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The CENVAT Credit Rules, 2004. [ Notification no. 23/2004-C.E. (NT) dated 10.09.2004]

The CENVAT Credit Rules, 2004. [ Notification no. 23/2004-C.E. (NT) dated 10.09.2004]. 22 nd June 2014. Conventional Tax System. Tax Credit System under VAT. Need of Cenvat scheme. To remove the effect of tax on tax. To remove cascading effect of tax.

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The CENVAT Credit Rules, 2004. [ Notification no. 23/2004-C.E. (NT) dated 10.09.2004]

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  1. The CENVAT Credit Rules, 2004.[Notification no. 23/2004-C.E. (NT) dated 10.09.2004] 22nd June 2014. CA RIMA MEHTA, carimamehta@gmail.com

  2. Conventional Tax System CA RIMA MEHTA, carimamehta@gmail.com

  3. Tax Credit System under VAT CA RIMA MEHTA, carimamehta@gmail.com

  4. Need of Cenvat scheme • To remove the effect of tax on tax. • To remove cascading effect of tax. • To reduce the value of end product and taxing value of end product by giving the credit of duty paid by previous dealer or purchaser. CA RIMA MEHTA, carimamehta@gmail.com

  5. Rule 1. Short title, extent and commencement • This rules extent to whole of India : • Provided that nothing contained in these rules relating to availment and utilisation of credit of service tax shall apply to state of Jammu and Kashmir. CA RIMA MEHTA, carimamehta@gmail.com

  6. Which duties are available as credit ? • Credit of excise duty on inputs and capital goods and service tax on input services is available. • Rule 3(1) : More specifically, credit of following duties paid are available. All the duties mentioned in Rule 3(1) of the said rules shall form a ‘Pool’. CA RIMA MEHTA, carimamehta@gmail.com

  7. For which payment credit can be utilised? [Rule 3(4)] CA RIMA MEHTA, carimamehta@gmail.com

  8. Certain specifications for utilising credit • One to one co-relation not required in Cenvat. • The credit is inter-changeable, except following: CA RIMA MEHTA, carimamehta@gmail.com

  9. When can we avail credit what are the specifications in this regard? (Rule 4) CA RIMA MEHTA, carimamehta@gmail.com

  10. When can we avail credit what are the specifications in this regard? CA RIMA MEHTA, carimamehta@gmail.com

  11. When can we avail credit what are the specifications in this regard? CA RIMA MEHTA, carimamehta@gmail.com

  12. What are the documents on the basis of which duty can be availed? (Rule 9) • Original or Duplicate Invoice issued by manufacturer or importer, First stage dealer’s Invoice or second stage dealer’s invoice, Bill of Entry, Supplementary Invoice • A Challan evidencing payment of service tax, • An invoice, bill or challan issued by a provider of input service, • An invoice, bill or challan issued by a provider of input service distributor. CA RIMA MEHTA, carimamehta@gmail.com

  13. CENVAT CREDIT OF CAPITAL GOODS [Rule 2(a)] Capital Goods Means : Following goods namely • All goods falling under chapter 82,84,85,90,6805,6804 • Pollution control equipment • Components, spares and accessories of such goods • Moulds and dies, jigs and fixtures. • Refectories and refractory materials. • Tubes and pipes and fittings. • Storage tank. • Motor vehicles for providing output services including dumpers and tippers. • used…. • In the factory of the mfg. of the final products but does not include any equipment or appliances used in an office • Outside the factory for generation of electricity. 2. For providing output services. CA RIMA MEHTA, carimamehta@gmail.com

  14. CENVAT CREDIT OF CAPITAL GOODS CA RIMA MEHTA, carimamehta@gmail.com

  15. CENVAT Credit on Motor Vehicle • Cenvat Credit is allowable on motor vehicles (except under heading Nos. 8702, 8703, 8704, 8711 and their chassis) to manufacturers. The excluded chapter heads are relating to motor vehicles for transport of 10 or more persons (including driver), motor cars, station wagons, motor vehicles for transport of goods and motor cycles. • In effect, Cenvat credit is available only in respect of tractors, special purpose motor vehicles, work trucks, bicycles, baby carriages and trailers and parts and accessories of all motor vehicles to the manufacturers, w.e.f. 1-4-2012. CA RIMA MEHTA, carimamehta@gmail.com

  16. CENVAT Credit on Motor Vehicle • Cenvat credit of motor vehicles covered under headings 8702, 8703, 8704 and 8711 and their chassis is available only if they are registered in the name of service provider and to specified service providers like: • courier, • renting or hire of motor vehicles, • transportation of passengers, • motor driving training schools, • transportation of inputs and capital goods used for providing an output service • (Servicing of motor vehicles not included) CA RIMA MEHTA, carimamehta@gmail.com

  17. ANALYSIS & CASE LAWS FOR CAPITAL GOODS 1. For manufacture : term employed is “Used in the factory of Manufacturer” For Service Provider : term employed is “Used for providing output service”. • The term employed is “for providing” not “in or in relation to”. • It is burden on assessee to satisfy whether capital goods is used. However, it is required or not could not be decided by revenue. (CCE vs. Hindustan Coca Cola Beverages Ltd. 2011(271)ELT 314(T). CA RIMA MEHTA, carimamehta@gmail.com

  18. ANALYSIS & CASE LAWS FOR CAPITAL GOODS 4. Scope of term “Factory” : Inputs used at different places nearest to factories to produce intermediate goods are eligible for input credit. Rope way used out side the factory was allowed as eligible credit as capital goods. (Birla Corporation Ltd. vs. CCE 2005(186)ELT266(SC) 5. Supporting structure of plant and machinery if it is not integral part of machinery it cannot be called as capital goods. (Vandana Global Ltd. vs. CCE 2010(253)ELT440(T-LB) Explanation 2 : Input include goods used in the manufacture of capital goods which are further used in the factory of manufacturer but shall not include cement, angles, channels etc other items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods. CA RIMA MEHTA, carimamehta@gmail.com

  19. Exempted Service [Rule 2(e)] • Wef. 01.04.2011, exempted service include trading as well as taxable service whose part of value is exempt on the condition that no credit of input and input service, used for providing taxable service shall be taken. • Wef. 01.07.2012, any service on which service tax is not leviable in terms of sec 66B is also called exempt service which means all the activities which is not service in terms of sec 65B(44) or falling under sec 66D is also called exempt service. • In ‘exempted transaction’, tax is not payable on final product and input credit is not available • Services exported shall not be called as exempt service. CA RIMA MEHTA, carimamehta@gmail.com

  20. Exempted Goods [Rule 2(d)] • As per Rule 2(d) of Cenvat Credit Rules, 'exempted goods' means goods which are exempt from whole of duty of excise leviable thereon and • includes goods which are chargeable to 'Nil' rate of duty and • the goods in respect of which the benefit of an exemption under Notification No. 1/2011-CE dated 1st March 2011 is availed • [The words in italics have been inserted w.e.f. 1-4-2011]. • In ‘exempted transaction’, tax is not payable on final product and input credit is not available CA RIMA MEHTA, carimamehta@gmail.com

  21. Input for Output Service and Final product • In terms of Rule 2(k)(iv), input means all goods used for providing any output service except: • (a) light diesel oil, high speed diesel oil, petrol, • (b) any goods used for construction of building, civil structure or part thereof or laying of foundation or making of structure for support of capital goods, • (c) capital goods, • (d) motor vehicle, • (e) any goods such as food items, goods used in guest house, residential colony, club or recreational facility, clinical establishment, when such goods are used primarily for personal use or consumption of any employee. CA RIMA MEHTA, carimamehta@gmail.com

  22. Input for Output Service and Final product • Goods having no relation with manufacture of final product shall not be eligible for credit. • – As per CBE&C circular, even office furniture and stationery is eligible as input. • Therefore relation with the manufacture shall be construed in the wider sense. CA RIMA MEHTA, carimamehta@gmail.com

  23. Input for Final Product • In terms of Rule 2(k)(i), input means all goods used in the factory by a manufacturer of final product • including accessories cleared along with final product, the value of which is included in the value of final product and • goods used for providing free warranty for final product. • Exclusions as mentioned for Service providers remain as it is for manufacturer of final product. • Input consumed for quality control in laboratory, before actual process of manufacturing, is eligible for taking credit. (Tata engineering and locomotive Co. Ltd. 2010(256)ELT2010-56(Bom) CA RIMA MEHTA, carimamehta@gmail.com

  24. Input Service [Rule 2(l) Definition of Input service contains 3 clauses : • Means • Includes and • Excludes. If the word “include/s “ is used it means that the definition is not exhaustive but it is inclusive, i.e. it expands the meaning - Doypack Systems (P.) Ltd. v. UOI (1988) 2 SCR 962 = 1988 2 SCC 299 = 65 Comp Cas 1 = 36 ELT 201 = AIR 1988 SC 782 * Lucknow Development Authority v. M K Gupta (1994) 1 SCC 243 = 1994 AIR SCW 97 = AIR 1994 SC 787. Input Service means any service, - • Used by a provider of output service for providing an output service or • Used by mfg. whether directly or indirectly in or in relation to the mfg. of final products and clearance of final products up to the place of removal, CA RIMA MEHTA, carimamehta@gmail.com

  25. Input Service • Input Service Includes services used in relation to folllowing: CA RIMA MEHTA, carimamehta@gmail.com

  26. Input Service but excludes • Service portion in the execution of a works contract and construction services used for construction or execution of works contract of bldg. & laying of foundation or making of structures for support of capital goods except for provision of one or more of specified service. • Services of renting of motor vehicles, which is not a capital goods. BA. Service of general insurance business, servicing, repair and maintenance, in relation to motor vehicle except • a mfger. of motor vehicle or • An insurance co. In respect of motor vehicle • Such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic life and health insurance and travel benefits extended to employees on leave when such services are used primarily for personal purpose of any employee. CA RIMA MEHTA, carimamehta@gmail.com

  27. Input service credit relating to motor vehicle • The definition of input service implies that, no other assessee can avail the credit of renting of motor vehicle and insurance of motor vehicle of specified chapter heads, except the output service is any of the following: • courier, • renting or hire of motor vehicles, • transportation of passengers, • motor driving training schools, • transportation of inputs and capital goods used for providing an output service • For motor vehicles other than specified chapter heads, no specification for output service. CA RIMA MEHTA, carimamehta@gmail.com

  28. Wasteful Expenditure as per department for non-eligibility of Cenvat credit • Open society - Building for office or factory is a waste • Employees, staff, should travel by public bus or airplane. Motor vehicle, taxi is luxury • Employee benefit is a luxury – employ only casual labour • Credit shall not be denied merely on the ground that input service was not availed within the factory premises. CCE vs. Ultra tech Cement Ltd. 2012(278)ELT523(T) CA RIMA MEHTA, carimamehta@gmail.com

  29. Input service relating to construction • In the first extended part, for input service, the expression employed are “ includes services used in relation to modernization, renovation or repair of a factory, premises of provider of output service or an office relating to such factory or premises but in excluded part, only few categories [such as wc, construction service, architect, chartered engineer, licensed surveyor] are restricted which is in relation to construction of building or civil structure or part thereof. • It means combined effect is all input services except the excluded category used for setting up of factory, or office premises relating to factory or office premises relating to factory or laying of foundation or making of structure for support of capital goods shall not be permissible as input service. • However such restriction is not applicable in case of modernisation, renovation or repair of such factory or civil structure or premises of office building. CA RIMA MEHTA, carimamehta@gmail.com

  30. Input or Capital Goods removed as such • Rule 3(5), • An amount equal to credit availed in respect of such inputs or capital goods shall be paid. • Such removal shall be made under the cover of invoice. • Payment shall not be required where inputs are removed for providing output service. • Such payment shall be made by debiting the cenvat credit or by way of cash. CA RIMA MEHTA, carimamehta@gmail.com

  31. Capital goods removed after being used • Manufacturer or output service provider shall have to pay an amount equal to Cenvat Credit taken on said capital goods reduced by percentage points calculated by SLM as specified below for each quarter from the date of taking cenvat credit. • However if the duty leviable on transaction value is higher than amount so calculated, credit to be paid is that of duty on transaction value. • If capital Goods are cleared as waste/scrap, there shall be paid amt equal to duty liability on transaction value. CA RIMA MEHTA, carimamehta@gmail.com

  32. Capital goods removed after being used • (a) for Computer and its peripherals : • (b) for capital goods other than computers, @ 2.5% for each quarter. CA RIMA MEHTA, carimamehta@gmail.com

  33. Reversal of Cenvat if inputs partially or fully written off • Cenvat credit reversal is required even if the inputs are written off fully or partially in books of account (w.e.f. 1-3-2011) [so far, such reversal was required only if inputs were completely written off]. • applicable when provision made in books of account to that effect. CA RIMA MEHTA, carimamehta@gmail.com

  34. Reversal for duty remitted on goods manufactured [Rule 3(5c)] • Duty on final product is remitted under Rule 21 of Central Excise Rules, 2002. • Rule 21 speaks about remission of duty when goods have been lost/destroyed by natural cause or unavoidable accident or claimed as unfit for consumption at the time before removal. • Cenvat credit taken on inputs and input services* used to manufacture said goods shall be reversed. • * Reversal of input services added from 08.01.2014 vide notification no. 01/2014. CA RIMA MEHTA, carimamehta@gmail.com

  35. Procedure for Reversal • By way of debiting the Cenvat Credit account or otherwise. • Before 5th day of following month/quarter as the case may be except for the month of March, where such payment shall be made on or before 31st March. • If an assessee fails to pay, it shall be recovered under Rule 14. • Applicable Penalty under Rule 15 : Not exceeding duty or S.tax liability on goods or service or 2000/- Rs. w.e. is higher. • Over and above, penalties under Excise and Service Tax is also be levied. CA RIMA MEHTA, carimamehta@gmail.com

  36. Refund of Cenvat Credit [Rule 5] • Applicable to exporter of goods or service without payment of duty. • Refund amt = (Export t/o of goods+ Export t/0 of services)/Total t/o * Net Cenvat Credit. • Net cenvat credit = total credit – amount reversed in terms of Rule 3(5C). i.e. remitted under rule 21 of Central excise Rules 2002. • No refund is admissible if assessee avails drawback. CA RIMA MEHTA, carimamehta@gmail.com

  37. Refund of Cenvat to service providers providing services taxed on RCM • Rule 5B: • A provider of service providing serivices notified under sub-section (2) of section 68 of Finance Act, and being unable to utilisecenvat availed on input and input services for payment of s.tax on such output services, shall be allowed refund of such unutilisedcenvat credit. • Definition of Output services: • “Output Service” means any service provided by a provider of service but shall not include a service,- • (1) Specified in Sec 66D of Finance act, or • (2)where whole of S.tax is liable to be paid by receipient of service. CA RIMA MEHTA, carimamehta@gmail.com

  38. Rule 6 of Cenvat Credit Rules • Rule 6 applies where both exempted goods and taxable goods are manufactured or exempted and taxable services provided • Payment of ‘amount’ increased to 6% in case of exempted services w.e.f. 1-4-2012 • 4 options are available to assessee CA RIMA MEHTA, carimamehta@gmail.com

  39. Four Options • (1) Maintain separate inventory and accounts of receipt and use of inputs and input services used for exempted goods/exempted output services – Rule 6(2) of Cenvat Credit Rules • (2) Pay amount equal to 6% of value of exempted goods (if he is ‘manufacturer) and of value of exempted services (if he is service provider), 2% in case of transport of goods or passengers by rail. W.e.f. 01.04.2012. – Rule 6(3)(i) as amended w.e.f. 1-4-2012 [The ‘amount’ payable was 5% 31-3-2012]. (Continued) CA RIMA MEHTA, carimamehta@gmail.com

  40. Four Options • (3) Pay an ‘amount’ equal to proportionate Cenvat credit attributable to exempted final product/ exempted output services, as provided in rule 6(3A) – Rule 6(3)(ii) of Cenvat Credit Rules • (4) Maintain separate accounts for inputs and pay ‘amount’ as determined under rule 6(3A) in respect of input services - Rule 6(3)(iii) of Cenvat Credit Rules as inserted w.e.f. 1-4-2011. CA RIMA MEHTA, carimamehta@gmail.com

  41. Value for Services under abatement scheme • Entire Value will be treated as value of ‘exempted service’ for rule 6 • However, if 6% ‘amount’ is payable, it will be on amount on which service tax not paid (e.g. if service tax paid on 40%, ‘amount’ of 6% will be on balance 60%. CA RIMA MEHTA, carimamehta@gmail.com

  42. Exemptions subject to condition of non-availment of Cenvat Credit • Rule 6(3D) • (inserted w.e.f. 1-4-2011) • It states that payment of ‘amount’ under rule 6(3) shall be deemed to be Cenvat credit not taken for purpose of an exemption notification where exemption is granted on condition that no Cenvat on input and input services is availed. CA RIMA MEHTA, carimamehta@gmail.com

  43. Value of service for services under composition Schemes for rule 6 • In case of services covered under composition scheme, ‘value’ for applying rule 6 will be tax amount divided by rate of service tax applicable under general exemption. Present rate is 12% • If gross amount Rs. 1,000, service tax paid Rs. 48. Then value of taxable service for rule 6 would be Rs. 400. • If service tax rate 10% then service tax would be Rs 40 and vale will be Rs 400. CA RIMA MEHTA, carimamehta@gmail.com

  44. Principle Behind Calculations under Rule 6 • Take entire Cenvat credit of inputs and input services used in exempted as well as taxable final products and exempted as well as taxable services. • At the end of month, assessee should calculate and reverse Cenvat credit attributable to exempted final products and exempted services on provisional basis CA RIMA MEHTA, carimamehta@gmail.com

  45. Principle Behind Calculations under Rule 6 1. Rule 6(3A)(b)(i) • Inputs used for exempted final products 2. Rule 6(3A)(b)(ii) • Inputs used for exempted services (On proportionate basis, based on ratio of previous year) 3. Rule 6(3A)(b)(iii) • Input services used for exempted final products and exempted services (On proportionate basis based on ratio of previous year). • Total • 1+2+3 = amount to be reversed every month on provisional basis CA RIMA MEHTA, carimamehta@gmail.com

  46. Principle Behind Calculations under Rule 6 • Assessee should calculate the ratios on actual basis and make fresh calculations and pay difference, if any, before 30th June. • If it is found that he had paid excess amount based on provisional ratio, he can adjust the difference himself by taking credit. CA RIMA MEHTA, carimamehta@gmail.com

  47. Provision in case of traded goods • Provision in case of traded goods : Difference between sale price and cost of goods sold (determined as per generally accepted accounting principles) or 10% of Cost of goods sold w.e. is more, is to be treated as value of exempted service. • Treaded goods shall be included in the exempt service as it consist in the negative list under sec 66D of the Finance Act, 1994 which is very well included in the definition of “Exempt Service”. • Therefore credit shall be reversed in that regard. Value thereof shall be as mentioned above. CA RIMA MEHTA, carimamehta@gmail.com

  48. Non applicability of reversal provision on specified transactions • Export of goods and export of services, • Supplies to SEZ, EOU, EHTP, STP, • Goods supplied against international competitive bidding, goods supplied to UN organisations, foreign diplomatic missions or diplomatic agents, • Provision of services to SEZ (where exemption is available) • Supplies made for setting up of Solar power generation projects. (inserted by notification no. 25/2012 w.e.f. 08.05.2012) CA RIMA MEHTA, carimamehta@gmail.com

  49. Provision for Banking Company • This provision applies to not withstanding anything contained in sub-rule (1),(2),(3) of Rule 6. • In respect of banking service, the Bank or NBFC is required to pay ‘amount’ equal to 50% of Cenvat Credit availed on inputs and input services [Rule 6(3B) of Cenvat Credit Rules as inserted w.e.f. 1-4-2011]. CA RIMA MEHTA, carimamehta@gmail.com

  50. Returns [Rule 9] • For Manufacturer : within 10 days from the end of the said month/quarter as the case may be. • For First stage dealer/Second stage dealer : within 15 days from the close of each quarter. • For Output Service provider : half yearly return in the form specified by the end of the month following particular half year. CA RIMA MEHTA, carimamehta@gmail.com

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