CENVAT Credit. 4.1 Introduction & brief Legislative History. 4.2 CENVAT Credit Rules, 2004

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1 4.1 Introduction & brief Legislative History 4 CENVAT Credit The powers conferred on the Central Government under clause (xviaa) and clause (xvia) of section 37(2) of the Central Excise Act, 1944 lead to introduction of Central Value Added Tax (CENVAT). Section 37(2) (xvia) empowers the Central Government to make rules to provide for the credit of duty paid or deemed to have been paid on the goods used in or in relation to manufacture of excisable goods. Section 37(2) (xviaa) empowers Central Government to make rules to provide for credit of service tax leviable under Chapter V of the Finance Act, 1994, paid or payable on taxable services used in, or in relation to, the manufacture of excisable goods. CENVAT was initially introduced as Modvat. With effect from , manufacturers were entitled to avail credit of duty paid on inputs used in or in relation to manufacture of the end products. The scheme ensured that duty paid on input stage is offset against the duty payable at the final product stage. The object was to prevent cascading effect of duty on the final products. Later, this scheme was extended to capital goods to be effective from In the year 1997, the entire rules were recasted but distinct rules were maintained for inputs and capital goods. Over the years, disputes between the Department and assessees on the interpretation of Modvat rules and procedures plagued the system. With the intention to put an end to this situation, Budget 2000 unified the rules for capital goods and inputs into one set of rules (Rules starting from Rule 57AA to 57AK) which were simple and transparent. Subsequently, CENVAT Credit Rules, 2001 were introduced vide Notification No. 31/2001 dated 21 st June 2001 which were similar to the old rules 57AA to 57AK of Central Excise Rules, These rules were again superseded by the CENVAT Credit Rules, 2002 which were notified vide notification No.5/2002 dated CENVAT Credit Rules, 2004 On yet another new set of rules, CENVAT Credit Rules, 2004 were released to replace the erstwhile CENVAT Credit Rules, 2002 and Service Tax Credit Rules, These rules provide for integration of manufacturing sector and service sector, for the purpose of setting off the duty incidence. The new CENVAT Credit Rules 2004 are a follow up of the Union Finance Minister Mr P. Chidambaram's assurances in the Parliament for taking steps to integrate the tax on goods and services. The new rules mark a beginning towards a fully integrated 'Goods and Service

2 4.2 Central Excise tax" recommended by the Kelkar committee in July In other words, duties of excise paid on inputs/capital goods and service tax paid on input services can be adjusted against a manufacturer s excise duty liability or a service provider s service tax liability. Excise duty and service tax shall continue to be separate levies. The CENVAT Credit Rules, 2004 extend to the whole of India. However, the provisions of these rules in relation to availment and utilization of credit of service tax shall not apply to the State of Jammu and Kashmir as service tax law is not applicable to Jammu & Kashmir. The rules cover all the three categories, namely manufacturers, service providers and manufacturers-cum-service providers. 4.3 Rule 2 - Definitions The CENVAT rules have to be interpreted progressively to ensure that the purpose of the scheme is preserved. Therefore, the Rules are to be read liberally and not literally Capital goods means:- (A) the following goods, namely :- (i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to the Excise Tariff Act; (ii) pollution control equipment; (iii) components, spares and accessories of the goods specified at (i) and (ii); (iv) moulds and dies, jigs and fixtures; (v) refractories and refractory materials; (vi) tubes and pipes and fittings thereof; (vii) storage tank, and (viii) motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711** and their chassis, but including dumpers and tippers. used - (1) in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or (1A) outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory; or (2) for providing output service.

3 CENVAT Credit 4.3 (B) motor vehicle designed for transportation of goods including their chassis registered in the name of the service provider, when used for- (i) providing an output service of renting of such motor vehicle; or (ii) transportation of inputs and capital goods used for providing an output service; or (iii) providing an output service of courier agency. (C) motor vehicle designed to carry passengers including their chassis, registered in the name of the provider of service, when used for providing output service of- (i) (ii) transportation of passengers; or renting of such motor vehicle; or (iii) imparting motor driving skills. (D) components, spares and accessories of motor vehicles which are capital goods for the assessee [Rule 2(a)]. **Tariff headings 8702, 8703, 8704, 8711 are as follows:- (i) Motor vehicles for the transport of 10 or more persons, including the driver. (ii) Motor cars and other motor vehicles principally designed for the transport of persons (other than those covered in (i) above), including station wagons and racing cars. (iii) Motor vehicles for transport of goods. (iv) Motorcycles (including mopeds) and cycles fitted with an auxiliary motor, with or without side cars. Items used in ceramic tiles industry - whether capital goods or inputs: The issue has been clarified vide Circular No. 920/10/2010 CX dated as under: S.N Issue o 1. Whether items, namely, alumina balls/ ceramic pebbles which are grinding media used in ball mills in the ceramic tile industry should be treated as capital goods or inputs for CENVAT credit purposes? 2. Whether items, namely, bolting cloth/ screens/ silicon cylinders which carry designs and which are fitted on the machines used for printing of design over the surface of the tiles, should be considered as capital goods or inputs for CENVAT credit purposes? Clarification It is clarified that alumina balls/ ceramic pebbles should be considered as component/ part of the machines and should be classified as capital goods for CENVAT credit purposes. It is clarified that these items are essential for operating of the machines. Therefore, being part/ component of the machines, they would be considered as capital goods for the CENVAT credit purposes.

4 4.4 Central Excise Exempted Goods: "Exempted goods" means goods which are exempt from the whole of the duty of excise leviable thereon and includes goods which are chargeable to "Nil" rate of duty and goods in respect of which the benefit of an exemption under Notification No. 1/2011- CE, dated or under entries at serial numbers 67 and 128* of Notification No. 12/2012-CE dated is availed [Rule 2(d)]. *Note: Entries at serial numbers 67 and 128 cover the following goods:- S. No. Particulars 67 Coal, briquettes, ovoids and similar solid fuels manufactured from coal 128 All goods mentioned in Chapter 31 (fertilizers), other than those which are clearly not to be used as fertilisers Exempted Services: Exempted service means a- (1) taxable service which is exempt from the whole of the service tax leviable thereon; or (2) service, on which no service tax is leviable under section 66B of the Finance Act; or (3) taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken; but shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994 [Rule 2(e)] Final Products: Rule 2(h) defines final products as excisable goods manufactured or produced from input, or using input service. Excisable goods are defined in section 2(d) of the Act to mean goods which are specified in the Tariff as being subject to a duty of excise. Therefore, this term is wide enough to cover all products, whether final or intermediate, which are manufactured by the assessee by a manufacturing process. This may also include the goods which are exempted by way of notification First Stage Dealer: Rule 2(ij) means a dealer who purchases the goods directly from- (i) the manufacturer under the cover of an invoice issued in terms of the provision of Central Excise Rules, 2002 or from the depot of the said manufacturer, or from premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer, under cover of an invoice; or (ii) an importer or from the depot of an importer or from the premises of the consignment agent of the importer, under cover of an invoice Inputs: Rule 2(k) provides that input means- (i) all goods used in the factory by the manufacturer of the final product; or (ii) any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or (iii) all goods used for generation of electricity or steam for captive use; or (iv) all goods used for providing any output service;

5 CENVAT Credit 4.5 but excludes- (A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol; (B) any goods used for - (a) construction or execution of works contract of a building or a civil structure or a part thereof; or (b) laying of foundation or making of structures for support of capital goods, except for the provision of service portion in the execution of a works contract or construction service as listed under clause (b) of section 66E of the Act; (C) capital goods except when used as parts or components in the manufacture of a final product; (D) motor vehicles; (E) any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee; and (F) any goods which have no relationship whatsoever with the manufacture of a final product. Meaning of free warranty Free warranty means a warranty provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer. Interpretation of the expression no relationship whatsoever with the manufacture of a final product : Credit of all goods used in the factory is allowed except in so far as it is specifically denied. The expression no relationship whatsoever with the manufacture of a final product must be interpreted and applied strictly and not loosely. The expression does not include any goods used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not. Only credit of goods used in the factory but having absolutely no relationship with the manufacture of final product is not allowed. Goods such as furniture and stationary used in an office within the factory are goods used in the factory and are used in relation to the manufacturing business and hence the credit of same is allowed [Circular No.943/04/2011-CX dated ]. Classification of structural components of Boiler and admissibility of CENVAT credit on these structural components: As per rule 2(k) of the CENVAT Credit Rules, 2004, CENVAT credit is available in respect of structural components if used as parts of Boiler. However, CENVAT credit would not be available in respect of structural components used for laying of foundation or making of structures for support of capital goods/ Boiler. Whether a particular structural component is a part of the Boiler or a component to make structure for supporting the Boiler is a question of facts and needs to be examined on a case to case basis, depending on the nature and use of the said structural component as per the

6 4.6 Central Excise existing legal provisions and judicial pronouncements on the subject [Circular No. 966/09/2012 CX dated ] Input service: Rule 2(l) provides that:- I. Meaning: Input service means any service, - (i) used by a provider of output service for providing an output service; or (ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal, and II. Inclusions: Input service includes:- Services used in relation to modernisation, 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, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal; III. Exclusions: Input service excludes:- (A) Following services, if they are used for construction or execution of works contract of a building or a civil structure or a part thereof; or laying of foundation or making of structures for support of capital goods:- (i) Service portion in the execution of a works contract (ii) Construction service as listed under section 66E(b) of the Act. However, if works contract services are used for provision of construction services, or vice versa, they shall be eligible as input services. (B) Services provided by way of renting of a motor vehicle, in so far as they relate to a motor vehicle which is not a capital goods ANALYSIS: It implies that the credit of the service tax paid on hiring of the motor vehicles, which are eligible as capital goods, is available. (BA) Service of general insurance business, servicing, repair and maintenance, in so far as they relate to a motor vehicle which is not a capital goods, except when used by - (a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by such person; or (b) an insurance company in respect of a motor vehicle insured or reinsured by such person ANALYSIS: The credit of the service tax paid on insurance, servicing, repair, maintenance etc. of the motor vehicles which are eligible as capital goods, is available.

7 CENVAT Credit 4.7 Exceptions: Credit of the service tax paid on insurance, servicing, repair, maintenance etc. of the motor vehicle, even if not a capital good, is available to the following:- (a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by such person; or (b) an insurance company in respect of a motor vehicle insured or reinsured by such person. In other words, (a) A manufacturer of motor vehicle can avail credit of the service tax paid on the in-transit insurance and on the repair and maintenance of the motor vehicles manufactured by him. (b) A motor insurance company can avail credit of the service tax paid on the re-insurance and third party insurance and repair and maintenance of the motor vehicles insured /reinsured by them. (C) Services such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee. ANALYSIS: The aforesaid services are not eligible as input services only when they are used primarily for personal use or consumption of any employee. Further, the list is only illustrative and not exhaustive. The following have been clarified by the CBEC vide Circular No.943/04/2011-CX dated with regard to availability of credit on input services: (i) Repair or renovation of factory or office: Credit of input services used for repair or renovation of factory or office is allowed. Services used in relation to renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, are specifically provided for in the inclusive part of the definition of input services. (i) Sales Commission: The credit of services on account of sales commission is allowed. The definition of input services allows all credit on services used for clearance of final products upto the place of removal. Moreover activity of sale promotion is specifically allowed and on many occasions the remuneration for same is linked to actual sale. Reading the provisions harmoniously, it is clarified that credit is admissible on the services of sale of dutiable goods on commission basis. (iii) Trading: Trading is an exempted service. Hence the credit of any inputs or input services used exclusively in trading cannot be availed Input Service Distributor : Rule 2(m) defines input service distributor as an office of the 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

8 4.8 Central Excise distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be Job Work: Job work has been defined in Rule 2(n) as processing or working upon of raw material or semi-finished goods supplied to the 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 aforesaid process and the expression "job worker" shall be construed accordingly Large tax payer: Rule 2(na) defines large tax payer to have the meaning assigned to it in the Central Excise Rules, The concept relating to large tax payer has been dealt in Chapter 5 : General Procedures Under Central Excise of Section A of this Study Material Manufacturer or producer - (i) in relation to articles of jewellery or other articles of precious metals falling under heading 7113 or 7114 as the case may be of the First Schedule to the Excise Tariff Act, includes a person who is liable to pay duty of excise leviable on such goods under sub-rule (1) of rule 12AA of the Central Excise Rules, 2002; (ii) in relation to goods falling under Chapters 61, 62 or 63 of the First Schedule to the Excise Tariff Act, includes a person who is liable to pay duty of excise leviable on such goods under sub-rule (1A) of rule 4 of the Central Excise Rules, 2002 [Rule 2(naa)] Output service: Output service means any service provided by a provider of service located in the taxable territory but shall not include a service,- (1) specified in the negative list under section 66D of the Finance Act; or (2) where the whole of service tax is liable to be paid by the recipient of service [Rule 2(p)] Second stage dealer: Rule 2(s) defines "second stage dealer" as a dealer who purchases the goods from a first stage dealer. 4.4 Rule 3 CENVAT Credit Duties/tax eligible for CENVAT credit: Sub-rule (1) of Rule 3 allows a manufacturer or producer of final products or a provider of output service to take CENVAT credit of i. the duty of excise specified in the First Schedule to the Tariff Act, leviable under the Act; (basic excise duty) However, CENVAT credit of the basic excise duty shall not be allowed to be taken when paid on any goods:- (a) in respect of which the benefit of an exemption under Notification No.1/2011-CE dated is availed. (b) specified in serial numbers 67 and 128 in respect of which the benefit of an exemption under Notification No. 12/2012-C.E. dated is availed. ii. the duty of excise specified in the Second Schedule to the Tariff Act, leviable under the Act; (special excise duty)

9 CENVAT Credit 4.9 iii. iv. the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act,1978; the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957; v. the national calamity contingent duty leviable under section 136 of the Finance Act, 2001 as amended by section 169 of the Finance Act 2003; vi. the education cess on excisable goods leviable under the Finance (No.2) Act, 2004; via the secondary and higher education cess on excisable goods leviable under the Finance Act, 2007; vii. the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv), (v), (vi), and (vii); However, CENVAT credit shall not be allowed in excess of 85% of the additional duty of customs paid under section 3(1) of the Customs Tariff Act, on ships, boats and other floating structures for breaking up (falling under tariff item of the First Schedule to the Customs Tariff Act). viia. the additional duty leviable under section 3(5) of the Customs Tariff Act. It is levied to counter balance the sales tax, value added tax, local tax etc. leviable on a like article on its sale, purchase or transportation in India. However, a provider of output service shall not be eligible to take credit of such additional duty. viii. the additional duty of excise leviable under the Finance Act, 2003; ix.. the service tax leviable under section 66 of the Finance Act; ixa. the service tax leviable under section 66A of the Finance Act. ixb. the service tax leviable under section 66B of the Finance Act x. the education cess on taxable services leviable under the Finance (No.2) Act, 2004; and xa. the secondary and higher education cess on taxable services leviable under the Finance Act, 2007; and xi. the additional duty of excise leviable on pan masala and tobacco products under the Finance Act, 2005 paid on- (i) any input or capital goods received in the factory of manufacture of final product or by the provider of output service on or after the 10th day of September, 2004; and (ii) any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, CENVAT credit in other cases: CENVAT credit will be allowed in the following cases also: (i) CENVAT credit for a job-worker: CENVAT credit is allowed in respect of the said duties, tax or cess paid on any inputs or input service used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the

10 4.10 Central Excise Notification No. 214/86 and received by the manufacturer for use in, or in relation to, the manufacture of final products on or after (ii) CENVAT credit in case of debonding: The amount equal to excise duty paid on the capital goods at the time of debonding of a unit in terms of the para 8 of Notification No. 22/2003 CE dated (which exempts certain goods when brought into 100% EOU / STP complex) shall be allowed as CENVAT credit. It may be noted here that in this case the credit is allowed for an amount equal to excise duty and not for excise duty. (iii) CENVAT credit in case of Project Imports: It has been clarified that the manufacturer of the final products and the provider of output service shall be allowed CENVAT credit of additional duty leviable under section 3 of the Customs Tariff Act on goods falling under heading 9801 of the First Schedule to the Customs Tariff Act. Exempt goods becoming dutiable or excisable: An assessee manufacturing exempted goods or non-excisable goods cannot avail CENVAT credit of duty paid on inputs used in the manufacture of such final products. However, if such final product becomes dutiable or excisable at a later date CENVAT credit of inputs in stock as on that date be availed by virtue of rule 3(2). In effect sub-rule (2) provides that an assessee entering into the tax net will be able to avail CENVAT credit of excise duty paid on inputs lying in stock inputs contained in work-in-progress inputs contained in finished goods On the other hand any assessee who opts out of CENVAT scheme should also reverse the credit contained in the raw material, finished goods and work in progress. For availing the transitional credit, the inputs must satisfy all the conditions as mentioned in definition of inputs. This provision is mainly invoked when the units availing the benefit of Notification No. 8/2003 becomes liable to excise duty when their aggregate value of clearances for home consumption crosses `150 lakh. Concepts relating to SSI units are discussed in Chapter 13. Exempt services becoming taxable: Sub-rule (3) lays down that in respect of services which are exempt from service tax, if any duty has been paid on inputs (received on and after the 10th day of September, 2004) lying in stock and used for providing such service, CENVAT Credit in respect of such duty will be allowed to the provider of output service on the date on which such service ceases to be an exempted service. Utilization of CENVAT credit: As per Rule 3(4), CENVAT credit can be utilised for: (1) payment of duty of excise levied on any final products. (2) payment of duty on inputs removed as such or after being partially processed or capital goods removed as such. (3) payment of duty when duty paid goods are returned to factory and are subsequently removed after being remade, refined or reconditioned. (4) for payment of service tax on any output service.

11 CENVAT Credit 4.11 CENVAT credit available on the last day of the month/quarter only to be utilized: While paying excise duty or service tax, the CENVAT credit shall be utilised only to the extent such credit is available on the last day of the month or quarter for payment of duty or tax relating to that month or the quarter [First proviso to rule 3(4)]. Further, CENVAT credit shall not be utilised for payment of any duty of excise on goods in respect of which the benefit of an exemption under Notification No. 1/2011-CE dated is availed [Second proviso to rule 3(4)]. It may be noted that CENVAT credit cannot be used for payment of service tax in respect of services where the person liable to pay tax is the service recipient. The following points need to be kept in mind while utilizing the CENVAT credit: (a) the CENVAT credit of the duty, or service tax, paid on the inputs, or input services, used in the manufacture of final products cleared after availing of the exemption under the following Notifications (i) No. 32/99-CE, dated 8 th July, 1999 (ii) No. 33/99-CE dated 8 th July, 1999 (iii) No. 39/2001-CE, dated 31 st July, 2001 (iv) No. 56/2002-CE, dated 14 th November, 2002 (v) No. 57/2002- CE, dated 14 th November, 2002 (vi) No. 56/2003-CE, dated 25 th June, 2003 and (vii) No. 71/2003-CE, dated 9 th September, 2003 shall, respectively, be utilized only for payment of duty on final products, in respect of which exemption under the said respective notifications is availed of. (b) No credit of the additional duty leviable under of section 3(5) of the Customs Tariff Act shall be utilised for payment of service tax on any output service. (c) CENVAT credit of only National Calamity Contingent duty (NCCD) shall be utilised for payment of the said NCCD payable on mobile phones. (d) CENVAT credit of any duty specified in sub-rule (1) of rule 3 cannot be utilized for payment of the Clean Energy Cess. (e) CENVAT credit of only additional duty of excise leviable on pan masala and tobacco products under the Finance Act, 2005 shall be utilised for payment of said additional duty of excise on final products. Inputs/capital goods removed as such: Rule 3(5) states that if the inputs or capital goods on which CENVAT credit has been taken are removed as such from the factory or premises of the provider of output service, the manufacturer of the final products or provider of output service has to pay an amount equal to the credit availed in respect of such inputs or capital goods. Such removal shall be made under the cover of an invoice referred to in Rule 9. The buyer will be able to take credit of such amount by virtue of rule 3(6).

12 4.12 Central Excise Inputs/capital goods removed for providing output service: The payment referred to in rule 3(5) above is not be required to be made where any inputs or capital goods are removed outside the premises of the provider of output service for providing the output service [First proviso to sub-rule (5)]. Inputs removed for providing free warranty for final products: Such payment shall not be required to be made where any inputs are removed outside the factory for providing free warranty for final products [Second proviso to sub-rule (5)]. Capital goods removed after being used: As per sub-rule (5A), if the capital goods, on which CENVAT credit has been taken, are removed after being used, whether as capital goods or as scrap or waste, the manufacturer or provider of output services shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking the CENVAT credit, namely:- S.No. Type of capital goods Percentage points calculated by straight line method 1. Computers and computer peripherals For each quarter in Percentage Year 1 10 % Year 2 8 % Year 3 5 % Year 4 & 5 1 % 2. Other capital goods 2.5% for each quarter However, if the amount so calculated is less than the amount equal to the duty leviable on transaction value, the amount to be paid shall be equal to the duty leviable on transaction value. In other words, if the capital goods are removed after being used, whether as capital goods or as scrap or waste, the manufacturer/provider of output services shall pay an amount equal to:- (I) CENVAT Credit taken on the said capital goods reduced by the percentage point calculated by straight line method (mentioned above) for each quarter of a year or part thereof from the date of taking the CEVAT Credit. or (II) Duty leviable on transaction value. whichever is higher. Further, sub-rule (6) provides that such amount will be eligible as CENVAT credit as if it was a duty paid by the person who removed such goods. Reversal of CENVAT credit if inputs/capital goods written off before use: Sub-rule (5B) provides that if the value of any (i) input, or

13 CENVAT Credit 4.13 (ii) capital goods before being put to use, on which CENVAT credit has been taken is written off fully or partially or where any provision to write off fully or partially has been made in the books of account, then the manufacturer or service provider is required to pay an amount equivalent to the CENVAT credit taken in respect of the said inputs or capital goods. However, if these are subsequently used in the manufacture of final products or the provision of output services, the manufacturer or output service provider can take credit of the amount paid earlier. A point to note here is that credit will not be reversed in situations where the value of inputs are partially reduced in the financial records but the same are capable of being used in the manufacture. CENVAT credit taken on inputs used in WIP/finished goods written off in the books of accounts: Circular No. 907/27/2009-CX dated has clarified about the treatment of the CENVAT credit taken on the inputs, which have gone into manufacture of work in progress (WIP), semi finished goods and finished goods, and have also been written off fully in the books of accounts. (i) In case, finished goods are written off in the books of accounts and:- S.No. In case, the excise duty on the finished goods Treatment 1. has not been remitted the manufacturer would be liable to pay excise duty. Thus, he need not reverse the CENVAT credit taken on inputs. 2. has been remitted under rule 21 of the Central Excise Rules, 2002 the manufacturer would be required to reverse the credit on the inputs used. (ii) In case, work in progress (WIP) is written off in the books of accounts and:- S.No. Stage of completion of the WIP goods 1. It can be considered as manufactured goods 2. It cannot be considered as manufactured goods Treatment same treatment as applicable to finished goods in point (i) mentioned above the said goods should be considered as inputs and the treatment for reversal of credit applicable to inputs would be applicable. Recovery of amount payable under sub-rules (5), (5A) and (5B): If the manufacturer of goods or the provider of output service fails to pay the amount payable on: (i) removal of inputs/capital goods as such [Sub-rule (5)]

14 4.14 Central Excise (ii) removal of capital goods after use [Sub-rule (5A)] (iii) writing off the value of the inputs/capital goods, [Sub-rule (5B)] the same would be recovered in the manner provided under rule 14. Rule 14 provides for recovery of CENVAT credit wrongly taken. Failure to pay an amount payable under rule 3(5A) Failure to pay an amount payable under rule 3(5) shall lead to Failure to pay an amount payable under rule 3(5B) Recovery in the manner as provided in rule 14 CENVAT credit on inputs to be reversed if duty remitted on final product: Sub-rule (5C) provides that where on any goods manufactured or produced by an assessee, the payment of duty is ordered to be remitted under rule 21 of the Central Excise Rules, 2002, the CENVAT credit taken on the inputs used in the manufacture or production of said goods shall be reversed. It needs to be noted that the reversal is only in respect of inputs and not required for input services. CENVAT credit in case of inputs/capital goods procured from 100% EOU/EHTP/STP: As per sub-rule (7) the amount of CENVAT credit in respect of inputs and capital goods cleared on or after the from an export-oriented undertaking (EOU) or by a unit in Electronic Hardware Technology Park (EHTP) or in a software technology park (STP), as the case may be, on which such undertaking or unit has paid A. excise duty leviable under section 3 of the Excise Act read with serial number 2 of the Notification No. 23/2003 CE, dated ; and B. the education cess and the secondary and higher education cess on the excise duty referred to in (A), shall be the aggregate of (a) that portion of excise duty referred to in (A), as is equivalent to - the additional duty leviable under section 3(1) of the Customs Tariff Act (Countervailing duty), which is equal to the duty of excise under section 3(1)(a) of the Excise Act;

15 CENVAT Credit 4.15 the additional duty leviable under section 3(5) of the Customs Tariff Act (special countervailing 4%); and (b) the education cess and the secondary and higher education cess referred to in (B). Rule 3(7) has to be applied only for the duties levied under section 3 of the Central Excise Act. The availment of credit in respect of any other duties charged by the EOU/EHTP/STP unit would be governed by Rule 3(1). Manner of utilisation of CENVAT credit (1) Clause (b) of sub-rule 7 further lays down the manner of utilisation of CENVAT Credit. It provides that CENVAT credit in respect of - (a) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textiles and Textile Articles) Act, 1978; (b) the national calamity contingent duty leviable under the Finance Act, 2001; (c) the education cess on excisable goods leviable under the Finance (No.2) Act, 2004; (d) the secondary and higher education cess on excisable goods leviable under the Finance Act, 2007; (e) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under items (i), (ii) and (iii) above; (f) the additional duty of excise leviable under the Finance Act, 2003; (g) the education cess on taxable services leviable under the Finance (No.2) Act, 2004; (h) the secondary and higher education cess on taxable services leviable under the Finance Act, 2007; and (i) the additional duty of excise leviable under the Finance Act, 2005, shall be utilized only towards payment of duty of excise or as the case may be, of service tax leviable under the said Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 or the national calamity contingent duty, or the education cess on excisable goods, or the secondary and higher education cess on excisable goods, or the additional duty of excise leviable under the Finance Act, 2003, or the education cess on taxable services or the secondary and higher education cess on taxable services or the additional duty of excise leviable under the Finance Act, 2005, respectively, on any final products manufactured by the manufacturer or for payment of such duty on inputs themselves, if such inputs are removed as such or after being partially processed or on any output service. However, credit of the education cess on excisable goods and education cess on taxable services can be utilised, either for payment of the education cess on excisable goods or for the payment of the education cess on taxable services. Also, the credit of the secondary and higher education cess on excisable goods and the secondary and higher education cess on taxable services can be utilized, either for payment of the secondary and higher education cess on excisable goods or for the payment of the secondary and higher education cess on taxable services.

16 4.16 Central Excise It has been clarified that the credit of the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 paid on or after the 1st day of April, 2000, may be utilised towards payment of duty of excise leviable under the First Schedule or the Second Schedule to the Excise Tariff Act. Thus, Basic excise duty, Special excise duty and the Additional excise duty (GSI) are inter-changeable i.e. credit of duty paid under one head can be utilised for payment of duty under other head. (2) The CENVAT credit, in respect of additional duty leviable under section 3 of the Customs Tariff Act, paid on marble slabs or tiles falling under tariff items and respectively of the First Schedule to the Tariff Act shall be allowed to the extent of Rs.30 per square metre. It has been explained that where the provisions of any other rule or notification provide for grant of whole or part exemption on condition of non-availability of credit of duty paid on any input or capital goods, or of service tax paid on input service, the provisions of such other rule or notification shall prevail over the provisions of these rules. Though there is no reference to waste, refuse or by-product, the C.B.E.C. Circular No.B/4/7/2000-TRU, dated has clarified that cenvat credit shall be admissible on the part of the input contained in waste, refuse or by-product. Further, the guidelines issued by the Board on 1 st September 2001 reiterate the same. 4.5 Rule 4 Conditions for availing the CENVAT credit Availment of credit on inputs: Rule 4 specifies the conditions for allowing CENVAT credit. Sub-rule 1 allows instant credit on inputs after receipt into the factory of the manufacturer or in the premises of the provider of output service. Two points to be noted here are that the manufacturer/output service provider can take the credit immediately as soon as the inputs are received in the factory/premises: (i) without waiting till the inputs are actually utilized in the manufacture and (ii) even if the payment for the inputs to the supplier is pending Availment of credit in case of jewellery manufactured on job-work basis: The first proviso to rule 4(1) lays down that where articles of jewellery or other articles of precious metals falling under heading 7113 or 7114 as the case may be of the Central Excise Tariff are manufactured on job work basis, the CENVAT credit of duty paid on inputs may be taken immediately on receipt of such inputs in the registered premises of the principal manufacturer subject to the condition that such inputs are used in the manufacture of articles of jewellery by the job worker. Availment of credit on inputs by the output service provider: CENVAT credit in respect of inputs may be taken by the provider of output service when the inputs are delivered to such provider, subject to maintenance of documentary evidence of delivery and location of the inputs [Second proviso to rule 4(1)]. Credit in case of trade discount: Sometimes a manufacturer may avail full credit of the amount of duty paid by supplier as reflected in the invoice. However, subsequently the supplier allows some trade discount or reduces the price, without reducing the duty paid by

17 CENVAT Credit 4.17 him. In such a case, the entire amount of duty paid by the manufacturer, as shown in the invoice would be available as credit for the reason that rule 3 of CENVAT Credit Rules, 2004 allows credit of duty paid by the inputs manufacturer and not duty payable by the said manufacturer. It may however be confirmed that the supplier, who has paid duty, has not filed/claimed the refund on account of reduction in price. However, if the duty paid is also reduced, along with the reduction in price, the reduced excise duty would only be available as credit [Circular No. 877/15/2008-CX dated ] Availment of credit on capital goods: The provisions in respect of availment of credit on capital goods are discussed below: 50% credit on capital goods in the year of receipt: Sub-rule 2(a) restricts the quantum of credit in respect of capital goods received in a factory or in the premises of the provider of output service or outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory at any point of time in a given financial year as under: a. Upto 50% in the same financial year; b. Balance in one or more subsequent financial years provided the capital goods is still in the possession and use of the manufacturer or the output service provider. 100% credit on capital goods in one installment in the year of receipt in case of SSI: An assessee eligible to avail of the exemption under a notification based on the value of clearances in a financial year is allowed to take the CENVAT credit in respect of capital goods for the whole amount of the duty paid on such capital goods in the same financial year [Third proviso to sub-rule (2)(a)]. Above relaxation is available to a unit who is eligible to claim SSI exemption regardless of whether he actually claims it or opts to pay duty. An eligible unit is one whose aggregate value of clearances did not exceed ` 400 lakh in the preceding financial year. Capital goods cleared as such in the year of acquisition: If the capital goods are cleared as such in the same financial year, CENVAT credit in respect of such capital goods shall be allowed for the whole amount of the duty paid on such capital goods in the same financial year. Credit of the additional duty leviable under section 3(5): The CENVAT credit of the additional duty leviable under section 3(5) of the Customs Tariff Act in respect of capital goods shall be allowed immediately on receipt of the capital goods in the factory of a manufacturer. Availment of credit on capital goods by output service provider: CENVAT credit in respect of capital goods may be taken by the provider of output service when the capital goods are delivered to such provider, subject to maintenance of documentary evidence of delivery and location of the capital goods [Fourth proviso to rule 4(2)(a)] Credit in case of components, spares accessories etc.: In respect of certain capital goods like components, spares and accessories, refractories and refractory materials, moulds and

18 4.18 Central Excise dies and goods falling under heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the Central Excise Tariff, the condition regarding possession of the capital goods in the second year is not applicable since these are consumable items, provided they are not sold. Credit in case of capital goods acquired on lease, hire purchase: Sub-rule (3) allows CENVAT credit for capital goods acquired on lease, hire-purchase or through loan from a financing company. Credit vis a vis depreciation on capital goods: Sub-rule (4) provides that no CENVAT credit shall be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which the manufacturer or provider of output service claims as depreciation under section 32 of the Income-tax Act, In other words the manufacturer or provider of output service cannot enjoy the benefit of both depreciation allowance as well as CENVAT Credit Availment of credit on input services: Sub-rule (7) provides that the CENVAT credit in respect of input service shall be allowed, on or after the day on which the invoice, bill or, as the case may be, challan referred to in rule 9 is received. Where service tax is paid on reverse charge mechanism: In case of an input service where the service tax is paid on reverse charge by the recipient of the service, the CENVAT credit in respect of such input service shall be allowed on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to in rule 9. Where the payment of value of input service and service tax payable thereon is not made within 3 months of the date of invoice/bill/challan: In case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in rule 9, is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT credit availed on such input service and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules. In case any payment towards an input service is refunded or a credit note is received by the manufacturer/service provider: If any payment or part thereof, made towards an input service is refunded or a credit note is received by the manufacturer or the service provider who has taken credit on such input service, he shall pay an amount equal to the CENVAT credit availed in respect of the amount so refunded or credited. Points which merit consideration 1. The amount mentioned in this sub-rule, unless specified otherwise, shall be paid by the manufacturer of goods or the provider of output service by debiting the CENVAT credit or otherwise on or before the 5th day of the following month except for the month of March, when such payment shall be made on or before the 31st day of the month of March.

19 CENVAT Credit If the manufacturer of goods or the provider of output service fails to pay the amount payable under this sub-rule, it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT credit wrongly taken. 3. In case of a manufacturer who avails the exemption under a notification based on the value of clearances in a financial year and a service provider who is an individual or proprietary firm or partnership firm, the expressions, following month and month of March occurring in sub-rule (7) shall be read respectively as following quarter and quarter ending with the month of March. 4.6 Job Work provisions [Rule 4(5) and 4(6)] The goods (being inputs or capital goods) may be sent to the job worker for further processing, testing, repair, reconditioning or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose. Rule 4(5) lays down that in order to avail CENVAT credit on such goods a time limit of 180 days has been fixed before which the goods must be ordinarily returned to the factory. In case the goods are not returned within 180 days the credit on such goods has to be reversed. However, credit can be retaken once the goods come back. Removal of jigs, moulds, dies, fixtures and dies to vendors/job worker permitted without reversal of CENVAT credit: Sub-rule (5)(b) extends the CENVAT credit in respect of jigs, fixtures, moulds and dies sent by manufacturer of final products to:- (a) another manufacturer for the production of goods, or (b) a job worker for the production of goods on his behalf according to his specifications. Direct dispatch of final products from job-worker s factory: Sub-rule (6) allows direct dispatch or clearance of final products from job worker s premises subject to the approval of Deputy Commissioner of Central Excise or Assistant Commissioner of Central Excise, as the case may be, in each such case of removal. This approval can be granted on an annual basis to each job worker. For instance, when the job worker is in Bangalore, principal manufacturer is in Delhi and customer in Chennai, it may be practical to get authorization to remove the finished goods directly from Bangalore to Chennai. There are basically three variants of the above procedure (a) On Inputs on which credit availed and removal of semi-finished goods liable to duty. (b) Direct dispatch of inputs to job worker directly without receipt in factory. (c) Movement of semi processed goods from job worker to job worker. Removal of inputs to job worker for test, repairs: The provisions relating to removal of inputs to job worker for test, repairs, or carrying out any other operation for the purposes of manufacture of intermediate products/final product are contained in rule 4(5). The procedures are as under: