CONTENTS Chapter-heads I-5 Rule-wise Index I-23 1 CENVAT CREDIT SCHEME 1.1 Background of VAT 1 1.1-1 Budget 2016-17 3 1.2 Basic Concept of VAT 3 1.2-1 Tax credit system to remove cascading effect 4 1.2-2 VAT is consumption based tax 5 1.2-3 Advantages of VAT 5 1.2-4 Disadvantages of VAT 6 1.3 Cenvat Scheme, 2004 6 1.4 Highlights of Cenvat Scheme 7 2 RULE 2 : DEFINITIONS Text of rule 2 9 2.1 Classification of the definitions 19 2.2 Customs Tariff Act 20 2.3 Excise Act 20 2.4 Excise Tariff Act 20 2.5 Finance Act 20 2.6 Manufacturer or producer 20 2.7 Notification 21 2.8 Residual clause 21 2.9 Exempted goods 21 I-7
CONTENTS I-8 2.10 Final products 21 2.10-1 Excisable goods 21 2.10-2 Element of manufacture must be present 22 2.10-3 Manufacture as defined by Court - New substance having distinct name, character or use must emerge 23 2.10-4 No Cenvat to manufacturer if no manufacture 24 2.11 Output Service 25 2.12 Person liable for paying service tax 26 2.13 Provider of taxable service 26 3 RULE 2(a) : CAPITAL GOODS 3.1 Cenvat credit of duty paid on Capital goods 27 3.1-1 Highlights of definition of capital goods 29 3.1-2 Eligibility of capital goods 36 3.1-3 Eligibility of certain motor vehicles and its components, spares and accessories as capital goods 39 3.1-4 Capital goods used exclusively for exempted final products and output services not eligible 41 3.1-5 Capital goods can include equipment or appliance used in office for manufacturer 43 3.1-6 Goods imported under project imports 44 3.2 General provisions in respect of capital goods 44 3.2-1 Ownership of capital goods is not essential to avail Cenvat on capital goods 46 3.2-2 Use of capital goods by manufacturer 48 3.2-3 Capital goods extended from factory are eligible 50 3.2-4 Reversal of Cenvat credit in respect of obsolete capital goods written off without use 51 3.2-5 Capital goods manufactured within the factory 51 3.3 Capital goods used by Service provider 52 3.4 Conditions for availing Credit on Capital Goods 54 3.4-1 Cenvat credit on capital goods has to be availed in two stages, except by SSI 55 3.4-2 Capital goods used in EPC project 58 4 RULE 2(k) : INPUTS 4.1 Input goods eligible for Cenvat credit 59
I-9 CONTENTS 4.1-1 Inputs for construction excluded under exclusion clause (B) except when used for works contract or construction service 60 4.1-2 Condition of use of input in factory for manufacturer but not applicable to service providers 62 4.1-3 Capital goods are not inputs but parts and components can be inputs 62 4.1-4 Capital goods not defined as capital goods will be eligible as inputs 62 4.1-4A Small value capital goods are inputs - not capital goods 63 4.1-5 Motor vehicle is not input but capital goods in case of some services 63 4.1-6 Goods for personal consumption of employees not eligible 63 4.1-7 Goods used for captive generation of electricity or steam eligible but not HSD, LDO, Petrol 64 4.1-8 Furnace oil used to supply electricity and steam to two units of same company having separate registrations 66 4.1-8A Goods used for pumping of water 67 4.1-9 Goods having no relationship with manufacture of final product not eligible 67 4.1-10 Inputs directly sent to site and fitted there are eligible as input 68 4.1-11 Input goods in respect of service providers 68 4.2 Other provisions relating to input 70 4.2-1 Partial or full write off of inputs 70 4.2-2 Storage of inputs outside the factory 72 4.2-3 Input Credit Distributor 73 4.2-3A Distribution of credit by warehouse of manufacturer 73 4.2-4 Clearance of packing material in which inputs were packed 73 4.2-5 Clearance of waste by service provider 74 4.3 Case law under earlier definition which is still relevant 75 4.3-1 Process losses and handling loss are allowable 75 4.3-2 No credit on short received inputs 77 4.3-3 Credit if goods lost/destroyed/damaged in process but no credit if inputs are lost or destroyed in store room or pilfered 78 4.3-4 Inputs need not be utilised within the factory itself 84 4.3-5 No Cenvat credit if inputs were not intended for manufacture 85 4.4 Statutory definition of input upto 31-3-2011 85
CONTENTS I-10 5 RULE 2(l) : INPUT SERVICE 5.1 Input Services eligible for Cenvat credit 86 5.1-1 Analysis of the definition 88 5.1-2 Meaning of includes 88 5.1-3 Meaning of in relation to 90 5.1-4 Services covered in inclusive part of the definition 90 5.1-5 Cenvat credit of service tax paid on imported services 91 5.2 Place of removal 91 5.3 Services specifically excluded from definition of input service 97 5.3-1 Construction related Services specifically excluded under clause (A) 97 5.3-2 Renting of Motor Vehicle Services specifically excluded under clause (B) 99 5.3-3 Motor vehicle insurance and repair related Services specifically excluded under clause (BA) 101 5.3-4 Services for personal use or consumption of employees specifically excluded under clause (C) 102 5.3-5 What is wasteful expenditure as per the revised definition of input service 103 5.3-6 Services provided before 1-4-2011 but invoice raised on or after 1-4-2011 103 5.3-7 Service need not be received in the factory 103 5.4 Case law relating to specific services 104 5.4-1 Services of Commission agent 104 5.4-2 Canteen services as input service 106 5.4-3 Telecom related services 106 5.4-4 Manufacture or factory related services 109 5.4-5 Administration related services 113 5.4-6 Renting and leasing services 116 5.4-7 Insurance related services 116 5.4-8 Input services for providing taxable output services 117 5.4-9 Marketing related services 118 5.4-10 Export related services 119 5.5 Cenvat Credit of input service on receipt of invoice of service provider 119 5.5-1 Deduction of some amount from invoice of service provider 121
I-11 CONTENTS 6 RULE 3 : CENVAT CREDIT Text of rule 3 122 6.1 Eligibility of Cenvat Credit 139 6.1-1 Meaning of Cenvat Credit 140 6.1-2 Transitory provisions in respect of education cess and SAHE cess 142 6.1-3 Some issues relating to eligibility of Cenvat credit 143 6.2 Cenvat Credit when product ceases to be exempted goods or service seizes to be exempted service 145 6.2-1 Opting for Cenvat by SSI 145 6.2-2 Simultaneous availment of Cenvat and SSI exemption permissible when SSI manufacturing with other s brand name but not in other cases 146 6.3 Utilisation of credit 148 6.3-1 Utilisation of Cenvat credit 149 6.3-2 Time limit for taking Credit 150 6.3-3 Carry forward of Unutilised Cenvat credit 150 6.3-4 Full credit available in case of goods obtained from North Eastern States, J&K, Sikkim and Kutch district 151 6.3-5 Cenvat credit only of inputs received upto end of month, even if duty/tax is to be paid by 5th/6th of following month 151 6.3-6 Inter-changeability of Cenvat credit 152 6.3-7 Cenvat credit by exempted units from North Eastern States, J&K, Sikkim and Kutch district 153 6.3-8 Cenvat Credit cannot be utilised for payment of service tax when tax is payable under reverse charge method 153 6.4 Removal of inputs and capital goods on which Cenvat was taken 153 6.4-1 Removal of inputs after processing 158 6.4-2 Mode of payment of amount 158 6.4-3 Inputs/capital goods can be exported without payment of amount 158 6.4-4 Inputs can be cleared for export on payment of duty and rebate claimed 159 6.4-5 If inputs were obtained without payment of duty, final product cannot be exported on payment of duty and rebate claimed 159 6.4-6 Recovery if the amount not paid 160
CONTENTS I-12 6.5 Removal of capital goods after use 160 6.5-1 Provision during 1-4-2012 to 27-9-2013 164 6.6 Restrictions on Cenvat credit in certain cases 164 6.6-1 Restrictions on utilisation of credit of some duties 166 6.6-2 Cenvat Credit in respect of goods procured from EOU 167 6.6-3 Cenvat credit of CVD/excise/service tax paid in cash or through debit in duty credit scrip is allowable 171 6.7 Other Issues relating to availment of Cenvat Credit 171 6.7-1 One to one correlation not necessary in Cenvat 171 6.7-2 Classification/Duty liability cannot be altered or challenged at the end of user of inputs 173 6.7-3 Full credit of duty paid by supplier is available, even if less duty was payable or not payable 174 6.7-4 Full Cenvat credit of duty paid available even if seller gave trade discount or price reduction later 175 6.7-5 Buyer can avail Cenvat credit, if supplier paid duty higher than what was payable or when not payable 178 6-7-5A Entire Cenvat credit even if duty payable on final product lower than input credit available 181 6.7-6 Registration and eligibility of Cenvat credit are independent issues 181 6.7-7 Cenvat provisions and valuation provisions are independent 182 6.7-8 Amalgamation and Cenvat 182 6.7-9 Transfer of credit of SAD from one factory to other 183 6.7-10 Accounting entries not relevant for eligibility of Cenvat credit 184 6.8 Payment of amount in some cases (normally termed as Reversal of Cenvat ) 184 6.8-1 Payment of amount if final product subsequently exempt 186 6.9 When payment of amount (i.e. reversal of Cenvat credit not required 187 6.9-1 No reversal if supplier gives reduction in price after clearance 188 6.9-2 No Cenvat reversal if duty paid on final product, even if it was not payable 189 6.10 Cenvat eligible as input but availed as capital goods and vice versa 193 6.11 Cenvat credit if demand made on final products for past period 194
I-13 CONTENTS 7 RULE 4 : CONDITIONS FOR ALLOWING CENVAT CREDIT Text of rule 4 196 7.1 Time limit for taking Credit of duty paid on inputs and input services 205 7.1-1 When the Cenvat credit of input services can be normally taken? 206 7.1-2 No time limit for Cenvat credit of duty paid on capital goods 208 7.1-3 There was no time limit for taking Cenvat Credit on inputs and input services upto 1-9-2014 208 7.1-4 Time limit for taking Cenvat credit when service tax payable under reverse charge basis 210 7.1-4A Time limit applicable in respect of reverse charged during 1-9-2014 to 1-3-2015 210 7.1-5 Time limit for taking Cenvat Credit of Input Services during 1-9-2014 to 1-3-2015 212 7.2 Availment of Cenvat credit on capital goods 214 7.3 Cenvat credit of capital goods obtained on lease, hire purchase or loan 215 7.4 Depreciation cannot be claimed on duty portion of value of capital goods 215 7.5 Removal of inputs and capital goods for job work/repairs/testing 215 7.5-1 Provisions for sending inputs/capital goods for job work/testing/repairs 215 7.6 Procedure for sending goods for Job work under Cenvat 219 7.6-1 Direct despatch of inputs to job worker 220 7.6-2 Scrap/waste generated at end of job worker 221 7.6-3 Amount payable if goods not returned within 180 days 222 7.6-4 Provisions applicable to job worker 222 7.6-5 Direct despatch of final product from place of job worker 223 7.6-6 Job worker can use his own inputs, avail Cenvat of inputs used by him and utilise it elsewhere 224 7.6-7 Job worker can pay duty on value of goods supplied by him 224 7.6-8 Capital goods can be sent to job worker 224 7.6-9 Waste can be sent out for melting/charging and return 225
CONTENTS I-14 7.6-10 Removal of rejected inputs for rework and return 226 7.6-11 Consumables and fuel can be sent for job work 226 7.6-12 Job worker can pay duty even if material sent under Cenvat 227 7.7 Removal of inputs other than those covered under Cenvat 227 7.8 Cenvat credit of input service on receipt of invoice 229 8 RULES 5, 5A AND 5B : REFUND OF CENVAT CREDIT Text of rules 5, 5A and 5B 230 8.1 Refund of Cenvat Credit 233 8.1-1 Is refund claim mandatory or assessee can utilise excess Cenvat Credit for payment of excise duty on DTA sales/service tax on services provided within India? 244 8.1-2 Manufacturer can avail Cenvat credit of service tax, he need not file refund claim 245 8.2 Provisions as applicable upto 1-4-2012 245 8.3 Exports by units in North-East Region and Sikkim 249 8.4 Refund of Cenvat Credit other than in case of exports 249 8.5 Service Provider can claim refund of excess Cenvat Credit if he is under partial reverse charge 251 9 RULE 6 : COMMON INPUTS AND INPUT SERVICES FOR EXEMPTED AND TAXABLE GOODS/SERVICES Text of rule 6 253 9.1 No Cenvat credit if final product/service exempt 271 9.1-1 Partial manufacture of exempted goods or partial provision of exempted services 272 9.1-2 General provisions applicable in both the cases 273 9.2 Special provisions in respect of Banking, FI and NBFC 273 9.3 Exempted goods 274 9.3-1 Goods cleared without payment of duty under exemption are exempted goods 275
I-15 CONTENTS 9.3-2 Exempted goods cannot be cleared under bond and Cenvat credit cannot be availed 275 9.3-3 Molasses used in exempted products 276 9.3-4 Goods supplied by DTA unit under Duty Credit Scrip are not exempted goods 277 9.3-5 Goods involved in Works Contract and food related services 277 9.4 Meaning of exempted services 278 9.4-1 Trading of goods or securities is exempted service 279 9.4-2 Sale of immovable property is exempted service 280 9.4-3 Services on which service tax paid under some conditional abatement/composition scheme are exempted services 280 9.4-4 Service of transportation of goods by a vessel from customs station of clearance in India to a place outside India is not exempt service 281 9.4-5 Job work under Cenvat is exempted service for rule 6 281 9.4-6 Interest on loans or interest on deposits and delayed payment charges are Nil value service 281 9.5 Disallowance of Cenvat of capital goods only if used exclusively for exempted final product/services 282 9.6 Zero rated transactions and exempted transactions 282 9.6-1 Supply to EOU/SEZ, export of goods, deemed exports or gold manufacture, supply of ethanol are zero rated 283 9.6-2 Exports are zero rated - No Cenvat reversal exported 284 9.6-3 Service provided to unit in SEZ is export and reversal of Cenvat or payment of amount not required 284 9.6-4 Supplies of goods to EOU, SEZ, International Competitive Bidding, UN Agencies are not exempt goods for rule 6 285 9.6-5 Exported service is not exempt service for purpose of rule 6 285 9.6-6 Intermediate product cleared for subsequent export are not exempted goods 286 9.7 Value for purpose of rule 6(3) and 6(3A) 287 9.8 Payment of amount on exempted final product/exempt services 288 9.8-1 No Cenvat credit of such amount paid 289 9.8-2 Payment of amount means Cenvat credit not taken 289 9.8-3 When to pay the amount 289 9.8-4 Return of exempted goods for repairs on which amount was paid 289
CONTENTS I-16 9.8-5 No excise duty payable on intermediate product if final product cleared on payment of amount 290 9.8-6 Amount can be recovered from buyer 290 9.8-7 If assessee recovers amount from buyer, further amount (6% of 6% or 7% of 7%) is not payable 291 9.8-8 Amount payable even if exemption notification does not state that Cenvat should not be availed 292 9.8.9 Recovery of the amount 292 9.9 Proportionate reversal of Cenvat Credit - provisions applicable w.e.f. 1-4-2016 292 9.9-1 Inform option to Superintendent 293 9.9-2 Mode of calculations of proportionate reversal w.e.f. 1-4-2016 294 9.9-3 Calculations at the end of the year for period after 1-4-2016 295 9.9-4 Intimation of details to Range Superintendent 296 9.9-5 Self adjustment of excess amount was paid 297 9.9-6 If assessee did not manufacture dutiable goods or did not render taxable in previous year 297 10 RULES 7, 7A & 7B : DISTRIBUTION OF CREDIT BY INPUT SERVICE DISTRIBUTOR Text of rules 7, 7A and 7B 298 10.1 Input Service Distributor 301 10.1-1 Concept of Input Service Distributor is compulsory w.e.f. 1-4-2012 if assessee has more than one factories or places of provision of service 303 10.1-2 Invoice for distribution of credit by input service distributor 306 10.1-3 Manner of distribution of Cenvat Credit w.e.f. 1-4-2016 306 10.1-3A Manner of distribution of Cenvat Credit during 1-4-2014 to 1-4-2016 308 10.1-4 Manner of distribution of Cenvat Credit during 1-4-2012 to 31-3-2014 310 10.1-5 Manner of distribution of credit by ISD upto 1-4-2012 312 10.1-6 Responsibilities of input service distributor 313
I-17 CONTENTS 10.2 Input Credit Distributor 314 10.3 Distribution of credit by warehouse of manufacturer 314 11 RULE 8 : STORAGE OF INPUT OUTSIDE THE FACTORY OF THE MANUFACTURER Text of rule 8 315 11.1 Storage of inputs outside the factory 316 11.2 Procedure to be followed 317 12 RULE 9 : DOCUMENTS, ACCOUNTS AND RETURNS Text of rule 9 318 12.1 Duty paying documents for Cenvat 324 12.1-1 General provisions in respect of eligible documents 325 12.1-2 Credit if duty paying document is lost 328 12.1-3 Ownership or purchase of inputs is not essential 329 12.1-4 Cenvat Credit in case of defects in duty paying documents 329 12.1-5 Computer generated invoices 331 12.1-6 Eligibility of computer generated invoice for Cenvat credit 332 12.1-7 Invoice or Bill can be called by other name e.g. Debit Note or contract note 333 12.1-8 Decisions that Cenvat cannot be denied for minor defects in documents 333 12.1-9 Is name of user of goods/receiver of services using inputs/input services necessary on Invoice? 341 12.2 Eligible duty paying documents 344 12.2-1 Invoice of Manufacturer or his depot 344 12.2-2 Supplementary Invoice by supplier-manufacturer or service provider for differential excise duty/service tax 348 12.2-3 Bill of Entry 352 12.2-4 GAR-7 challan when service tax paid by person other than service provider 357 12.2-5 Duty paid on TR-6 or GAR-7 challan in other cases 358
CONTENTS I-18 12.2-6 Other documents eligible for Cenvat credit 358 12.2-7 Certificate issued by registered courier 361 12.3 Debit Note issued by service provider 362 12.4 Responsibility of person taking Cenvat credit 364 12.4-1 Differential Duty refunded to supplier of inputs/ capital goods 365 12.5 Procedure for Cenvat 366 12.5-1 Returns under Cenvat 367 12.6 Records to be maintained for Cenvat 367 13 INVOICE OF DEALER OR IMPORTER FOR CENVAT 13.1 Dealer s Invoice for Cenvat 368 13.1-1 Dealers who can issue Cenvatable Invoice 370 13.2 Procedure of registration of Dealer 371 13.2-1 Requirement of Godown of Dealer 372 13.2-2 Goods must be despatched from premises of dealer 373 13.3 Dealer s invoice for Cenvat 374 13.3-1 Provisions when dealer of imported goods is claiming refund of Special CVD of Customs 375 13.3-2 Dealer can have another series of invoice called Private Invoices for Non-Cenvat goods 375 13.4 Provisions in respect of imported consignments 376 13.4-1 Despatch of split consignments after import 377 13.5 Direct dispatch of goods by manufacturer i.e. transit sale 377 13.6 Other provisions relating to dealers invoice 379 14 RULE 9A : INFORMATION RELATING TO PRINCIPAL INPUTS Text of rule 9A 383 14.1 Annual Information relating to Principal Inputs 384 14.1-1 Monthly return of receipt and consumption of each of principal inputs 385 14.1-2 Penalty for late submission or non-submission of ER-5/ ER-6, or not submitting electronically 386
I-19 CONTENTS 15 RULES 10 & 10A : TRANSFER OF CENVAT CREDIT Text of rules 10 and 10A 387 15.1 Transfer/Merger/Shifting of undertaking 389 15.1-1 Permission for transfer to be granted within three months 395 15.2 Transfer of credit of SAD from one factory to other 395 16 RULE 11 : TRANSITIONAL PROVISION Text of rule 11 396 16.1 Opting or going out of Cenvat 398 16.1-1 Reversal of credit at the time of going out of Cenvat 398 16.1-2 Opting out of Cenvat by SSI 399 17 RULE 12 : SPECIAL PROVISIONS FOR NORTH-EAST REGION, KUTCH DISTRICT OF GUJARAT, STATE OF JAMMU AND KASHMIR AND STATE OF SIKKIM Text of rule 12 401 17.1 Buyer from new units in J&K, Sikkim, NE and Kutch can avail Cenvat credit 402 18 RULE 12A : PROCEDURE AND FACILITIES FOR LARGE TAXPAYER Text of rule 12A 404 18.1 Large Tax Payers Units 408 18.1-1 Procedural relaxations in excise to LTU 410 18.1-2 Sharing of information between CBDT and CBEC 411
CONTENTS I-20 19 RULE 12AAA : POWER TO IMPOSE RESTRICTIONS IN CERTAIN TYPES OF CASES Text of rule 12AAA 412 19.1 Withdrawal of facilities to manufacturer/dealer misusing facilities 413 19.1-1 When the facility can be withdrawn and restrictions imposed 414 19.1-2 Which restrictions can be placed and which facilities can be withdrawn? 415 19.1-3 Time for which facilities can be withdrawn 417 19.1-4 Procedure to be followed 417 19.1-5 Comments on the provisions 417 20 RULE 13 : DEEMED CREDIT Text of rule 13 419 20.1 Deemed credit on declared inputs 420 21 RULE 14 : RECOVERY OF CENVAT CREDIT WRONGLY TAKEN OR ERRONEOUSLY REFUNDED Text of rule 14 421 21.1 Scope of the Rule 422 21.2 Reversal before utilisation means Cenvat credit was not taken 424 21.2-1 Interest is compensatory not penal 425 21.3 Earlier controversy upto 1-4-2012 425 22 RULES 15 AND 15A : CONFISCATION AND PENALTY/GENERAL PENALTY Text of rules 15 and 15A 427 22.1 Penalty for wrongful availment of credit 429 22.2 Take or utilise 431
I-21 CONTENTS 22.3 No penalty if wrong availment of Cenvat due to differences in interpretation 433 22.4 Residual Penalty for violation of Cenvat Credit Rules 433 23 RULE 16 : SUPPLEMENTARY PROVISION Text of rule 16 434 23.1 Scope of sub-rule (1) 435 23.2 Scope of sub-rule (2) 435 24 ACCOUNTING, INVENTORY VALUATION AND CENVAT 24.1 Accounting Treatment of Inputs in Cenvat 436 24.1-1 Accounting Treatment of Inputs received 437 24.1-2 Accounting treatment for Service Tax 438 24.1-3 Write off of non-utilisable balance in Cenvat credit receivable account 439 24.2 Accounting of Duty paid on Capital Goods 440 24.2-1 Accounting in case of lease or hire purchase transactions 443 24.3 Payment of excise duty demands from Cenvat credit 444 24.4 Payment of amount 444 24.5 Inventory Valuation and Cenvat 445 24.5-1 Conflict between AS-2 and section 145A 445 24.5-2 Accounting treatment of unpaid excise duty on final products 447 24.5-3 Valuation of inventory of WIP and final products 447 24.5-4 Other aspects of valuation 448 APPENDICES Cenvat Credit Rules, 2004 451 Cenvat Notifications 528
CONTENTS I-22 Cenvat Circulars 566 Central Excise Rules, 2002 658 SUBJECT INDEX 693 LIST OF CIRCULARS/TRADE NOTICES 702 LIST OF BASE NOTIFICATIONS 704