Cenvat Credit Sushil Agarwal

8/8/2019 Cenvat Credit Sushil Agarwal

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Service TaxService Tax

CENVAT CREDITCENVAT CREDIT

Sushil AggarwalSushil AggarwalAnil Sushil & Co.Anil Sushil & Co.

Chartered AccountantChartered Accountant

1, Temple Complex, Shiv Mandir, Tilak1, Temple Complex, Shiv Mandir, Tilak

Bridge, New Delhi 110 001.Bridge, New Delhi 110 001.

Ph. 2337 1637, 2337 1937Ph. 2337 1637, 2337 1937


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Step Towards Integration

In the budget 2004-2005 the idea to

extend credit of service tax and excise

duty across goods and services was

mooted.

The CENVAT Credit Rules, 2004 came

into force from 10-9-2004, and have

replaced the CENVAT Credit Rules, 2002and Service Tax Credit Rules, 2002.


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What is available as credit

CENVAT credit of excise duty (includingadditional excise duty etc.) and the servicetax and the Education Cess on taxableservices and excisable goods, which is

paid on- Any input or capital goods received in the

premises of the provider of output service onor after the 10th day of September, 2004, and

Any input service received by the provider ofoutput services on or after the 10th day ofSeptember, 2004,


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Components of eligible duty & Tax The duty of excise specified in the First and the

Second Schedule to the Excise Tariff Act, leviable

under the Excise Act,

The additional duty of excise leviable under

section 3 of both (i)the additional Duties of Excise

(Textile and Textile Articles) Act, 1957 and (ii)additional Duties of Excise (Goods of Special

Importance) Act, 1957. Also the additional duty of

excise leviable under section 157 of the Finance

Act, 2003. The National Calamity Contingent duty leviable

under section 136 of the Finance Act, 2001,


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Components of eligible duty & Tax The Education Cess on excisable goods leviable

under section 91 read with section 93 of theFinance (No. 2) Act, 2004,

The additional duty leviable under the CustomsTariff Act,

The service tax leviable under section 66 of theFinance Act,

The Education Cess on taxable services leviableunder section 91 read with section 95 of the

Finance (No.2) Act, 2004, the additional duty of excise leviable under

section 85 of the Finance Act, 2005


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When credit is available

The CENVAT credit in respect of inputs

may be taken immediately on receipt of

the inputs in the premises of the provider

of output services

Components of eligible duty & Tax

An importer who pays CVD (countervailingDuty) by a debit in DEPB pass book may

not be eligible to credit in the absence of

express provisions.


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Payment of input service is

pre-condition The credit is allowed only after the payment of

service tax as indicated in invoice. [sub-rule (7)of Rule 4].

There is no express provision for partialallowance based on part payment or settlementfor a lower value.

Contrarily liability of tax on output service arises

even on receipt of part payment. A logical presumption is that credit should be

ava


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What is not input Light diesel oil, HS diesel, petrol whether used in

relation to manufacture of goods or for provision ofservice, irrespective whether used directly orindirectly and whether contained in the finalproduct or not.

Also included in the above list are lubricating oils,greases, cutting oils, coolants, accessories of thefinal products cleared along with the finalproducts, goods used as paint, or as packing

material, or as fuel, or for generation of electricityor steam used in or in relation to manufacture offinal products or for any other purpose, within thefactory of production,


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What is input and input service

Input include goods used in the manufacture of capital goods

which are further used in the factory of the manufacturer

Input service means any service,-

used by a provider of taxable service for providing an

output service, or

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,

A co-relation of inputs to output is thus a must.


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What is input and input service Services used in relation to setting up,

modernization, renovation or repairs of a factory,premises of provider of output service or an officerelating to such factory or premises, advertisementor 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, inwardtransportation of inputs or capital goods andoutward transportation upto the place of removalare also input services. [clause (1) of rule 2]


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Importance of place of removal Sec.4(3)(c ) of the Central Excise Act stipulates as

under:

"place of removal" means-

i. a factory or any other place or premises of production

or manufacture of the excisable goods;ii. warehouse or any other place or premises whereinthe excisable goods have been permitted to bedeposited without payment of duty,

iii.a depot, premises of a consignment agent or anyother place or premises from where excisable goodsare to be sold after their clearance form the factory.


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Impractical Situations Question may arise as to allowability of CENVAT credit on

tax paid on transportation used after place of removal.What is the logic of such disallowance. Shall it extend totransportation incurred on after sales maintenance andfree replacements.

Condition relating to receipt of goods in the premises for

availing cenvat credit. CENVAT Credit for the excise duty paid on any input or capital

goods will be allowed as credit only if such input or capitalgoods are received in premises of output services provider

in case of a tour operator, he does not bring the motor vehicle inits premises but are used for the rendering of output service


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Credit of education cess only

against education cess The credit of the Education Cess on

excisable goods and the Education Cess

on taxable services can be utilized either

for payment of the Education Cess onexcisable goods or for the payment of the

Education Cess on taxable services

[proviso to clause (b) of sub-rule (7) ofRule 3]


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Utilization / Application of credit When to utilise

The CENVAT credit may be utilized for payment ofservice tax on any output service, but the

CENVAT credit shall be utilized only to the extent

such credit is available on the last day of the

month or quarter, as the case may be [sub-rule (4)of Rule 3].

A question may arise, whether CENVAT credit can

be used to pay interest and penalty. (note2 of ST3). Refund of unused credit shall not be allowable under

any circumstances. (Rule 4(2))


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Utilization / Application of credit

Reversal / utilization of Credit

The CENVAT credit may be utilized for payment of-

a)An amount equal to CENVAT credit taken on

inputs if such inputs are removed as such or afterbeing partially processed or

b)an amount equal to the CENVAT credit taken oncapital goods if such capital goods are removed assuch or

service tax on any output service:


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Utilization / Application of credit

Availing of credit is subsequent to recording ofcredit. Recording and reversing amounts to notavailing the credit and no penalty can be invoked.

credit can be denied to an assesse under the ruleonly on two grounds, firstly for having not used the

inputs in the manufacture of goods and secondlyfor having removed the inputs as such. The creditcannot be denied to the assessee for having failedto utilize the inputs for a long time or for having

written of the value of the inputs in the books.(CCE, Indore v. M/s Kinetic motors Co. Ltd.)


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Transition from exemption to taxability

In case where a service which ceases to be an

exempted service, the provider of the output serviceshall be allowed to take CENVAT credit of the dutypaid on the inputs (not input services) received onand after the 10th day of September, 2004 and lying

in stock on the date on which any service ceases tobe an exempted service and used for providing suchservice

This benefit is apparently not available on transition

to taxability on crossing of 4 lac barrier. The credit in respect of input services availed andlying as part of stock & WIP should be available onlogical grounds in the absence of specific denial.


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Transition from old to new rules As per Rule 11, the service tax and excise duty credit lying

un-availed under the Service tax credit rules, 2002 or

CENVAT credit rules 2002 shall be allowed to be utilisedunder the CENVAT credit rules, 2004.

As per Rule 11, the amount of credit of input orinput services as comprised in the value of closingstock of Raw material, WIP and finished goods on

the date of transition from taxability to exemptionshall have to be paid back. This law is applicableonly for claiming value / qty based exemptionduring a fy. year.

Transition from Taxability to exemption


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Credit for inputs used in exempt services

cenvat credit is not available in respect of inputs

contained in scrap (exempted goods).

Exceptions to this rule are:

the credit utilized when final products is dutiable, can

not be reversed if subsequently the exemption is

withdrawn.Commissioner of Central Excise Rajkot Vs.

ASHOK Iron & Steel Fabricators, 2002 (140) ELT 277

Separate books of accounts be kept where both taxable

and non-taxable services are being rendered. Record of

receipt, consumption and inventory should be

maintained.


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Credit on common inputs for taxableand exempt services

In the absence of separate record credit availability shallbe restricted to 20% ofoutput tax.

Unused balance of credit can however be carried forwardindefinitely.

Where credit available is less than 20% of output liability

the whole credit should be allowed. W.E.F. 16/05/05 explanation III has been added to rule 6

(3) to restrict availability of credit where input is incurredexclusively in respect of exempted goods/ services.

A question may arise, can a trader, rendering taxableservices in addition to trading, adopt the 20% formula in

the light of the fact that trading is no service at all.


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Consignment makes business sense Trading is not a taxable service. It is rather not a service.

Trading as agent is covered under Business Aux.Services.

Agent can claim tax input on advertising, marketresearch etc. but trader can not.

This is over and above the VAT free stock transferadvantage.

ISSUES A question may arise as to availability of input service tax

credit to a share broker who in addition to trading on

behalf of customers and sub-brokers trades on his own. Similar issue may arise in case of company engaged in

wholly taxable activity but extends interest bearing loansfrom its surplus funds.


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Option of mixed system of credit Assessee providing many services

For some services, separate input record ismaintained

For others common inputs are used

Law does not prohibit use of different method of

claiming credit in respect of different services Law itself provides for full credit for 16 input services

unless they are inputs, exclusive to exempt services.Services of the like Consulting Engineer, Architect,

IPR, Construction, Banking, Real Estate, Security,Management consultancy are included here.


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Abetments and exemptions

Notif. 1/2006 provides that a service

provider who claims an abetment shall not

be eligible to input credit.

Where a construction job is sub-

contracted the contractor will not be able

to claim credit of input service tax charged

on the bill of the subcontractorsimultaneous to his claim for abetment.


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Matching of input to output service

There is no specific requirement of matching

each input service to corresponding outputservice for claiming the credit.

Credit for expenditure on Mobile Phone

Mobile phone expenditure was hitherto notMobile phone expenditure was hitherto not

allowed under the Service tax credit rules,2002.allowed under the Service tax credit rules,2002.

Only expenditure in respect of phones installed atOnly expenditure in respect of phones installed at

the premises from where the service is providedthe premises from where the service is providedwas allowed. There is no such restriction with thewas allowed. There is no such restriction with the

Cenvat Credit Rules, 2004.Cenvat Credit Rules, 2004.


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Credit on Capital Goods

Capital goods are:

i. all goods falling under chapter 82, 84, 85, 90,heading no. 68.02 and sub-heading no. 6801.10 ofthe first schedule to the excise tariff act (thesechapters include defined items of machinery, tools,optical, photographic, medical instruments, abrasivematerial etc.)

(ii) pollution control equipment, (iii) componentsspares and accessories of above specified goods,(iv) moulds and dies, jigs and fixtures,(v) refractoryand refractory materials,(vi) tubes and pipes andfittings thereof, and (vii) storage tank,


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Credit on CG -Restrictions Capital goods used in factory (and not in

office) are eligible to credit. In case of output service provider also the

credit is available. The restriction of use in

office is apparently not there. For motor vehicles the credit is availableonly to couriers, tour operators, cargohandling agency, goods transport agency,

outdoor caterer, pandal & shamianacontractor & rent a cab operator.

C dit CG d


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Credit on CG - procedure Credit is available in two parts of 50% each. One in

the year of acquisition and the other in the subsequent

year. There is no condition of put to use or installation. capital goods acquired on lease, hire purchase or loan

are equally eligible to credit.

On clearance of capital goods in the first year itself theentire credit shall be available.

Depreciation on duty is not allowed. Dealer to takeonly one benefit.

Credit is not denied if CG are sent for job work andreceived with in 180 days. Beyond this period thecredit will have to be reversed and reclaimed once thegoods are received back.


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Credit reversal - removal of CG

On removal (except for providing the outputservice) CENVAT credit as availed on such goodsshall have to be reversed / paid.

Removal shall be under the cover of an invoice.

No reversal if removal is as scrap / waste.

However duty as applicable on scrap / waste shallbe chargeable by manufacturer. This would notapply to service provider.

CENVAT credit shall not be available on capitalgoods used exclusively for exempted goods /services


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Refund of CENVAT credit

Exports not only entail transfer of goods and services

without charging any duty or service tax they also entitle theexporter to claim credit for duty and service tax paid on

inputs and input services against his other taxable activity.

Where adjustment is not possible, law provides for refund.

Cenvat Credit Rules provide for refund in case of exportingmanufacturers. Export of service rules provide for refund in

case of services export.

Refund of credit shall be not be allowed where the exporter

avails drawback or rebate of duty under the relevant rules. A question may arise on availability of credit to merchant

exporters.


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Input service distributor Where several manufacturing units or service

providing units, scattered geographically, work underan umbrella of a (say) head office and the head officeeither incurs common expenses or procures inputscentrally or even clears all bills for supplies or services

centrally, the units will be unable to claim the cenvatcredit on such payments. There may situations whereservices or goods are received by units or whereexpenses like marketing, management consultancy or

advertisement are incurred centrally. To circumvent such a situation the distribution ruleshave been introduced for the first time.


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Conditions for distribution of Credit

1. Credit can not be distributed in excess of

the amount of service tax paid by the

distributor,

2. Credit attributable exclusively to

exempted goods or services shall not be

distributed.


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Registration of Distributor

input service distributor shall have to issue an

invoice or a challan,signed & serially numbered andcontaining in addition to the amount being

distributed, the particulars of the service provider,

credit distributor and the recipient of the credit. Such

provisions did not exist in law prior to 16/06/05.

Procedure for distribution

The distributor shall need to seekregistration and shall be required tofile regular returns.

M i t f R d


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Maintenance of Records the burden of proof regarding the admissibility of the

CENVAT credit whether on inputs, input services or oncapital goods, shall lie upon the manufacturer orprovider of output service taking such credit. [sub-rule(5) of rule 9].

The manufacturer of final products or the provider of

output service shall maintain proper records for thereceipt, disposal, consumption and inventory of theinput and capital goods in which the relevantinformation regarding the value, duty paid, CENVAT

credit taken and utilized, the person from whom theinput or capital goods have been procured etc. isrecorded. Thus no specific record is prescribed.


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Documents entitling credit

Invoice issued by either the manufacturer or importer or

from a registered depot of the importer or his consignmentagent.

Invoice issued by a first stage or a second stage dealer.

A supplementary invoice, issued by a manufacturer or

importer of inputs or capital goods. A bill of entry.

A certificate issued by an appraiser of customs in respect ofgoods imported through a Foreign Post Office.

an invoice, bill or challan issued by an input servicesdistributor under rule 4A of the Services Tax Rules, 1994.[sub-rule (1) of rule 9]


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Documents entitling credit

A challan evidencing payment of service tax by the

person liable to pay service tax under sub-clauses (iii),

(iv), (v) and (vii) of clause (d) of sub- rule (1) of rule (2) of

the Service Tax Rules, 1994,

The above clause has been amended, w.e.f. 16-6-2005to provide that in case of input service of goods transport

service is utilized then CENVAT Credit can be availed on

the strength on the TR-6 Challan. This is trade facilitation

measure taken by the Government as severalrepresentations were made to the Government in this

regard.


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Contents of an Invoice The invoice / Challan shall be signed, serially

numbered and shall contain:- The name, address and the registration number of the

issuer,

The name and address of the person receiving taxableservice

Description, classification and value of taxable serviceprovided or to be provided; and

The service tax payable thereon.

In the absence of some of the above particulars thecredit may not be denied if the authorities aresatisfied that the tax under review has been paidand the input credit is being legitimately claimed.


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Payment of tax to ensure before

taking CENVAT Credit The output service provider or the input service

distributor taking CENVAT credit shall take

reasonable steps to ensure that tax on such

goods / services has been duly paid by hisinput / service provider.

To satisfy oneself about the identity and address

of the person issuing invoice is such a

reasonable step. To keep a copy of certificate ofregistration of such person is also such a step.


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THANKS

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