RECENT AMENDMENTS IN CENVAT CREDIT RULES. 15 th May, 2011 A. R. KRISHNAN CHARTERED ACCOUNTANT

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1 RECENT AMENDMENTS IN CENVAT CREDIT RULES 15 th May, 2011 A. R. KRISHNAN CHARTERED ACCOUNTANT J. B. NAGAR CPE STUDY CIRCLE OF WIRC OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

2 RECENT AMENDMENTS IN CENVAT CREDIT RULES A. R. Krishnan Chartered Accountant S. No. Contents Page No. 1. Introduction 1 Changes Effective From Reversal of Cenvat credit availed on partial write-off of the value of 1 inputs or capital goods 3. Services provided to a SEZ developer / unit shall not be subjected to Rule 6 of the Credit Rules i.e. would not be considered as exempted 1 services for the service provider. Changes Effective From Definition of input services amended to restrict credit on certain items 4.1 Credit on services used for setting up of office premises or factory sought to be denied 4.2 Six specified services used for certain construction, excluded from the ambit of input services 4.3 Definition of input services made more restrictive by deleting the phrase activities relating to business wide ramifications would substantially restrict the allowability of Cenvat credit on input service. 4.4 Services of insurance, hire and repair of cars sought to be excluded from the ambit of input services except for certain specified services 4.5 Services used primarily for personal use or consumption of any employees are sought to be excluded. 5. Definition of inputs amended for the purpose of availing Cenvat credit on inputs Availment of Cenvat credit on input services on receipt of invoices instead of on payment basis subject to conditions and exceptions Position prior to Availment of credit on input services w.e.f to be on receipt of invoices instead of on payment to supplier but credit 8 reversible if invoice not paid within 3 months 6.4 Credit on input service invoice issued before 1/4/2011 would continue to be available only on cash basis Credit on reverse charge payments would be available only on cash basis Reversal of Cenvat credit on refund of payment or receipt of credit note 9

3 7. Procedure for availment of Cenvat credit on common inputs / input 9 services amended 7.1 Position prior to Amendments to the above position Banks, Financial Institutions and Non-Banking Financial 12 Companies (NBFCs) providing banking and other financial services; and Life Insurance companies providing life insurance cover / ULIP services compulsorily to reverse / pay 50% / 20% of Cenvat credit availed by them. 7.7 Summation Method of computing the Value of taxable services in case of air travel agent, forex money changers, lottery organizers and works contractors opting to pay a presumptive rate of tax prescribed Partially exempted services to be considered as exempted services Trading to be considered as exempted services Credit of additional tax on supplementary invoice not allowed in case where additional tax became recoverable from the supplier for want of bona fides Retrospective Amendment w.e.f Service tax paid on imported services by the recipient of service allowed as cenvat credit retrospectively w.e.f Miscellaneous matters 13. Existing contracts Conclusion Katta Meeta 24 Copy of recent Circular No. 943/04/2011-CX dated

4 1. Introduction RECENT AMENDMENTS IN CENVAT CREDIT RULES A. R. Krishnan Chartered Accountant 1.1 Significant changes have been made to the Cenvat Credit Rules, 2004 ( Credit Rules ). This note primarily focuses on the changes significantly affecting service providers. Most of the changes are effective from but some are effective from CHANGES EFFECTIVE FROM Reversal of Cenvat credit availed on partial write-off of the value of inputs or capital goods 2.1 Presently, rule 3(5B) of the Credit Rules, requires a manufacturer or a service provider to reverse Cenvat credit on (i) inputs and (ii) capital goods before being put to use that are fully written-off by them in their books of accounts. The above rule has now been amended requiring the service provider to reverse the Cenvat credit availed on the said inputs or capital goods even when a part of the value of the said input or capital good has been written off in the books of accounts or a provision has been made for the same. 3. Services provided to a SEZ developer / unit shall not be subjected to Rule 6 of the Credit Rules i.e. would not be considered as exempted services for the service provider. 3.1 Services provided to a SEZ developer /Unit for their authorised operations, without payment of service tax thereon (i.e. claiming exemption) shall not be considered as exempted services for the purpose of rule 6. Thus, no Cenvat credit on inputs, input services and capital 1

5 goods used for providing such services to the SEZ developer / unit would have to be reversed or paid. CHANGES EFFECTIVE FROM Definition of input services amended to restrict credit on certain items Credit on services used for setting up of office premises or factory sought to be denied 4.1 Prior to , services used in relation to setting up, modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises were specifically considered to be input services. The definition of input services has been amended to delete the word setting up. The intention is to deny credit on any services availed for setting up of factory or premises. However, cenvat credit on repairs, renovation or modernisation of a factory or premises would continue to be available. Thus, Cenvat credit on architect services, construction services, works contract services etc. for setting up of factory or premises would not be available. Six specified services used for certain construction, excluded from the ambit of input services 4.2 A specific exclusion has been engrafted to provide that 6 specified services used for - (a) construction 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, shall not be considered as input service. The specified services are : (i) Architect services 2

6 (ii) Port services (both major & minor ports) (iii) Airport Services (iv) Commercial and industrial Construction Services (v) Construction of residential complex services; and (vi) Works contract services. However, when the above six services are used for the provision of one or more of the above specified services, credit shall be allowed. To illustrate, if a bank or advertising agency avails services of an architect to construct their offices, they would not be entitled to the credit of tax paid on architect services. However, if the construction service provider avails the services of an architect to construct, he would be entitled to credit of tax paid on the architect s fees. Definition of input services made more restrictive by deleting the phrase activities relating to business wide ramifications would substantially restrict the allowability of Cenvat credit on input service. 4.3 Prior to , activities relating to business such as, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit relating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal. were specifically included and considered as an input service. It was held in CCE v. Ultratech Cement Ltd. (2010) 20 STR 577 (Bom.) that the activities mentioned after the phrase such as were only illustrative and not exhaustive of the activities relating to business. Thus, there are several judgments which have taken a position that the Cenvat credit on input services relating to the assessee s business would be allowed even if they are not enumerated specifically in the definition. In order to restrict the allowability of Cenvat credit on 3

7 input services, the definition has been amended to delete the words activities relating to business such as to restrict the cenvat credit only to those services explicitly specified in the definition. Further, in addition to those already mentioned above (accounting, auditing, etc.), two services viz., business exhibition services and legal services have been included within the ambit of input services. The above amendment would have far reaching implications where Cenvat credit on services would be more on the denial mode rather than on the allowance mode. Services of insurance, hire and repair of cars sought to be excluded from the ambit of input services except for certain specified services 4.4 The following services in so far as they relate to a motor vehicle have been excluded from the ambit of input services (i) General insurance services; (ii) rent-a-cab services; (iii) authorised service station services; and (iv) supply of tangible goods for use services However, the above would be considered as input service only when used for the provision of certain taxable services where the credit on motor vehicle is available as capital goods. These services are : (a) Courier agency services (b) Tour operator services (c) Rent-a-cab services (d) Cargo handling services (e) Goods transport agency services (f) Outdoor caterer services (g) Pandal or shamiana contractor services 4

8 Thus, a BPO (Business Process Outsourcing) company using car-hire to transport its employees working late night (even under a statutory requirement) may not get credit of the tax paid on such services a significant hit for these companies. Services used primarily for personal use or consumption of any employees are sought to be excluded. 4.5 Services used primarily for personal use or consumption of any employees are sought to be excluded. The definition gives an illustrative [not exhaustive] list of such services as under : (i) outdoor catering; (ii) beauty treatment; (iii) health services; (iv) cosmetic and plastic surgery; (v) membership of a club; (vi) health and fitness centre; (vii) life insurance; (viii) health insurance; and (ix) travel benefits extended to employees on vacation such as Leave or Home Travel Concession This change may trigger a lot of issues and litigation whether a particular service is primarily for personal use or consumption of any employees or for the purpose of business say, a canteen service provided by an establishment in a remote area which is also a statutory requirement. 4.6 The TRU Circular No. D.O.F. No.334/3/2011-TRU dated explaining the amendments clarified as to the above exclusion that Most of these services constitute a part of the cost-to-company package of the 5

9 employee and are provided either free of charge or on concessional basis to company employees. 4.7 The above amendments in the definition of input service are aimed at restricting the credit considerably and would substantially reduce the availability of cenvat credit on input services. Such a step, it is submitted, is a retrograde step in the direction of implementing GST, where a seamless credit is proposed to be provided. Maybe with these changes cenvat debit would be right word instead of cenvat credit! 5. Definition of inputs amended for the purpose of availing Cenvat credit on inputs. 5.1 The definition of inputs has been substituted by a new definition. The term input has been defined to mean the following goods: (i) all goods used in the factory by the manufacturer of the final product; (ii) any goods including accessories cleared along with the final product, the value of which is included in the value of the final product. (iii) goods used for providing free warranty for final products. Free warranty has been defined to mean 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. (iv) all goods used for generation of electricity or steam for captive use (v) all goods used for providing any output service. 5.2 Further, a negative list of goods has also been prescribed. Such goods are specifically excluded from the definition of inputs. They are: 6

10 (i) light diesel oil, high-speed diesel oil or motor spirit commonly known as petrol; (ii) any goods used for (a) construction of a building or civil structure or part thereof; or (b) laying foundation or making structures for support of capital goods However, such goods shall be considered as inputs when they are used for providing the following specified taxable services: (a) port services (major and minor ports); (b) airport services; (c) commercial or industrial construction services (d) construction of residential complex services (e) Works contract services. (iii) Capital goods except when used as parts or components in the manufacture of a final product; (iv) motor vehicles (v) goods used primarily for personal use or consumption of any employee such as food items, goods used within a guesthouse, residential colony, club or a recreation facility and clinical establishment. (vi) Any goods which have no relationship whatsoever with the manufacture of final product. 6. Availment of Cenvat credit on input services on receipt of invoices instead of on payment basis subject to conditions and exceptions Position prior to Prior to , credit of service tax paid on input services was admissible only when the value of input service alongwith the service tax 7

11 payable thereon as indicated in the invoice has been paid to the input service provider. Availment of credit on input services w.e.f to be on receipt of invoices instead of on payment to supplier but credit reversible if invoice not paid within 3 months. 6.2 Consequent to the formulation of Point of Taxation Rules, 2011 and changes in the Service Tax Rules, 1994 which require a service provider to pay service tax on earlier of date of issue of invoice (completion of service if invoice is not issued within prescribed time) or date of receipt of payment, the Government has also amended the Credit Rules to provide that the credit on the input services would, w.e.f , be available on or after the date on which the invoice- issued by the input service provider is received subject to certain conditions and exceptions explained below. Thus, post , the assessee need not wait until he makes payment of value and service tax thereon to the supplier for availing credit. 6.3 However, if payment is not made within three months of the date of invoice the credit on such input service shall be paid / reversed. Such payment / reversal would have to be made by the 5 th of the month/quarter following the month / quarter in which the said 3 months expire except in case of March where the payment / reversal would have to be made by 31 st March failing which the assessee would be liable for interest and penalty. Further, the assessee would be entitled to take the credit reversed / paid earlier, once he makes the payment of the value and service tax thereon to the input service supplier. 8

12 Credit on input service invoice issued before 1/4/2011 would continue to be available only on cash basis 6.4 In respect of invoices issued before , the present dispensation would apply, viz., that the credit would be available only after the payment of value and service tax thereon to the input service provider. Credit on reverse charge payments would be available only on cash basis. 6.5 Where service tax is paid on reverse charge by the recipient of services, credit would continue to be available only after the payment of value and service tax thereon. Reversal of Cenvat credit on refund of payment or receipt of credit note 6.6 If the payment made towards an input service is refunded or credit note is received for the whole or part of the amount [whether with service tax or not], then the service provider would be required to pay / reverse a proportionate amount of the Cenvat credit availed on the said input service. 7. Procedure for availment of Cenvat credit on common inputs / input services amended Position prior to Prior to , Rule 6 of the Credit Rules inter alia provided as follows. (i) Rule 6(1) provided that CENVAT credit shall not be allowed on inputs or input services which are used for providing exempted services except in the circumstances mentioned in sub-rule (2). 9

13 (ii) Rule 6(2) provided that where inputs or input services are used to provide taxable as well as exempted services, then the service provider shall maintain separate accounts of inputs and input services used for taxable services and exempt services and take credit only on input or input services used for taxable output services. (iii) Rule 6(3) provided that where the service provider opts not to maintain separate accounts as per rule 6(2), he may avail the entire credit on inputs / input services but opt for either of the following : (a) (b) pay 6% of the value of exempted services and utilise the entire credit available [ 6% option ]; or pay an amount equal to the cenvat credit attributable to exempt services computed in a prescribed manner and then utilise the entire credit available. Rule 6(3A) of the Credit Rules prescribes the formula for determining the cenvat credit attributable to exempt services which is as under : Total Cenvat Credit taken x Value of exempted services Value of taxable + exempted services (iv) This option is hereinafter is referred to as proportionate option. Rule 6(5) provided that notwithstanding anything contained in sub-rules (1), (2) and (3) of Rule 6 in case of input services falling within certain specified categories, 16 in number 1, the credit of 1 The specified services are: 1. Consulting engineer; 2. Architect; 3. Interior decorator; 4. Management and Business consultant; 5. Real estate agent; 6. Security agency; 7. Scientific and technical consultancy services; 8. Banking and financial services; 9. Insurance auxiliary services relating to life insurance; 10. Erection, commissioning and installation; 11. Management, Maintenance and repair services; 12. Technical testing and analysis; 13. Technical inspection and certification; 14. Non-corporate foreign exchange brokers; 15. Commercial or Industrial Construction services; 16. Intellectual property services. 10

14 service tax paid on such services would be fully allowed irrespective of the fact that no separate records are maintained unless such services are used exclusively for providing exempted services. Amendments to the above position 7.2 The significant amendments to the above position are as under: (i) The amount payable under the 6% option [see para 7.1(iii)(a) above] has been reduced from 6% to 5% w.e.f (hereinafter this option is referred to as 5% option ). (ii) Rule 6(3) has been amended to provide the service provider with a third option (in addition to 5% option and proportionate option ), namely: (a) to maintain separate accounts (receipt, consumption and inventory) only for common inputs (not input services) used for providing taxable and exempted services and take credit only to the extent of inputs used for providing taxable services; and (b) as regards common input services pay the amount of Cenvat credit attributable to exempt services under the proportionate option. (iii) Rule 6(5) deleted: Rule 6(5) of the Credit Rules that allowed 100% credit on certain specified categories, irrespective of the fact that no separate accounts are maintained unless such services are used exclusively providing exempted services, has been deleted.[truly a great blow to the industry!] 11

15 (iv) The facility of quarterly payment of cenvat credit attributable to exempted services has been allowed to sole proprietary concerns and partnership firms who normally pay service tax quarterly. Banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) providing banking and other financial services; and Life Insurance companies providing life insurance cover / ULIP services compulsorily to reverse / pay 50% / 20% of Cenvat credit availed by them. 7.3 The Credit Rules have been amended to exclude the following services providers from the operation of rule 6(1), 6(2) & 6(3) as described in para 7.1 and 7.2 above. Instead, they have to compulsorily reverse / pay a specified percentage [50% / 20%] of the Cenvat credit taken by them. Thus, the options and restrictions under those rules viz., maintenance of separate accounts or 5% option or proportionate option etc. would not be available to these service providers. The service providers alongwith the specified percentage of credit required to be reversed / paid by them is given in the table below: Sl. No. Category of service providers Percentage of credit availed required to be reversed / paid 1. Banking companies and financial institutions including 50% NBFCs providing Banking and other financial services 2. Life insurance Companies providing life insurance cover 20% 3. Life insurance companies providing services of 20% management of investment under Unit Linked Insurance Plan (ULIP) scheme 12

16 7.4 It is to be noted that in case of the above service providers there is no option but to pay the Cenvat credit either by way of reversal or cash the percentages stated above, (a) whether they provide exempted services or not; and (b) even if they provide services other than the above specified services i.e. banking and other financial services or life insurance services / investment management services. 7.5 The Government in its Circular has explained the reasoning behind the amendment as follows: 1.6 A substantial part of the income of a bank or a life insurance company is from investments or by way of interest in which a number of inputs and input services are used. There have been difficulties in ascertaining the amount of credit flowing into earning these amounts. Thus a banking company or a financial institution, including NBFC, providing banking and financial services are being obligated to pay an amount equal to 50% of the credit availed. In case of services relating to life insurance or management of ULIPs such amount will be equal to 20% of credit availed. Other options of payment of amount under Rule 6 shall not be available for these taxpayers. 7.6 Thus, the above specified service providers would have to pay the specified percentage of the credit availed by them on the inputs and input services and utilise the balance credit without the restrictions under rule 6(1) or 6(2) or 6(3). The restriction would not operate on capital goods. The liability has to be discharged by the 5th of the following month except for the month of March where it is payable by 31 st March by way of reversal of Cenvat credit or cash payment. 13

17 Summation 7.7 Thus, after the above amendments, the position maybe summarised as under : (i) (ii) CENVAT credit shall be fully allowed on all inputs / input services used exclusively for taxable output services; CENVAT credit shall not be allowed on inputs or input services which are used exclusively for providing exempted services. (iii) Where inputs or input services are used to provide taxable as well as exempted services, then the service provider shall have the following options: (a) (b) maintain separate accounts of inputs and input services used for taxable services and exempt services and take credit only of input or input services used for taxable output services. where the service provider opts not to maintain separate accounts as aforesaid he may avail the entire credit on inputs / input services but opt for either of the following : (A) (B) pay 5% of the value of exempted services and utilise the entire credit available [ 5% option ]; or pay an amount equal to the cenvat credit attributable to exempt services under the proportionate option i.e. using the formula: Total Cenvat Credit taken x Value of exempted services Value of taxable + exempted services (C) Maintain separate accounts only in respect of inputs (not input services) used for taxable services and exempted services and take credit only on inputs used for taxable output services; and as regards common input services, pay an amount equal to the cenvat 14

18 (iv) (v) credit attributable to exempted services under the proportionate option. Banks (including Financial Institutions and NBFCs) and Life Insurance Companies, have to reverse / pay 50% and 20% respectively of the total cenvat credit taken on inputs and input services but the balance Cenvat credit shall be fully allowed without restriction. CENVAT Credit in respect of capital goods shall be fully allowed (even to Banks and Life Insurance Companies) unless they are used exclusively for providing exempted services. 8. Method of computing the Value of taxable services in case of air travel agent, forex money changers, lottery organizers and works contractors opting to pay a presumptive rate of tax prescribed 8.1 In the case of - (i) Air travel agents paying service tax u/r 6(7) of the Service tax Rules, 1994 (i.e. 0.6 / 1.2% of basic fare instead 10% on commission); (ii) forex money changers including authorised dealers engaged in providing money changing services and paying service tax u/r 6(7B) of the Service Tax Rules, 1994 [i.e. specified percentage 2 (as per the applicable slab) of gross amount exchanged]; (iii) a distributor or selling agent engaged in the business of promotion, marketing or organising of lottery paying service tax u/r 6(7C) of the Service tax Rules, 1994 (i.e. Rs. 6,000/- / Rs. 9,000/- for every Rs. 10 lakhs) 2 W.e.f

19 (iv) Works Contractor paying service tax under the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 [4% of gross value], the value of taxable service shall be worked out as follows: Amount of tax paid Applicable full tax rate x 100 For e.g. if a works contractor has paid service tax of Rs. 8,000/- i.e. 4% of Rs. 2,00,000/- under the Composition Scheme instead of paying 10% on value of taxable services, the value of taxable services would be computed as follows: 8000 x 100 = Rs. 80, The above method of determination of value of taxable services would be relevant for reversing the Cenvat credit attributable to the exempted services under the proportionate option where the credit is reversed using the formula: Total Cenvat Credit taken x Value of exempted services Value of taxable services + value of exempted services Thus, in case of service providers opting to pay presumptive tax as aforesaid, the value of taxable service in the denominator of the above formula, would be computed in a manner explained in para 8.1 above. 9. Partially exempted services to be considered as exempted services 9.1 Under the service tax law, a service provider of certain specified categories 3 (hereinafter referred to as partially exempted services ) are 3 Mandap keeper services; Tour operator services; Rent-a-cab scheme operator services; Convention services; Business auxiliary services; Banking and other Financial services 16

20 entitled to claim an abatement of tax inter alia on the condition that Cenvat credit on any inputs, or input services, shall not be availed. For e.g. a tour operator gets a 75% abatement on package tour subject inter alia to the condition that no Cenvat shall be availed on inputs/inputs services (and capital goods) used for providing such taxable services under notification no. 1/2006-ST dated Thus, he is required to pay service tax only on 25% of the value, if he does not take any Cenvat credit. 9.2 Prior to , such services were not considered as exempted services. Exempted services were defined to mean (a) services which are exempt from the whole of the service tax leviable thereon ; and (b) services on which no service tax is leviable u/s. 66. Since the services were only partially exempted and not wholly exempted these were not considered to be exempted services. 9.3 The following changes have been made to the Credit Rules: (i) The Government has amended the definition of exempted services 4 to include such partially exempted services also as exempted services. Partially exempted services are taxable services whose part of the value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken. Thus, such partially exempted services would also be considered as exempted service. provided in relation to a Chit; Erection, commissioning or installation services; Commercial or industrial construction services; Outdoor catering services; Pandal and Shamiana services; Construction of Complex services; Transport of goods by rail; 4 Rule 2(e) 17

21 (ii) For the purpose of 5% option, the value of partially exempted services, shall be the exempted portion of the value. For e.g. if value of partially exempted service is Rs. 100/- and the exemption on that service is 75%, the value of exempted services for the 5% option shall be Rs. 75/- (i.e. 75% of Rs. 100/-). However, no similar provision has been made for computing value of exempted service in case of proportionate option. Thus, in case of proportionate option, it appears the full value of the partially exempted services shall be considered as value of exempted services instead of only the exempted portion of the value. (iii) Lastly, the rules have been amended categorically to provide that the reversal of Cenvat credit attributable to such partially exempted services under rule 6(3), [i.e. under any of the 3 options mentioned in para 7.7(iii)(b) above] shall be deemed to be compliance of the condition of non-availment of Cenvat credit on input and input services as required by the relevant abatement notification. Thus, the abatement claim would not be jeopardised if the assessee follows the procedure for reversal of Cenvat credit attributable to such partially exempted services as per rule 6(3). 9.4 Thus, the treatment of partially exempted services would be as under: (i) No Cenvat credit would be allowed on inputs and inputs services exclusively used for providing such partially exempted services. (ii) As regards common inputs / input services used for providing fully taxable services and partially exempted services, an assessee would have the following options : (a) Maintain separate accounts of common inputs / input services used for providing fully taxable services and 18

22 partially exempted services and take credit only on such inputs / input services that is used for providing fully taxable services; or (b) if no separate accounts as aforesaid have been maintained - (A) if the service provider exercises the 5% option, he would be required to pay 5% also of the abated value of the partially exempted services. Thus, if value of partially exempted service is Rs. 100/- and the exemption on that service is 75%, the amount required to be paid shall be Rs i.e. 5% of Rs. 75/- (i.e. 75% of Rs. 100/-) [excluding Cess]. (B) if the service provider exercises the proportionate option, the CENVAT credit attributable to the exempted services would be reversed / paid after calculating by applying the following formula : Full Value of abated Services Common Input Credit X Value of Taxable services + Full value of Taken abated services (C) Thus, in the proportionate option it appears the intention is not to give any credit on the abated services. Maintain separate accounts for inputs used in providing fully taxable services and partially exempted services and take only such credit on inputs used for fully taxable services; and exercise the proportionate option qua common input services 19

23 used for providing fully taxable services and partially exempted services as explained above. (iii) The payment of an amount under (A), (B) or (C) above, shall be deemed to be compliance of the condition of non-availment of Cenvat credit on input and input services as required by the relevant abatement notification. 10. Trading to be considered as exempted services 10.1 An Explanation has been inserted to the definition of exempted services which reads as under: Explanation For the removal of doubts, it is hereby clarified that exempted services includes trading Further, the rules have been amended to provide that the value in case of trading, shall be the greater of the following: (i) the sale price minus the cost of goods sold determined as per generally accepted accounting principles, but without including the expenses incurred towards purchase of goods. (ii) 10% of the cost of goods sold. Thus, even in case where the sale price minus the cost of goods sold is a loss, the value of traded goods would be taken as 10% of the cost of goods sold Thus, trading in goods has been clarified to be an exempted service for the removal of doubts. However, it is submitted that the Explanation would not have a retrospective effect since it alters the law existing prior to the insertion of the above explanation. The law was stated in Orion Appliances Ltd. vs. CST (2010) 19 STR 205 (Tri-Ahmd.), where it was held that trading activity is nothing but purchase and sales of goods and 20

24 cannot be called a service and therefore it cannot be considered as exempted service. Hence the Explanation cannot have a retrospective effect since it alters the law The consequences of treating trading in goods as an exempted service are as under: (i) service tax paid on services exclusively used in trading activity cannot be availed as input service credit; (ii) as regards services which are used in common for trading activity as well as taxable services, the assessee may maintain separate accounts of inputs and input services used for taxable services and trading separately and claim cenvat credit only to the extent they relate to taxable services. (iii) where the assessee does not maintain separate accounts as explained in (ii) above, the trading activity would be considered as exempted services for the purposes of the 5% option and the proportionate option and accordingly: (a) the assessee would be required to pay 5% of the value of traded goods [i.e. 5% of gross profit] if he exercises the 5% option ; or (b) he would be required to reverse the credit attributable to trading activity under the proportionate option by using the formula: Common Input Credit Taken X Value of trading [i.e. Gross profit] Value of Value of Taxable + trading[gross services profit] 21

25 (iv) The value of traded goods for the purposes of the 5% option or inclusion in the value of exempted services under the proportionate option, would be the greater of the following: (a) the sale price minus the cost of goods sold determined as per generally accepted accounting principles, but without including the expenses incurred towards purchase of goods. (b) 10% of the cost of goods sold. Thus, even in case where the sale price minus the cost of goods sold is a loss, the value of traded goods would be taken as 10% of the cost of goods sold The following points need to be noted in this regard: (i) It appears that not only trading in goods are considered as exempt services but it may also include trading in shares, government bonds, bullion, derivatives and other securities since they are considered as goods under Sale of Goods Act, (ii) Cenvat credit on capital goods used exclusively in trading activities would not be allowable. However, if the capital goods are used for trading activities as well as for providing taxable services, it appears that the entire cenvat credit on Capital Goods can be claimed since rule 6(4) dealing with allowance / disallowance of cenvat credit on capital goods, disallows cenvat credit only if they are exclusively used for providing exempted services. 22

26 11. Credit of additional tax on supplementary invoice not allowed in case where additional tax became recoverable from the supplier for want of bona fides 11.1 Presently, as per Rule 9(1)(b) of the Credit Rules, credit can be availed by an assessee of any additional excise duties 5 charged by a manufacturer of inputs on the basis of a supplementary invoice issued by a manufacturer of inputs for the additional excise duties except where the additional duty became recoverable from the manufacturer on account of any non-levy or short-levy by reasons of fraud, collusion, willful mis-statement, etc. However, presently, there are no such specific provisions for claiming credit of additional service tax paid on input services. Though there were no specific provisions, in the author s view, credit was still allowable. Further, there were no restrictions that the credit of additional service tax on input services would not be allowable if the additional service tax became recoverable from the input service supplier by reasons of fraud, collusion, willful mis-statement, etc. as in case of excise duty on inputs. However, w.e.f , the Credit Rules have been amended to provide that credit can be availed by an assessee of any additional service tax charged by an input service provider on the basis of a supplementary invoice issued by the supplier. However, where the additional tax became recoverable on account of any non-levy or short-levy by reasons of fraud, collusion, willful mis-statement, etc credit shall not be allowed. 5 Additional excise duty means duty levied and paid by a manufacturer of inputs subsequent to the original clearance of inputs. Such additional duty maybe paid if there is a short payment initially or even if there was no payment at all - German Remedies vs. CCE (2004) 177 ELT 539 (Tri.-Del.). 23

27 RETROSPECIVE AMENDMENT W.E.F Service tax paid on imported services by the recipient of service allowed as cenvat credit retrospectively w.e.f Rule 3 is being amended retrospectively w.e.f to provide that the credit of service tax paid under section 66A of the Finance Act, 1994 i.e. service tax paid on imported services by a recipient of service shall be allowed. This change will come into effect retrospectively from , on enactment of the Finance Bill, This amendment is clarificatory and is in line with the Board Circular No. F. No. 354 / 148 /2009 TRU dated 16 th July, 2009 where the Board clarified that cenvat credit of tax paid on imported services would be allowed if they are in the nature of input services. The amendment has been made to set at rest the controversy triggered by the department so that pending proceedings are decided in line with the above amendment. MISCELLANEOUS MATTERS 13. Existing contracts 13.1 The changes made by this budget especially to the definition of input services are restrictive denying credit on several input services used. This would affect existing contracts where the price quoted by the service provider may have taken into account the availability of cenvat credit on several inputs / input services which post the above changes would not be available. This would adversely affect these service providers and would lead to an increase in their costs. CONCLUSION - KATTA MEETA The changes in Cenvat Credit by the recent Budget are Katta meeta, few changes meeta but most katta Aagey Kya Hoga - KYA PATHA. All roads would lead to only one PATHA address Court! 24

28 CIRCULAR NO 943/04/2011-CX, Dated : April 29, 2011 Sub: Clarification on issues relating to CENVAT Credit Rules 2004 Regarding. The CENVAT Credit Rules 2004 were amended along with the Budget 2011 announcements vide Notification 3/2011-CE (NT) dt A few changes were further effected vide Notification 13/2011-CE (NT) dt On a few issues trade has requested for clarity. Accordingly the following clarifications are presented issue wise in a tabular format. S.No. Issue Clarification 1 Can credit of capital goods be availed of when used in manufacture of dutiable goods on which benefit under Notification 1/2011- CE is availed or in provision of a service whose part of value is exempted on the condition that no credit of inputs and input services is taken? 2 Is the credit of only specified goods and services listed in the definition of inputs and input services not allowed such as goods used in a club, outdoor catering etc, or is the list only illustrative? 3 How is the no relationship whatsoever with the manufacture of a final product to be determined? As per Rule 6(4) no credit can be availed on capital goods used exclusively in manufacture of exempted goods or in providing exempted service. Goods in respect of which the benefit of an exemption under notification No. 1/2011-CE, dated the 1st March, 2011 is availed are exempted goods [Rule 2(d)]. Taxable services 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, are exempted services [Rule 2(e)]. Hence credit of capital goods used exclusively in manufacture of such goods or in providing such service is not allowed. The list is only illustrative. The principle is that cenvat credit is not allowed when any goods and services are used primarily for personal use or consumption of employees. 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 25

29 4 Is the credit of input services used for repair or renovation of factory or office available? 5 Is the credit of Business Auxiliary Service (BAS) on account of sales commission now disallowed after the deletion of expression activities related to business? 6 Can the credit of input or input services used exclusively in trading, be availed? 7 What shall be the treatment of credit of input and input services used in trading before ? 8 While calculating the value of trading what principle to follow- FIFO, LIFO or one to one correlation? 9 Are the taxes and year end discounts to be included in the sale price and cost of goods sold while calculating the value of trading? 10 Does the expression in or in relation used in Rule 6 override the definition of input under Rule 2(k) for determining the eligibility of Cenvat 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. 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. 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. Trading is an exempted service. Hence the credit of any inputs or input services used exclusively in trading cannot be availed. Trading is an exempted service. Hence credit of any inputs or input services used exclusively in trading cannot be availed. Credit of common inputs and input services could be availed subject to restriction of utilization of credit up to 20% of the total duty liability as provided for in extant Rules. The method normally followed by the concern for its accounting purpose as per generally accepted accounting principles should be used. Generally accepted accounting principles need to be followed in this regard. All taxes for which set off or credit is available or are refundable/ refunded may not be included. Discounts are to be included. The definition of input is given in Rule 2(k) and Rule 6 only intends to segregate the credits of inputs used towards dutiable goods and exempted goods. While applying Rule 6, 26

30 credit? 11 Sub-rules 3B and 3C of rule 6 apply to whole entity or independently in respect of each registration? 12 Is the credit available on services received before on which credit is not allowed now? e.g. rent-a-cab service the expression in or in relation must be read harmoniously with the definition of inputs. The sub-rules 6(3B) and 6(3C) impose obligation on the entities providing banking and financial services (in case of a bank and a financial institution including a nonbanking financial company) or life insurance services or management of investment under ULIP service. The obligation is applicable independently in respect of each registration. When such a concern is exclusively rendering any other service from a registered premises, the said rules do not apply. In addition to BoFS and life insurance services if any other service is rendered from the same registered premises, the said rules will apply and due reversals need to be done. The credit on such service shall be available if its provision had been completed before Trade and Industry as well as field formations may be suitably informed. 3. Receipt of this Circular may kindly be acknowledged. 4. Hindi version will follow. F.No.354/73/2011 -TRU (Shobhit Jain) OSD, TRU 27