TAXMANN S CENVAT LAW & PRACTICE CHAPTER-HEADS. Contents I-7 Table of cases I-49

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1 TAXMANN S CENVAT LAW & PRACTICE CHAPTER-HEADS PAGE Contents I-7 Table of cases I-49 CHAPTER 1 : CENVAT CREDIT SCHEME 1 CHAPTER 2 : RULE 2 : DEFINITIONS 27 CHAPTER 3 : CAPITAL GOODS 52 CHAPTER 4 : INPUTS 77 CHAPTER 5 : INPUT SERVICE/OUTPUT SERVICE 177 CHAPTER 6 : RULE 3 : CENVAT CREDIT 248 CHAPTER 7 : RULE 4 : CONDITIONS FOR ALLOWING CENVAT CREDIT 350 CHAPTER 8 : RULES 5 AND 5A : REFUND OF CENVAT CREDIT 431 CHAPTER 9 : RULE 6 : OBLIGATION OF A MANUFACTURER OR PRODUCER OF FINAL PRODUCTS AND A PRO- VIDER OF TAXABLE SERVICE 483 CHAPTER 10 : RULES 7 & 7A : MANNER OF DISTRIBUTION OF CREDIT BY INPUT SERVICE DISTRIBUTOR AND DISTRIBUTION OF CREDIT ON INPUTS BY OFFICE OR ANY OTHER PREMISES OF OUTPUT SERVICE PROVIDER 582 CHAPTER 11 : RULE 8 : STORAGE OF INPUT OUTSIDE THE FAC- TORY OF THE MANUFACTURER 586 CHAPTER 12 : RULE 9 : DOCUMENTS, ACCOUNTS AND RETURNS 592 CHAPTER 13 : INVOICES OF MANUFACTURERS, DEALERS AND SERVICE PROVIDERS 672 CHAPTER 14 : RULE 9A : INFORMATION RELATING TO PRINCIPAL INPUTS 734 CHAPTER 15 : RULE 10 & 10A : TRANSFER OF CENVAT CREDIT 745 CHAPTER 16 : RULE 11 : TRANSITIONAL PROVISION 752 CHAPTER 17 : RULE 12 : SPECIAL PROVISIONS FOR NORTH-EAST REGION, KUTCH DISTRICT OF GUJARAT, STATE OF JAMMU AND KASHMIR AND STATE OF SIKKIM 758 CHAPTER 18 : RULE 12A : PROCEDURE AND FACILITIES FOR LARGE TAXPAYER 829 CHAPTER 19 : RULE 12AA/12AAA : POWER TO IMPOSE RESTRICTIONS IN CERTAIN TYPES OF CASES 858

2 CHAPTER 20 : RULE 13 : DEEMED CREDIT 868 CHAPTER 21 : RULE 14 : RECOVERY OF CENVAT CREDIT WRONGLY TAKEN OR ERRONEOUSLY REFUNDED 870 CHAPTER 22 : RULES 15 AND 15A : CONFISCATION AND PENALTY/GENERAL PENALTY 913 CHAPTER 23 : RULE 16 : SUPPLEMENTARY PROVISION 935 CHAPTER 24 : JOB WORK 937 APPENDIX Indirect Tax Ombudsman Guidelines, Validation Provisions Pertaining to Cenvat Credit Rules 999 LIST OF CIRCULARS/TRADE NOTICES 1021 LIST OF BASE NOTIFICATIONS 1025 CONTENTS PAGE Chapter-heads I-5 Table of cases I-49 1 CENVAT CREDIT SCHEME 1.1 The backdrop to the 2004 Rules Rules v Rules - A broad comparison General outline of CENVAT Credit Scheme, 2004 for manufacturers General outline of CENVAT Credit Scheme, 2004 for service providers Judicial principles Opting for or opting out of Cenvat Scheme Departmental Manual Departmental circulars Circulars whether retrospective or prospective Circulars are binding on revenue Services provided in Jammu & Kashmir are excluded Indirect tax Ombudsman Guidelines 12 Annex 1.1 Text of Chapter Five of CBEC s Excise Manual of Supplementary Instructions,

3 2 RULE 2 : DEFINITIONS Text of rule Classification of the definitions Customs Tariff Act Excise Act Excise Tariff Act Finance Act A Manufacturer or Producer Notification Residual clause Exempted goods Final products Excisable goods Element of manufacture must be present a The statutory definition b Judicial rulings c Certain relevant decisions Waste and scrap 39 Annex 2.1 Rule 12AA of Central Excise Rules, Annex 2.2 Notification No. 1/2011-CE, dated Annex 2.3 Rule 4(1A) of Central Excise Rules 51 3 CAPITAL GOODS 3.1 Definition as applicable to manufacturer Goods must fall under specified Chapters/Headings a Material handling equipments b Ventral diesel hydro loco c Goods used in mines d Universal measuring machine e Tapping ladle car f Ingot white metal g Battery charger h Electric bulbs/rubber strips i Computer system j Washing machines k Elevator Spare parts/components/accessories are included 55

4 3.1-2a Meaning of component b Meaning of spare part c Meaning of accessory d Goods can be processed before use e Foundation structures and roofing materials f Rope asbestos/graphite asbestos/hoists g Asbestos gasket sheet h Resin bonded insulation material i Surface miner j Iron/steel ingots k MS items l Flooring components m Channels/angles/joints etc n Cables used for electric feeder line o Goods used in Ceramic Tiles Industry p Welding Electrodes q Asbestos Joining Sheets Other specified items a Motor vehicles The user requirement a Capital goods used in mines b Definition of factory c Whether factory can be located at different places d Manufacture/process must be present e Use must be in manufacturer s factory f User need not be exclusive g Use need not be continuous h Use can be on exempt intermediate goods i Bought-out capital goods exported as such j Capital goods not made functional k Consumables are not excluded l Pipes and fittings m Capital Goods used in R&D section A Goods used outside the factory Relevance of purpose of use Exclusion of equipment/appliances used in an office Requirements must be satisfied at the time of receipt Importance of tariff classification Ownership is not a relevant factor Old/Used capital goods are not excluded 72

5 3.2 Definition as applicable to output service provider Motor vehicles Dumpers/Tippers Components, spares and accessories Telecommunication towers/equipments 74 Annex 3.1 Cenvat credit on capital goods used in manufacture of exempt intermediate goods 75 Annex 3.2 Items used in Ceramic Tiles Industry 76 4 INPUTS SECTION A - DEFINITION OF INPUT AS APPLICABLE TO BOTH MANUFACTURERS AND SERVICE PROVIDERS FROM The statutory definition Departmental clarifications The specifically covered items The excluded items 80 SECTION B - DEFINITION OF INPUT AS APPLICABLE TO MANUFACTURER TILL Input, definition of a The specific part b The inclusive part c The place of use Use in or in relation to manufacture Supreme Court rulings Larger Bench view in Union Carbide case Other judicial propositions Certain settled basic propositions The common understanding The three acid tests Functional test is relevant State of delivery at factory gate is relevant Onus on claimant Benefit cannot be curtailed through Trade Notices Department has no say on manufacturing methods Finished products can also be inputs Adjudicating authority cannot decide eligibility on the basis of his personal knowledge Considerations which are not relevant Physical presence of inputs not necessary 87

6 4.4-2 Input need not go into product mix Both direct and indirect participation are covered Repetitiveness of use or one-time use is not relevant Necessity for use is not relevant Frequency of use/rapidity of consumption are not relevant No distinction between consumables and non-consumables Full consumption of inputs is not a must Benefit is not confined to raw materials Direct conversion into final product is not a must Components must be judged by their indispensability Situations based on purpose of use or stage of use Inputs used out of technical necessity Inputs used in machines for various purposes a Welding electrodes and gases used for repair/ maintenance b Goods used for repair/maintenance c Lubricants/greases d Other inputs Inputs used to meet marketing requirements/necessities Inputs used for purification purposes Inputs used in ancillary/preparatory processes Inputs used in intermediate products Inputs used in post-manufacture stage Inputs used as cleaning/cleansing agents Inputs held to have directly participated in the process of manufacture Goods supplied free along with final product Bed sheets/blankets Other cases Inputs used as packing material All types of containers are covered Benefit cannot be restricted to ready-to-use materials No distinction between duty-paid and exempt items No distinction between primary and peripheral packing Manner of sale of goods is relevant Packing material damaged while packing Boomer Tattoo Holograms Jumbo bags Hanging cards 129

7 Packing materials used for local transportation of raw materials Biscuits Judicial rulings Inputs used as fuel Meaning of fuel Fuel not confined to oils only Furnace oil Oxygen/Hydrogen Naphtha Low Sulphur Heavy Stock (LSHS) Carbon Black Feed Stock (CBFS) Inputs used for generation of steam or electricity Scope of the expression within the factory of production a Whether 100% should be captively consumed b Supply to residential colony/township c Supply to canteen in factory premises Light Diesel Oil/High Speed Diesel Oil/Motor Spirit Supply of electricity to another unit of same assessee A When one unit purchases power from another unit Partial disallowance of credit Case where notional disallowance had to be made Treatment of water Furnace oil Electricity consumed in administrative office When excess electricity is wheeled outside the factory and sold by assessee Exchanging captively generated electricity with electricity from the grid Lubricants/Greases, etc Inputs used for testing/inspection/trial runs Inputs used for testing/inspection Inputs used for trial runs Input samples drawn for testing Inputs used in in-house pre-testing of parts/components Accessories Clearance must be along with final product Inclusion of value in assessable value a Meaning of accessories b Disposable syringes/needles 151

8 4.11-2c Tucks used for razors/blades d Free supply of blades e Windscreen wiper kit f Support angles/brackets g Tubes and flaps Inputs which are essential/compulsory fittings or attachments Paints Use of input need not necessarily be within the factory Supreme Court reverses its earlier ruling When input is stored within the precincts of the factory Explosives used in cement industry Battery Lead Acid used in mines Inputs captively produced and used Light Diesel Oil/High Speed Diesel Oil/Petrol Whether Cixon and SBPS are excluded Position in respect of HSD Oil for the period to Inputs contained in waste/refuse/by-product, or used in intermediate product Inputs used in capital goods which are used captively Items excluded a The Vandana Global case Design and development charges A Facility charges Inputs used for effluent treatment of plant Inputs used for research A Inputs sent for job work and then exported B Inputs used for repairs C Cement used as construction material D Inputs used in combination packs E Inputs subjected to testing/inspection and then exported F Raw materials used for trial run of plant G EPABX System H Liquified Petroleum Gas (LPG) used in factory canteen 165 SECTION C - DEFINITION OF INPUTS AS APPLICABLE TO OUTPUT SERVICE PROVIDER, TILL The statutory definition The eligible goods a Jetty used in port service User requirement 166

9 4.22 Supply of tangible goods service Telecom structures/equipments 167 Annex 4.1/4.2 Admissibility of Modvat credit on transformer oil 168 Annex 4.3 Admissibility of Modvat credit on thinners used in spray painting of automobiles/admissibility of credit on Thinners used as dilutents for paints for spray painting of Excisable products 169 Annex 4.4 Admissibility of Cenvat credit on inputs and capital goods used by the manufacturer outside the factory premises 170 Annex 4.5 Notification No. 67/95-C.E., dated Annex 4.6 Credit on Tangible goods supplied during the course of providing Taxable service under section 65(105)(zzzzj) 173 Annex 4.7 Availability of Cenvat credit on inputs used in the manufacture of capital goods 174 Annex 4.8 Clarification on issues relating to definition of Input as substituted with effect from INPUT SERVICE/OUTPUT SERVICE SECTION A - POSITION FROM Statutory definition The departmental clarification The two main parts of the definition Significance of the words means and includes Used is not synonymous with consumed Scope of the expression in relation to The specifically included services Services which are relevant Purpose-based exclusion of certain services Eligibility of various services as input services 184 SECTION B - POSITION FROM Scope of the term activities relating to business High Court Rulings Larger Bench Ruling Overall analysis by High Court Issues relating to scope and ambit of the definition Whether any service will be an input service if its value forms part of the cost of final product a The Press Note 195

10 5.5-1b Reliance on Accounting Standards c High Court Rulings Whether services covered under the inclusive part should also satisfy the user test Outward transportation of goods Place of removal Availment/utilisation of credit by consignors/consignees using goods transport agency s service a Utilisation of Credit b Availment of Credit Stage upto which credit can be availed Board s clarification Larger Bench decides in favour of assessee High Court affirms Larger Bench decision Other Judicial decisions and departmental clarifications relating to various taxable services Advertising Agency s service Airport Service Air Travel Agent s Service Authorised Service Station Service Business Auxiliary Service Cargo Handling Service Chartered Accountant s service Cleaning Activity Service Clearing & Forwarding Agent s Service Construction Service Consulting Engineer s Service Courier service Custom House Agent s Service Dry Cleaning Service Erection, Commissioning or Installation Service Event Management Service Goods Transport Agency s Service Insurance/landscaping services Management or Business Consultants Service Management, maintenance or repair service Manpower recruitment and supply agency s service Outdoor Caterer s Service Pandal or Shamiana Contractor s Service Photography service Rent-a-cab Scheme operator s service Renting of immovable property service 228

11 Security Service Technical Testing & Analysis Service Telephone Services (Landline/Mobile) Tour Operator s Service Output service Person liable for paying service tax Provider of taxable service 236 Annex 5.1 List of services liable to service tax (As on ) 238 Annex 5.2 Service tax credit on transportation of goods from factory to depot 242 Annex 5.3 Certain issues relating to Transport of goods by road service 243 Annex 5.4 Service tax credit on imported services 246 Annex 5.5 Clarification on issues relating to amended definition of input service from RULE 3 : CENVAT CREDIT Text of rule Arrangement of the Chapter 260 A. ALLOWANCE OF DUTY CREDIT TO THE MANUFACTURER 6.2 Basic requirements for allowing duty credit Manufacturer v. Producer Final products Inputs used in intermediate products by job worker Receipt need not be routed through the original supplier Goods must be duty paid Ownership is not a relevant consideration Burden of proof Relevance of balance sheet figures Prior registration is not necessary Types of duties eligible for credit Basic excise duty Special excise duty Other duties National Calamity contingent duty Education Cesses Countervailing duty Additional duty levied by Finance Acts Project imports Additional customs duty Additional customs duty paid in cash or through DFCE/

12 TPS certificates Credit allowable to 100% EOUs Transitional credit on inputs only Allowability of credit in certain situations Inputs destroyed prior to, during or after use Inputs damaged in transit a When assessee receives insurance money Inputs destroyed at intermediate stage Inputs lost in storage Material handling losses Returned goods a Text of rule 16 of Central Excise Rules, b Contents of the rule c Source of manufacture is no longer relevant d Self-manufactured goods are also covered e Removal of refinished goods f Payment can be made on monthly basis g Departmental instructions h Some decided cases When duty is paid by job worker Receipt of goods in packed condition Inputs/capital goods which are written off a Position prior to b Position from c Rule 3(5B) made applicable to service providers from Credit on CVD debited to DEPB Pass Book Input delivered to another factory of same manufacturer Materials used by job worker Attempt to use inputs proving infructuous Burning losses and invisible processing losses Inputs cleared as final product after minor processing Dismantling and erection charges Labour charges Line Rejections/Store Rejections Denial of credit based on uncorroborated evidence Stolen inputs When assessee has no plant/machinery/manpower in its factory Broken inputs Storage of inputs in sister unit 285

13 Where buyer of inputs had not borne the duty burden Fixed facility charges When there is only trading activity Inputs received in a different unit Inputs procured duty-free but later made duty-paid Inputs received in one unit and then transferred to another unit Whether doctrine of unjust enrichment applies Inputs getting damaged/defective during job work Finished goods obtained on stock transfer for sale When finished goods are dutiable When waste or scrap is removed Restricted credit Storage of non-duty paid goods outside the factory Availment of credit on molasses and its utilisation Availment and utilisation of GSI duty credit on inputs Storage of duty-paid goods inside factory premises A When remission of duty is obtained B Availment of credit by CNG manufacturers 293 B. ALLOWANCE OF SERVICE TAX CREDIT TO THE MANUFACTURER 6.13 Basic requirements for allowing service tax credit Receipt of input service Use of input service Input services used by job worker Eligible items for tax credit Tax must have been paid Depot sales Issues relating to input service tax credit on goods transport agency s service Restricted credit 294 C. ALLOWANCE OF DUTY CREDIT TO THE OUTPUT SERVICE PROVIDER 6.14 Basic requirements to be satisfied Meaning of output service provider Receipt of inputs/capital goods Use of inputs/capital goods Types of duties eligible for credit Duty on goods must have been paid Restricted credit Availment of credit on tippers 297 D. ALLOWANCE OF SERVICE TAX CREDIT TO THE OUTPUT SERVICE PROVIDER

14 6.15 Basic requirements to be satisfied Receipt of input service Use of input service Eligible items for tax credit Service tax must have been paid Prior registration is not a condition Transitional credit on input services 299 E. UTILISATION OF CENVAT CREDIT BY A MANUFACTURER OR OUTPUT SERVICE PROVIDER 6.17 The normal rule Some relevant rulings a When both duty paid and non-duty paid inputs are used b When inputs are common for different products c When final product is initially exempt but later becomes dutiable d When inputs are different for different varieties of same final product Principle of first come, first out cannot be applied for utilisation of inputs Credit erroneously utilised must be restored while demanding duty When assessee stops manufacturing activity Credit should not be allocated raw material-wise or product-wise Restriction on quantum of credit utilisable Meaning of credit is available When assessee avails exemption benefit Restriction applicable to units in N.E. Region/Kutch District/State of Jammu & Kashmir/Sikkim A Clean Energy Cess Restrictions on utilisation of credit Utilisation of credit on payment of service tax on goods transport agency s services A Clearance of capital goods as waste and scrap on or after F. OTHER ISSUES APPLICABLE BOTH TO MANUFACTURER AND OUTPUT SERVICE PROVIDER 6.21 Removal of inputs/capital goods as such Action by the manufacturer Action by output service provider Limited scope of the sub-rule a Removal must be physical and not deemed b Packing material kept separately in consignment 312

15 6.21-3c When burnt out capital goods were sold as scrap d Clearance of remnants of inputs e Lubricating oil getting drained and cleared as waste oil f Packing material getting damaged during packing g Service tax credit is not required to be reversed A Reversal of credit when inputs/capital goods/works-inprogress (WIP)/finished goods are written off Payment can be on monthly basis Credit is admissible on such payment Inputs/capital goods exported under bond When input can no longer be put to use When empty container is removed Department cannot demand payment of transaction value Removal of waste is not covered Used capital goods cannot be treated as capital goods removed as such Inter-unit transfer of inputs Inputs cleared as such at very high assessable value When intermediate product is cleared When there is transfer of ownership of entire factory When capital goods are removed to 100% EOUs When inputs removed were found to be not required for manufacture Capital goods destroyed by fire after long use Capital goods sold but not removed from premises Inter-unit removal of capital goods Capital goods removed for job work after use When bought-out items are supplied along with the final product Purchase of entire factory, in which a plant was situated Removal of capital goods after putting them to use Position prior to Position from to Position from onwards CENVAT credit on goods and services subject to conditional exemption 322 Annex 6.1 Availment of credit on CVD paid on imported car kits 323 Annex 6.2 Project imports - Relevant extracts from Chapter 98 of the First Schedule to the Customs Tariff Act 324 Annex 6.3 Clarification regarding return of duty paid goods for refining, remaking, etc. 327 Annex 6.4 Procedure for receipt of duty paid goods for repairs, reconditioning, etc., under rule 16 of Central Excise

16 Annex 6.5 Annex 6.6 Annex 6.7 Annex 6.8 Rules, Admissibility of credit on the input/capital goods which are written off 334 Storage of non-duty paid goods outside the factory premises - Waiver of merchant overtime charges 335 Availment of accumulated Modvat/Cenvat credit on molasses for payment of duty on sugar 336 Diversion of credit taken on inputs for exempted products under the North-East notifications for payment of central excise duty on other products 337 Annex 6.9 Storage of duty paid goods inside factory premises 338 Annex 6.10 Inadmissibility of Cenvat credit on countervailing duty 339 Annex 6.11 Clarification with regard to valuation of goods 340 Annex 6.12 Annex 6.13 Annex 6.14 Annex 6.15 Availing of Cenvat Credit of Additional Customs Duty (CVD) paid through Duty Free Credit Entitlement (DFCE)/Target Plus Scheme (TPS) Certificates 341 CNG manufacturers : Single registration and Cenvat credit availability 343 Credit of duty under rule 16 of Central Excise Rules on goods brought into the factory 345 Reversal of credit when value of work-in-progress or finished goods is written off 346 Annex 6.16 Leviability of duty on capital goods cleared after being put into use for over 10 years 347 Annex 6.17 Clarification regarding restricted service tax credit 348 Annex 6.18 Allowability on credit on duty paid on exempted goods RULE 4 : CONDITIONS FOR ALLOWING CENVAT CREDIT Text of rule Contents of the Rule 354 CONDITIONS APPLICABLE TO MANUFACTURER 7.2 Time-limit for availment of duty credit on inputs Meaning of immediately Deferred availment of credit a When supplier paid duty after clearance of goods b When duty on final product was later paid on demand c When claim is made at appellate stage d When process is held as manufacture e When duty is demanded during adjudication

17 proceedings f When duty liability itself was determined at appellate stage g When credit was taken two days earlier h When there was doubt about eligibility to credit Quantum of duty credit on inputs Notional/Proportionate credit is not contemplated When manufacturing premises is unlicensed Adjudicating authority cannot reassess duty Discrepancies in weight of inputs a Relevant factors laid down by Tribunal When assessee weighs the inputs on its receipt Transit losses a Transit loss of petroleum products Duty paid by supplier must be allowed credit in full Non-receipt of inputs Shortages in inputs a Shortages noticed during stock verification b Value written off in balance sheet c Shortages stated to be made good by supplier later Shortages detected by the department When receipt of inputs was not established When input loses its identity Process losses When consumption of inputs is believed to be excessive Inputs not established as fully used When department believes that costlier inputs have been used When there was no actual receipt of inputs When supplier reimbursed cost of shortages When supplier s duty liability is under dispute Shortages detected from account entries When supplier has paid duty under protest When supplier has paid excess duty Evaporation loss prior to use When supplier has misclassified the goods When inputs are received short When supplier later suo motu paid differential duty When supplier later allows discount When full credit was taken before receipt of full

18 consignment of inputs When purchaser issues debit notes on supplier When assessee fails to produce Sales Tax Form Breakage loss of aerated water bottles When supplier subsequently reduces the price Regularisation of differential/erroneous credits Differential credit due to departmental adjudication Restoration of credit pursuant to demand by department When erroneous utilisation of credit is regularised Restoration of credit when goods are damaged in transit Restoration of expunged credit when department holds that final product was dutiable Suo motu restoration of credit Restoration of excess debit due to excess duty paid on final product Reversal of credit due to difference between physical balance and recorded balance of inputs Demanding duty again when irregular credit had been reversed Department cannot order reversal of credit without assigning reasons Suo motu reversal of credit availed on the strength of unrelated document Omission to make account entries When supporting document had been seized by the department Ordering reversal of credit without detailed enquiry about nature of input When supplier had availed credit on the strength of original copy of invoice Questioning supplier s liability to pay duty When assessee requests for inspection of documents and retesting of samples When the supplying dealer is believed to have received goods from non-existent units When basis of allegation itself vanishes Correlation in quantity between inputs and final products Supply of inputs proved fictitious Reversal and re-availment of credit Reversal of duty credit on light diesel oil 385

19 Reversal of credit on packages/containers When supplier has fraudulently availed credit When supplier has defaulted in payment of duty on monthly basis Recredit of reversed credit Reversal of credit on damaged goods/inputs When assessee is directed to pay duty twice When assessee irregularly withdrew option to avail SSI exemption When capital goods are alleged to have been transferred Imported inputs sold as such in India Non-reversal of credit ordered under notification Disallowance of credit due to non-accountal of inputs Effect of progressive increase in wastage of inputs Availment of credit when process does not amount to manufacture Availment of credit after correcting the address of the consignee in the invoice Availment of duty credit on capital goods Quantum of credit a Relaxation to certain goods and to certain assessees b Foregoing credit in initial year c Crucial date for determining eligibility to credit d Relaxation to imported goods e When capital goods are cleared as waste and scrap on or after f When components, etc., are consumed in the first year itself g When final product becomes exempt in subsequent year h When excess credit taken in first year was rectified in that year itself i Exemption on possession of moulds j Capital goods sent for job work Installation of goods no longer relevant Capital goods acquired on lease/hire-purchase/loan agreement Meaning of lease Meaning of Hire-purchase 397

20 7.5-5a Hire-purchase v. Sale b Hire-purchase v. Lease c Hire-purchase v. Financial arrangement Meaning of Loan agreement Variations/unusual features in agreement Inter-unit movement of capital goods Recalculating duty payable after accepting supplier s calculation Transferring capital goods to finance company and taking it back on lease CENVAT credit or depreciation benefit - Not both Amendment to Income-tax Act Department should look into accepted income-tax return Whether depreciation can be claimed on the unavailed portion of credit in the first year Goods can be sent for job work Time-limit must be computed in days and not months The three conditions that must be cumulatively satisfied vis-a-vis inputs Jigs, fixtures, moulds and dies Furnace oil sent to job worker for generation and supply of steam When supplier of inputs is himself the job worker When inputs remained unprocessed in job worker s premises Power plant set up outside the factory for generation and supply of steam/electricity can be treated as job worker Imported inputs sent abroad for repairs Procedure for job work Direct movement of goods from job worker s premises Goods covered under project imports Date on which credit on input services is allowable Order for non-reversal of Cenvat credit 413 CONDITIONS APPLICABLE TO OUTPUT SERVICE PROVIDER 7.12 Conditions in a nutshell 414 Annex 7.1 Modvat credit on sulphuric acid used in manufacture of detergents 416 Annex 7.2 Cenvat credit involved on stock of Light Diesel Oil as on

21 Annex 7.3 Payment of duty on waste package/containers used for packing Modvatable inputs when cleared from the factory of the manufacturer availing Modvat/ Cenvat credit 419 Annex 7.4 Clearance of goods from premises of job worker 420 Annex 7.5 Notifications ordering non-reversal of credit in certain cases 424 Annex 7.6 Reversal of credit when supplier allows discount or reduces the price 426 Annex 7.7 Rule 3 of the Cenvat Credit Rules, Cenvat credit - Irregular availment of Cenvat credit on certain activities not amounting to manufacture 427 Annex 7.8 Tolerance limit of breakage of bottles due to handling during storage and clearance 428 Annex 7.9 Clarifications regarding availment of credit on input services RULES 5 AND 5A : REFUND OF CENVAT CREDIT Text of rules 5 & 5A 431, 432 REFUND OF CENVAT CREDIT 8.1 The contents of rule A Position prior to A-1 Position for the period to B Position from C Date of effect D Input must ab initio be eligible for credit E Refund cannot be claimed on notional basis F Refund is permissible only for export of goods and for no other reason whatsoever 436 FACILITIES EXTENDED TO EXPORTER OF GOODS 8.2 The two facilities extended Treatment of unutilized credit Refund of unutilized credit a Scope of the term for any reason Safeguards, conditions and limitations a Procedure for export b Periodicity of claim c Dispensing with furnishing of undertaking d Submission of application with enclosures e Circumstances warranting refund f Limit on refund of unutilised Input Service

22 Credit g Where to send the application h Time-limit for filing application i Who will allow the refund j Contents of application k Departmental clarifications Certain decided issues Export need not be direct by the manufacturer Exports under DEEC Scheme When credit gets accumulated due to forced payment out of PLA Exports under the DEPB Scheme Whether clearances to 100% EOUs can be treated as export Department has no jurisdiction to probe into reasons for non-utilisation of credit Where merchant exporter had claimed only customs drawback When assessee stops production and closes its factory Refund cannot be denied to SSI unit working under exemption Manufacture of an excisable item is not necessary Transitional credit is also eligible for refund Refund to 100% EOUs Accumulation of credit due to distortion in duty rates Where assessee is manufacturing only exempted goods Refund claim should not be rejected on technical grounds Clearances by DTA units to SEZ units are not export under rule Necessity for excise/service tax registration Exports under advance licence scheme Departmental clarifications/judicial rulings on refunds When cenvatted inputs are themselves exported under bond Interest on delayed refund Refund of unutilised credit on GSI duty Choice between refund and rebate/drawback 456 FACILITIES EXTENDED TO EXPORTER OF OUTPUT SERVICES 8.9 The two facilities extended Utilisation of accumulated credit Refund of unutilised credit Safeguards, conditions and limitations 458

23 8.9-3a Procedure for export b Periodicity of claim c Submission of application with enclosures d Circumstances warranting refund e Limit on refund of unutilised input service credit f Where to send the application g Time-limit for filing application h Who will allow the refund i Contents of application j Departmental clarifications 459 POSITION FROM TO A Refund of Cenvat credit A-1 Departmental clarification 460A REFUND FACILITY TO UNITS IN SPECIFIED AREAS 8.10 The background to Rule 5A 460A 8.11 Contents of Rule 5A 460B 8.12 Procedure for obtaining refund 460B VALIDATION PROVISIONS 8.13 Departmental clarification & validation provisions 460D Annex 8.1 Notification No. 5/2006-C.E. (N.T.), dated Annex 8.1A Amendment to Notification No. 5/2006-C.E. (N.T.), issued under rule 5 of the Cenvat Credit Rules, Annex 8.2 Cash refund of the accumulated Modvat credit 468 Annex 8.3 Cash refund of unutilised credit to exporters who had availed drawback on customs portion of duties 469 Annex 8.4 Utilisation of Cenvat credit in respect of inputs on which credit is availed but the inputs are exported as such under bond 471 Annex 8.5 Refund of unutilized Credit of Additional Duty of Excise (Goods of Special Importance) in terms of rule Annex 8.6 Simplified procedure for sanction of refund of unutilised credit/rebate claims in cases of export 475 Annex 8.7 Procedure for claiming refund of Cenvat credit by units in specified areas 477 Annex 8.8 Clarification regarding problems faced by exporters in availing refund of excess credit RULE 6 : OBLIGATION OF A MANUFACTURER OR PRODUCER OF FINAL PRODUCTS AND A PROVIDER OF TAXABLE SERVICE Text of rule 6 483

24 PROVISIONS RELEVANT FOR MANUFACTURER WHO IS NOT AN OUTPUT SERVICE PROVIDER 9.1 Scope of rule Effect of sub-rule (1) a Meaning of exempted goods b Tribunal s analysis c When by-product is dutiable d Captive generation of electricity e When manufacturer switches over to exemption benefit f Credit on wastes of inputs used in packing materials in the medicine industry Goods to which rule 6 will not apply Final products destroyed and remission of duty obtained a Tribunal s views b Departmental views c When remission of duty is obtained for unmarketability of finished goods d Law amended to overcome the decisions Goods exported without payment of duty Inter-factory clearances Applicability to 100% EOUs Applicability to manufacturers of both dutiable goods and exempted goods (Position prior to ) Applicability to by-products/intermediate products a When by-product emerges on its own b Clearance of by-product to sister unit c 9.4-1d Applicability to hazardous waste arising on its own 511 Applicability to floor sweepings arising during manufacture of dutiable final product Option to manufacturer a Constitutional validity b Inputs need not be stored separately c Physical segregation of inputs is not contemplated d Simultaneous reversal of credit is not required e Both dutiable product and exempt product need not simultaneously emerge f Use of input need not be direct g When exempt final product is exported under

25 bond Payment of total price a Goods notified for MRP assessment b Stock transfers between units c Trade discount must be excluded d When final product is conditionally exempt e Whether mere reversal of credit will suffice f Retrospective validating amendments through the Finance Act, g When process does not amount to manufacture h When product is ab initio not excisable i Manufacture of both types of goods need not be on day-to-day basis j Applicability to packing material k When 8% price is disproportionate to credit taken Receiver/User of goods not entitled to avail credit Should goods be distinct and different Mode of payment Consequences of non-payment A Applicability to manufacturer of both dutiable goods and exempted goods and provider of both taxable and exempted services (Position from ) A-1 Departmental clarifications A-2 Mere reversal of credit is permitted on a conditional basis A-3 Consequences of non-payment A-4 Form in which accounts should be maintained A-5 Quantification of payments and attendant conditions provided in sub-rule (3A) A-5a Exercise of option [Clause (a)] A-5b Provisional determination of amount [Clause (b)] A-5c Final determination of amount [Clause (c)] A-5d Final payment to be made [Clause (d)] A-5e Excess amount to be adjusted [Clause (f)] A-5f Intimation of department [Clause (g)] A-5g Relaxation for certain manufacturers/service providers [Clauses (h) and (i)] 529

26 9.4A-5h Meanings of certain expressions A-5i Payment through cenvat account A-5j Recovery provisions will apply B Modifications/Changes made with effect from B-1 Sub-rule (1) B-2 Sub-rule (2) B-3 Sub-rule (3) B-4 Definition of exempted goods enlarged B-5 Definition of exempted services enlarged B-6 Definition of value enlarged B-7 Sub-rule (3A) B-8 Ad hoc payment by two services - Sub-rules (3B) and (3C) B-9 Conditional exemption can be availed - Sub-rule (3D) B-10 Other issues B-11 Departmental clarifications Final product becoming exempt after availment of credit Judicial views under Modvat Scheme a Kirloskar Oil Engines Ltd. s case b Super Cassettes Industries Ltd. s case c Khanbhai Esoofbhai case d Premier Tyres Ltd. s case e Ashok Iron & Steel Fabricators case f The preferable view g Subsequent Tribunal view h Other judicial views Position under the Cenvat Credit Scheme Other decided issues under MODVAT scheme When final product is non-excisable When exemption is conditional When intermediate product is exempt Foregoing of exemption in order to avail credit Samples cleared duty-free When final products are partially exempt When final products are partly cleared on payment of duty and partly at nil rate of duty When final product is discarded as waste When credit is utilised prior to utilisation of inputs Position when amount is realised from buyers Effect of non-payment of amount Demands/appeals raised prior to

27 9.10 Supplies made for Gujarat earthquake relief Credit not allowable on capital goods in certain situations User test must be applied at the time of receipt of capital goods Use in exempted goods which become dutiable later When capital goods are yet to be fully installed When a new plant is integrated with an existing plant Capital goods capable of use in both exempt and dutiable goods Exception in respect of certain services - Position prior to PROVISIONS RELEVANT FOR AN OUTPUT SERVICE PROVIDER WHO IS NOT A MANUFACTURER OF FINAL PRODUCTS 9.13 Prohibition on use in exempted services Meaning of input service Scope of the expression exempted services General option to all output service providers Option under sub-rule (2) Option under sub-rule (3) - Position prior to a Where service provider is also engaged in trading activities Option under sub-rules (3) and (3A) from / Position in respect of capital goods Units/developers in Special Economic Zones 554 Annex 9.1/2 Availment to credit on inputs used exclusively for the manufacture of exempted finished goods 555 Annex 9.3 Notification No. 108/95-C.E., dated Annex 9.4 Annex 9.5 Admissibility of MODVAT/CENVAT credit on inputs used in the manufacture of finished goods on which duty has been remitted 560 Reversal of Cenvat credit on clearance of goods under rule 19(2) of Central Excise Rules, 2002 under Notification No. 43/2001-C.E. (N.T.), dated Annex 9.6 Determination of price under rule 57CC 563 Annex 9.7 Reversal of Modvat credit taken on inputs under rule 57CC 564 Annex 9.8 Realisation of amount paid under erstwhile rule 57CC(1) and its retention by manufacturers 565 Annex 9.9 Recovery of amounts which are not duly paid under rule 6 Annex 9.10 of the Cenvat Credit Rules, Availment of Cenvat/Modvat credit when common inputs are used for both dutiable and exempted goods 569

28 Annex 9.11 Reversal of inputs credit in respect of supplies made for Gujarat earthquake relief 570 Annex 9.12 Clarification on amendments to rule 6 effected from Annex 9.13 Utilization of accumulated Cenvat credit restricted in terms of erstwhile rule 6(3)(c) of Cenvat Credit Rules, Annex 9.14 Non-applicability of rule 6 to developer of a Special Economic Zone 576 Annex 9.15 Cenvat credit of CVD on imported goods - Utilisation towards payment of service tax 577 Annex 9.16 Practice being adopted by leading hotel chains to utilize Cenvat credit beyond permissible limits 578 Annex 9.17 Clarification on issues relating to amendments in rule 6 with effect from (Relevant extracts) RULES 7 & 7A : MANNER OF DISTRIBUTION OF CREDIT BY INPUT SERVICE DISTRIBUTOR AND DISTRIBUTION OF CREDIT ON INPUTS BY OFFICE OR ANY OTHER PREMISES OF OUTPUT SERVICE PROVIDER Text of rules 7 & 7A 582, Definition of input service distributor Necessity for input service distributor Scope of rule The prescribed conditions The departmental clarification 585A No fresh condition should be imported into the rule 585A 10.5 Scope of rule 7A 585A 11 RULE 8 : STORAGE OF INPUT OUTSIDE THE FACTORY OF THE MANUFACTURER Text of rule Scope of the rule A case of departmental inaction Tribunal s view in another case A case of illegal confiscation Procedure to be followed 588 Annex 11.1 Procedure for storing inputs outside the factory premises 589

29 12 RULE 9 : DOCUMENTS, ACCOUNTS AND RETURNS Text of rule Scope of the rule 597 REQUIREMENTS AS APPLICABLE TO MANUFACTURERS 12.2 Supporting documents For availing duty credit a Supplementary invoice b Self invoice For availing service tax credit Meanings of first stage dealer and second stage dealer Admissibility of credit in certain situations Invoices are not endorsable When invoice is in the name of head office Discrepancies in bill of entry Validity of photostat copies Sales on high seas basis Endorsing bill of entry after completion of import When bill of entry is in the name of the registered office When user is a mere division of importer Ex-bond bill of entry Relevance of port of importation Difference in consignee s name Clerical mistake in account entries Imported inputs taken on loan Imports through customs houses Imports through post parcel Imported inputs warehoused duty-free Restructured/Endorsed bill of entry When proof of payment is properly endorsed in the bill of entry Unendorsed bill of entry Attested bill of entry Invoice showing different consignee When dealer has not proved that manufacturer has discharged duty liability When imported goods are transferred before customs clearance Suo motu credit of duty paid in excess 607