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Allowability of CENVAT Credit in case of Supply of Goods

CA Afzal Ghaniwala (Chartered Accountant) (76 Points)

22 January 2011

Suppose Mr. X Purchases an equipment of Rs 100 and paid excise duty of Rs 10. He thereafter enters into agreement with Mr.Y for selling that equipment and provide service relating to installation and erection of that equipment in the premises of Mr.Y. Mr.X sell that equipment and also collects service tax from Mr. Y towards installation of the equipment. Now can Mr. X avail cenvat credit of Rs.10 against his service tax liablity ?

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2 Replies

pravin (student) (38 Points)
Replied 02 February 2011

Dear Afzal,

1. Once you buy any capital equipments cenvat credit that can be availed will be restricted to 50% in the year of purchase. Balance 50% can be availed at any time thereafter.

2. The Balance 50% can be availed only if you have the possession of the Capital asset when you are availing the CENVAT Credit.

3. If you sell the Capital Asset in the year of purchase it -self 100% credit you can take and have to be passed on immediately to the buyer.

4. Yes we can take credit of CEVAT for the service Tax liability only up to 50%.

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Soumyen Sarkar (free) (102 Points)
Replied 06 March 2011

Let me answer your queries this way :

If Mr. X wants to sell the instrument on which he paid Rs 10 excise duty already, then he is required to reverse the same amount of credit from his credit account irrespective of the price at which he sells it to Mr. Y Even if he gets only half of the original price, he needs to debit Rs 10/= These issues are discussed in Rule 3(1) and Rule 3(5) of Cenvat Credit Rules 2004.

Regarding collection of Service Tax on installation of the instrument at Mr. Y's premse, Mr, X himself needs to be registered as Sevice Provider for the same service. Only then he can collect Service tax and Mr. Y then can take credit on the same Tax.