CONTENTS CENVAT CREDIT SCHEME RULE 2 : DEFINITIONS I-7. Chapter-heads I-5 Rule-wise Index I-23

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1 CONTENTS Chapter-heads I-5 Rule-wise Index I-23 1 CENVAT CREDIT SCHEME 1.1 Background of VAT Budget Basic Concept of VAT Tax credit system to remove cascading effect VAT is consumption based tax Advantages of VAT Disadvantages of VAT Cenvat Scheme, Highlights of Cenvat Scheme 7 2 RULE 2 : DEFINITIONS Text of rule Classification of the definitions Customs Tariff Act Excise Act Excise Tariff Act Finance Act Manufacturer or producer Notification Residual clause Exempted goods 21 I-7

2 CONTENTS I Final products Excisable goods Element of manufacture must be present Manufacture as defined by Court - New substance having distinct name, character or use must emerge No Cenvat to manufacturer if no manufacture Output Service Person liable for paying service tax Provider of taxable service 26 3 RULE 2(a) : CAPITAL GOODS 3.1 Cenvat credit of duty paid on Capital goods Highlights of definition of capital goods Eligibility of capital goods Eligibility of certain motor vehicles and its components, spares and accessories as capital goods Capital goods used exclusively for exempted final products and output services not eligible Capital goods can include equipment or appliance used in office for manufacturer Goods imported under project imports General provisions in respect of capital goods Ownership of capital goods is not essential to avail Cenvat on capital goods Use of capital goods by manufacturer Capital goods extended from factory are eligible Reversal of Cenvat credit in respect of obsolete capital goods written off without use Capital goods manufactured within the factory Capital goods used by Service provider Conditions for availing Credit on Capital Goods Cenvat credit on capital goods has to be availed in two stages, except by SSI Capital goods used in EPC project 58 4 RULE 2(k) : INPUTS 4.1 Input goods eligible for Cenvat credit 59

3 I-9 CONTENTS Inputs for construction excluded under exclusion clause (B) except when used for works contract or construction service Condition of use of input in factory for manufacturer but not applicable to service providers Capital goods are not inputs but parts and components can be inputs Capital goods not defined as capital goods will be eligible as inputs A Small value capital goods are inputs - not capital goods Motor vehicle is not input but capital goods in case of some services Goods for personal consumption of employees not eligible Goods used for captive generation of electricity or steam eligible but not HSD, LDO, Petrol Furnace oil used to supply electricity and steam to two units of same company having separate registrations A Goods used for pumping of water Goods having no relationship with manufacture of final product not eligible Inputs directly sent to site and fitted there are eligible as input Input goods in respect of service providers Other provisions relating to input Partial or full write off of inputs Storage of inputs outside the factory Input Credit Distributor A Distribution of credit by warehouse of manufacturer Clearance of packing material in which inputs were packed Clearance of waste by service provider Case law under earlier definition which is still relevant Process losses and handling loss are allowable No credit on short received inputs Credit if goods lost/destroyed/damaged in process but no credit if inputs are lost or destroyed in store room or pilfered Inputs need not be utilised within the factory itself No Cenvat credit if inputs were not intended for manufacture Statutory definition of input upto

4 CONTENTS I-10 5 RULE 2(l) : INPUT SERVICE 5.1 Input Services eligible for Cenvat credit Analysis of the definition Meaning of includes Meaning of in relation to Services covered in inclusive part of the definition Cenvat credit of service tax paid on imported services Place of removal Services specifically excluded from definition of input service Construction related Services specifically excluded under clause (A) Renting of Motor Vehicle Services specifically excluded under clause (B) Motor vehicle insurance and repair related Services specifically excluded under clause (BA) Services for personal use or consumption of employees specifically excluded under clause (C) What is wasteful expenditure as per the revised definition of input service Services provided before but invoice raised on or after Service need not be received in the factory Case law relating to specific services Services of Commission agent Canteen services as input service Telecom related services Manufacture or factory related services Administration related services Renting and leasing services Insurance related services Input services for providing taxable output services Marketing related services Export related services Cenvat Credit of input service on receipt of invoice of service provider Deduction of some amount from invoice of service provider 121

5 I-11 CONTENTS 6 RULE 3 : CENVAT CREDIT Text of rule Eligibility of Cenvat Credit Meaning of Cenvat Credit Transitory provisions in respect of education cess and SAHE cess Some issues relating to eligibility of Cenvat credit Cenvat Credit when product ceases to be exempted goods or service seizes to be exempted service Opting for Cenvat by SSI Simultaneous availment of Cenvat and SSI exemption permissible when SSI manufacturing with other s brand name but not in other cases Utilisation of credit Utilisation of Cenvat credit Time limit for taking Credit Carry forward of Unutilised Cenvat credit Full credit available in case of goods obtained from North Eastern States, J&K, Sikkim and Kutch district Cenvat credit only of inputs received upto end of month, even if duty/tax is to be paid by 5th/6th of following month Inter-changeability of Cenvat credit Cenvat credit by exempted units from North Eastern States, J&K, Sikkim and Kutch district Cenvat Credit cannot be utilised for payment of service tax when tax is payable under reverse charge method Removal of inputs and capital goods on which Cenvat was taken Removal of inputs after processing Mode of payment of amount Inputs/capital goods can be exported without payment of amount Inputs can be cleared for export on payment of duty and rebate claimed If inputs were obtained without payment of duty, final product cannot be exported on payment of duty and rebate claimed Recovery if the amount not paid 160

6 CONTENTS I Removal of capital goods after use Provision during to Restrictions on Cenvat credit in certain cases Restrictions on utilisation of credit of some duties Cenvat Credit in respect of goods procured from EOU Cenvat credit of CVD/excise/service tax paid in cash or through debit in duty credit scrip is allowable Other Issues relating to availment of Cenvat Credit One to one correlation not necessary in Cenvat Classification/Duty liability cannot be altered or challenged at the end of user of inputs Full credit of duty paid by supplier is available, even if less duty was payable or not payable Full Cenvat credit of duty paid available even if seller gave trade discount or price reduction later Buyer can avail Cenvat credit, if supplier paid duty higher than what was payable or when not payable A Entire Cenvat credit even if duty payable on final product lower than input credit available Registration and eligibility of Cenvat credit are independent issues Cenvat provisions and valuation provisions are independent Amalgamation and Cenvat Transfer of credit of SAD from one factory to other Accounting entries not relevant for eligibility of Cenvat credit Payment of amount in some cases (normally termed as Reversal of Cenvat ) Payment of amount if final product subsequently exempt When payment of amount (i.e. reversal of Cenvat credit not required No reversal if supplier gives reduction in price after clearance No Cenvat reversal if duty paid on final product, even if it was not payable Cenvat eligible as input but availed as capital goods and vice versa Cenvat credit if demand made on final products for past period 194

7 I-13 CONTENTS 7 RULE 4 : CONDITIONS FOR ALLOWING CENVAT CREDIT Text of rule Time limit for taking Credit of duty paid on inputs and input services When the Cenvat credit of input services can be normally taken? No time limit for Cenvat credit of duty paid on capital goods There was no time limit for taking Cenvat Credit on inputs and input services upto Time limit for taking Cenvat credit when service tax payable under reverse charge basis A Time limit applicable in respect of reverse charged during to Time limit for taking Cenvat Credit of Input Services during to Availment of Cenvat credit on capital goods Cenvat credit of capital goods obtained on lease, hire purchase or loan Depreciation cannot be claimed on duty portion of value of capital goods Removal of inputs and capital goods for job work/repairs/testing Provisions for sending inputs/capital goods for job work/testing/repairs Procedure for sending goods for Job work under Cenvat Direct despatch of inputs to job worker Scrap/waste generated at end of job worker Amount payable if goods not returned within 180 days Provisions applicable to job worker Direct despatch of final product from place of job worker Job worker can use his own inputs, avail Cenvat of inputs used by him and utilise it elsewhere Job worker can pay duty on value of goods supplied by him Capital goods can be sent to job worker Waste can be sent out for melting/charging and return 225

8 CONTENTS I Removal of rejected inputs for rework and return Consumables and fuel can be sent for job work Job worker can pay duty even if material sent under Cenvat Removal of inputs other than those covered under Cenvat Cenvat credit of input service on receipt of invoice RULES 5, 5A AND 5B : REFUND OF CENVAT CREDIT Text of rules 5, 5A and 5B Refund of Cenvat Credit Is refund claim mandatory or assessee can utilise excess Cenvat Credit for payment of excise duty on DTA sales/service tax on services provided within India? Manufacturer can avail Cenvat credit of service tax, he need not file refund claim Provisions as applicable upto Exports by units in North-East Region and Sikkim Refund of Cenvat Credit other than in case of exports Service Provider can claim refund of excess Cenvat Credit if he is under partial reverse charge RULE 6 : COMMON INPUTS AND INPUT SERVICES FOR EXEMPTED AND TAXABLE GOODS/SERVICES Text of rule No Cenvat credit if final product/service exempt Partial manufacture of exempted goods or partial provision of exempted services General provisions applicable in both the cases Special provisions in respect of Banking, FI and NBFC Exempted goods Goods cleared without payment of duty under exemption are exempted goods 275

9 I-15 CONTENTS Exempted goods cannot be cleared under bond and Cenvat credit cannot be availed Molasses used in exempted products Goods supplied by DTA unit under Duty Credit Scrip are not exempted goods Goods involved in Works Contract and food related services Meaning of exempted services Trading of goods or securities is exempted service Sale of immovable property is exempted service Services on which service tax paid under some conditional abatement/composition scheme are exempted services Service of transportation of goods by a vessel from customs station of clearance in India to a place outside India is not exempt service Job work under Cenvat is exempted service for rule Interest on loans or interest on deposits and delayed payment charges are Nil value service Disallowance of Cenvat of capital goods only if used exclusively for exempted final product/services Zero rated transactions and exempted transactions Supply to EOU/SEZ, export of goods, deemed exports or gold manufacture, supply of ethanol are zero rated Exports are zero rated - No Cenvat reversal exported Service provided to unit in SEZ is export and reversal of Cenvat or payment of amount not required Supplies of goods to EOU, SEZ, International Competitive Bidding, UN Agencies are not exempt goods for rule Exported service is not exempt service for purpose of rule Intermediate product cleared for subsequent export are not exempted goods Value for purpose of rule 6(3) and 6(3A) Payment of amount on exempted final product/exempt services No Cenvat credit of such amount paid Payment of amount means Cenvat credit not taken When to pay the amount Return of exempted goods for repairs on which amount was paid 289

10 CONTENTS I No excise duty payable on intermediate product if final product cleared on payment of amount Amount can be recovered from buyer If assessee recovers amount from buyer, further amount (6% of 6% or 7% of 7%) is not payable Amount payable even if exemption notification does not state that Cenvat should not be availed Recovery of the amount Proportionate reversal of Cenvat Credit - provisions applicable w.e.f Inform option to Superintendent Mode of calculations of proportionate reversal w.e.f Calculations at the end of the year for period after Intimation of details to Range Superintendent Self adjustment of excess amount was paid If assessee did not manufacture dutiable goods or did not render taxable in previous year RULES 7, 7A & 7B : DISTRIBUTION OF CREDIT BY INPUT SERVICE DISTRIBUTOR Text of rules 7, 7A and 7B Input Service Distributor Concept of Input Service Distributor is compulsory w.e.f if assessee has more than one factories or places of provision of service Invoice for distribution of credit by input service distributor Manner of distribution of Cenvat Credit w.e.f A Manner of distribution of Cenvat Credit during to Manner of distribution of Cenvat Credit during to Manner of distribution of credit by ISD upto Responsibilities of input service distributor 313

11 I-17 CONTENTS 10.2 Input Credit Distributor Distribution of credit by warehouse of manufacturer RULE 8 : STORAGE OF INPUT OUTSIDE THE FACTORY OF THE MANUFACTURER Text of rule Storage of inputs outside the factory Procedure to be followed RULE 9 : DOCUMENTS, ACCOUNTS AND RETURNS Text of rule Duty paying documents for Cenvat General provisions in respect of eligible documents Credit if duty paying document is lost Ownership or purchase of inputs is not essential Cenvat Credit in case of defects in duty paying documents Computer generated invoices Eligibility of computer generated invoice for Cenvat credit Invoice or Bill can be called by other name e.g. Debit Note or contract note Decisions that Cenvat cannot be denied for minor defects in documents Is name of user of goods/receiver of services using inputs/input services necessary on Invoice? Eligible duty paying documents Invoice of Manufacturer or his depot Supplementary Invoice by supplier-manufacturer or service provider for differential excise duty/service tax Bill of Entry GAR-7 challan when service tax paid by person other than service provider Duty paid on TR-6 or GAR-7 challan in other cases 358

12 CONTENTS I Other documents eligible for Cenvat credit Certificate issued by registered courier Debit Note issued by service provider Responsibility of person taking Cenvat credit Differential Duty refunded to supplier of inputs/ capital goods Procedure for Cenvat Returns under Cenvat Records to be maintained for Cenvat INVOICE OF DEALER OR IMPORTER FOR CENVAT 13.1 Dealer s Invoice for Cenvat Dealers who can issue Cenvatable Invoice Procedure of registration of Dealer Requirement of Godown of Dealer Goods must be despatched from premises of dealer Dealer s invoice for Cenvat Provisions when dealer of imported goods is claiming refund of Special CVD of Customs Dealer can have another series of invoice called Private Invoices for Non-Cenvat goods Provisions in respect of imported consignments Despatch of split consignments after import Direct dispatch of goods by manufacturer i.e. transit sale Other provisions relating to dealers invoice RULE 9A : INFORMATION RELATING TO PRINCIPAL INPUTS Text of rule 9A Annual Information relating to Principal Inputs Monthly return of receipt and consumption of each of principal inputs Penalty for late submission or non-submission of ER-5/ ER-6, or not submitting electronically 386

13 I-19 CONTENTS 15 RULES 10 & 10A : TRANSFER OF CENVAT CREDIT Text of rules 10 and 10A Transfer/Merger/Shifting of undertaking Permission for transfer to be granted within three months Transfer of credit of SAD from one factory to other RULE 11 : TRANSITIONAL PROVISION Text of rule Opting or going out of Cenvat Reversal of credit at the time of going out of Cenvat Opting out of Cenvat by SSI RULE 12 : SPECIAL PROVISIONS FOR NORTH-EAST REGION, KUTCH DISTRICT OF GUJARAT, STATE OF JAMMU AND KASHMIR AND STATE OF SIKKIM Text of rule Buyer from new units in J&K, Sikkim, NE and Kutch can avail Cenvat credit RULE 12A : PROCEDURE AND FACILITIES FOR LARGE TAXPAYER Text of rule 12A Large Tax Payers Units Procedural relaxations in excise to LTU Sharing of information between CBDT and CBEC 411

14 CONTENTS I RULE 12AAA : POWER TO IMPOSE RESTRICTIONS IN CERTAIN TYPES OF CASES Text of rule 12AAA Withdrawal of facilities to manufacturer/dealer misusing facilities When the facility can be withdrawn and restrictions imposed Which restrictions can be placed and which facilities can be withdrawn? Time for which facilities can be withdrawn Procedure to be followed Comments on the provisions RULE 13 : DEEMED CREDIT Text of rule Deemed credit on declared inputs RULE 14 : RECOVERY OF CENVAT CREDIT WRONGLY TAKEN OR ERRONEOUSLY REFUNDED Text of rule Scope of the Rule Reversal before utilisation means Cenvat credit was not taken Interest is compensatory not penal Earlier controversy upto RULES 15 AND 15A : CONFISCATION AND PENALTY/GENERAL PENALTY Text of rules 15 and 15A Penalty for wrongful availment of credit Take or utilise 431

15 I-21 CONTENTS 22.3 No penalty if wrong availment of Cenvat due to differences in interpretation Residual Penalty for violation of Cenvat Credit Rules RULE 16 : SUPPLEMENTARY PROVISION Text of rule Scope of sub-rule (1) Scope of sub-rule (2) ACCOUNTING, INVENTORY VALUATION AND CENVAT 24.1 Accounting Treatment of Inputs in Cenvat Accounting Treatment of Inputs received Accounting treatment for Service Tax Write off of non-utilisable balance in Cenvat credit receivable account Accounting of Duty paid on Capital Goods Accounting in case of lease or hire purchase transactions Payment of excise duty demands from Cenvat credit Payment of amount Inventory Valuation and Cenvat Conflict between AS-2 and section 145A Accounting treatment of unpaid excise duty on final products Valuation of inventory of WIP and final products Other aspects of valuation 448 APPENDICES Cenvat Credit Rules, Cenvat Notifications 528

16 CONTENTS I-22 Cenvat Circulars 566 Central Excise Rules, SUBJECT INDEX 693 LIST OF CIRCULARS/TRADE NOTICES 702 LIST OF BASE NOTIFICATIONS 704