Cenvat Credit Rules, 2004 CA V.RAGHURAMAN B.Com , fca , llb , ACS, Grad. cWA

1. Cenvat Credit Rules, 2004CA V.RAGHURAMANB.Com, fca, llb, ACS, Grad. cWA

2. INTRODUCTION • Credit mechanism is vital for effective operation of Value Added Tax system • Introduced for the first in 1986 as ‘Modvat credit’, initially credit mechanism was available only for ‘inputs’. • Subsequently, the credit facility was extended to ‘capital goods’ in the year 1994. • Modvat credit was renamed as ‘Cenvat Credit’ in the year 2000.

3. Introduction • Cenvat Credit Rules, 2004- Notification No.23/2004-CE dt.10.9.04 – which replaced Cenvat Credit Rules, 2002 & Service Tax Credit Rules, 2002 – unified credit on goods and services. • Unifies credit on goods and services by including the definition of ‘input services’ and widening of the definition of ‘input’. This was meant to pave way for introduction of GST.

4. FIRST STEP – UNIFICATIONCENVAT CREDIT RULES, 2004

5. INTRODUCTION INPUT BASKET OUTPUT BASKET INPUT GOODS INPUT SERVICES CAPITAL GOODS OUTPUT GOODS OUTPUT SERVICES

6. INTRODUCTION OUTPUT PROVIDERS SERVICE PROVIDER BOTH MFG AND SERVICES MANUFACTURER

7. Capital Goods – Rule 2(a)

8. Capital Goods – Rule 2(a)

9. Important issues • CCE v. Rajasthan Spinning and Weaving Mills Ltd. - 2010 (255) E.L.T. 481 (S.C.) • Credit allowed on steel plates and M.S. channels etc used for fabricating chimney for Diesel Generator • Chimney is a Pollution control equipment - Any equipment used for getting rid of effluents to be treated as accessory to specified capital goods and credit thereon admissible • User test adopted - the question whether an item falls within the purview of “capital goods” would depend upon the user it is put to

10. Important issues – component or accessory • Saraswathi Sugar Mills, 2011 (270) E.L.T. 465 (S.C) • Structural used for installation of sugar mill- not capital goods ( does not qualify to be components) . • Iron and Steel structures would not go into composition of vacuum pans, crystallizers etc. and are not essential requirements in sugar manufacturing unit. Held that iron and steel structures are not components of capital goods used in sugar manufacturing plant. • Whether qualifies as accessory not examined by Supreme Court.

11. Cenvat credit on spares of ropeway • Supreme Court in the case of Birla Corporation Ltd. vCCE 2005 (186) ELT 266 (SC), dealing with this issue held that the spares of ropeway used for transporting crushed limestone from mines located 4.2 kms away to factory, the appellant is entitled to Modvat credit on the spare of ropeway.

12. ‘Inputs’

13. ‘Inputs’

14. Inputs

15. Inputs

16. Important issues • Whether inputs used for construction of / manufacture of capital goods qualify as inputs? • Erstwhile definition specifically provided for said activity • CCE Vs. SLR Steels Ltd., 2012 (280) E.L.T. 176 (Kar.) • Goods used for construction of storage tank and pollution control equipment qualify as inputs even if Storage tank/ pollution control equipment is immovable property

17. Manufacturer vs Manufacture • CCE v Rashtriya Ispat Nigam Ltd. 2011 (271) ELT 338 (AP), High Court held that the Steel sheets and coal used for fabrication of capital goods and parts during process of repair to machinery in the factory of the manufacturer and, as such, fall within the ambit of the definition of capital goods as the same is used by the manufacturer. • High Court distinguished between the words ‘manufacturer’ which is used in the definition of capital goods and the word ‘manufacture', and has given a view that essence under the definition is used by the manufacturer within factory and not merely manufacturing activity.

18. Important issues • Whether inputs used for construction of / manufacture of capital goods qualify as inputs? • Under present provisions only use in construction or fabrication of civil structures or support structures to capital goods is excluded. • Construction /manufacture of storage tank / pollution control equipment is not specifically excluded.

19. Important issues • Credit on goods used for repair of machinery • Certainly has relationship with manufacturing activity • Goods used for testing of finished products • Eligible inputs :Flex Engineering -2012 (276) E.L.T. 153 (S.C.) • Without testing machines are not fit for sale

20. Important issues • Packing Materials: • Erstwhile rules specifically included ‘Packing materials’ • Primary packing : without which goods cannot be cleared. So credit still eligible as they have relation with manufacture. • Kwality Biscuits 2011 (272) ELT 364 (Kar.)- without packing final products cannot be sold. • Secondary packing: Could it be termed as accessory. (adds benfit ).

21. Important issues • Credit on bought out items (combo pack) • Prime Health Care Products 2011 (272) ELT 54 (Guj) • Credit on plastic droppers/ measurement units supplied along with drugs • Okasa Ltd. 2009 (241) ELT 359 (Bom.) • In terms advisory from Drug Controller of Indiaof Without which drug cannot be sold • Credit on promotional materials: • Perfetti Van Mele India Pvt. Ltd. v CCE 2010(254) ELT 620 (P&H) - Credit was denied

22. Input Service

23. Input Service

24. Input service

25. Input service

26. Input service

27. Means, includes & excludes definition • CCE vs. Heavy Engineering Corporation Ltd. 1990 (49) ELT 531 (Tri) – held that the inclusion clause would enjoy a broader scope whereas the exclusion clause would be restricted to the items mentioned therein. • RBI v. Peerless General Finance and Investment Co. Ltd., AIR 1987 SC 1023 – held that interpretation must depend on the text and the context as they are the bases of interpretation and when there is express exclusion clause, all such exclusions would get excluded irrespective of ‘means and includes’ part of the definition.

28. Effect of amendment • Phrases “construction of factory / office”, “activities relating to business such as” were deleted w.e.f. 1.4.2011 • Exhaustive definition is made more restrictive • On one hand tax everything under the sky (negative list) but on other hand more restrictive definitions on credit side • Artificial barriers are created.

29. Coca Cola’ case- 2009(15) S.T.R. 657(Bom.) • Availability of input service credit on advertising of soft drinks procured by the manufacturers of ‘concentrates’. • In relation to activities of business: • Phrase has a wider scope • Can not be restricted to certain activities • Legislature has not employed any qualifying words such as • ‘important activities’, • ‘main activities’, • ‘essential activities’ • All services relating to business are eligible

30. ABB’ case 2011-TIOL-395-HC-KAR-ST • Expression “activities relating to business” covers transportation upto customer’s place and word “relating” widens scope. • Input service not restricted to services specified after expression “such as” as it is purely illustrative. • Definition of input service having different limbs providing independent benefit. • Credit admissible if one limb is satisfied even if others are not satisfied • Hence, outward transportation of finished goods from the place of removal is covered by the definition of 'input service' upto 31.03.2008. Calcutta High Court has taken contrary view in CCE vsVesuvisous India Ltd 2014 (34) STR 26.

31. GTC Industry’s Case-2008 (12) S.T.R. 468 (Tri. - LB) • credit of tax on these taxable services allowed that go to form part of assessable value for payment of excise duty • Expenses towards canteen and provision of subsidized canteen forms part of cost of production as evident from para 4.1 of CAS-4 • Cost of food forms part of expenditure incurred having bearing on cost of production

32. CCE vs. Stanzen Toyotetsu India (P) Ltd. 2001 (23) STR 444 (Kar)

33. Toyota Kirloskar Motor P Ltd – 2011 (24) S.T.R. 645 (Kar) • Photography & Shamiana services utilised for ‘Rajyotsava Day’ celebrations • Held that these services have nexus with manufacture of final product as well as relating to it business. The State function arranged once a year is for welfare of employees for preservation of State’s culture, hence has nexus with business of manufacture of final product. • Keeping in view the sentiments of the particular state and as a reasonable employer, if company wants satisfy the aspirations of the people in a lawful manner, he cannot be found fault with, since the assessee in no way personally benefitted from this.

34. Maintenance of residential colony • CC & C.Ex., Hyd Vs. ITC Ltd., 2013 (32) STR 288 (A.P.) • Maintenance of residential colony for its employees at remote location is not provided, it would not be feasible to carry on its manufacturing activity. Staff colony is directly and intrinsically linked to manufacturing activity. • Therefore services like lawn mowing, garbage collection and cleaning, harvesting, swimming pool maintenance, weeding etc to be considered as ‘input services’ under Rule 2(l) • However, certain other High Courts have taken contrary view. See Bombay High Court in CCE vs Manikgarh Cement 2010 (20) STR 456.

35. Important issues

36. Important issues

37. Exempted Service – Rule 2(e) • “exempted service” means a- • (1) taxable service which is exempt from the whole of the service tax leviable thereon; or • (2) service, on which no service tax is leviable under section 66B of the Finance Act; or • (3) taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken; but shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994.

38. Output Service – Rule 2(p) (p) “output service” means any service provided by a provider of service located in the taxable territory but shall not include a service,- • (1) specified in section 66D of the Finance Act; or • (2) where the whole of service tax is liable to be paid by the recipient of service.’

39. Rule 3(1)

40. Rule 3

41. Utilisation of Cenvat • Rule 3(4) – Cenvat credit may be utilised for payment of: • Excise duty on final product • Cenvat credit reversal on removal as such of input / CG • Amount payable under Rule 16(2) • Service Tax on output service • Explanation inserted w.e.f., 1.7.2012: “Explanation. - CENVAT credit cannot be used for payment of service tax in respect of services where the person liable to pay tax is the service recipient” • Karnataka High Court decision in M/s Aravind Fashions Ltd 2012 (25) S.T.R. 583 (Kar.) • What is position regarding ‘Joint Charge’ recipient?

42. Rule 3(4)-Utilization of credit

43. Rule 3(5) – Removal of inputs or capital goods as such

44. Rule 3(5A) Removal of CG as such ‘after use’

45. Rule 3

46. Important issues under Rule 3 • No one to one correlation between input and final product: • HMM Limited Vs. Collector of Central Excise, New Delhi, 1996 (87) E.L.T. 593 (S.C) • Bharat Litho Co. Ltd. V CCEx. Delhi, 2004 (172) E.L.T. 327 (Tri.-Delhi). • Utilization of credit relating to manufacture for payment of service tax on renting: • Lakshmi Technology & Engineering Indus. Ltd, 2011 (23) S.T.R. 265 (Tri. – Chennai)

47. Rule 4

48. Rule 4

49. Rule 4(5) –Job work

50. Rule 4-Jobwork • Cenvat credit shall be allowed on the jigs, fixtures, moulds and dies sent by a manufacturer to another manufacturer or a job worker • Goods sent to job worker can be removed directly from job worker’s premises with the Deputy / Asst. Commissioner’s permission – Rule 4(6)