, ‘B’ gets the material at Rs. 110, inclusive of tax @ 10%. He carries out further processing and sells his output to ‘C’ at Rs. 150. While calculating his cost, ‘B’ has considered his purchase cost of materials as Rs. 110 and added Rs. 40 as his conversion charges. While selling product to C, B will charge tax again @ 10%. Thus C will get the item at Rs. 165 (150+10% tax). As stages of production and/or sales continue, each subsequent purchaser has to pay tax again and again on the material which has already suffered tax. This is called cascading effect.
Cascading effect of conventional system of taxes - A tax purely based on selling price of a product has cascading effect, which has the following disadvantages - (a) Computation of exact tax content difficult (b) Varying Tax Burden as tax burden depends on number of stages through which a product passes (c) Discourages Ancillarisation (d) Increases cost of production (e) Concessions on basis of use is not possible (f) Exports cannot be made tax free.
VAT to avoid the cascading effect – VAT was developed to avoid cascading effect of taxes. In the aforesaid example, ‘value added’ by B is only Rs. 40 (150–110), tax on which would have been only Rs. 4, while the tax paid was Rs. 15. In VAT, the idea is that B will pay tax on only Rs 40 i.e. value added by him. Then, it makes no difference whether a product passes through 5 or 10 stages or even 100 stages, as every person will pay tax only on ‘value added’ by him to the product and not on total selling price.
Tax credit system - VAT removes these defects by tax credit system. Under this system, credit is given at each stage of tax paid at earlier stage.
Illustration of tax credit system - In the example we saw above, ‘B’ will purchase goods from ‘A’ @ Rs. 110, which is inclusive of duty of Rs. 10. Since ‘B’ is going to get credit of duty of Rs. 10, he will not consider this amount for his costing. He will charge conversion charges of Rs. 40.00 and sell his goods at Rs. 140. He will charge 10% tax and raise invoice of Rs. 154.00 to ‘C’. (140 plus tax @ 10%). In the Invoice prepared by ‘B’, the duty shown will be Rs. 14. However, ‘B’ will get credit of Rs. 10 paid on the raw material purchased by him from ‘A’. Thus, effective duty paid by ‘B’ will be only Rs. 4. ‘C’ will get the goods at Rs. 154 and not at Rs. 165 which he would have got in absence of Cenvat. Thus, in effect, ‘B’ has to pay duty only on Rs 40, which is the value added by him.
Following example will illustrate the tax credit method of Cenvat.
Transaction without VAT
Transaction With VAT
Details
A
B
A
B
Purchases -
110
-
100
Value Added
100
40
100
40
Sub–Total
100
150
100
140
Add Tax 10%
10
15
10
14
Total
110
165
110
154
Note - 'B' is purchasing goods from 'A'. In second case, his purchase price is Rs 100/- as he is entitled to Cenvat credit of Rs 10/- i.e. tax paid on purchases. His invoice shows tax paid as Rs 14. However, since he has got credit of Rs 10/-, effectively he is paying only Rs 4/- as tax, which is 10% of Rs 40/-, i.e. 10% of 'value added' by him.
Advantages of tax credit system - The ‘Tax Credit Method’ has following advantages - (a) Audit control is much better, which helps in controlling tax evasion. It acts as a self-policing mechanism (b) Flexibility in applying varying tax rates to different commodities (c) Useful in giving tax benefits on exports or other preferred end-uses like uses by common man etc. Most of the countries have adopted ‘tax credit’ method for implementation of VAT.
Meaning of ‘Value added’ – In the above illustration, the ‘value’ of inputs is Rs 110, while ‘value’ of output is Rs 150. Thus, the manufacturer has made ‘value addition’ of Rs 40 to the product. Simply put, ‘value added’ is the difference between selling price and the purchase price.
Advantages of VAT - Advantages of VAT are as follows : (a) Exports can be freed from domestic trade taxes (b) It provides an instrument of taxing consumption of goods and services (c) Interference in market forces is minimal (d) Aids tax enforcement by providing audit trail through different stages of production and trade. Thus, it acts as a self-policing mechanism (e) Neutrality i.e. with minimum distortion in tax structure - as there are few variations in tax rates and exemptions from taxation are very few.
The disadvantage is that paper work required increases considerably and it is not as simple as a single point sales tax.
New Cenvat scheme
MODVAT credit scheme was introduced in 1986 vide rules 57A to 57U. Since rules can be amended easily by Central Government, the scheme remains flexible and hence can be modified quickly as per changing requirements. Cenvat was introduced in place of Modvat w.e.f. 1.4.2000, vide new set of rules 57AA to 57AK. Later, separate Cenvat Credit Rules were introduced w.e.f. 1-7-2001. These were replaced by Cenvat Credit Rules, 2002. These are now replaced by Cenvat Credit Rules, 2004 w.e.f. 10-9-2004.
Section 94(2) of Finance Act, 1994 empowers Central Government to make rules for – (i) credit of service tax paid on services consumed for providing a taxable service in case where the services consumed and the service provided fall in the same category [clause (ee)] (ii) credit of service tax paid on the services consumed or duties paid or deemed to have been paid on goods used for providing taxable service [clause (eee)] (iii) provisions for determining export of taxable services [clause (f)] (iv) Rebate of service tax paid or payable on taxable services consumed or duties paid or deemed to have been paid on goods used for providing taxable services which are exported out of India [clause (h)].
Service Tax Credit Rules, 2002 were issued effective from 16-8-2002, which are now merged with Cenvat Credit Rules, 2004 w.e.f. 10-9-2004.
Merging of Cenvat and Service Tax Rules - Cenvat Credit Rules, 2004 have been issued by superseding Cenvat Credit Rules, 2002 and Service Tax Credit Rules, 2002. The new rules are effective from 10-9-2004.
Rule 16(2) of Cenvat Credit Rules, 2004 states that any reference in any notification, circular, trade notice, rules etc. to Cenvat Credit Rules, 2002 or Service Tax Credit Rules 2002, shall be construed as reference to Cenvat Credit Rules, 2004.
General highlights of Cenvat scheme – General highlights of the scheme (except those related to integration of service tax and excise duty credit) are as follows :
Credit of duty paid on input and input services - The Cenvat scheme is principally based on system of granting credit of duty paid on inputs and input services. A manufacturer or service provider has to pay excise duty and service tax as per normal procedure on the basis of ‘Assessable Value’ (which is mainly based on selling price). However, he gets credit of duty paid on inputs and service tax paid on input services.
Input goods eligible for Cenvat to manufacturer - Credit will be available of excise duty paid on (a) raw materials (excluding few items) (b) material used in or in relation to manufacture like consumables etc. (c) Paints, packing materials, fuel etc. used for any purpose. However, duty paid on high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol) is not available as Cenvat credit, even if these are used as raw materials or as fuel.
Input may be used directly or indirectly - The input may be used directly or indirectly in or in relation to manufacture. The input need not be present in the final product.
Inputs goods eligible for Cenvat to service provider - Credit will be available of excise duty paid on inputs used for providing output services, except high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol).
No input credit if final product/output service exempt from duty/ service tax - No credit is available if final product is exempt from duty or final service is exempt from service tax. If a manufacturer manufactures more than one product, it may happen that some of the products are exempt from duty. Similarly, in case of service provider, some services may be taxable while some services may not be covered. In such cases, duty paid on inputs and service tax paid on input services used for manufacture of exempted products/services cannot be used for payment of duty or tax on other final products/services which are not exempt from duty/tax. If the manufacturer/service provider uses common inputs both for exempted as well as un-exempted goods/services, he should maintain separate records for inputs/input services used for manufacture of exempted final products and should not avail Cenvat on such inputs/input services. However, if he does not maintain separate records and inventories of inputs/input services used in exempted final products/services, he has to pay an ‘amount’ of 10% of price of exempted goods. - - As per section 91 read with section 93 of Finance (No. 2) Act, 2004, education cess is payable only on ‘duties of excise’. ‘Amount’ is not ‘duty’. Hence, education cess is not payable on such ‘amount’.
In case of exempt services, he can utilise Cenvat credit only upto 20% of service tax payable on output service.
Credit on basis of specified documents - Credit is to be availed only on the basis of specified documents as proof of payment of duty on inputs or tax on input services.
Credit available instantly - Credit of duty on inputs can be taken up instantly, i.e. as soon as inputs reach the factory is received. In case of capital goods, upto 50% credit is available in current year and balance in subsequent financial year. In case of input services, credit is available only after the amount of Bill is paid to person who had provided the service.
No cash Refund - In some cases, it may happen that duty paid on inputs and service tax paid on input services may be more than duty payable on final products. In such cases, though the Cenvat credit will be available to the manufacturer/service provider, he cannot use the same and the same will lapse. There is no provision for refund of the excess Cenvat credit. However, the only exception is in case of exports where duty paid on input material or services used for exported goods is refundable. Other exception is Tribunal can order refund when Cenvat credit could not be availed due to fault / wrong action of the department. Refund may also be granted if assessee could not utilise credit for some other reason.
One-to-one correlation not required - Cenvat Credit Rules do not require input-output correlation to be established.
Cenvat on Capital Goods - Credit of duty paid on machinery, plant, spare parts of machinery, tools, dies, etc., is available. However, upto 50% credit is available in current year and balance in subsequent financial year or years.
Cenvat to manufacturer available only if there is 'manufacture' - Cenvat on inputs or input services is available only if the process is 'manufacture'. Otherwise, Cenvat is not available. [In fact, in such cases, no duty is payable on the final product and question of Cenvat does not arise at all].
Cenvat credit is indefeasible - In CCE v. Dai Ichi Karkaria Ltd. 1999(112) ELT 353 = 1999 AIR SCW 3205 = (1999) 7 SCC 448 = AIR 1999 SC 3234 (SC 3 member bench), it was held that Cenvat credit validly taken is indefeasible. It was also observed that co-relation between final product and raw materials is not required in Cenvat scheme. - - However, Cenvat credit balance at the year end is not income of assessee – CIT v. Indo Nippon Chemicals (2003) 130 Taxman 179 = 155 ELT 452 = 261 ITR 275 (SC).
Integration of Excise duty and service tax credit - The highlights of scheme of integration are as follows –
Wide definition of ‘input service’ – A manufacturer/service provider will be entitled to credit of service tax paid by him which are used by him directly or indirectly in or in relation to manufacture of final product/provision of output services. This would include even services which are received prior to commencement of manufacture/provision of output services. Even input services relating to setting up a factory will be eligible.
In addition to this, services like advertising, activities relating to business like accounting, auditing, storage, transport etc., which are not directly related to manufacture/provision of output services but are related to the sale of manufactured goods/provision of output services would also be permitted for credit. In fact, all input services relating to all activities relating to business are eligible for Cenvat credit.
Full credit of tax paid on input services - Full credit of service tax on services (such as telephone, security, construction, advertising service, market research etc.) which are received in relation to the offices pertaining to a manufacturer or service provider would be allowed, even if these are partly used in exempted final product/output services.
Credit of duty paid on capital goods – Capital goods used for manufacture of final product and/or used for providing output taxable service will be available. A service provider can take out capital goods from his premises, provided that he brings them back within 180 days. This period can be extended.
Restriction on credit of capital goods - The restriction of 50% on credit on capital goods would continue for manufacturers as well as service providers, i.e. in case of capital goods, 50% credit will be available in first year and balance 50% in subsequent year/s. It may be noted that in case of some service providers, motor vehicle has been defined as ‘capital goods’.
credit of goods as inputs used by service providers – Goods used for provision of output services will be treated as inputs even in respect of service provider. A service provider will be entitled to credit of excise duty paid on raw materials/consumables used by him while providing output service. It may be noted that as per notification No. 12/2003-ST dated 20-6-2003, a service provider is not required to pay service tax on goods and materials used by him for providing output services. This notification makes it clear that this exemption is not available if Cenvat credit of duty paid on inputs is taken. If such credit is taken, it should be reversed.
Credit on motor vehicles used to provide output service – Motor vehicles are not ‘capital goods’ for purpose of ‘manufacture’, but credit on motor vehicles would be allowed as ‘capital goods’ only to the service providers of courier, tour operator, rent-a-cab scheme operator, cargo handling agency, outdoor caterer, pandal and shamiana operator and goods transport agency. Motor vehicle will not be treated as ‘capital goods’ for manufacturers or other service providers.
Services Billed/received at Head Office/Regional Offices - In some cases, the bill/invoice is raised in the name of head office/regional office etc., but services are actually received in the factory (or factories) or premises of service provider. In addition, the Head Office/Regional Offices receive services which are not specific for any factory/premises or service provider, such as advertising, market research, management consultancy etc. Bills in respect of such services would be received only in these offices. To enable the manufacturer/service provider to avail credit of such input services, a concept of “input service distributor” has been introduced. The HO/Regional Office will have to register as ‘Input Service Distributor’ with Excise department. The HO/Regional Office will have to issue Invoice to the factory/office providing service. The factory/service provider can avail credit on basis of such invoice. It would be left to the assessee to decide as to how he distributes the credit among various factories or service providing units. He has to ensure that the total credit allowed does not exceed the eligible credit amount. Such offices which distribute the credit would have to obtain service tax registration.
Manufacturer making exempted as well as un-exempted final products - Manufacturers making both exempted and non-exempted goods can maintain separate account in respect of inputs used in exempted and un-exempted final products. A manufacturer not maintaining separate accounts would pay 10% (increased from 8% as credit of service tax is being allowed) of the price of exempted goods.
Service provider providing exempted as well as un-exempted services – A service provider of exempted and non-exempted services not maintaining separate accounts would be eligible to avail Cenvat credit only to the extent of 20% of service tax payable on output services [Till 10-9-2004, it was 35%].
Full credit in case of specified input services - In case of specified services such as construction, erection/ commissioning/ installation etc. credit would be disallowed only when they are used exclusively in relation to manufacture of exempted goods/ services. Otherwise full credit would be allowed
Persons eligible for credit
Rule 3(1) of Cenvat Credit Rules states that a manufacturer or producer of final products and a provider of output service shall be allowed to take credit (hereinafter referred to as the Cenvat credit). EOU units can also avail Cenvat credit.
The Cenvat Credit is of specified duties (basic, special, AED, NCCD, education cess, service tax, CVD on imported goods etc. as discussed later) paid on inputs or capital goods received in the factory or premises of service provider, and also service tax paid on input services.
Manufacturer eligible for Cenvat credit – Cenvat credit can be availed by ‘manufacturer or producer’ of final products. ‘Manufacture’ or ‘production’ means new and identifiable product known in the market. Thus, ‘manufacturer’ or ‘producer’ is the person who actually brings the final product into existence.
Final products eligible under the Cenvat scheme - Cenvat has been extended to all items included in CETA.
As per rule 2(h), ‘Final Product’ means excisable goods manufactured or produced from inputs, or using input service.
Cenvat scheme has been extended to all manufactured final products. These goods cover food products, chemicals, plastics and rubber products, tobacco products, leather and wood articles, textile articles, paper, metals, engineering goods, matches, textile products, electrical and electronic goods and automobile sector.
EOU are entitled to Cenvat credit – EOU units have been allowed to avail Cenvat credit w.e.f. 6-9-2004, by amending rule 17(1) of Central Excise Rules – confirmed in CBE&C Circular Nos. 799/32/2004-CX dated 23-9-2004 and 54/2004-Cus dated 13-10-2004.
Waste and scrap is final product for Cenvat - As per Cenvat provisions, waste or scrap is treated as a final product within definition of rule 57AA(c) [Now new rule 2(h)] and its clearance is as if it is a final product. - MFDR TRU No. 345/2/2000-TRU dated 29-8-2000.
No Cenvat if goods exported and exporter claims duty drawback – An assessee can get export incentives only once. Thus, if he avails Cenvat credit, he cannot claim excise portion of All India duty drawback rate. However, he can avail customs portion of duty drawback rate even if he avails Cenvat.
No Cenvat if no ‘manufacture’
Cenvat credit is available only when 'manufacture' takes place. Cenvat provisions are available when there is ‘manufacture’ i.e. new and identifiable product known in the market emerges. However, if the processing does not amount to ‘manufacture’ Cenvat credit on inputs is not available.
Service Provider eligible for Cenvat credit
As per rule 3(1), provider of output service shall be allowed to take Cenvat credit of specified duties and taxes.
As per rule 2(p), “output service” means any taxable service provided by the provider of taxable service, to a customer, client, subscriber, policy holder or any other person, as the case may be, and the expressions ‘provider’ and ‘provided’ shall be construed accordingly.
Thus, only a person who is providing taxable output service will be eligible to take Cenvat credit.
The words client, customer, subscriber etc. are used in definition of each taxable service under section 65(105) of Finance Act, 1994. Those words will be applicable for purpose of this definition.
Input Goods for Cenvat
Inputs which are goods are eligible for Cenvat credit by both manufacturer as well as service provider.
Statutory definition –Rule 2(k) defines ‘input’ as follows –
Rule 2(k) “Input” means –
(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production;
(ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service.
Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.
Explanation 2.- Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer.
Input for a manufacturer – Definition of ‘input’ as far as manufacturer is concerned, is in two parts –
(a) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not.
(b) ‘Input’ includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production.
This has following implications – (1) Second part of the definition is independent of the first part. In other words, requirement of ‘used in or in relation to manufacture’ is not applicable to ‘inputs’ included in second part of definition, as the words used are ‘or for any other purpose’ (2) ‘Inputs’ as defined in second part of definition will be eligible as long as they are used within the factory of production (except accessories of final products cleared along with the final product, as obviously, these cannot be used within factory of production). The purpose for which these are used is immaterial. (This would be so, even if it is held that the words ‘for any purpose’ apply only to goods used for generation of electricity or steam. The reason is rules do not state the purpose for which these are required to be used in the factory).
In Ballarpur Industries v. CCE 2000(116) ELT 312 (CEGAT 3 member bench), it was observed that inclusive definition expands the scope of the expression and cannot be treated as restrictive in any sense. Once a particular item is covered by the definition of ‘input’, one need not proceed further and examine the question as to whether the goods (fuel in this case) are used in or in relation to manufacture of final product.
Inputs eligible for Cenvat under first part of definition
The definition of ‘input’ covers following -
· All goods [except High Speed Diesel Oil (HSD), Light Diesel Oil (LDO) and petrol] used in, or in relation to, the manufacture of the final products. The input may be used directly or indirectly in or in relation to manufacture of final product. The input need not be present in the final product (first part of the definition)
· Input includes * lubricating oils, greases, cutting oils and coolants * accessories of final products cleared along with the final product * Goods used as paint * Packing material * Fuel * Goods used for generation of electricity or steam used in or in relation to manufacture of final products or for any purpose. - - These can be used ‘for any purpose’. (second part of the definition)
· Input also includes goods used in manufacture of capital goods which are further used in the factory of manufacturer (Explanation 2 to the definition).
Inputs should be ‘used’ – mere intention to use is not sufficient – Rule 2(k)(i) which defines ‘inputs’ for manufacturer states that these should be ‘used in the factory’. Thus, mere intention to use is not sufficient to avail Cenvat credit.
In or in relation to manufacture of final product - The input must be used in or in relation to the manufacture of final product, in respect of inputs which are not covered in second part of the definition of ‘inputs’. Thus, if an input is used ‘in the manufacture’ or ‘in relation to the manufacture’, it is eligible for claiming Cenvat credit.
‘In the manufacture’ means the input is actually used in the manufacture of finished product, either directly or indirectly. It may be present in the ‘final product’ in same or similar or identifiable form or it might have got converted during process and may not be seen or identified in the final product. ‘In relation to the manufacture’ means, the input has been used during a process while manufacturing the product like consumable. The input need not form part of final product. Thus, the term 'in relation to manufacture' is a very wide term and covers all inputs which have direct nexus with the manufacturing process. 'Manufacture' includes all processes incidental or ancillary to manufacture. Thus, the term 'inputs' is much more wider than mere 'raw materials'.
The expression ‘in relation to’ (so also ‘pertaining to’) is a very broad expression, which pre-supposes another subject matter. These are words of comprehension which might both have a direct significance as well as an indirect significance depending on the context. -. - ‘Relating to’ is equivalent to or synonymous with as to ‘concerning with’ and ‘pertaining to’. The expression ‘pertaining to’ is an expression of expansion and not of contraction - Doypack Systems P Ltd. v. UOI (1988) 2 SCR 962 = 1988 2 SCC 299 = (1989) 65 Comp Cas 1 = 1988 (36) ELT 201 (SC) = AIR 1988 SC 782 * Tamil Nadu Kalyana Mandapam Association v. UOI 2004 (167) ELT 3 = 135 STC 480 (SC).
'In relation to' are words of comprehensiveness which might have both a direct significance or indirect significance depending on the context. They are not words of restrictive content. - State Waqf Board v. Abdul Azeer Sahib (1967) 1 MLJ 190 = AIR 1968 Mad 79.
The expression ‘in relation to’ is of widest import. – Thyssen Stahlunion GMBH v. Steel Authority of India 1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999 (6) SCC 334.
Small Illustration - A small example will illustrate the position. While manufacturing wooden table, wood, nails and paints are used ‘in the manufacture’ of table, while sandpaper for polishing the table may be said to be used ‘in relation to manufacture’ of the product. Carpenter’s instruments are ‘capital goods’. While cooking food, the vegetables, oil, wheat flour etc. are used ‘in the manufacture’. Cooking gas and kerosene can also be said to be ‘used in manufacture’. However, electricity used in mixer or refrigerator can be said to be used ‘in relation to manufacture’. The electricity for tube-light in kitchen may facilitate cooking, but it cannot be said to be ‘used in or in relation to manufacture’ of food.
One to one correlation not necessary
Rule 3(4)(a) states that Cenvat credit may be utilised for payment of any duty of excise on any final product. Thus, there is no requirement of establishing relation between inputs/input services and final product.
There is no correlation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related - CCE v. Dai Ichi Karkaria Ltd. 112 ELT 353 = AIR 1999 SC 3234 = 1999 AIR SCW 3205 = (1999) 7 SCC 448 (SC 3 member bench).
Input goods in respect of service providers
Duty paid on input goods used by service providers is also eligible for Cenvat credit, but in a restricted way.
As per rule 2(k)(ii), all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service is ‘input’.
Input Service for Cenvat
Manufacturer as well as service provider will be eligible to get Cenvat credit of ‘input services’. Rule 2(l) of Cenvat Credit Rules reads as follows –
Rule 2(l) - “Input service” means any service –
(i) used by a provider of taxable service for providing an output service; or
(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal;
and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal
Wide coverage of input services – The words used in the definition in relation to manufacturer are ‘in relation to’.
Input services Used for providing output services – In case of service provider, the words used in definition of input service in rule 2(l)(i) are ‘used by a provider of taxable service for providing output service’. This appears to limit scope of ‘input service’ in respect of output service providers. However, as discussed later, the scope has been further widened by ‘adding ‘inclusive definition’ to the rules, i.e. even to input services which have only remote or insignificant nexus with output services will get covered as long as these are related to activities of business.
Service need not be received in factory or premises from where output service provided – In case of inputs and capital goods, Cenvat credit is eligible to manufacturer only if these are received in the factory. However, in case of input service, there is no such requirement. Input service need not be received in factory or premises of service provider.
In case of service provider, even there is no requirement that inputs and capital goods should be received in premises of service provider.
Coverage beyond manufacturing/service provision stage
Inclusive definition clause of rule 2(l) extends scope of ‘input services’ even beyond stage of ‘manufacture’ or ‘provision of service’. The inclusive clause makes it clear that services much earlier to manufacture or even after manufacture will be eligible as service tax credit.
Credit only after payment is made to service provider
Credit of input services can be availed only after the output service provider makes payment of value of input services and the service tax payable on it, as shown in invoice of input service provider. [Rule 4(7)]. [In case of excise duty, credit is available as soon as goods are received in the factory. There is no condition that credit can be availed only after payment is made to supplier of goods].
Input Service Distributor
A manufacturer or service provider may have head office/regional office at different place/s. The services may be received at head office/regional office, but ultimately, these will be indirectly used for manufacture or providing output service. Provision has been made to avail Cenvat credit of services received and paid for at head office/regional office. Such head office/regional office will be registered with central Excise and it will have to issue invoice on the manufacturer or producer or service provider.
Who is ‘input service distributor’ - As per rule 2(m), “input service distributor” means an office managing the business of manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be.
Document eligible for Cenvat credit - As per rule 9(1)(g); ‘invoice, bill or challan’ issued by an ‘input service distributor’ under rule 4A of Service Tax Credit Rules is an eligible document for purpose of taking Cenvat credit.
Capital goods for Cenvat
'Capital Goods' for Cenvat
Cenvat credit is available on inputs as well as capital goods. Some provisions are common while there are some specific provisions in respect of Cenvat on capital goods.
Capital Goods Eligible to a manufacturer or service provider – Manufacturers and service providers are eligible to avail Cenvat credit of capital goods used by them.
Following are the ‘capital goods’, vide Rule 2(a)(i) of Cenvat Credit Rules -
(i) * Tools, hand tools, knives etc. falling under chapter 82 * Machinery covered under chapter 84 * Electrical machinery under chapter 85 * Measuring, checking and testing machines etc. falling under chapter 90 * Grinding wheels and the like goods falling under sub-heading No 6801.10 * Abrasive powder or grain on a base of textile material, falling under chapter heading 68.02.
(ii) Pollution control equipment.
(iii) Components, spares and accessories of the goods specified above.
(iv) Moulds and dies.
(v) Refractories and refractory material.
(vi) Tubes, pipes and fittings thereof, used in the factory.
(vii) Storage Tank.
USE OF CAPITAL GOODS - The capital goods should be used – (a) in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office ; or (2) for providing output service.
Capital goods used exclusively for exempted final products and output services not eligible – Capital goods used exclusively for manufacture of exempted goods or providing exempt service are not eligible [rule 6(4)]. [Thus, partial use of capital goods for manufacture of exempted goods or provision of exempt output services is permissible, i.e. in such case, Cenvat credit on capital goods will be allowed].
Use of capital goods by manufacturer
Rule 2(a) provides that capital goods should be used – (a) in the factory of manufacturer of the final products or (b) for providing output service.
Capital goods manufactured within the factory
As per Explanation 2 to rule 2(k) of Cenvat Credit Rules, ‘input’ includes goods used in manufacture of capital goods which are further used in the factory of manufacturer. Thus, if a manufacturer manufactures some capital goods within the factory, goods used to manufacture such capital goods will be eligible as ‘inputs’. [i.e. 100% Cenvat credit will be available in the same financial year]. - - It may be noted that capital goods manufactured within the factory and used within the factory are exempt from excise duty vide notification No. 67/95-CE dated 16-3-1995.
Conditions for availing Credit on Capital Goods
The conditions for eligibility of Credit are as follows :
· Duty paying documents eligible are same for Cenvat on inputs
· Depreciation under section 32 of Income Tax Act should not be claimed on the excise portion of the Capital Goods. – Rule 4(4) of Cenvat Credit Rules (Otherwise, the manufacturer will get double deduction for Income Tax - one credit as Cenvat and another credit as depreciation)
Utilisation of Cenvat Credit
Duties eligible for credit
Assessee can avail credit of duty/ service tax paid on inputs and input services. This credit is known as ‘Cenvat Credit’.
Meaning of Cenvat Credit - Rule 3(1) states that following duties/taxes will be available as credit (hereinafter referred as Cenvat Credit).
The term ‘Cenvat Credit’ used in various rules means aggregate of following duties and taxes [Rule 3(1)].
(a) Basic excise duty on indigenous inputs [Paid on goods specified in first schedule to CETA]. Corresponding CVD on imported goods is allowable.
(b) Special excise duty [paid on goods specified in Second Schedule to CETA]. Corresponding CVD on imported goods is allowable.
(c) Additional Customs Duty paid u/s 3(5) of Customs Tariff Act w.e.f. 1-3-2005. This credit will not be available to service providers [This duty is payable @ 4% on imports of ITA (Information technology Agreement) bound items and on specified inputs/raw materials, for manufacture of electronic/information technology items, which are exempt from customs duty. This duty will not be charged on information technology software.
(d) Additional Excise Duty paid under Additional Duties of Excise (Goods of Special Importance) Act [AED(GSI)]. If these are imported, credit of corresponding CVD on imported goods can be availed [AED(GSI) on textile articles has been abolished w.e.f. 9-7-2004].
(e) Education cess on manufactured excisable goods and CVD equal to education cess on imported goods. This credit can be utilised only for payment of education cess on final product or output services.
(f) Additional Excise Duties paid on textile and textile articles [AED(TTA)]. If these are imported, corresponding CVD paid is also eligible [AED(TTA) has been abolished w.e.f. 9-7-2004].
(g) National Calamity Contingent Duty (NCCD) leviable under section 136 of Finance Act, 2001 and corresponding CVD paid on imported goods. This credit can be used for payment of NCD on outputs only and not for any other duty.
(h) Additional Customs Duty paid u/s 3(5) of Customs Tariff Act. This duty on imports is payable under clause 72 of Finance Bill, 2005 w.e.f. 1-3-2005. This credit will not be available to service providers, as provided in second proviso to rule 5 of Cenvat Credit Rules. Proviso to rule 4(2)(a) of Cenvat Credit Rules makes it clear that even if the goods on which this duty is paid are ‘capital goods’, full 100% credit will be available in first year itself [This duty is payable @ 4% on imports of ITA (Information technology Agreement) bound items and on specified inputs/raw materials, for manufacture of electronic/information technology items, which are exempt from customs duty. This duty is not levied on information technology software].
(i) Additional Excise Duty (Tea and Tea Waste) levied under section 157 of Finance Act, 2003. This credit can be utilised only for payment of AED(TTW) on final product. This duty has been abolished w.e.f. 1-3-2005.
(j) Service tax on input services.
(k) Education cess paid on service tax. This credit can be utilised only for payment of education cess on final product or output services.
(l) Additional Excise Duty paid under clause 85 of Finance Bill, 2005. This duty is payable w.e.f. 1-3-2005 on pan masala and certain tobacco products, as specified in seventh schedule to Finance Bill, 2005 [Credit of Additional Excise Duty paid under clause 85 of Finance Bill can be used for payment of this duty. Any other credit cannot be utilised and balance amount is required to be paid in case only].
Credit of basic duty, AED(GSI), special excise duty and service tax can be utilised for payment of basic excise duty on final products and vice versa.
Basic duty, SED, service tax on inputs, Additional Customs Duty paid u/s 3(5) of Customs Tariff Act and AED(GSI) are inter-changeable, i.e. Credit of duty paid under one head can be utilised for payment of duty under other head.
Credit of basic duty, SED, service tax, Additional customs Duty paid u/s 3(5) of Customs Tariff Act and AED(GSI) can also be utilised for payment of Education Cess, AED(TTA), AED(TTW) and NCCD, but not vice versa.
Education Cess paid on goods and paid on services is inter-changeable.
Restrictions on Cenvat credit in certain cases
Credit of any duty can be utilised for payment of any duty on final product. However, some exceptions are provided in rule 3(7).
Taking and Utilisation of credit
Credit of the duty paid on eligible inputs can be taken by the manufacturer immediately on receipt of inputs in the factory of manufacturer or in the premises of provider of output services - Rule 4(1) of Cenvat Credit Rules.
In case of capital goods, upto 50% credit only can be taken at any point of time in a financial year and in any succeeding year or years. – Rule 4(2) of Cenvat Credit Rules.
Payment of duty through Cenvat credit is almost as good as payment of duty through PLA and refund is permissible (if otherwise eligible) even if duty was paid through Cenvat credit.
Credit can be taken as soon as goods are received in the factory or premises of service provider. It is not necessary to wait till the inputs / capital goods are actually utilised in production [Rule 4(1) of Cenvat Credit Rules].
Manufacturer/service provider should maintain record of Cenvat credit availed and of credit utilised. (The record should be similar to PLA where credit is taken of duty paid by Challan in Bank and when finished goods are cleared, debit entry is made in PLA).
Utilisation of Cenvat credit – The Cenvat Credit [as defined in rule 3(1)] can be utilised for payment of any excise duty on :
· Any duty on any final product manufactured by manufacturer [Rule 3(4)(a)]
· Payment of ‘amount’ if inputs are removed as such or after partial processing [Rule 3(4)(b)]
· Payment of ‘amount’ on capital goods if they are removed as such [Rule 3(4)(c)]
· Payment of ‘amount’, if goods are cleared after repairs under rule 16(2) of Central Excise Rules [Rule 3(4)(d)]
· Payment under Cenvat Credit Rule 6 of 10% ‘amount’ on exempted goods or reversal of credit on inputs when common inputs or common input services are used for exempted as well as dutiable final products – Explanation I to Cenvat Credit rule 6(3)
· Reversal of Cenvat credit, if assessee opts out of Cenvat – Rule 11(2)
· Payment of ‘amount’ if goods sent for job work are not returned within 180 days – Rule 4(5)(a).
If by-product, scrap or waste is dutiable as ‘excisable goods’, duty will be payable on these as if it is a 'final product'.
Duty paying documents for Cenvat
As soon as a manufacturer/service provider receives an input, he can avail Cenvat credit of the duty paid on the inputs. However, in case of input service, he is entitled to service tax credit only when he makes payment to service tax provider. Documentary evidence is required regarding payment of duty on inputs/tax on input services.
Rule 9(1) of Cenvat Credit Rules prescribes that Cenvat Credit can be taken on the basis of -
· Invoice of manufacturer from factory
· Invoice of manufacturer from his depot or premises of consignment agent
· Invoice issued by registered importer
· Invoice issued by importer from his premises or consignment registered with Central Excise
· Invoice issued by registered first stage or second stage dealer
· Supplementary Invoice
· Bill of Entry
· Certificate issued by an appraiser of customs in respect of goods imported through foreign post office
· Challan of payment of tax where service tax is payable by other than input service provider
· Invoice, bill or challan issued by provider of input service on or after 10-9-2004
· Invoice, Bill or Challan issued by input service provider under rule 4A of Service Tax Rules.
Essential requirement of invoice –As per rule 9(2) of Cenvat Credit Rules, Cenvat credit cannot be denied as long as the document contains essential aspects of duty/tax payment i.e. –
(a) payment of duty or service tax
(b) description of goods or taxable service
(c) assessable value
(d) name and address of the factory or warehouse or provider of input service.
Thus, Cenvat cannot be denied if the documents contains these details and no permission/condonation is required if the invoice/bill/challan contains these basic details
Note that Serial Number or name of user-manufacturer is not a essential detail specified in rule 9(2) of Cenvat Credit Rules.
Exempted final products/output services
As per basic principle of VAT, credit of duty or tax can be availed only for payment of duty on final product or output services. As a natural corollary, if no duty is payable on final product or output services, credit of duty/tax paid on inputs or input services cannot be availed.
As per Rule 6(1) of Cenvat Credit Rules, Cenvat credit is not admissible on such quantity of input or input service which is used in manufacture of exempted goods or exempted services.
Thus, if inputs and input services are partly used in exempted final product/output service, Cenvat credit of that portion of input/input service will not be available.
Partial manufacture/provision of exempted products/services
It may happen that same inputs/input services are used partly for manufacture of dutiable goods/taxable services and partly for exempted goods/services. In such cases, the manufacturer/service provider has two options –
Maintain separate inventory - Maintain separate inventory and accounts of receipt and use of inputs (except fuel) and input services used for exempted final products/exempted output services. In such cases, he should not avail Cenvat credit of the inputs and input services which are used in exempted final services at all – Rule 6(2) of Cenvat Credit Rules. In CCE v. Padmini Polymers 2003(151) ELT 358 (CEGAT), it was held that there is no requirement that these must be stored separately. It is not necessary to maintain separate account in respect of ‘fuel’ used as inputs.
Pay 10% ‘amount’ if separate inventory and records not maintained - If the manufacturer/service provider opts not to maintain such separate accounts, he has to pay an amount equal to 10% of the ‘price’ of such exempted final products. Such payment can be made by debit to Cenvat credit account or PLA [rule 6(3)(b)].
As per section 91 read with 93 of Finance (No. 2) Act, 2004, education cess is payable only on ‘duties of excise’. ‘Amount’ is not ‘duty’. Hence, education cess is not payable on such ‘amount’.
Credit of service tax limited if service provider does not maintain separate accounts - In case of output service, if he does not maintain separate accounts, he can avail Cenvat only to the extent of 20% of service tax payable on final product.
Meaning of 'exempted goods' - As per Rule 2(d) of Cenvat Credit Rules, 'exempted goods' means goods which are exempt from whole of duty of excise leviable thereon and includes goods which are chargeable to 'Nil' rate of duty. Thus, 'exempted goods' for purpose of Cenvat cover (a) Goods chargeable to 'Nil' duty as per Tariff and (b) Goods which are exempt by a notification issued under section 5A.
Exempted goods do not mean non-excisable goods - Goods which are not mentioned in Tariff are not ‘exempted goods’ as they are neither ‘goods chargeable to 'Nil' duty as per Tariff’ nor ‘goods which are exempt by a notification issued under section 5A’.
Meaning of ‘exempted services’
As per rule 2(e), “exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of Finance Act.
Services on which no tax is payable are also ‘exempt services’ - - For purpose of the definition of ‘exempted services’, services on which no service tax is leviable are also ‘exempted services’. Thus, if a particular service is not taxable under present provisions of Finance Act, 1994, it will be ‘exempted service’ for purpose of rule 6.
Payment of ‘amount’ on exempted final products
If assessee opts not to maintain separate accounts in respect of inputs and input services utilised for exempted final products/exempted output services, he has to pay ‘amount’ of 10% of total price (excluding taxes) of exempted final product [rule 6(3)(b)].
When payment of ‘amount’ is not required
In certain cases, payment of ‘amount’ or reversal of Cenvat is not required.
Export of goods, deemed exports or gold manufacture - As per rule 6(6), a manufacturer can avail Cenvat credit on inputs when final product is despatched without payment of duty, in following cases –
(a) Final product is despatched to SEZ, EOU, EHTP or STP.
(b) Final product is supplied to United Nations or an international organisation for their official use or supplied to projects funded by them, which are exempt from duty.
(c) When final product is exported under bond without payment of duty
(d) Gold or silver arising in course of manufacture of copper or zinc by smelting.
(e) Goods supplied against International Competitive Bidding in terms of Notification No. 6/2002-CE dated 1-3-2002, if such goods are exempt from customs duty when imported in India
In such case, assessee need not reverse Cenvat credit or pay any ‘amount’. In other cases, the manufacturer is not entitled to avail Cenvat credit on inputs when final product is cleared without payment of duty.
This provision does not apply to service providers. See discussions in a subsequent paragraph.
No payment of amount if intermediate product cleared for subsequent export - If intermediate products are cleared to another manufacturer for manufacture of final products (and then final products are exported by that another manufacturer), no duty is payable as per notification No. 43/2001-CE(NT) dated 26-6-2001. In such cases, the intermediate products cleared are not ‘exempted goods’. Hence, ‘amount’ is not payable. This view has been confirmed in CBE&C circular No. 785/18/2004-CX dated 17-5-2004. It is clarified in the circular that exporter of final product will not be entitled to duty drawback of excise portion, as he has obtained inputs without payment of excise duty.
Inputs used in manufacture of capital goods used within the factory – Notification No. 67/95-CE exempts capital goods manufactured within the factory and used within the factory. In such case, a view is possible that ‘amount’ is payable on such capital goods. However, since the goods are not sold, there is no question of any ‘price’ and hence no ‘amount’ should be payable.
Input/services used for exempted as well as taxable services
If input services are partly used for taxable services and partly for exempted services assessee should maintain separate accounts of input and input services meant of exempted services and taxable services. He should take credit only of inputs and input services intended for use of taxable output service [rule 6(2)].
Limit on Cenvat credit if assessee does not maintain separate accounts - If assessee does not maintain separate accounts, he can avail Cenvat only upto 20% of tax payable on taxable output service. [The limit was 35% upto 10-9-2004].
For example, assume that service tax payable on output service is Rs 100. Service tax paid on input service is Rs 15. These input services are used both for taxable output services and exempt/non-taxable output services. In such case, assessee can avail and utilise credit of entire Rs 15. However, if tax paid on input services is Rs 75, and these are used both for exempted and taxable services, then assessee can actually utilise credit of only Rs 20. He will have to pay balance in cash, even if credit of Rs 55 is still available in his books.
He may take credit of Rs 75 in his Service Tax (Receivable) Account, but can utilise credit of Rs 20.
The balance may remain in his Service Tax Credit Account. He can utilise it in future if opportunity arises.
Removal of goods ‘as such’
A manufacturer/service provider who obtains the inputs / capital goods gets immediate credit of the duty paid by supplier on the inputs used by him.
The manufacturer/service provider uses these inputs / capital goods for manufacture of final products. However, occasionally, he may have to remove the inputs from his factory or premises of output service provider for -
(a) sale or disposal if these are not required by him or
(b) job work/processing in an outside factory and return
(c) rejected inputs for rework and return. Since credit has been taken on the inputs, control over their removal is necessary.
Removal of inputs / capital goods ‘as such’ for sale/disposal - If the manufacturer/service provider is not able to use the inputs (on which he has availed Cenvat credit) for any reason (like rejection, quality problems, excess supply, change in production plan, exports etc.), he can clear the inputs as such or after partial processing or capital goods as such, from factory/premises of service provider after payment of an ‘amount’.
Amount payable equal to Cenvat credit availed – The inputs or capital goods can be removed as such from the factory of manufacturer or premises of service provider on payment of an ‘amount’ equal to Cenvat credit availed when the credit was taken. In other words, it amounts to reversal of Cenvat credit taken [rule 3(5)].
If originally, education cess was paid, equivalent ‘amount’ would be payable. If originally, no education cess was paid, question of its payment does not arise even if goods are cleared now, as ‘amount’ is not ‘excise duty’.
Removal of capital goods after use
Provisions of rule 3(5) apply when inputs or capital goods are removed ‘as such’. The rules make no provision for removal of capital goods after use.
Rule 2(a)(A) states that capital goods should be ‘used’. Duration is not specified. Hence, even if the capital goods are used for one day, Cenvat eligibility of capital goods is established.
As per Concise Oxford Dictionary, ‘as such’ means ‘in the exact sense of the word’. In the present context, ‘as such’ can only mean ‘as it is’.
If capital goods are used and then sold/cleared, it cannot be said that these are removed ‘as such’. Hence rule 3(4) cannot apply. This will be particularly so if some parts were replaced during use or the capital goods was removed after dismantling.
Thus, rule 3(5) does not apply and capital goods can be removed without payment of any ‘amount’ after use. ‘Duty’ cannot be demanded, as assessee has certainly not manufactured the capital goods. Selling old machinery cannot by any stretch of imagination be termed as ‘manufacture’ and no excise duty is payable. Thus, neither ‘amount’ nor ‘duty’ is payable.
Often department insists on payment of ‘amount’ on your selling price or depreciated value. This has no legal basis. It is observed that some assessees even mention the amount as ‘duty’ in their invoice, which is totally incorrect.
Removal for job work/repairs/testing
In modern manufacturing technology, a manufacturer usually does not carry out all the processes himself. It is common that some manufacturing processes are carried out by him from other manufacturer or subcontractors on job-work basis.
Similarly, a manufacturer or service provider may also have to remove inputs as such or after some processing for test, repairs etc. In such cases, he can clear the inputs received by him for further processing/test/repairs etc. and obtain the same back after processing/test/repairs is carried out.
He can clear inputs/capital goods as such or after carrying out partial processing, without payment of duty/amount.
Procedure also available for goods under DEEC scheme - In case of inputs received under DEEC scheme, CVD has been paid on the inputs. Hence, the inputs should be recorded as per Cenvat procedures and these can be sent to job work as per usual Cenvat procedures - Hyderabad Commissionerate Trade Notice No. 71/95 dated 5-7-1997 - Para 3.
Provisions for sending inputs / capital goods for job work/testing/repairs - Provisions contained in Rule 4(5)(a) of Cenvat Credit Rules for this purpose are as follows :
Removal for processing/test - The inputs / capital goods can be removed as such or after partial processing to job worker for further processing, testing, repairs, reconditioning or any other purpose.
Job work and job worker – As per rule 2(n) of Cenvat Credit Rules, Job Work means processing or working upon of raw materials or semi-finished goods supplied to job worker, so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for the aforesaid process, and the expression ‘job worker’ shall be construed accordingly. [The definition of ‘job work’ is same as given in Notification No. 214/86-CE dated 25-3-1986]
Goods Should be returned to factory/premises of service provider - After carrying out the operation/test/repair etc., the goods should be returned to the factory or premises of service provider within 180 days. If these are not received back within 180 days of their being sent out, manufacturer/service provider should pay an ‘amount’ equivalent to Cenvat credit attributable to inputs / capital goods. Payment can be through Cenvat credit or PLA. If the inputs / capital goods come back after 180 days (say after 220 days), manufacturer/service provider can take Cenvat credit of duty paid by him - rule 4(5)(a).
Procedures and Records for Cenvat
The main procedures are—
· Maintaining records of inputs and capital goods
· Maintaining records of credit received and utilised
· Submit returns of details of Cenvat credit availed, Principal Inputs and utilization of Principal Inputs in forms ER-1 to ER-6 (Discussed in earlier chapter)
· Returns by dealer/service provider/input service distributor
Record of inputs and capital goods - The manufacturer of final products or provider of output service or input service distributor shall maintain proper records for the receipt, disposal, consumption and inventory of the inputs and capital goods.
The record should contain relevant information regarding (a) value (b) duty paid (c) the person from whom inputs / capital goods have been procured.
Burden of proof regarding admissibility of Cenvat credit is on the manufacturer or provider of output service taking the credit – Rule 9(5) of Cenvat Credit Rules.
Record of input services – The manufacturer of final products or the provider of output service shall maintain proper records for receipt and consumption of the input services. The record should contain relevant information regarding –
(a) Value of service
(b) Tax paid
(c) Cenvat Credit taken and utilised
(d) Person from whom input service has been procured
The burden of proof regarding the admissibility of Cenvat credit shall lie upon the person taking such credit. [rule 9(6)]
Cenvat Credit Record - Cenvat Credit record should be maintained, which is similar to PLA. It is a current account of Cenvat credit received, credit utilised and credit balance. This should give details of (a) credit availed against each input / capital goods (b) credit utilised against clearance of final products or removal of input as such or after processing or removal of capital goods as such (c) Balance credit available.
Returns – A manufacture has to be submit returns to Range Superintendent of Central Excise in the prescribed forms ER-1 to ER-6 in respect of Cenvat Availed, Principal Inputs, utilization of Principal inputs etc.. These are discussed in earlier chapter and hence not reproduced here. Others have to submit returns as follows -
· Quarterly return by first stage/second stage dealer within 15 days from close of quarter [rule 9(8)]
· Half yearly return within one month from close of half year, by provider of output services [rule 9(9)]
· Half yearly return within one month from close of half year, by Input Service Distributor [rule 9(10)]
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20 February 2009
Modvat is replace by cenvat
Background of CENVAT
Cenvat (Central Value Added Tax) has its origin in the system of VAT (Value Added Tax), which is common in West European Countries. Concept of VAT was developed to avoid cascading effect of taxes. VAT was found to be a very good and transparent tax collection system, which reduces tax evasion, ensures better tax compliance and increases tax revenue.
Modvat (modified value added tax) was introduced in India in 1986 (Modvat was re-named as Cenvat w.e.f. 1-4-2000). The system was termed as Modvat, as it was restricted upto manufacturing stage and credit of only excise duty paid on manufacturing products (and corresponding CVD paid on imported goods) was available.
System of VAT was introduced to service tax w.e.f. 16-8-2002.
VAT was not extended to sales tax, as sales tax is under jurisdiction of State Governments. However, State Governments have agreed to introduce sales tax VAT and it is likely to be introduced from April 2005. Haryana Government has introduced sales tax VAT in April 2004 and the experience is reported to be good.
Integration of goods and service tax - A task force was formed under Chairmanship of Shri Vijay Kelkar on Implementation of Fiscal Responsibility and Budget Management Act. The Kelkar Committee submitted its report in July 2004. The Committee has strongly recommended ‘Goods and Service Tax’ (GST).
Full integration of goods and service tax will take considerable time, as it can be achieved only after political consensus is achieved. However, a beginning has been made by proposing to make credit of service tax and excise duty inter-chargeable. Finance Minister Shri P Chidambaram, in para 148 of his budget speech on 8-7-2004, stated as follows, ‘I propose to take a major step towards integrating the tax on goods and services. Accordingly, I propose to extend credit of service tax and excise duty on goods and services. Accordingly, I propose to extend credit of service tax and excise duty across goods and services’.
To give effect to this proposal, Cenvat Credit Rules, 2004 have been issued and made effective from 10-9-2004.
Basic Concept of VAT
Generally, any tax is related to selling price of product. In modern production technology, raw material passes through various stages and processes till it reaches the ultimate stage e.g., steel ingots are made in a steel mill. These are rolled into plates by a re-rolling unit, while third manufacturer makes furniture from these plates. Thus, output of the first manufacturer becomes input for second manufacturer, who carries out further processing and supply it to third manufacturer. This process continues till a final product emerges. This product then goes to distributor/wholesaler, who sells it to retailer and then it reaches the ultimate consumer.
If a tax is based on selling price of a product, the tax burden goes on increasing as raw material and final product passes from one stage to other. For example, let us assume that tax on a product is 10% of selling price. Manufacturer ‘A’ supplies his output to ‘B’ at Rs. 100. Thus, ‘B’ gets the material at Rs. 110, inclusive of tax @ 10%. He carries out further processing and sells his output to ‘C’ at Rs. 150. While calculating his cost, ‘B’ has considered his purchase cost of materials as Rs. 110 and added Rs. 40 as his conversion charges. While selling product to C, B will charge tax again @ 10%. Thus C will get the item at Rs. 165 (150+10% tax). As stages of production and/or sales continue, each subsequent purchaser has to pay tax again and again on the material which has already suffered tax. This is called cascading effect.
Cascading effect of conventional system of taxes - A tax purely based on selling price of a product has cascading effect, which has the following disadvantages - (a) Computation of exact tax content difficult (b) Varying Tax Burden as tax burden depends on number of stages through which a product passes (c) Discourages Ancillarisation (d) Increases cost of production (e) Concessions on basis of use is not possible (f) Exports cannot be made tax free.
VAT to avoid the cascading effect – VAT was developed to avoid cascading effect of taxes. In the aforesaid example, ‘value added’ by B is only Rs. 40 (150–110), tax on which would have been only Rs. 4, while the tax paid was Rs. 15. In VAT, the idea is that B will pay tax on only Rs 40 i.e. value added by him. Then, it makes no difference whether a product passes through 5 or 10 stages or even 100 stages, as every person will pay tax only on ‘value added’ by him to the product and not on total selling price.
Tax credit system - VAT removes these defects by tax credit system. Under this system, credit is given at each stage of tax paid at earlier stage.
Illustration of tax credit system - In the example we saw above, ‘B’ will purchase goods from ‘A’ @ Rs. 110, which is inclusive of duty of Rs. 10. Since ‘B’ is going to get credit of duty of Rs. 10, he will not consider this amount for his costing. He will charge conversion charges of Rs. 40.00 and sell his goods at Rs. 140. He will charge 10% tax and raise invoice of Rs. 154.00 to ‘C’. (140 plus tax @ 10%). In the Invoice prepared by ‘B’, the duty shown will be Rs. 14. However, ‘B’ will get credit of Rs. 10 paid on the raw material purchased by him from ‘A’. Thus, effective duty paid by ‘B’ will be only Rs. 4. ‘C’ will get the goods at Rs. 154 and not at Rs. 165 which he would have got in absence of Cenvat. Thus, in effect, ‘B’ has to pay duty only on Rs 40, which is the value added by him.
Following example will illustrate the tax credit method of Cenvat.
Transaction without VAT
Transaction With VAT
Details
A
B
A
B
Purchases -
110
-
100
Value Added
100
40
100
40
Sub–Total
100
150
100
140
Add Tax 10%
10
15
10
14
Total
110
165
110
154
Note - 'B' is purchasing goods from 'A'. In second case, his purchase price is Rs 100/- as he is entitled to Cenvat credit of Rs 10/- i.e. tax paid on purchases. His invoice shows tax paid as Rs 14. However, since he has got credit of Rs 10/-, effectively he is paying only Rs 4/- as tax, which is 10% of Rs 40/-, i.e. 10% of 'value added' by him.
Advantages of tax credit system - The ‘Tax Credit Method’ has following advantages - (a) Audit control is much better, which helps in controlling tax evasion. It acts as a self-policing mechanism (b) Flexibility in applying varying tax rates to different commodities (c) Useful in giving tax benefits on exports or other preferred end-uses like uses by common man etc. Most of the countries have adopted ‘tax credit’ method for implementation of VAT.
Meaning of ‘Value added’ – In the above illustration, the ‘value’ of inputs is Rs 110, while ‘value’ of output is Rs 150. Thus, the manufacturer has made ‘value addition’ of Rs 40 to the product. Simply put, ‘value added’ is the difference between selling price and the purchase price.
Advantages of VAT - Advantages of VAT are as follows : (a) Exports can be freed from domestic trade taxes (b) It provides an instrument of taxing consumption of goods and services (c) Interference in market forces is minimal (d) Aids tax enforcement by providing audit trail through different stages of production and trade. Thus, it acts as a self-policing mechanism (e) Neutrality i.e. with minimum distortion in tax structure - as there are few variations in tax rates and exemptions from taxation are very few.
The disadvantage is that paper work required increases considerably and it is not as simple as a single point sales tax.
New Cenvat scheme
MODVAT credit scheme was introduced in 1986 vide rules 57A to 57U. Since rules can be amended easily by Central Government, the scheme remains flexible and hence can be modified quickly as per changing requirements. Cenvat was introduced in place of Modvat w.e.f. 1.4.2000, vide new set of rules 57AA to 57AK. Later, separate Cenvat Credit Rules were introduced w.e.f. 1-7-2001. These were replaced by Cenvat Credit Rules, 2002. These are now replaced by Cenvat Credit Rules, 2004 w.e.f. 10-9-2004.
Section 94(2) of Finance Act, 1994 empowers Central Government to make rules for – (i) credit of service tax paid on services consumed for providing a taxable service in case where the services consumed and the service provided fall in the same category [clause (ee)] (ii) credit of service tax paid on the services consumed or duties paid or deemed to have been paid on goods used for providing taxable service [clause (eee)] (iii) provisions for determining export of taxable services [clause (f)] (iv) Rebate of service tax paid or payable on taxable services consumed or duties paid or deemed to have been paid on goods used for providing taxable services which are exported out of India [clause (h)].
Service Tax Credit Rules, 2002 were issued effective from 16-8-2002, which are now merged with Cenvat Credit Rules, 2004 w.e.f. 10-9-2004.
Merging of Cenvat and Service Tax Rules - Cenvat Credit Rules, 2004 have been issued by superseding Cenvat Credit Rules, 2002 and Service Tax Credit Rules, 2002. The new rules are effective from 10-9-2004.
Rule 16(2) of Cenvat Credit Rules, 2004 states that any reference in any notification, circular, trade notice, rules etc. to Cenvat Credit Rules, 2002 or Service Tax Credit Rules 2002, shall be construed as reference to Cenvat Credit Rules, 2004.
General highlights of Cenvat scheme – General highlights of the scheme (except those related to integration of service tax and excise duty credit) are as follows :
Credit of duty paid on input and input services - The Cenvat scheme is principally based on system of granting credit of duty paid on inputs and input services. A manufacturer or service provider has to pay excise duty and service tax as per normal procedure on the basis of ‘Assessable Value’ (which is mainly based on selling price). However, he gets credit of duty paid on inputs and service tax paid on input services.
Input goods eligible for Cenvat to manufacturer - Credit will be available of excise duty paid on (a) raw materials (excluding few items) (b) material used in or in relation to manufacture like consumables etc. (c) Paints, packing materials, fuel etc. used for any purpose. However, duty paid on high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol) is not available as Cenvat credit, even if these are used as raw materials or as fuel.
Input may be used directly or indirectly - The input may be used directly or indirectly in or in relation to manufacture. The input need not be present in the final product.
Inputs goods eligible for Cenvat to service provider - Credit will be available of excise duty paid on inputs used for providing output services, except high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol).
No input credit if final product/output service exempt from duty/ service tax - No credit is available if final product is exempt from duty or final service is exempt from service tax. If a manufacturer manufactures more than one product, it may happen that some of the products are exempt from duty. Similarly, in case of service provider, some services may be taxable while some services may not be covered. In such cases, duty paid on inputs and service tax paid on input services used for manufacture of exempted products/services cannot be used for payment of duty or tax on other final products/services which are not exempt from duty/tax. If the manufacturer/service provider uses common inputs both for exempted as well as un-exempted goods/services, he should maintain separate records for inputs/input services used for manufacture of exempted final products and should not avail Cenvat on such inputs/input services. However, if he does not maintain separate records and inventories of inputs/input services used in exempted final products/services, he has to pay an ‘amount’ of 10% of price of exempted goods. - - As per section 91 read with section 93 of Finance (No. 2) Act, 2004, education cess is payable only on ‘duties of excise’. ‘Amount’ is not ‘duty’. Hence, education cess is not payable on such ‘amount’.
In case of exempt services, he can utilise Cenvat credit only upto 20% of service tax payable on output service.
Credit on basis of specified documents - Credit is to be availed only on the basis of specified documents as proof of payment of duty on inputs or tax on input services.
Credit available instantly - Credit of duty on inputs can be taken up instantly, i.e. as soon as inputs reach the factory is received. In case of capital goods, upto 50% credit is available in current year and balance in subsequent financial year. In case of input services, credit is available only after the amount of Bill is paid to person who had provided the service.
No cash Refund - In some cases, it may happen that duty paid on inputs and service tax paid on input services may be more than duty payable on final products. In such cases, though the Cenvat credit will be available to the manufacturer/service provider, he cannot use the same and the same will lapse. There is no provision for refund of the excess Cenvat credit. However, the only exception is in case of exports where duty paid on input material or services used for exported goods is refundable. Other exception is Tribunal can order refund when Cenvat credit could not be availed due to fault / wrong action of the department. Refund may also be granted if assessee could not utilise credit for some other reason.
One-to-one correlation not required - Cenvat Credit Rules do not require input-output correlation to be established.
Cenvat on Capital Goods - Credit of duty paid on machinery, plant, spare parts of machinery, tools, dies, etc., is available. However, upto 50% credit is available in current year and balance in subsequent financial year or years.
Cenvat to manufacturer available only if there is 'manufacture' - Cenvat on inputs or input services is available only if the process is 'manufacture'. Otherwise, Cenvat is not available. [In fact, in such cases, no duty is payable on the final product and question of Cenvat does not arise at all].
Cenvat credit is indefeasible - In CCE v. Dai Ichi Karkaria Ltd. 1999(112) ELT 353 = 1999 AIR SCW 3205 = (1999) 7 SCC 448 = AIR 1999 SC 3234 (SC 3 member bench), it was held that Cenvat credit validly taken is indefeasible. It was also observed that co-relation between final product and raw materials is not required in Cenvat scheme. - - However, Cenvat credit balance at the year end is not income of assessee – CIT v. Indo Nippon Chemicals (2003) 130 Taxman 179 = 155 ELT 452 = 261 ITR 275 (SC).
Integration of Excise duty and service tax credit - The highlights of scheme of integration are as follows –
Wide definition of ‘input service’ – A manufacturer/service provider will be entitled to credit of service tax paid by him which are used by him directly or indirectly in or in relation to manufacture of final product/provision of output services. This would include even services which are received prior to commencement of manufacture/provision of output services. Even input services relating to setting up a factory will be eligible.
In addition to this, services like advertising, activities relating to business like accounting, auditing, storage, transport etc., which are not directly related to manufacture/provision of output services but are related to the sale of manufactured goods/provision of output services would also be permitted for credit. In fact, all input services relating to all activities relating to business are eligible for Cenvat credit.
Full credit of tax paid on input services - Full credit of service tax on services (such as telephone, security, construction, advertising service, market research etc.) which are received in relation to the offices pertaining to a manufacturer or service provider would be allowed, even if these are partly used in exempted final product/output services.
Credit of duty paid on capital goods – Capital goods used for manufacture of final product and/or used for providing output taxable service will be available. A service provider can take out capital goods from his premises, provided that he brings them back within 180 days. This period can be extended.
Restriction on credit of capital goods - The restriction of 50% on credit on capital goods would continue for manufacturers as well as service providers, i.e. in case of capital goods, 50% credit will be available in first year and balance 50% in subsequent year/s. It may be noted that in case of some service providers, motor vehicle has been defined as ‘capital goods’.
credit of goods as inputs used by service providers – Goods used for provision of output services will be treated as inputs even in respect of service provider. A service provider will be entitled to credit of excise duty paid on raw materials/consumables used by him while providing output service. It may be noted that as per notification No. 12/2003-ST dated 20-6-2003, a service provider is not required to pay service tax on goods and materials used by him for providing output services. This notification makes it clear that this exemption is not available if Cenvat credit of duty paid on inputs is taken. If such credit is taken, it should be reversed.
Credit on motor vehicles used to provide output service – Motor vehicles are not ‘capital goods’ for purpose of ‘manufacture’, but credit on motor vehicles would be allowed as ‘capital goods’ only to the service providers of courier, tour operator, rent-a-cab scheme operator, cargo handling agency, outdoor caterer, pandal and shamiana operator and goods transport agency. Motor vehicle will not be treated as ‘capital goods’ for manufacturers or other service providers.
Services Billed/received at Head Office/Regional Offices - In some cases, the bill/invoice is raised in the name of head office/regional office etc., but services are actually received in the factory (or factories) or premises of service provider. In addition, the Head Office/Regional Offices receive services which are not specific for any factory/premises or service provider, such as advertising, market research, management consultancy etc. Bills in respect of such services would be received only in these offices. To enable the manufacturer/service provider to avail credit of such input services, a concept of “input service distributor” has been introduced. The HO/Regional Office will have to register as ‘Input Service Distributor’ with Excise department. The HO/Regional Office will have to issue Invoice to the factory/office providing service. The factory/service provider can avail credit on basis of such invoice. It would be left to the assessee to decide as to how he distributes the credit among various factories or service providing units. He has to ensure that the total credit allowed does not exceed the eligible credit amount. Such offices which distribute the credit would have to obtain service tax registration.
Manufacturer making exempted as well as un-exempted final products - Manufacturers making both exempted and non-exempted goods can maintain separate account in respect of inputs used in exempted and un-exempted final products. A manufacturer not maintaining separate accounts would pay 10% (increased from 8% as credit of service tax is being allowed) of the price of exempted goods.
Service provider providing exempted as well as un-exempted services – A service provider of exempted and non-exempted services not maintaining separate accounts would be eligible to avail Cenvat credit only to the extent of 20% of service tax payable on output services [Till 10-9-2004, it was 35%].
Full credit in case of specified input services - In case of specified services such as construction, erection/ commissioning/ installation etc. credit would be disallowed only when they are used exclusively in relation to manufacture of exempted goods/ services. Otherwise full credit would be allowed
Persons eligible for credit
Rule 3(1) of Cenvat Credit Rules states that a manufacturer or producer of final products and a provider of output service shall be allowed to take credit (hereinafter referred to as the Cenvat credit). EOU units can also avail Cenvat credit.
The Cenvat Credit is of specified duties (basic, special, AED, NCCD, education cess, service tax, CVD on imported goods etc. as discussed later) paid on inputs or capital goods received in the factory or premises of service provider, and also service tax paid on input services.
Manufacturer eligible for Cenvat credit – Cenvat credit can be availed by ‘manufacturer or producer’ of final products. ‘Manufacture’ or ‘production’ means new and identifiable product known in the market. Thus, ‘manufacturer’ or ‘producer’ is the person who actually brings the final product into existence.
Final products eligible under the Cenvat scheme - Cenvat has been extended to all items included in CETA.
As per rule 2(h), ‘Final Product’ means excisable goods manufactured or produced from inputs, or using input service.
Cenvat scheme has been extended to all manufactured final products. These goods cover food products, chemicals, plastics and rubber products, tobacco products, leather and wood articles, textile articles, paper, metals, engineering goods, matches, textile products, electrical and electronic goods and automobile sector.
EOU are entitled to Cenvat credit – EOU units have been allowed to avail Cenvat credit w.e.f. 6-9-2004, by amending rule 17(1) of Central Excise Rules – confirmed in CBE&C Circular Nos. 799/32/2004-CX dated 23-9-2004 and 54/2004-Cus dated 13-10-2004.
Waste and scrap is final product for Cenvat - As per Cenvat provisions, waste or scrap is treated as a final product within definition of rule 57AA(c) [Now new rule 2(h)] and its clearance is as if it is a final product. - MFDR TRU No. 345/2/2000-TRU dated 29-8-2000.
No Cenvat if goods exported and exporter claims duty drawback – An assessee can get export incentives only once. Thus, if he avails Cenvat credit, he cannot claim excise portion of All India duty drawback rate. However, he can avail customs portion of duty drawback rate even if he avails Cenvat.
No Cenvat if no ‘manufacture’
Cenvat credit is available only when 'manufacture' takes place. Cenvat provisions are available when there is ‘manufacture’ i.e. new and identifiable product known in the market emerges. However, if the processing does not amount to ‘manufacture’ Cenvat credit on inputs is not available.
Service Provider eligible for Cenvat credit
As per rule 3(1), provider of output service shall be allowed to take Cenvat credit of specified duties and taxes.
As per rule 2(p), “output service” means any taxable service provided by the provider of taxable service, to a customer, client, subscriber, policy holder or any other person, as the case may be, and the expressions ‘provider’ and ‘provided’ shall be construed accordingly.
Thus, only a person who is providing taxable output service will be eligible to take Cenvat credit.
The words client, customer, subscriber etc. are used in definition of each taxable service under section 65(105) of Finance Act, 1994. Those words will be applicable for purpose of this definition.
Input Goods for Cenvat
Inputs which are goods are eligible for Cenvat credit by both manufacturer as well as service provider.
Statutory definition –Rule 2(k) defines ‘input’ as follows –
Rule 2(k) “Input” means –
(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production;
(ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service.
Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.
Explanation 2.- Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer.
Input for a manufacturer – Definition of ‘input’ as far as manufacturer is concerned, is in two parts –
(a) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not.
(b) ‘Input’ includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production.
This has following implications – (1) Second part of the definition is independent of the first part. In other words, requirement of ‘used in or in relation to manufacture’ is not applicable to ‘inputs’ included in second part of definition, as the words used are ‘or for any other purpose’ (2) ‘Inputs’ as defined in second part of definition will be eligible as long as they are used within the factory of production (except accessories of final products cleared along with the final product, as obviously, these cannot be used within factory of production). The purpose for which these are used is immaterial. (This would be so, even if it is held that the words ‘for any purpose’ apply only to goods used for generation of electricity or steam. The reason is rules do not state the purpose for which these are required to be used in the factory).
In Ballarpur Industries v. CCE 2000(116) ELT 312 (CEGAT 3 member bench), it was observed that inclusive definition expands the scope of the expression and cannot be treated as restrictive in any sense. Once a particular item is covered by the definition of ‘input’, one need not proceed further and examine the question as to whether the goods (fuel in this case) are used in or in relation to manufacture of final product.
Inputs eligible for Cenvat under first part of definition
The definition of ‘input’ covers following -
· All goods [except High Speed Diesel Oil (HSD), Light Diesel Oil (LDO) and petrol] used in, or in relation to, the manufacture of the final products. The input may be used directly or indirectly in or in relation to manufacture of final product. The input need not be present in the final product (first part of the definition)
· Input includes * lubricating oils, greases, cutting oils and coolants * accessories of final products cleared along with the final product * Goods used as paint * Packing material * Fuel * Goods used for generation of electricity or steam used in or in relation to manufacture of final products or for any purpose. - - These can be used ‘for any purpose’. (second part of the definition)
· Input also includes goods used in manufacture of capital goods which are further used in the factory of manufacturer (Explanation 2 to the definition).
Inputs should be ‘used’ – mere intention to use is not sufficient – Rule 2(k)(i) which defines ‘inputs’ for manufacturer states that these should be ‘used in the factory’. Thus, mere intention to use is not sufficient to avail Cenvat credit.
In or in relation to manufacture of final product - The input must be used in or in relation to the manufacture of final product, in respect of inputs which are not covered in second part of the definition of ‘inputs’. Thus, if an input is used ‘in the manufacture’ or ‘in relation to the manufacture’, it is eligible for claiming Cenvat credit.
‘In the manufacture’ means the input is actually used in the manufacture of finished product, either directly or indirectly. It may be present in the ‘final product’ in same or similar or identifiable form or it might have got converted during process and may not be seen or identified in the final product. ‘In relation to the manufacture’ means, the input has been used during a process while manufacturing the product like consumable. The input need not form part of final product. Thus, the term 'in relation to manufacture' is a very wide term and covers all inputs which have direct nexus with the manufacturing process. 'Manufacture' includes all processes incidental or ancillary to manufacture. Thus, the term 'inputs' is much more wider than mere 'raw materials'.
The expression ‘in relation to’ (so also ‘pertaining to’) is a very broad expression, which pre-supposes another subject matter. These are words of comprehension which might both have a direct significance as well as an indirect significance depending on the context. -. - ‘Relating to’ is equivalent to or synonymous with as to ‘concerning with’ and ‘pertaining to’. The expression ‘pertaining to’ is an expression of expansion and not of contraction - Doypack Systems P Ltd. v. UOI (1988) 2 SCR 962 = 1988 2 SCC 299 = (1989) 65 Comp Cas 1 = 1988 (36) ELT 201 (SC) = AIR 1988 SC 782 * Tamil Nadu Kalyana Mandapam Association v. UOI 2004 (167) ELT 3 = 135 STC 480 (SC).
'In relation to' are words of comprehensiveness which might have both a direct significance or indirect significance depending on the context. They are not words of restrictive content. - State Waqf Board v. Abdul Azeer Sahib (1967) 1 MLJ 190 = AIR 1968 Mad 79.
The expression ‘in relation to’ is of widest import. – Thyssen Stahlunion GMBH v. Steel Authority of India 1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999 (6) SCC 334.
Small Illustration - A small example will illustrate the position. While manufacturing wooden table, wood, nails and paints are used ‘in the manufacture’ of table, while sandpaper for polishing the table may be said to be used ‘in relation to manufacture’ of the product. Carpenter’s instruments are ‘capital goods’. While cooking food, the vegetables, oil, wheat flour etc. are used ‘in the manufacture’. Cooking gas and kerosene can also be said to be ‘used in manufacture’. However, electricity used in mixer or refrigerator can be said to be used ‘in relation to manufacture’. The electricity for tube-light in kitchen may facilitate cooking, but it cannot be said to be ‘used in or in relation to manufacture’ of food.
One to one correlation not necessary
Rule 3(4)(a) states that Cenvat credit may be utilised for payment of any duty of excise on any final product. Thus, there is no requirement of establishing relation between inputs/input services and final product.
There is no correlation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related - CCE v. Dai Ichi Karkaria Ltd. 112 ELT 353 = AIR 1999 SC 3234 = 1999 AIR SCW 3205 = (1999) 7 SCC 448 (SC 3 member bench).
Input goods in respect of service providers
Duty paid on input goods used by service providers is also eligible for Cenvat credit, but in a restricted way.
As per rule 2(k)(ii), all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service is ‘input’.
Input Service for Cenvat
Manufacturer as well as service provider will be eligible to get Cenvat credit of ‘input services’. Rule 2(l) of Cenvat Credit Rules reads as follows –
Rule 2(l) - “Input service” means any service –
(i) used by a provider of taxable service for providing an output service; or
(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal;
and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal
Wide coverage of input services – The words used in the definition in relation to manufacturer are ‘in relation to’.
Input services Used for providing output services – In case of service provider, the words used in definition of input service in rule 2(l)(i) are ‘used by a provider of taxable service for providing output service’. This appears to limit scope of ‘input service’ in respect of output service providers. However, as discussed later, the scope has been further widened by ‘adding ‘inclusive definition’ to the rules, i.e. even to input services which have only remote or insignificant nexus with output services will get covered as long as these are related to activities of business.
Service need not be received in factory or premises from where output service provided – In case of inputs and capital goods, Cenvat credit is eligible to manufacturer only if these are received in the factory. However, in case of input service, there is no such requirement. Input service need not be received in factory or premises of service provider.
In case of service provider, even there is no requirement that inputs and capital goods should be received in premises of service provider.
Coverage beyond manufacturing/service provision stage
Inclusive definition clause of rule 2(l) extends scope of ‘input services’ even beyond stage of ‘manufacture’ or ‘provision of service’. The inclusive clause makes it clear that services much earlier to manufacture or even after manufacture will be eligible as service tax credit.
Credit only after payment is made to service provider
Credit of input services can be availed only after the output service provider makes payment of value of input services and the service tax payable on it, as shown in invoice of input service provider. [Rule 4(7)]. [In case of excise duty, credit is available as soon as goods are received in the factory. There is no condition that credit can be availed only after payment is made to supplier of goods].
Input Service Distributor
A manufacturer or service provider may have head office/regional office at different place/s. The services may be received at head office/regional office, but ultimately, these will be indirectly used for manufacture or providing output service. Provision has been made to avail Cenvat credit of services received and paid for at head office/regional office. Such head office/regional office will be registered with central Excise and it will have to issue invoice on the manufacturer or producer or service provider.
Who is ‘input service distributor’ - As per rule 2(m), “input service distributor” means an office managing the business of manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be.
Document eligible for Cenvat credit - As per rule 9(1)(g); ‘invoice, bill or challan’ issued by an ‘input service distributor’ under rule 4A of Service Tax Credit Rules is an eligible document for purpose of taking Cenvat credit.
Capital goods for Cenvat
'Capital Goods' for Cenvat
Cenvat credit is available on inputs as well as capital goods. Some provisions are common while there are some specific provisions in respect of Cenvat on capital goods.
Capital Goods Eligible to a manufacturer or service provider – Manufacturers and service providers are eligible to avail Cenvat credit of capital goods used by them.
Following are the ‘capital goods’, vide Rule 2(a)(i) of Cenvat Credit Rules -
(i) * Tools, hand tools, knives etc. falling under chapter 82 * Machinery covered under chapter 84 * Electrical machinery under chapter 85 * Measuring, checking and testing machines etc. falling under chapter 90 * Grinding wheels and the like goods falling under sub-heading No 6801.10 * Abrasive powder or grain on a base of textile material, falling under chapter heading 68.02.
(ii) Pollution control equipment.
(iii) Components, spares and accessories of the goods specified above.
(iv) Moulds and dies.
(v) Refractories and refractory material.
(vi) Tubes, pipes and fittings thereof, used in the factory.
(vii) Storage Tank.
USE OF CAPITAL GOODS - The capital goods should be used – (a) in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office ; or (2) for providing output service.
Capital goods used exclusively for exempted final products and output services not eligible – Capital goods used exclusively for manufacture of exempted goods or providing exempt service are not eligible [rule 6(4)]. [Thus, partial use of capital goods for manufacture of exempted goods or provision of exempt output services is permissible, i.e. in such case, Cenvat credit on capital goods will be allowed].
Use of capital goods by manufacturer
Rule 2(a) provides that capital goods should be used – (a) in the factory of manufacturer of the final products or (b) for providing output service.
Capital goods manufactured within the factory
As per Explanation 2 to rule 2(k) of Cenvat Credit Rules, ‘input’ includes goods used in manufacture of capital goods which are further used in the factory of manufacturer. Thus, if a manufacturer manufactures some capital goods within the factory, goods used to manufacture such capital goods will be eligible as ‘inputs’. [i.e. 100% Cenvat credit will be available in the same financial year]. - - It may be noted that capital goods manufactured within the factory and used within the factory are exempt from excise duty vide notification No. 67/95-CE dated 16-3-1995.
Conditions for availing Credit on Capital Goods
The conditions for eligibility of Credit are as follows :
· Duty paying documents eligible are same for Cenvat on inputs
· Depreciation under section 32 of Income Tax Act should not be claimed on the excise portion of the Capital Goods. – Rule 4(4) of Cenvat Credit Rules (Otherwise, the manufacturer will get double deduction for Income Tax - one credit as Cenvat and another credit as depreciation)
Utilisation of Cenvat Credit
Duties eligible for credit
Assessee can avail credit of duty/ service tax paid on inputs and input services. This credit is known as ‘Cenvat Credit’.
Meaning of Cenvat Credit - Rule 3(1) states that following duties/taxes will be available as credit (hereinafter referred as Cenvat Credit).
The term ‘Cenvat Credit’ used in various rules means aggregate of following duties and taxes [Rule 3(1)].
(a) Basic excise duty on indigenous inputs [Paid on goods specified in first schedule to CETA]. Corresponding CVD on imported goods is allowable.
(b) Special excise duty [paid on goods specified in Second Schedule to CETA]. Corresponding CVD on imported goods is allowable.
(c) Additional Customs Duty paid u/s 3(5) of Customs Tariff Act w.e.f. 1-3-2005. This credit will not be available to service providers [This duty is payable @ 4% on imports of ITA (Information technology Agreement) bound items and on specified inputs/raw materials, for manufacture of electronic/information technology items, which are exempt from customs duty. This duty will not be charged on information technology software.
(d) Additional Excise Duty paid under Additional Duties of Excise (Goods of Special Importance) Act [AED(GSI)]. If these are imported, credit of corresponding CVD on imported goods can be availed [AED(GSI) on textile articles has been abolished w.e.f. 9-7-2004].
(e) Education cess on manufactured excisable goods and CVD equal to education cess on imported goods. This credit can be utilised only for payment of education cess on final product or output services.
(f) Additional Excise Duties paid on textile and textile articles [AED(TTA)]. If these are imported, corresponding CVD paid is also eligible [AED(TTA) has been abolished w.e.f. 9-7-2004].
(g) National Calamity Contingent Duty (NCCD) leviable under section 136 of Finance Act, 2001 and corresponding CVD paid on imported goods. This credit can be used for payment of NCD on outputs only and not for any other duty.
(h) Additional Customs Duty paid u/s 3(5) of Customs Tariff Act. This duty on imports is payable under clause 72 of Finance Bill, 2005 w.e.f. 1-3-2005. This credit will not be available to service providers, as provided in second proviso to rule 5 of Cenvat Credit Rules. Proviso to rule 4(2)(a) of Cenvat Credit Rules makes it clear that even if the goods on which this duty is paid are ‘capital goods’, full 100% credit will be available in first year itself [This duty is payable @ 4% on imports of ITA (Information technology Agreement) bound items and on specified inputs/raw materials, for manufacture of electronic/information technology items, which are exempt from customs duty. This duty is not levied on information technology software].
(i) Additional Excise Duty (Tea and Tea Waste) levied under section 157 of Finance Act, 2003. This credit can be utilised only for payment of AED(TTW) on final product. This duty has been abolished w.e.f. 1-3-2005.
(j) Service tax on input services.
(k) Education cess paid on service tax. This credit can be utilised only for payment of education cess on final product or output services.
(l) Additional Excise Duty paid under clause 85 of Finance Bill, 2005. This duty is payable w.e.f. 1-3-2005 on pan masala and certain tobacco products, as specified in seventh schedule to Finance Bill, 2005 [Credit of Additional Excise Duty paid under clause 85 of Finance Bill can be used for payment of this duty. Any other credit cannot be utilised and balance amount is required to be paid in case only].
Credit of basic duty, AED(GSI), special excise duty and service tax can be utilised for payment of basic excise duty on final products and vice versa.
Basic duty, SED, service tax on inputs, Additional Customs Duty paid u/s 3(5) of Customs Tariff Act and AED(GSI) are inter-changeable, i.e. Credit of duty paid under one head can be utilised for payment of duty under other head.
Credit of basic duty, SED, service tax, Additional customs Duty paid u/s 3(5) of Customs Tariff Act and AED(GSI) can also be utilised for payment of Education Cess, AED(TTA), AED(TTW) and NCCD, but not vice versa.
Education Cess paid on goods and paid on services is inter-changeable.
Restrictions on Cenvat credit in certain cases
Credit of any duty can be utilised for payment of any duty on final product. However, some exceptions are provided in rule 3(7).
Taking and Utilisation of credit
Credit of the duty paid on eligible inputs can be taken by the manufacturer immediately on receipt of inputs in the factory of manufacturer or in the premises of provider of output services - Rule 4(1) of Cenvat Credit Rules.
In case of capital goods, upto 50% credit only can be taken at any point of time in a financial year and in any succeeding year or years. – Rule 4(2) of Cenvat Credit Rules.
Payment of duty through Cenvat credit is almost as good as payment of duty through PLA and refund is permissible (if otherwise eligible) even if duty was paid through Cenvat credit.
Credit can be taken as soon as goods are received in the factory or premises of service provider. It is not necessary to wait till the inputs / capital goods are actually utilised in production [Rule 4(1) of Cenvat Credit Rules].
Manufacturer/service provider should maintain record of Cenvat credit availed and of credit utilised. (The record should be similar to PLA where credit is taken of duty paid by Challan in Bank and when finished goods are cleared, debit entry is made in PLA).
Utilisation of Cenvat credit – The Cenvat Credit [as defined in rule 3(1)] can be utilised for payment of any excise duty on :
· Any duty on any final product manufactured by manufacturer [Rule 3(4)(a)]
· Payment of ‘amount’ if inputs are removed as such or after partial processing [Rule 3(4)(b)]
· Payment of ‘amount’ on capital goods if they are removed as such [Rule 3(4)(c)]
· Payment of ‘amount’, if goods are cleared after repairs under rule 16(2) of Central Excise Rules [Rule 3(4)(d)]
· Payment under Cenvat Credit Rule 6 of 10% ‘amount’ on exempted goods or reversal of credit on inputs when common inputs or common input services are used for exempted as well as dutiable final products – Explanation I to Cenvat Credit rule 6(3)
· Reversal of Cenvat credit, if assessee opts out of Cenvat – Rule 11(2)
· Payment of ‘amount’ if goods sent for job work are not returned within 180 days – Rule 4(5)(a).
If by-product, scrap or waste is dutiable as ‘excisable goods’, duty will be payable on these as if it is a 'final product'.
Duty paying documents for Cenvat
As soon as a manufacturer/service provider receives an input, he can avail Cenvat credit of the duty paid on the inputs. However, in case of input service, he is entitled to service tax credit only when he makes payment to service tax provider. Documentary evidence is required regarding payment of duty on inputs/tax on input services.
Rule 9(1) of Cenvat Credit Rules prescribes that Cenvat Credit can be taken on the basis of -
· Invoice of manufacturer from factory
· Invoice of manufacturer from his depot or premises of consignment agent
· Invoice issued by registered importer
· Invoice issued by importer from his premises or consignment registered with Central Excise
· Invoice issued by registered first stage or second stage dealer
· Supplementary Invoice
· Bill of Entry
· Certificate issued by an appraiser of customs in respect of goods imported through foreign post office
· Challan of payment of tax where service tax is payable by other than input service provider
· Invoice, bill or challan issued by provider of input service on or after 10-9-2004
· Invoice, Bill or Challan issued by input service provider under rule 4A of Service Tax Rules.
Essential requirement of invoice –As per rule 9(2) of Cenvat Credit Rules, Cenvat credit cannot be denied as long as the document contains essential aspects of duty/tax payment i.e. –
(a) payment of duty or service tax
(b) description of goods or taxable service
(c) assessable value
(d) name and address of the factory or warehouse or provider of input service.
Thus, Cenvat cannot be denied if the documents contains these details and no permission/condonation is required if the invoice/bill/challan contains these basic details
Note that Serial Number or name of user-manufacturer is not a essential detail specified in rule 9(2) of Cenvat Credit Rules.
Exempted final products/output services
As per basic principle of VAT, credit of duty or tax can be availed only for payment of duty on final product or output services. As a natural corollary, if no duty is payable on final product or output services, credit of duty/tax paid on inputs or input services cannot be availed.
As per Rule 6(1) of Cenvat Credit Rules, Cenvat credit is not admissible on such quantity of input or input service which is used in manufacture of exempted goods or exempted services.
Thus, if inputs and input services are partly used in exempted final product/output service, Cenvat credit of that portion of input/input service will not be available.
Partial manufacture/provision of exempted products/services
It may happen that same inputs/input services are used partly for manufacture of dutiable goods/taxable services and partly for exempted goods/services. In such cases, the manufacturer/service provider has two options –
Maintain separate inventory - Maintain separate inventory and accounts of receipt and use of inputs (except fuel) and input services used for exempted final products/exempted output services. In such cases, he should not avail Cenvat credit of the inputs and input services which are used in exempted final services at all – Rule 6(2) of Cenvat Credit Rules. In CCE v. Padmini Polymers 2003(151) ELT 358 (CEGAT), it was held that there is no requirement that these must be stored separately. It is not necessary to maintain separate account in respect of ‘fuel’ used as inputs.
Pay 10% ‘amount’ if separate inventory and records not maintained - If the manufacturer/service provider opts not to maintain such separate accounts, he has to pay an amount equal to 10% of the ‘price’ of such exempted final products. Such payment can be made by debit to Cenvat credit account or PLA [rule 6(3)(b)].
As per section 91 read with 93 of Finance (No. 2) Act, 2004, education cess is payable only on ‘duties of excise’. ‘Amount’ is not ‘duty’. Hence, education cess is not payable on such ‘amount’.
Credit of service tax limited if service provider does not maintain separate accounts - In case of output service, if he does not maintain separate accounts, he can avail Cenvat only to the extent of 20% of service tax payable on final product.
Meaning of 'exempted goods' - As per Rule 2(d) of Cenvat Credit Rules, 'exempted goods' means goods which are exempt from whole of duty of excise leviable thereon and includes goods which are chargeable to 'Nil' rate of duty. Thus, 'exempted goods' for purpose of Cenvat cover (a) Goods chargeable to 'Nil' duty as per Tariff and (b) Goods which are exempt by a notification issued under section 5A.
Exempted goods do not mean non-excisable goods - Goods which are not mentioned in Tariff are not ‘exempted goods’ as they are neither ‘goods chargeable to 'Nil' duty as per Tariff’ nor ‘goods which are exempt by a notification issued under section 5A’.
Meaning of ‘exempted services’
As per rule 2(e), “exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of Finance Act.
Services on which no tax is payable are also ‘exempt services’ - - For purpose of the definition of ‘exempted services’, services on which no service tax is leviable are also ‘exempted services’. Thus, if a particular service is not taxable under present provisions of Finance Act, 1994, it will be ‘exempted service’ for purpose of rule 6.
Payment of ‘amount’ on exempted final products
If assessee opts not to maintain separate accounts in respect of inputs and input services utilised for exempted final products/exempted output services, he has to pay ‘amount’ of 10% of total price (excluding taxes) of exempted final product [rule 6(3)(b)].
When payment of ‘amount’ is not required
In certain cases, payment of ‘amount’ or reversal of Cenvat is not required.
Export of goods, deemed exports or gold manufacture - As per rule 6(6), a manufacturer can avail Cenvat credit on inputs when final product is despatched without payment of duty, in following cases –
(a) Final product is despatched to SEZ, EOU, EHTP or STP.
(b) Final product is supplied to United Nations or an international organisation for their official use or supplied to projects funded by them, which are exempt from duty.
(c) When final product is exported under bond without payment of duty
(d) Gold or silver arising in course of manufacture of copper or zinc by smelting.
(e) Goods supplied against International Competitive Bidding in terms of Notification No. 6/2002-CE dated 1-3-2002, if such goods are exempt from customs duty when imported in India
In such case, assessee need not reverse Cenvat credit or pay any ‘amount’. In other cases, the manufacturer is not entitled to avail Cenvat credit on inputs when final product is cleared without payment of duty.
This provision does not apply to service providers. See discussions in a subsequent paragraph.
No payment of amount if intermediate product cleared for subsequent export - If intermediate products are cleared to another manufacturer for manufacture of final products (and then final products are exported by that another manufacturer), no duty is payable as per notification No. 43/2001-CE(NT) dated 26-6-2001. In such cases, the intermediate products cleared are not ‘exempted goods’. Hence, ‘amount’ is not payable. This view has been confirmed in CBE&C circular No. 785/18/2004-CX dated 17-5-2004. It is clarified in the circular that exporter of final product will not be entitled to duty drawback of excise portion, as he has obtained inputs without payment of excise duty.
Inputs used in manufacture of capital goods used within the factory – Notification No. 67/95-CE exempts capital goods manufactured within the factory and used within the factory. In such case, a view is possible that ‘amount’ is payable on such capital goods. However, since the goods are not sold, there is no question of any ‘price’ and hence no ‘amount’ should be payable.
Input/services used for exempted as well as taxable services
If input services are partly used for taxable services and partly for exempted services assessee should maintain separate accounts of input and input services meant of exempted services and taxable services. He should take credit only of inputs and input services intended for use of taxable output service [rule 6(2)].
Limit on Cenvat credit if assessee does not maintain separate accounts - If assessee does not maintain separate accounts, he can avail Cenvat only upto 20% of tax payable on taxable output service. [The limit was 35% upto 10-9-2004].
For example, assume that service tax payable on output service is Rs 100. Service tax paid on input service is Rs 15. These input services are used both for taxable output services and exempt/non-taxable output services. In such case, assessee can avail and utilise credit of entire Rs 15. However, if tax paid on input services is Rs 75, and these are used both for exempted and taxable services, then assessee can actually utilise credit of only Rs 20. He will have to pay balance in cash, even if credit of Rs 55 is still available in his books.
He may take credit of Rs 75 in his Service Tax (Receivable) Account, but can utilise credit of Rs 20.
The balance may remain in his Service Tax Credit Account. He can utilise it in future if opportunity arises.
Removal of goods ‘as such’
A manufacturer/service provider who obtains the inputs / capital goods gets immediate credit of the duty paid by supplier on the inputs used by him.
The manufacturer/service provider uses these inputs / capital goods for manufacture of final products. However, occasionally, he may have to remove the inputs from his factory or premises of output service provider for -
(a) sale or disposal if these are not required by him or
(b) job work/processing in an outside factory and return
(c) rejected inputs for rework and return. Since credit has been taken on the inputs, control over their removal is necessary.
Removal of inputs / capital goods ‘as such’ for sale/disposal - If the manufacturer/service provider is not able to use the inputs (on which he has availed Cenvat credit) for any reason (like rejection, quality problems, excess supply, change in production plan, exports etc.), he can clear the inputs as such or after partial processing or capital goods as such, from factory/premises of service provider after payment of an ‘amount’.
Amount payable equal to Cenvat credit availed – The inputs or capital goods can be removed as such from the factory of manufacturer or premises of service provider on payment of an ‘amount’ equal to Cenvat credit availed when the credit was taken. In other words, it amounts to reversal of Cenvat credit taken [rule 3(5)].
If originally, education cess was paid, equivalent ‘amount’ would be payable. If originally, no education cess was paid, question of its payment does not arise even if goods are cleared now, as ‘amount’ is not ‘excise duty’.
Removal of capital goods after use
Provisions of rule 3(5) apply when inputs or capital goods are removed ‘as such’. The rules make no provision for removal of capital goods after use.
Rule 2(a)(A) states that capital goods should be ‘used’. Duration is not specified. Hence, even if the capital goods are used for one day, Cenvat eligibility of capital goods is established.
As per Concise Oxford Dictionary, ‘as such’ means ‘in the exact sense of the word’. In the present context, ‘as such’ can only mean ‘as it is’.
If capital goods are used and then sold/cleared, it cannot be said that these are removed ‘as such’. Hence rule 3(4) cannot apply. This will be particularly so if some parts were replaced during use or the capital goods was removed after dismantling.
Thus, rule 3(5) does not apply and capital goods can be removed without payment of any ‘amount’ after use. ‘Duty’ cannot be demanded, as assessee has certainly not manufactured the capital goods. Selling old machinery cannot by any stretch of imagination be termed as ‘manufacture’ and no excise duty is payable. Thus, neither ‘amount’ nor ‘duty’ is payable.
Often department insists on payment of ‘amount’ on your selling price or depreciated value. This has no legal basis. It is observed that some assessees even mention the amount as ‘duty’ in their invoice, which is totally incorrect.
Removal for job work/repairs/testing
In modern manufacturing technology, a manufacturer usually does not carry out all the processes himself. It is common that some manufacturing processes are carried out by him from other manufacturer or subcontractors on job-work basis.
Similarly, a manufacturer or service provider may also have to remove inputs as such or after some processing for test, repairs etc. In such cases, he can clear the inputs received by him for further processing/test/repairs etc. and obtain the same back after processing/test/repairs is carried out.
He can clear inputs/capital goods as such or after carrying out partial processing, without payment of duty/amount.
Procedure also available for goods under DEEC scheme - In case of inputs received under DEEC scheme, CVD has been paid on the inputs. Hence, the inputs should be recorded as per Cenvat procedures and these can be sent to job work as per usual Cenvat procedures - Hyderabad Commissionerate Trade Notice No. 71/95 dated 5-7-1997 - Para 3.
Provisions for sending inputs / capital goods for job work/testing/repairs - Provisions contained in Rule 4(5)(a) of Cenvat Credit Rules for this purpose are as follows :
Removal for processing/test - The inputs / capital goods can be removed as such or after partial processing to job worker for further processing, testing, repairs, reconditioning or any other purpose.
Job work and job worker – As per rule 2(n) of Cenvat Credit Rules, Job Work means processing or working upon of raw materials or semi-finished goods supplied to job worker, so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for the aforesaid process, and the expression ‘job worker’ shall be construed accordingly. [The definition of ‘job work’ is same as given in Notification No. 214/86-CE dated 25-3-1986]
Goods Should be returned to factory/premises of service provider - After carrying out the operation/test/repair etc., the goods should be returned to the factory or premises of service provider within 180 days. If these are not received back within 180 days of their being sent out, manufacturer/service provider should pay an ‘amount’ equivalent to Cenvat credit attributable to inputs / capital goods. Payment can be through Cenvat credit or PLA. If the inputs / capital goods come back after 180 days (say after 220 days), manufacturer/service provider can take Cenvat credit of duty paid by him - rule 4(5)(a).
Procedures and Records for Cenvat
The main procedures are—
· Maintaining records of inputs and capital goods
· Maintaining records of credit received and utilised
· Submit returns of details of Cenvat credit availed, Principal Inputs and utilization of Principal Inputs in forms ER-1 to ER-6 (Discussed in earlier chapter)
· Returns by dealer/service provider/input service distributor
Record of inputs and capital goods - The manufacturer of final products or provider of output service or input service distributor shall maintain proper records for the receipt, disposal, consumption and inventory of the inputs and capital goods.
The record should contain relevant information regarding (a) value (b) duty paid (c) the person from whom inputs / capital goods have been procured.
Burden of proof regarding admissibility of Cenvat credit is on the manufacturer or provider of output service taking the credit – Rule 9(5) of Cenvat Credit Rules.
Record of input services – The manufacturer of final products or the provider of output service shall maintain proper records for receipt and consumption of the input services. The record should contain relevant information regarding –
(a) Value of service
(b) Tax paid
(c) Cenvat Credit taken and utilised
(d) Person from whom input service has been procured
The burden of proof regarding the admissibility of Cenvat credit shall lie upon the person taking such credit. [rule 9(6)]
Cenvat Credit Record - Cenvat Credit record should be maintained, which is similar to PLA. It is a current account of Cenvat credit received, credit utilised and credit balance. This should give details of (a) credit availed against each input / capital goods (b) credit utilised against clearance of final products or removal of input as such or after processing or removal of capital goods as such (c) Balance credit available.
Returns – A manufacture has to be submit returns to Range Superintendent of Central Excise in the prescribed forms ER-1 to ER-6 in respect of Cenvat Availed, Principal Inputs, utilization of Principal inputs etc.. These are discussed in earlier chapter and hence not reproduced here. Others have to submit returns as follows -
· Quarterly return by first stage/second stage dealer within 15 days from close of quarter [rule 9(8)]
· Half yearly return within one month from close of half year, by provider of output services [rule 9(9)]
· Half yearly return within one month from close of half year, by Input Service Distributor [rule 9(10)]
Modvat is replace by cenvat
Background of CENVAT
Cenvat (Central Value Added Tax) has its origin in the system of VAT (Value Added Tax), which is common in West European Countries. Concept of VAT was developed to avoid cascading effect of taxes. VAT was found to be a very good and transparent tax collection system, which reduces tax evasion, ensures better tax compliance and increases tax revenue.
Modvat (modified value added tax) was introduced in India in 1986 (Modvat was re-named as Cenvat w.e.f. 1-4-2000). The system was termed as Modvat, as it was restricted upto manufacturing stage and credit of only excise duty paid on manufacturing products (and corresponding CVD paid on imported goods) was available.
System of VAT was introduced to service tax w.e.f. 16-8-2002.
VAT was not extended to sales tax, as sales tax is under jurisdiction of State Governments. However, State Governments have agreed to introduce sales tax VAT and it is likely to be introduced from April 2005. Haryana Government has introduced sales tax VAT in April 2004 and the experience is reported to be good.
Integration of goods and service tax - A task force was formed under Chairmanship of Shri Vijay Kelkar on Implementation of Fiscal Responsibility and Budget Management Act. The Kelkar Committee submitted its report in July 2004. The Committee has strongly recommended ‘Goods and Service Tax’ (GST).
Full integration of goods and service tax will take considerable time, as it can be achieved only after political consensus is achieved. However, a beginning has been made by proposing to make credit of service tax and excise duty inter-chargeable. Finance Minister Shri P Chidambaram, in para 148 of his budget speech on 8-7-2004, stated as follows, ‘I propose to take a major step towards integrating the tax on goods and services. Accordingly, I propose to extend credit of service tax and excise duty on goods and services. Accordingly, I propose to extend credit of service tax and excise duty across goods and services’.
To give effect to this proposal, Cenvat Credit Rules, 2004 have been issued and made effective from 10-9-2004.
Basic Concept of VAT
Generally, any tax is related to selling price of product. In modern production technology, raw material passes through various stages and processes till it reaches the ultimate stage e.g., steel ingots are made in a steel mill. These are rolled into plates by a re-rolling unit, while third manufacturer makes furniture from these plates. Thus, output of the first manufacturer becomes input for second manufacturer, who carries out further processing and supply it to third manufacturer. This process continues till a final product emerges. This product then goes to distributor/wholesaler, who sells it to retailer and then it reaches the ultimate consumer.
If a tax is based on selling price of a product, the tax burden goes on increasing as raw material and final product passes from one stage to other. For example, let us assume that tax on a product is 10% of selling price. Manufacturer ‘A’ supplies his output to ‘B’ at Rs. 100. Thus, ‘B’ gets the material at Rs. 110, inclusive of tax @ 10%. He carries out further processing and sells his output to ‘C’ at Rs. 150. While calculating his cost, ‘B’ has considered his purchase cost of materials as Rs. 110 and added Rs. 40 as his conversion charges. While selling product to C, B will charge tax again @ 10%. Thus C will get the item at Rs. 165 (150+10% tax). As stages of production and/or sales continue, each subsequent purchaser has to pay tax again and again on the material which has already suffered tax. This is called cascading effect.
Cascading effect of conventional system of taxes - A tax purely based on selling price of a product has cascading effect, which has the following disadvantages - (a) Computation of exact tax content difficult (b) Varying Tax Burden as tax burden depends on number of stages through which a product passes (c) Discourages Ancillarisation (d) Increases cost of production (e) Concessions on basis of use is not possible (f) Exports cannot be made tax free.
VAT to avoid the cascading effect – VAT was developed to avoid cascading effect of taxes. In the aforesaid example, ‘value added’ by B is only Rs. 40 (150–110), tax on which would have been only Rs. 4, while the tax paid was Rs. 15. In VAT, the idea is that B will pay tax on only Rs 40 i.e. value added by him. Then, it makes no difference whether a product passes through 5 or 10 stages or even 100 stages, as every person will pay tax only on ‘value added’ by him to the product and not on total selling price.
Tax credit system - VAT removes these defects by tax credit system. Under this system, credit is given at each stage of tax paid at earlier stage.
Illustration of tax credit system - In the example we saw above, ‘B’ will purchase goods from ‘A’ @ Rs. 110, which is inclusive of duty of Rs. 10. Since ‘B’ is going to get credit of duty of Rs. 10, he will not consider this amount for his costing. He will charge conversion charges of Rs. 40.00 and sell his goods at Rs. 140. He will charge 10% tax and raise invoice of Rs. 154.00 to ‘C’. (140 plus tax @ 10%). In the Invoice prepared by ‘B’, the duty shown will be Rs. 14. However, ‘B’ will get credit of Rs. 10 paid on the raw material purchased by him from ‘A’. Thus, effective duty paid by ‘B’ will be only Rs. 4. ‘C’ will get the goods at Rs. 154 and not at Rs. 165 which he would have got in absence of Cenvat. Thus, in effect, ‘B’ has to pay duty only on Rs 40, which is the value added by him.
Following example will illustrate the tax credit method of Cenvat.
Transaction without VAT
Transaction With VAT
Details
A
B
A
B
Purchases -
110
-
100
Value Added
100
40
100
40
Sub–Total
100
150
100
140
Add Tax 10%
10
15
10
14
Total
110
165
110
154
Note - 'B' is purchasing goods from 'A'. In second case, his purchase price is Rs 100/- as he is entitled to Cenvat credit of Rs 10/- i.e. tax paid on purchases. His invoice shows tax paid as Rs 14. However, since he has got credit of Rs 10/-, effectively he is paying only Rs 4/- as tax, which is 10% of Rs 40/-, i.e. 10% of 'value added' by him.
Advantages of tax credit system - The ‘Tax Credit Method’ has following advantages - (a) Audit control is much better, which helps in controlling tax evasion. It acts as a self-policing mechanism (b) Flexibility in applying varying tax rates to different commodities (c) Useful in giving tax benefits on exports or other preferred end-uses like uses by common man etc. Most of the countries have adopted ‘tax credit’ method for implementation of VAT.
Meaning of ‘Value added’ – In the above illustration, the ‘value’ of inputs is Rs 110, while ‘value’ of output is Rs 150. Thus, the manufacturer has made ‘value addition’ of Rs 40 to the product. Simply put, ‘value added’ is the difference between selling price and the purchase price.
Advantages of VAT - Advantages of VAT are as follows : (a) Exports can be freed from domestic trade taxes (b) It provides an instrument of taxing consumption of goods and services (c) Interference in market forces is minimal (d) Aids tax enforcement by providing audit trail through different stages of production and trade. Thus, it acts as a self-policing mechanism (e) Neutrality i.e. with minimum distortion in tax structure - as there are few variations in tax rates and exemptions from taxation are very few.
The disadvantage is that paper work required increases considerably and it is not as simple as a single point sales tax.
New Cenvat scheme
MODVAT credit scheme was introduced in 1986 vide rules 57A to 57U. Since rules can be amended easily by Central Government, the scheme remains flexible and hence can be modified quickly as per changing requirements. Cenvat was introduced in place of Modvat w.e.f. 1.4.2000, vide new set of rules 57AA to 57AK. Later, separate Cenvat Credit Rules were introduced w.e.f. 1-7-2001. These were replaced by Cenvat Credit Rules, 2002. These are now replaced by Cenvat Credit Rules, 2004 w.e.f. 10-9-2004.
Section 94(2) of Finance Act, 1994 empowers Central Government to make rules for – (i) credit of service tax paid on services consumed for providing a taxable service in case where the services consumed and the service provided fall in the same category [clause (ee)] (ii) credit of service tax paid on the services consumed or duties paid or deemed to have been paid on goods used for providing taxable service [clause (eee)] (iii) provisions for determining export of taxable services [clause (f)] (iv) Rebate of service tax paid or payable on taxable services consumed or duties paid or deemed to have been paid on goods used for providing taxable services which are exported out of India [clause (h)].
Service Tax Credit Rules, 2002 were issued effective from 16-8-2002, which are now merged with Cenvat Credit Rules, 2004 w.e.f. 10-9-2004.
Merging of Cenvat and Service Tax Rules - Cenvat Credit Rules, 2004 have been issued by superseding Cenvat Credit Rules, 2002 and Service Tax Credit Rules, 2002. The new rules are effective from 10-9-2004.
Rule 16(2) of Cenvat Credit Rules, 2004 states that any reference in any notification, circular, trade notice, rules etc. to Cenvat Credit Rules, 2002 or Service Tax Credit Rules 2002, shall be construed as reference to Cenvat Credit Rules, 2004.
General highlights of Cenvat scheme – General highlights of the scheme (except those related to integration of service tax and excise duty credit) are as follows :
Credit of duty paid on input and input services - The Cenvat scheme is principally based on system of granting credit of duty paid on inputs and input services. A manufacturer or service provider has to pay excise duty and service tax as per normal procedure on the basis of ‘Assessable Value’ (which is mainly based on selling price). However, he gets credit of duty paid on inputs and service tax paid on input services.
Input goods eligible for Cenvat to manufacturer - Credit will be available of excise duty paid on (a) raw materials (excluding few items) (b) material used in or in relation to manufacture like consumables etc. (c) Paints, packing materials, fuel etc. used for any purpose. However, duty paid on high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol) is not available as Cenvat credit, even if these are used as raw materials or as fuel.
Input may be used directly or indirectly - The input may be used directly or indirectly in or in relation to manufacture. The input need not be present in the final product.
Inputs goods eligible for Cenvat to service provider - Credit will be available of excise duty paid on inputs used for providing output services, except high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol).
No input credit if final product/output service exempt from duty/ service tax - No credit is available if final product is exempt from duty or final service is exempt from service tax. If a manufacturer manufactures more than one product, it may happen that some of the products are exempt from duty. Similarly, in case of service provider, some services may be taxable while some services may not be covered. In such cases, duty paid on inputs and service tax paid on input services used for manufacture of exempted products/services cannot be used for payment of duty or tax on other final products/services which are not exempt from duty/tax. If the manufacturer/service provider uses common inputs both for exempted as well as un-exempted goods/services, he should maintain separate records for inputs/input services used for manufacture of exempted final products and should not avail Cenvat on such inputs/input services. However, if he does not maintain separate records and inventories of inputs/input services used in exempted final products/services, he has to pay an ‘amount’ of 10% of price of exempted goods. - - As per section 91 read with section 93 of Finance (No. 2) Act, 2004, education cess is payable only on ‘duties of excise’. ‘Amount’ is not ‘duty’. Hence, education cess is not payable on such ‘amount’.
In case of exempt services, he can utilise Cenvat credit only upto 20% of service tax payable on output service.
Credit on basis of specified documents - Credit is to be availed only on the basis of specified documents as proof of payment of duty on inputs or tax on input services.
Credit available instantly - Credit of duty on inputs can be taken up instantly, i.e. as soon as inputs reach the factory is received. In case of capital goods, upto 50% credit is available in current year and balance in subsequent financial year. In case of input services, credit is available only after the amount of Bill is paid to person who had provided the service.
No cash Refund - In some cases, it may happen that duty paid on inputs and service tax paid on input services may be more than duty payable on final products. In such cases, though the Cenvat credit will be available to the manufacturer/service provider, he cannot use the same and the same will lapse. There is no provision for refund of the excess Cenvat credit. However, the only exception is in case of exports where duty paid on input material or services used for exported goods is refundable. Other exception is Tribunal can order refund when Cenvat credit could not be availed due to fault / wrong action of the department. Refund may also be granted if assessee could not utilise credit for some other reason.
One-to-one correlation not required - Cenvat Credit Rules do not require input-output correlation to be established.
Cenvat on Capital Goods - Credit of duty paid on machinery, plant, spare parts of machinery, tools, dies, etc., is available. However, upto 50% credit is available in current year and balance in subsequent financial year or years.
Cenvat to manufacturer available only if there is 'manufacture' - Cenvat on inputs or input services is available only if the process is 'manufacture'. Otherwise, Cenvat is not available. [In fact, in such cases, no duty is payable on the final product and question of Cenvat does not arise at all].
Cenvat credit is indefeasible - In CCE v. Dai Ichi Karkaria Ltd. 1999(112) ELT 353 = 1999 AIR SCW 3205 = (1999) 7 SCC 448 = AIR 1999 SC 3234 (SC 3 member bench), it was held that Cenvat credit validly taken is indefeasible. It was also observed that co-relation between final product and raw materials is not required in Cenvat scheme. - - However, Cenvat credit balance at the year end is not income of assessee – CIT v. Indo Nippon Chemicals (2003) 130 Taxman 179 = 155 ELT 452 = 261 ITR 275 (SC).
Integration of Excise duty and service tax credit - The highlights of scheme of integration are as follows –
Wide definition of ‘input service’ – A manufacturer/service provider will be entitled to credit of service tax paid by him which are used by him directly or indirectly in or in relation to manufacture of final product/provision of output services. This would include even services which are received prior to commencement of manufacture/provision of output services. Even input services relating to setting up a factory will be eligible.
In addition to this, services like advertising, activities relating to business like accounting, auditing, storage, transport etc., which are not directly related to manufacture/provision of output services but are related to the sale of manufactured goods/provision of output services would also be permitted for credit. In fact, all input services relating to all activities relating to business are eligible for Cenvat credit.
Full credit of tax paid on input services - Full credit of service tax on services (such as telephone, security, construction, advertising service, market research etc.) which are received in relation to the offices pertaining to a manufacturer or service provider would be allowed, even if these are partly used in exempted final product/output services.
Credit of duty paid on capital goods – Capital goods used for manufacture of final product and/or used for providing output taxable service will be available. A service provider can take out capital goods from his premises, provided that he brings them back within 180 days. This period can be extended.
Restriction on credit of capital goods - The restriction of 50% on credit on capital goods would continue for manufacturers as well as service providers, i.e. in case of capital goods, 50% credit will be available in first year and balance 50% in subsequent year/s. It may be noted that in case of some service providers, motor vehicle has been defined as ‘capital goods’.
credit of goods as inputs used by service providers – Goods used for provision of output services will be treated as inputs even in respect of service provider. A service provider will be entitled to credit of excise duty paid on raw materials/consumables used by him while providing output service. It may be noted that as per notification No. 12/2003-ST dated 20-6-2003, a service provider is not required to pay service tax on goods and materials used by him for providing output services. This notification makes it clear that this exemption is not available if Cenvat credit of duty paid on inputs is taken. If such credit is taken, it should be reversed.
Credit on motor vehicles used to provide output service – Motor vehicles are not ‘capital goods’ for purpose of ‘manufacture’, but credit on motor vehicles would be allowed as ‘capital goods’ only to the service providers of courier, tour operator, rent-a-cab scheme operator, cargo handling agency, outdoor caterer, pandal and shamiana operator and goods transport agency. Motor vehicle will not be treated as ‘capital goods’ for manufacturers or other service providers.
Services Billed/received at Head Office/Regional Offices - In some cases, the bill/invoice is raised in the name of head office/regional office etc., but services are actually received in the factory (or factories) or premises of service provider. In addition, the Head Office/Regional Offices receive services which are not specific for any factory/premises or service provider, such as advertising, market research, management consultancy etc. Bills in respect of such services would be received only in these offices. To enable the manufacturer/service provider to avail credit of such input services, a concept of “input service distributor” has been introduced. The HO/Regional Office will have to register as ‘Input Service Distributor’ with Excise department. The HO/Regional Office will have to issue Invoice to the factory/office providing service. The factory/service provider can avail credit on basis of such invoice. It would be left to the assessee to decide as to how he distributes the credit among various factories or service providing units. He has to ensure that the total credit allowed does not exceed the eligible credit amount. Such offices which distribute the credit would have to obtain service tax registration.
Manufacturer making exempted as well as un-exempted final products - Manufacturers making both exempted and non-exempted goods can maintain separate account in respect of inputs used in exempted and un-exempted final products. A manufacturer not maintaining separate accounts would pay 10% (increased from 8% as credit of service tax is being allowed) of the price of exempted goods.
Service provider providing exempted as well as un-exempted services – A service provider of exempted and non-exempted services not maintaining separate accounts would be eligible to avail Cenvat credit only to the extent of 20% of service tax payable on output services [Till 10-9-2004, it was 35%].
Full credit in case of specified input services - In case of specified services such as construction, erection/ commissioning/ installation etc. credit would be disallowed only when they are used exclusively in relation to manufacture of exempted goods/ services. Otherwise full credit would be allowed
Persons eligible for credit
Rule 3(1) of Cenvat Credit Rules states that a manufacturer or producer of final products and a provider of output service shall be allowed to take credit (hereinafter referred to as the Cenvat credit). EOU units can also avail Cenvat credit.
The Cenvat Credit is of specified duties (basic, special, AED, NCCD, education cess, service tax, CVD on imported goods etc. as discussed later) paid on inputs or capital goods received in the factory or premises of service provider, and also service tax paid on input services.
Manufacturer eligible for Cenvat credit – Cenvat credit can be availed by ‘manufacturer or producer’ of final products. ‘Manufacture’ or ‘production’ means new and identifiable product known in the market. Thus, ‘manufacturer’ or ‘producer’ is the person who actually brings the final product into existence.
Final products eligible under the Cenvat scheme - Cenvat has been extended to all items included in CETA.
As per rule 2(h), ‘Final Product’ means excisable goods manufactured or produced from inputs, or using input service.
Cenvat scheme has been extended to all manufactured final products. These goods cover food products, chemicals, plastics and rubber products, tobacco products, leather and wood articles, textile articles, paper, metals, engineering goods, matches, textile products, electrical and electronic goods and automobile sector.
EOU are entitled to Cenvat credit – EOU units have been allowed to avail Cenvat credit w.e.f. 6-9-2004, by amending rule 17(1) of Central Excise Rules – confirmed in CBE&C Circular Nos. 799/32/2004-CX dated 23-9-2004 and 54/2004-Cus dated 13-10-2004.
Waste and scrap is final product for Cenvat - As per Cenvat provisions, waste or scrap is treated as a final product within definition of rule 57AA(c) [Now new rule 2(h)] and its clearance is as if it is a final product. - MFDR TRU No. 345/2/2000-TRU dated 29-8-2000.
No Cenvat if goods exported and exporter claims duty drawback – An assessee can get export incentives only once. Thus, if he avails Cenvat credit, he cannot claim excise portion of All India duty drawback rate. However, he can avail customs portion of duty drawback rate even if he avails Cenvat.
No Cenvat if no ‘manufacture’
Cenvat credit is available only when 'manufacture' takes place. Cenvat provisions are available when there is ‘manufacture’ i.e. new and identifiable product known in the market emerges. However, if the processing does not amount to ‘manufacture’ Cenvat credit on inputs is not available.
Service Provider eligible for Cenvat credit
As per rule 3(1), provider of output service shall be allowed to take Cenvat credit of specified duties and taxes.
As per rule 2(p), “output service” means any taxable service provided by the provider of taxable service, to a customer, client, subscriber, policy holder or any other person, as the case may be, and the expressions ‘provider’ and ‘provided’ shall be construed accordingly.
Thus, only a person who is providing taxable output service will be eligible to take Cenvat credit.
The words client, customer, subscriber etc. are used in definition of each taxable service under section 65(105) of Finance Act, 1994. Those words will be applicable for purpose of this definition.
Input Goods for Cenvat
Inputs which are goods are eligible for Cenvat credit by both manufacturer as well as service provider.
Statutory definition –Rule 2(k) defines ‘input’ as follows –
Rule 2(k) “Input” means –
(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production;
(ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service.
Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.
Explanation 2.- Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer.
Input for a manufacturer – Definition of ‘input’ as far as manufacturer is concerned, is in two parts –
(a) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not.
(b) ‘Input’ includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production.
This has following implications – (1) Second part of the definition is independent of the first part. In other words, requirement of ‘used in or in relation to manufacture’ is not applicable to ‘inputs’ included in second part of definition, as the words used are ‘or for any other purpose’ (2) ‘Inputs’ as defined in second part of definition will be eligible as long as they are used within the factory of production (except accessories of final products cleared along with the final product, as obviously, these cannot be used within factory of production). The purpose for which these are used is immaterial. (This would be so, even if it is held that the words ‘for any purpose’ apply only to goods used for generation of electricity or steam. The reason is rules do not state the purpose for which these are required to be used in the factory).
In Ballarpur Industries v. CCE 2000(116) ELT 312 (CEGAT 3 member bench), it was observed that inclusive definition expands the scope of the expression and cannot be treated as restrictive in any sense. Once a particular item is covered by the definition of ‘input’, one need not proceed further and examine the question as to whether the goods (fuel in this case) are used in or in relation to manufacture of final product.
Inputs eligible for Cenvat under first part of definition
The definition of ‘input’ covers following -
· All goods [except High Speed Diesel Oil (HSD), Light Diesel Oil (LDO) and petrol] used in, or in relation to, the manufacture of the final products. The input may be used directly or indirectly in or in relation to manufacture of final product. The input need not be present in the final product (first part of the definition)
· Input includes * lubricating oils, greases, cutting oils and coolants * accessories of final products cleared along with the final product * Goods used as paint * Packing material * Fuel * Goods used for generation of electricity or steam used in or in relation to manufacture of final products or for any purpose. - - These can be used ‘for any purpose’. (second part of the definition)
· Input also includes goods used in manufacture of capital goods which are further used in the factory of manufacturer (Explanation 2 to the definition).
Inputs should be ‘used’ – mere intention to use is not sufficient – Rule 2(k)(i) which defines ‘inputs’ for manufacturer states that these should be ‘used in the factory’. Thus, mere intention to use is not sufficient to avail Cenvat credit.
In or in relation to manufacture of final product - The input must be used in or in relation to the manufacture of final product, in respect of inputs which are not covered in second part of the definition of ‘inputs’. Thus, if an input is used ‘in the manufacture’ or ‘in relation to the manufacture’, it is eligible for claiming Cenvat credit.
‘In the manufacture’ means the input is actually used in the manufacture of finished product, either directly or indirectly. It may be present in the ‘final product’ in same or similar or identifiable form or it might have got converted during process and may not be seen or identified in the final product. ‘In relation to the manufacture’ means, the input has been used during a process while manufacturing the product like consumable. The input need not form part of final product. Thus, the term 'in relation to manufacture' is a very wide term and covers all inputs which have direct nexus with the manufacturing process. 'Manufacture' includes all processes incidental or ancillary to manufacture. Thus, the term 'inputs' is much more wider than mere 'raw materials'.
The expression ‘in relation to’ (so also ‘pertaining to’) is a very broad expression, which pre-supposes another subject matter. These are words of comprehension which might both have a direct significance as well as an indirect significance depending on the context. -. - ‘Relating to’ is equivalent to or synonymous with as to ‘concerning with’ and ‘pertaining to’. The expression ‘pertaining to’ is an expression of expansion and not of contraction - Doypack Systems P Ltd. v. UOI (1988) 2 SCR 962 = 1988 2 SCC 299 = (1989) 65 Comp Cas 1 = 1988 (36) ELT 201 (SC) = AIR 1988 SC 782 * Tamil Nadu Kalyana Mandapam Association v. UOI 2004 (167) ELT 3 = 135 STC 480 (SC).
'In relation to' are words of comprehensiveness which might have both a direct significance or indirect significance depending on the context. They are not words of restrictive content. - State Waqf Board v. Abdul Azeer Sahib (1967) 1 MLJ 190 = AIR 1968 Mad 79.
The expression ‘in relation to’ is of widest import. – Thyssen Stahlunion GMBH v. Steel Authority of India 1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999 (6) SCC 334.
Small Illustration - A small example will illustrate the position. While manufacturing wooden table, wood, nails and paints are used ‘in the manufacture’ of table, while sandpaper for polishing the table may be said to be used ‘in relation to manufacture’ of the product. Carpenter’s instruments are ‘capital goods’. While cooking food, the vegetables, oil, wheat flour etc. are used ‘in the manufacture’. Cooking gas and kerosene can also be said to be ‘used in manufacture’. However, electricity used in mixer or refrigerator can be said to be used ‘in relation to manufacture’. The electricity for tube-light in kitchen may facilitate cooking, but it cannot be said to be ‘used in or in relation to manufacture’ of food.
One to one correlation not necessary
Rule 3(4)(a) states that Cenvat credit may be utilised for payment of any duty of excise on any final product. Thus, there is no requirement of establishing relation between inputs/input services and final product.
There is no correlation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related - CCE v. Dai Ichi Karkaria Ltd. 112 ELT 353 = AIR 1999 SC 3234 = 1999 AIR SCW 3205 = (1999) 7 SCC 448 (SC 3 member bench).
Input goods in respect of service providers
Duty paid on input goods used by service providers is also eligible for Cenvat credit, but in a restricted way.
As per rule 2(k)(ii), all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service is ‘input’.
Input Service for Cenvat
Manufacturer as well as service provider will be eligible to get Cenvat credit of ‘input services’. Rule 2(l) of Cenvat Credit Rules reads as follows –
Rule 2(l) - “Input service” means any service –
(i) used by a provider of taxable service for providing an output service; or
(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal;
and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal
Wide coverage of input services – The words used in the definition in relation to manufacturer are ‘in relation to’.
Input services Used for providing output services – In case of service provider, the words used in definition of input service in rule 2(l)(i) are ‘used by a provider of taxable service for providing output service’. This appears to limit scope of ‘input service’ in respect of output service providers. However, as discussed later, the scope has been further widened by ‘adding ‘inclusive definition’ to the rules, i.e. even to input services which have only remote or insignificant nexus with output services will get covered as long as these are related to activities of business.
Service need not be received in factory or premises from where output service provided – In case of inputs and capital goods, Cenvat credit is eligible to manufacturer only if these are received in the factory. However, in case of input service, there is no such requirement. Input service need not be received in factory or premises of service provider.
In case of service provider, even there is no requirement that inputs and capital goods should be received in premises of service provider.
Coverage beyond manufacturing/service provision stage
Inclusive definition clause of rule 2(l) extends scope of ‘input services’ even beyond stage of ‘manufacture’ or ‘provision of service’. The inclusive clause makes it clear that services much earlier to manufacture or even after manufacture will be eligible as service tax credit.
Credit only after payment is made to service provider
Credit of input services can be availed only after the output service provider makes payment of value of input services and the service tax payable on it, as shown in invoice of input service provider. [Rule 4(7)]. [In case of excise duty, credit is available as soon as goods are received in the factory. There is no condition that credit can be availed only after payment is made to supplier of goods].
Input Service Distributor
A manufacturer or service provider may have head office/regional office at different place/s. The services may be received at head office/regional office, but ultimately, these will be indirectly used for manufacture or providing output service. Provision has been made to avail Cenvat credit of services received and paid for at head office/regional office. Such head office/regional office will be registered with central Excise and it will have to issue invoice on the manufacturer or producer or service provider.
Who is ‘input service distributor’ - As per rule 2(m), “input service distributor” means an office managing the business of manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be.
Document eligible for Cenvat credit - As per rule 9(1)(g); ‘invoice, bill or challan’ issued by an ‘input service distributor’ under rule 4A of Service Tax Credit Rules is an eligible document for purpose of taking Cenvat credit.
Capital goods for Cenvat
'Capital Goods' for Cenvat
Cenvat credit is available on inputs as well as capital goods. Some provisions are common while there are some specific provisions in respect of Cenvat on capital goods.
Capital Goods Eligible to a manufacturer or service provider – Manufacturers and service providers are eligible to avail Cenvat credit of capital goods used by them.
Following are the ‘capital goods’, vide Rule 2(a)(i) of Cenvat Credit Rules -
(i) * Tools, hand tools, knives etc. falling under chapter 82 * Machinery covered under chapter 84 * Electrical machinery under chapter 85 * Measuring, checking and testing machines etc. falling under chapter 90 * Grinding wheels and the like goods falling under sub-heading No 6801.10 * Abrasive powder or grain on a base of textile material, falling under chapter heading 68.02.
(ii) Pollution control equipment.
(iii) Components, spares and accessories of the goods specified above.
(iv) Moulds and dies.
(v) Refractories and refractory material.
(vi) Tubes, pipes and fittings thereof, used in the factory.
(vii) Storage Tank.
USE OF CAPITAL GOODS - The capital goods should be used – (a) in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office ; or (2) for providing output service.
Capital goods used exclusively for exempted final products and output services not eligible – Capital goods used exclusively for manufacture of exempted goods or providing exempt service are not eligible [rule 6(4)]. [Thus, partial use of capital goods for manufacture of exempted goods or provision of exempt output services is permissible, i.e. in such case, Cenvat credit on capital goods will be allowed].
Use of capital goods by manufacturer
Rule 2(a) provides that capital goods should be used – (a) in the factory of manufacturer of the final products or (b) for providing output service.
Capital goods manufactured within the factory
As per Explanation 2 to rule 2(k) of Cenvat Credit Rules, ‘input’ includes goods used in manufacture of capital goods which are further used in the factory of manufacturer. Thus, if a manufacturer manufactures some capital goods within the factory, goods used to manufacture such capital goods will be eligible as ‘inputs’. [i.e. 100% Cenvat credit will be available in the same financial year]. - - It may be noted that capital goods manufactured within the factory and used within the factory are exempt from excise duty vide notification No. 67/95-CE dated 16-3-1995.
Conditions for availing Credit on Capital Goods
The conditions for eligibility of Credit are as follows :
· Duty paying documents eligible are same for Cenvat on inputs
· Depreciation under section 32 of Income Tax Act should not be claimed on the excise portion of the Capital Goods. – Rule 4(4) of Cenvat Credit Rules (Otherwise, the manufacturer will get double deduction for Income Tax - one credit as Cenvat and another credit as depreciation)
Utilisation of Cenvat Credit
Duties eligible for credit
Assessee can avail credit of duty/ service tax paid on inputs and input services. This credit is known as ‘Cenvat Credit’.
Meaning of Cenvat Credit - Rule 3(1) states that following duties/taxes will be available as credit (hereinafter referred as Cenvat Credit).
The term ‘Cenvat Credit’ used in various rules means aggregate of following duties and taxes [Rule 3(1)].
(a) Basic excise duty on indigenous inputs [Paid on goods specified in first schedule to CETA]. Corresponding CVD on imported goods is allowable.
(b) Special excise duty [paid on goods specified in Second Schedule to CETA]. Corresponding CVD on imported goods is allowable.
(c) Additional Customs Duty paid u/s 3(5) of Customs Tariff Act w.e.f. 1-3-2005. This credit will not be available to service providers [This duty is payable @ 4% on imports of ITA (Information technology Agreement) bound items and on specified inputs/raw materials, for manufacture of electronic/information technology items, which are exempt from customs duty. This duty will not be charged on information technology software.
(d) Additional Excise Duty paid under Additional Duties of Excise (Goods of Special Importance) Act [AED(GSI)]. If these are imported, credit of corresponding CVD on imported goods can be availed [AED(GSI) on textile articles has been abolished w.e.f. 9-7-2004].
(e) Education cess on manufactured excisable goods and CVD equal to education cess on imported goods. This credit can be utilised only for payment of education cess on final product or output services.
(f) Additional Excise Duties paid on textile and textile articles [AED(TTA)]. If these are imported, corresponding CVD paid is also eligible [AED(TTA) has been abolished w.e.f. 9-7-2004].
(g) National Calamity Contingent Duty (NCCD) leviable under section 136 of Finance Act, 2001 and corresponding CVD paid on imported goods. This credit can be used for payment of NCD on outputs only and not for any other duty.
(h) Additional Customs Duty paid u/s 3(5) of Customs Tariff Act. This duty on imports is payable under clause 72 of Finance Bill, 2005 w.e.f. 1-3-2005. This credit will not be available to service providers, as provided in second proviso to rule 5 of Cenvat Credit Rules. Proviso to rule 4(2)(a) of Cenvat Credit Rules makes it clear that even if the goods on which this duty is paid are ‘capital goods’, full 100% credit will be available in first year itself [This duty is payable @ 4% on imports of ITA (Information technology Agreement) bound items and on specified inputs/raw materials, for manufacture of electronic/information technology items, which are exempt from customs duty. This duty is not levied on information technology software].
(i) Additional Excise Duty (Tea and Tea Waste) levied under section 157 of Finance Act, 2003. This credit can be utilised only for payment of AED(TTW) on final product. This duty has been abolished w.e.f. 1-3-2005.
(j) Service tax on input services.
(k) Education cess paid on service tax. This credit can be utilised only for payment of education cess on final product or output services.
(l) Additional Excise Duty paid under clause 85 of Finance Bill, 2005. This duty is payable w.e.f. 1-3-2005 on pan masala and certain tobacco products, as specified in seventh schedule to Finance Bill, 2005 [Credit of Additional Excise Duty paid under clause 85 of Finance Bill can be used for payment of this duty. Any other credit cannot be utilised and balance amount is required to be paid in case only].
Credit of basic duty, AED(GSI), special excise duty and service tax can be utilised for payment of basic excise duty on final products and vice versa.
Basic duty, SED, service tax on inputs, Additional Customs Duty paid u/s 3(5) of Customs Tariff Act and AED(GSI) are inter-changeable, i.e. Credit of duty paid under one head can be utilised for payment of duty under other head.
Credit of basic duty, SED, service tax, Additional customs Duty paid u/s 3(5) of Customs Tariff Act and AED(GSI) can also be utilised for payment of Education Cess, AED(TTA), AED(TTW) and NCCD, but not vice versa.
Education Cess paid on goods and paid on services is inter-changeable.
Restrictions on Cenvat credit in certain cases
Credit of any duty can be utilised for payment of any duty on final product. However, some exceptions are provided in rule 3(7).
Taking and Utilisation of credit
Credit of the duty paid on eligible inputs can be taken by the manufacturer immediately on receipt of inputs in the factory of manufacturer or in the premises of provider of output services - Rule 4(1) of Cenvat Credit Rules.
In case of capital goods, upto 50% credit only can be taken at any point of time in a financial year and in any succeeding year or years. – Rule 4(2) of Cenvat Credit Rules.
Payment of duty through Cenvat credit is almost as good as payment of duty through PLA and refund is permissible (if otherwise eligible) even if duty was paid through Cenvat credit.
Credit can be taken as soon as goods are received in the factory or premises of service provider. It is not necessary to wait till the inputs / capital goods are actually utilised in production [Rule 4(1) of Cenvat Credit Rules].
Manufacturer/service provider should maintain record of Cenvat credit availed and of credit utilised. (The record should be similar to PLA where credit is taken of duty paid by Challan in Bank and when finished goods are cleared, debit entry is made in PLA).
Utilisation of Cenvat credit – The Cenvat Credit [as defined in rule 3(1)] can be utilised for payment of any excise duty on :
· Any duty on any final product manufactured by manufacturer [Rule 3(4)(a)]
· Payment of ‘amount’ if inputs are removed as such or after partial processing [Rule 3(4)(b)]
· Payment of ‘amount’ on capital goods if they are removed as such [Rule 3(4)(c)]
· Payment of ‘amount’, if goods are cleared after repairs under rule 16(2) of Central Excise Rules [Rule 3(4)(d)]
· Payment under Cenvat Credit Rule 6 of 10% ‘amount’ on exempted goods or reversal of credit on inputs when common inputs or common input services are used for exempted as well as dutiable final products – Explanation I to Cenvat Credit rule 6(3)
· Reversal of Cenvat credit, if assessee opts out of Cenvat – Rule 11(2)
· Payment of ‘amount’ if goods sent for job work are not returned within 180 days – Rule 4(5)(a).
If by-product, scrap or waste is dutiable as ‘excisable goods’, duty will be payable on these as if it is a 'final product'.
Duty paying documents for Cenvat
As soon as a manufacturer/service provider receives an input, he can avail Cenvat credit of the duty paid on the inputs. However, in case of input service, he is entitled to service tax credit only when he makes payment to service tax provider. Documentary evidence is required regarding payment of duty on inputs/tax on input services.
Rule 9(1) of Cenvat Credit Rules prescribes that Cenvat Credit can be taken on the basis of -
· Invoice of manufacturer from factory
· Invoice of manufacturer from his depot or premises of consignment agent
· Invoice issued by registered importer
· Invoice issued by importer from his premises or consignment registered with Central Excise
· Invoice issued by registered first stage or second stage dealer
· Supplementary Invoice
· Bill of Entry
· Certificate issued by an appraiser of customs in respect of goods imported through foreign post office
· Challan of payment of tax where service tax is payable by other than input service provider
· Invoice, bill or challan issued by provider of input service on or after 10-9-2004
· Invoice, Bill or Challan issued by input service provider under rule 4A of Service Tax Rules.
Essential requirement of invoice –As per rule 9(2) of Cenvat Credit Rules, Cenvat credit cannot be denied as long as the document contains essential aspects of duty/tax payment i.e. –
(a) payment of duty or service tax
(b) description of goods or taxable service
(c) assessable value
(d) name and address of the factory or warehouse or provider of input service.
Thus, Cenvat cannot be denied if the documents contains these details and no permission/condonation is required if the invoice/bill/challan contains these basic details
Note that Serial Number or name of user-manufacturer is not a essential detail specified in rule 9(2) of Cenvat Credit Rules.
Exempted final products/output services
As per basic principle of VAT, credit of duty or tax can be availed only for payment of duty on final product or output services. As a natural corollary, if no duty is payable on final product or output services, credit of duty/tax paid on inputs or input services cannot be availed.
As per Rule 6(1) of Cenvat Credit Rules, Cenvat credit is not admissible on such quantity of input or input service which is used in manufacture of exempted goods or exempted services.
Thus, if inputs and input services are partly used in exempted final product/output service, Cenvat credit of that portion of input/input service will not be available.
Partial manufacture/provision of exempted products/services
It may happen that same inputs/input services are used partly for manufacture of dutiable goods/taxable services and partly for exempted goods/services. In such cases, the manufacturer/service provider has two options –
Maintain separate inventory - Maintain separate inventory and accounts of receipt and use of inputs (except fuel) and input services used for exempted final products/exempted output services. In such cases, he should not avail Cenvat credit of the inputs and input services which are used in exempted final services at all – Rule 6(2) of Cenvat Credit Rules. In CCE v. Padmini Polymers 2003(151) ELT 358 (CEGAT), it was held that there is no requirement that these must be stored separately. It is not necessary to maintain separate account in respect of ‘fuel’ used as inputs.
Pay 10% ‘amount’ if separate inventory and records not maintained - If the manufacturer/service provider opts not to maintain such separate accounts, he has to pay an amount equal to 10% of the ‘price’ of such exempted final products. Such payment can be made by debit to Cenvat credit account or PLA [rule 6(3)(b)].
As per section 91 read with 93 of Finance (No. 2) Act, 2004, education cess is payable only on ‘duties of excise’. ‘Amount’ is not ‘duty’. Hence, education cess is not payable on such ‘amount’.
Credit of service tax limited if service provider does not maintain separate accounts - In case of output service, if he does not maintain separate accounts, he can avail Cenvat only to the extent of 20% of service tax payable on final product.
Meaning of 'exempted goods' - As per Rule 2(d) of Cenvat Credit Rules, 'exempted goods' means goods which are exempt from whole of duty of excise leviable thereon and includes goods which are chargeable to 'Nil' rate of duty. Thus, 'exempted goods' for purpose of Cenvat cover (a) Goods chargeable to 'Nil' duty as per Tariff and (b) Goods which are exempt by a notification issued under section 5A.
Exempted goods do not mean non-excisable goods - Goods which are not mentioned in Tariff are not ‘exempted goods’ as they are neither ‘goods chargeable to 'Nil' duty as per Tariff’ nor ‘goods which are exempt by a notification issued under section 5A’.
Meaning of ‘exempted services’
As per rule 2(e), “exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of Finance Act.
Services on which no tax is payable are also ‘exempt services’ - - For purpose of the definition of ‘exempted services’, services on which no service tax is leviable are also ‘exempted services’. Thus, if a particular service is not taxable under present provisions of Finance Act, 1994, it will be ‘exempted service’ for purpose of rule 6.
Payment of ‘amount’ on exempted final products
If assessee opts not to maintain separate accounts in respect of inputs and input services utilised for exempted final products/exempted output services, he has to pay ‘amount’ of 10% of total price (excluding taxes) of exempted final product [rule 6(3)(b)].
When payment of ‘amount’ is not required
In certain cases, payment of ‘amount’ or reversal of Cenvat is not required.
Export of goods, deemed exports or gold manufacture - As per rule 6(6), a manufacturer can avail Cenvat credit on inputs when final product is despatched without payment of duty, in following cases –
(a) Final product is despatched to SEZ, EOU, EHTP or STP.
(b) Final product is supplied to United Nations or an international organisation for their official use or supplied to projects funded by them, which are exempt from duty.
(c) When final product is exported under bond without payment of duty
(d) Gold or silver arising in course of manufacture of copper or zinc by smelting.
(e) Goods supplied against International Competitive Bidding in terms of Notification No. 6/2002-CE dated 1-3-2002, if such goods are exempt from customs duty when imported in India
In such case, assessee need not reverse Cenvat credit or pay any ‘amount’. In other cases, the manufacturer is not entitled to avail Cenvat credit on inputs when final product is cleared without payment of duty.
This provision does not apply to service providers. See discussions in a subsequent paragraph.
No payment of amount if intermediate product cleared for subsequent export - If intermediate products are cleared to another manufacturer for manufacture of final products (and then final products are exported by that another manufacturer), no duty is payable as per notification No. 43/2001-CE(NT) dated 26-6-2001. In such cases, the intermediate products cleared are not ‘exempted goods’. Hence, ‘amount’ is not payable. This view has been confirmed in CBE&C circular No. 785/18/2004-CX dated 17-5-2004. It is clarified in the circular that exporter of final product will not be entitled to duty drawback of excise portion, as he has obtained inputs without payment of excise duty.
Inputs used in manufacture of capital goods used within the factory – Notification No. 67/95-CE exempts capital goods manufactured within the factory and used within the factory. In such case, a view is possible that ‘amount’ is payable on such capital goods. However, since the goods are not sold, there is no question of any ‘price’ and hence no ‘amount’ should be payable.
Input/services used for exempted as well as taxable services
If input services are partly used for taxable services and partly for exempted services assessee should maintain separate accounts of input and input services meant of exempted services and taxable services. He should take credit only of inputs and input services intended for use of taxable output service [rule 6(2)].
Limit on Cenvat credit if assessee does not maintain separate accounts - If assessee does not maintain separate accounts, he can avail Cenvat only upto 20% of tax payable on taxable output service. [The limit was 35% upto 10-9-2004].
For example, assume that service tax payable on output service is Rs 100. Service tax paid on input service is Rs 15. These input services are used both for taxable output services and exempt/non-taxable output services. In such case, assessee can avail and utilise credit of entire Rs 15. However, if tax paid on input services is Rs 75, and these are used both for exempted and taxable services, then assessee can actually utilise credit of only Rs 20. He will have to pay balance in cash, even if credit of Rs 55 is still available in his books.
He may take credit of Rs 75 in his Service Tax (Receivable) Account, but can utilise credit of Rs 20.
The balance may remain in his Service Tax Credit Account. He can utilise it in future if opportunity arises.
Removal of goods ‘as such’
A manufacturer/service provider who obtains the inputs / capital goods gets immediate credit of the duty paid by supplier on the inputs used by him.
The manufacturer/service provider uses these inputs / capital goods for manufacture of final products. However, occasionally, he may have to remove the inputs from his factory or premises of output service provider for -
(a) sale or disposal if these are not required by him or
(b) job work/processing in an outside factory and return
(c) rejected inputs for rework and return. Since credit has been taken on the inputs, control over their removal is necessary.
Removal of inputs / capital goods ‘as such’ for sale/disposal - If the manufacturer/service provider is not able to use the inputs (on which he has availed Cenvat credit) for any reason (like rejection, quality problems, excess supply, change in production plan, exports etc.), he can clear the inputs as such or after partial processing or capital goods as such, from factory/premises of service provider after payment of an ‘amount’.
Amount payable equal to Cenvat credit availed – The inputs or capital goods can be removed as such from the factory of manufacturer or premises of service provider on payment of an ‘amount’ equal to Cenvat credit availed when the credit was taken. In other words, it amounts to reversal of Cenvat credit taken [rule 3(5)].
If originally, education cess was paid, equivalent ‘amount’ would be payable. If originally, no education cess was paid, question of its payment does not arise even if goods are cleared now, as ‘amount’ is not ‘excise duty’.
Removal of capital goods after use
Provisions of rule 3(5) apply when inputs or capital goods are removed ‘as such’. The rules make no provision for removal of capital goods after use.
Rule 2(a)(A) states that capital goods should be ‘used’. Duration is not specified. Hence, even if the capital goods are used for one day, Cenvat eligibility of capital goods is established.
As per Concise Oxford Dictionary, ‘as such’ means ‘in the exact sense of the word’. In the present context, ‘as such’ can only mean ‘as it is’.
If capital goods are used and then sold/cleared, it cannot be said that these are removed ‘as such’. Hence rule 3(4) cannot apply. This will be particularly so if some parts were replaced during use or the capital goods was removed after dismantling.
Thus, rule 3(5) does not apply and capital goods can be removed without payment of any ‘amount’ after use. ‘Duty’ cannot be demanded, as assessee has certainly not manufactured the capital goods. Selling old machinery cannot by any stretch of imagination be termed as ‘manufacture’ and no excise duty is payable. Thus, neither ‘amount’ nor ‘duty’ is payable.
Often department insists on payment of ‘amount’ on your selling price or depreciated value. This has no legal basis. It is observed that some assessees even mention the amount as ‘duty’ in their invoice, which is totally incorrect.
Removal for job work/repairs/testing
In modern manufacturing technology, a manufacturer usually does not carry out all the processes himself. It is common that some manufacturing processes are carried out by him from other manufacturer or subcontractors on job-work basis.
Similarly, a manufacturer or service provider may also have to remove inputs as such or after some processing for test, repairs etc. In such cases, he can clear the inputs received by him for further processing/test/repairs etc. and obtain the same back after processing/test/repairs is carried out.
He can clear inputs/capital goods as such or after carrying out partial processing, without payment of duty/amount.
Procedure also available for goods under DEEC scheme - In case of inputs received under DEEC scheme, CVD has been paid on the inputs. Hence, the inputs should be recorded as per Cenvat procedures and these can be sent to job work as per usual Cenvat procedures - Hyderabad Commissionerate Trade Notice No. 71/95 dated 5-7-1997 - Para 3.
Provisions for sending inputs / capital goods for job work/testing/repairs - Provisions contained in Rule 4(5)(a) of Cenvat Credit Rules for this purpose are as follows :
Removal for processing/test - The inputs / capital goods can be removed as such or after partial processing to job worker for further processing, testing, repairs, reconditioning or any other purpose.
Job work and job worker – As per rule 2(n) of Cenvat Credit Rules, Job Work means processing or working upon of raw materials or semi-finished goods supplied to job worker, so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for the aforesaid process, and the expression ‘job worker’ shall be construed accordingly. [The definition of ‘job work’ is same as given in Notification No. 214/86-CE dated 25-3-1986]
Goods Should be returned to factory/premises of service provider - After carrying out the operation/test/repair etc., the goods should be returned to the factory or premises of service provider within 180 days. If these are not received back within 180 days of their being sent out, manufacturer/service provider should pay an ‘amount’ equivalent to Cenvat credit attributable to inputs / capital goods. Payment can be through Cenvat credit or PLA. If the inputs / capital goods come back after 180 days (say after 220 days), manufacturer/service provider can take Cenvat credit of duty paid by him - rule 4(5)(a).
Procedures and Records for Cenvat
The main procedures are—
· Maintaining records of inputs and capital goods
· Maintaining records of credit received and utilised
· Submit returns of details of Cenvat credit availed, Principal Inputs and utilization of Principal Inputs in forms ER-1 to ER-6 (Discussed in earlier chapter)
· Returns by dealer/service provider/input service distributor
Record of inputs and capital goods - The manufacturer of final products or provider of output service or input service distributor shall maintain proper records for the receipt, disposal, consumption and inventory of the inputs and capital goods.
The record should contain relevant information regarding (a) value (b) duty paid (c) the person from whom inputs / capital goods have been procured.
Burden of proof regarding admissibility of Cenvat credit is on the manufacturer or provider of output service taking the credit – Rule 9(5) of Cenvat Credit Rules.
Record of input services – The manufacturer of final products or the provider of output service shall maintain proper records for receipt and consumption of the input services. The record should contain relevant information regarding –
(a) Value of service
(b) Tax paid
(c) Cenvat Credit taken and utilised
(d) Person from whom input service has been procured
The burden of proof regarding the admissibility of Cenvat credit shall lie upon the person taking such credit. [rule 9(6)]
Cenvat Credit Record - Cenvat Credit record should be maintained, which is similar to PLA. It is a current account of Cenvat credit received, credit utilised and credit balance. This should give details of (a) credit availed against each input / capital goods (b) credit utilised against clearance of final products or removal of input as such or after processing or removal of capital goods as such (c) Balance credit available.
Returns – A manufacture has to be submit returns to Range Superintendent of Central Excise in the prescribed forms ER-1 to ER-6 in respect of Cenvat Availed, Principal Inputs, utilization of Principal inputs etc.. These are discussed in earlier chapter and hence not reproduced here. Others have to submit returns as follows -
· Quarterly return by first stage/second stage dealer within 15 days from close of quarter [rule 9(8)]
· Half yearly return within one month from close of half year, by provider of output services [rule 9(9)]
· Half yearly return within one month from close of half year, by Input Service Distributor [rule 9(10)]
20 February 2009
its very good information.
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