CENVAT CREDIT –
RULE 6
PRESENTATION BY-:
CA ASHOK BATRA
M/S A.K.BATRA & ASSOCIATES
A-36, RAJOURI GARDEN
FIRST FLOOR , DELHI-27
1
CENVAT CREDIT



In any Indirect Tax under VAT system one has
to calculate Net Tax payable i.e. Output Tax
Liability – Tax Credit
Calculation of Output Tax Liability is becoming
easier and easier with the increase in the scope
of taxable services
Money saved is money earned, hence calculation
of Tax Credit is gaining importance and will
become more relevant in GST regime.
2
CENVAT CREDIT

Claim of CENVAT is becoming a subject matter of
litigation because:


Definition of Inputs, Input services and Capital goods
not drafted with precision and subject to interpretation
in more than one manner
There are economic activities carried out in various
permutations and combinations which have not been
visualized and provided in law i.e. trading,
manufacturing, provision of services and return on
investments etc.
Difficult to maintain separate records being intangible in
nature
3
CENVAT CREDIT

Implication of wrong availment of CENVAT:

Implication of non-availment of CENVAT


Interest, penalties, loss of expense/depreciation
resulting into increased liability of Income Tax
Increased liability of tax to extent of 70% of
CENVAT
Cautious and Judicious approach is the answer
to the issue
4
CENVAT CREDIT

Basic Fundamental:



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Must fall under the definition of inputs(2k), input
services2(l) and capital goods2(a)
Must be used for the provision of output service
Inputs, services used exclusively for providing exempted
service CENVAT not allowed
Credit of duty on capital goods and specified services
under rule 6(5) shall be allowed even if used partially for
providing taxable services
There should be a proper duty paying document
(invoice, bill, etc.) in terms of Rule 9.
5
CENVAT CREDIT- RULE 6
Obligation of manufacture of dutiable and exempted
goods and provider of taxable and exempted services
– Not applicable in case of following:
1. Assessee providing only taxable services
2. Assessee providing exempted services only

New Procedure applicable w.e.f. 01.04.2008.



Prior to that, utilization of CENVAT Credit was restricted to 20%
of Output Service tax liability.
Accumulated CENVAT Credit as on 01.04.08 shall be available
fully as per Departmental clarification F.NO. 137/72/2008-CX.4
dated 21.11.2008.
Rule 6 not applicable to services rendered to J&K as
these are not exempted services.
6
CENVAT CREDIT – RULE 6
Rule 6(1)



No Cenvat credit of Service Tax paid in respect of input or
input services used for manufacture of exempted goods or
provision of exempted services.
Exception - Rule 6 (2) i.e. maintenance of separate records
Proviso: CENVAT Credit on inputs shall not be denied to
a job worker referred in Rule 12AA of CER, 2002, on the
ground that said inputs are used in the manufacture of
goods cleared without payment of duty under the
provisions of that rule – Applicable in the case of mfr.
Under excise
7
CENVAT CREDIT – RULE 6

Situation I – Where service provider is maintaining
separate accounts
Rule 6(2) – Separate accounts/records
Rule 6(2) of CENVAT Credit Rules, 2004, provides that, where
a provider of output service avails of CENVAT credit in respect
of any inputs or input services and provider of such output
service which are chargeable to tax as well as exempted services,
then, the provider of output service shall maintain separate
accounts for receipt, consumption and inventory of input and
input service meant for use in providing output service and the
quantity of input meant for use in the exempted services and
take CENVAT credit only on that quantity of input or input
service which is intended for use in providing output service on
which service tax is payable.
8
CENVAT CREDIT – RULE 6
Situation II – Where service provider is not maintaining separate
accounts
Rule 6(3) and (3A)
W.e.f. 01.04.2008, Rule 6(3) is being amended and Rule 6(3A) is being inserted in
CENVAT Credit Rules, 2004. Rule 6(3) provides the following options to
provider of output service opting not to maintain separate accounts [Rule 6(3)]:

Option-I: The provider of output service shall pay an amount equal to 6%
(8% upto 07.07.2009)of the value of the exempted services. Manufacture of
goods shall pay an amount equal to 5% (10% upto 07.07.2009 of the value of
exempted goods

Option-II: Provider of taxable services shall reverse the credit attributable
to the inputs and input services used for providing exempted services as per
the procedure prescribed in the rule i.e. [Rule 6(3A)].
Note: It is an option and not an obligation. Department
cannot force the assessee for exercising of a particular
option.
9
CENVAT CREDIT – RULE 6
Rule 6(3) and (3A) – Cont.
 Procedure to be followed for exercising option II
 Step1: Information to jurisdictional Superintendent
before opting for this Scheme
 While exercising the option of availing CENVAT on
provisional (estimated) basis, the provider of output
service shall file a letter with the jurisdictional
Superintendent containing following information,
namely:(i) name, address and registration No. of the provider of
output service (i.e. assessee);
(ii) date from which the option under this clause is
exercised or proposed to be exercised;
10
CENVAT CREDIT – RULE 6
Rule 6(3) and (3A) – Cont.
(iii) description of taxable services;
(iv) description of exempted services provided and/or to
be provided by assessee;
(v) opening balance of CENVAT credit of inputs and
input services on the date of exercising this option;

Option once exercised shall not be reversed during
the remaining part of the financial year and to be
applied to the business as a whole on the basis of
registration
11
CENVAT CREDIT – RULE 6


Rule 6(3) and (3A) – Cont.
Step 2 : Provisional CENVAT Credit to be taken by
assessee on monthly basis
Assessee shall calculate the eligible amount of monthly
CENVAT Credit in respect of inputs and input services
and avail the same on provisional basis in the ratio of
value of taxable and exempted services provided by
assessee in the preceding financial year. Assessee
shall avail such provisional credit (estimated credit)
while discharging its monthly service tax liability
12
CLAIM OF CENVAT
Rule 6(3) and (3A) – Cont.




Step 3: Calculation of ‘Total Estimated CENVAT
Credit’ availed by assessee during the year and ‘Total
Actual Admissible CENVAT Credit’ during the year.
At the end of financial year, assessee shall calculate the
“Total Actual admissible credit” and “Total Estimated
Credit”.
Total Estimated Credit
=“Estimated credit on inputs”
plus “Estimated credit on input services” (claimed during the
relevant financial year)
Total Actual admissible Credit
= Total Actual
admissible Credit on inputs + Total Actual admissible
Credit on input services
13
CLAIM OF CENVAT


Rule 6(3) and (3A) – Cont.
Step 4: Adjustment/payment of excess/short
CENVAT Credit availed by assessee
At the end of Financial Year, assessee shall pay the
CENVAT Credit on or before 30th June of succeeding
financial year if total estimated credit taken by him is
MORE than total actual admissible credit admissible.
Interest @ 24% per annum shall be charged and
collected from such assessee if such service provider
makes payment of differential Cenvat after the due date
i.e. 30th June.
14
CENVAT CREDIT – RULE 6
Rule 6(3) and (3A) – Cont.


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Step 5:
Information to jurisdictional Superintendent
after making aforesaid payment/adjustment
The provider of output service shall inform to the
jurisdictional Superintendent of Central Excise within a
period of 15 days from the date of additional payment or
adjustment as explained in step 4 (para no. 2.6) above.
Information given by the provider of output service shall
contain the following particulars, namely:(i) details of CENVAT credit attributable to exempted
goods and exempted services, month wise, for the whole
financial year, determined provisionally as calculated 2 & 3
above.
(ii) CENVAT credit attributable to exempted goods and
exempted services for the whole financial year, determined
as per step 3 above.
15
CENVAT CREDIT – RULE 6
Rule 6(3) and (3A) – Cont.

(iii) amount short paid determined as per step 4, along
with the date of payment of the amount short-paid,

(iv) interest payable and paid, if any, on the amount
short-paid, if payment is made after 30th June of
succeeding financial year.

(v) adjustment of CENVAT Credit if assessee had
claimed the less CENVAT Credit on estimated basis.
16
Summary of Rule 6 (1), (2) & (3)
Sl. Situation
No
.
Extent of CENVAT
Credit allowed
1
100% CENVAT Credit is
allowed
2
If a service provider /
manufacturer provides only
taxable services /
manufacture only taxable
goods
If a
service provider
provides/manufacturer
only
exempted
services
/
manufacturer only exempted
goods
No CENVAT Credit is
allowed
17
Summary of Rule 6 (1), (2) & (3)
Sl.
No.
Situation
3
If a service provider/manufacturer
provides / manufactures both taxable &
exempted services: / goods- In this
situation following options are
available:-
Extent of CENVAT Credit
allowed
(A)Option to maintain separate accounts
for the Receipt & Consumption of taxable
& non-taxable services/goods vide Rule 6(2)
of CENVAT Credit Rule
CENVAT Credit allowed only to the
extent of inputs/services used in
providing taxable services/ taxable
goods
(B)Option of not to maintain separate
accounts in the aforesaid manner(Rule
6(3)(i) OR 6(3) (ii) as the case may be)
(i) Either pay 6% (8% upto 6-72009) on the value of exempted
services
OR
(ii) Reverse the CENVAT Credit
attributable to the inputs & input
services used for providing exempted
services/exempted goods
18
Issued involved in applying the
formula under Rule 6 (3)
Treatment of Traded Goods

To be considered on the same footing as that of exempted
goods / services

Metro Shoes Pvt. Ltd. Vs. CCE Mumbai – 2008 (10) STR 382
(Tri-Mum.) - Cenvat for service tax paid on services
which are directly and wholly attributable to the
trading activities is not available
19
Issued involved in applying the
formula under Rule 6 (3)
Whether value of export goods/services should be
taken as final product / taxable service or exempted
goods / services
In respect of exempted services
Export of services chargeable to Nil rate of Service Tax
 Rule of CCR, 2004 – No reversal of Cenvat Credit on
exported services.
 Para 6 of Circular No. 868/6/2008-CX dated 9-5-2008
confirms that export of services without payment of
Service Tax are to be treated as taxable services.
 Value of export of services should be taken in
denominator i.e. with the value of taxable services.
20
CENVAT CREDIT – RULE 6
Rule 6 (4)

Rule 6(4) of CENVAT Credit Rules, 2004, provides that
CENVAT Credit shall not be allowed on capital goods which are
used exclusively in the manufacture of exempted goods or in
providing exempted services, other than the final product which
are exempt from the whole of the duty of excise leviable thereon
under any notification where exemption is granted based upon
the value or quantity of clearances made in the financial year.
NOTE: CENVAT Credit on capital goods will be available to
output service provider even if such capital goods are used partly
for the purpose of providing taxable service and partly for the
purpose of exempted services
21
CENVAT CREDIT – RULE 6
Rule 6(5)

Rule 6(5) of Cenvat Credit Rules, 2004, implies that in
case of 16 specified services, CENVAT Credit shall not
be allowed if such services are used exclusively for
providing exempted services. This implies that in
case of 16 specified taxable services, service provider
can avail full CENVAT credit even if these are partially
used in providing output taxable services and partially
in providing exempted services.
22
CENVAT CREDIT – RULE 6
Rule 6(5)
Following are list of aforesaid services mentioned in Rule 6 (5)
• Consulting Engineer
• Architect
• Interior Decorator
• Management, Maintenance or Repair
• Foreign Exchange broker other than Banking & Financial
Institution with NBFC & Body Corporate
• Intellectual property service other than copy right
• Management Consultant
23
Cenvat Credit
Rule 6(5)
•
•
•
•
•
•
•
•
Real Estate Agent
Security Agency
Technical Testing and Analysis
Scientific or Technical Consultancy
Banking & Other Financial Services
Erection, Commissioning or Installation
Technical Inspection or Certification
Construction services in respect of Commercial or
Industrial Buildings or Civil Structures
24
CENVAT Credit
Rule 6(6)
The provisions of sub-rules (1), (2), (3) and (4),
shall not be applicable in case the excisable
goods removed without payment of the duty
under specified circumstances as specified under
the law.
25
Clarification by Department w.r.t.
Rule 6
Circular No. 868/6/2008-CX dated 09.05.2008
Question 1 : Whether an assessee availing option (i) or option
(ii) under rule 6(3) is allowed to take CENVAT Credit of
duty paid on inputs and input services which are used for both
dutiable and exempted goods or services.
Answer: Yes
26
Clarification by Department w.r.t.
Rule 6
Circular No. 868/6/2008-CX dated 09.05.2008
Question 2 : Whether an assessee availing option (i) in respect of
certain exempted goods/services can also avail option (ii) in
respect of other exempted goods or services simultaneously?
Answer: No
 The same assessee cannot avail both option (i) and
option (ii) simultaneously during a financial year
 Option once exercised during a financial year (F.Y.)
cannot be withdrawn during the remaining part of the
FY
27
Clarification by Department w.r.t.
Rule 6
Circular No. 868/6/2008-CX dated 09.05.2008
Question 3 : Assessee opting for option (i) is required to pay an
amount equivalent to 10% of value of exempted goods or 8% of value
of exempted services. What is the scope of term "value" for the said
purpose
Answer:
 Value of exempted goods = As per Section 4/4A of
CEA, 1994 (Transaction Value u/s 4 in case goods
chargeable to specific rate of duty)
 Value of exempted services = Gross amount charged for
providing exempted service (without abatement)
28
Clarification by Department w.r.t.
Rule 6
Circular No. 868/6/2008-CX dated 09.05.2008
Question 4 : What is the accounting code to be followed by the
assessee who is required to pay 8% or other amount for the
exempted service under Rule 6(3).
Answer: 0044
29
Clarification by Department w.r.t.
Rule 6
Circular No. 868/6/2008-CX dated 09.05.2008
Question 5 : Whether input services distributor can also opt for
option (i) or option (ii)?
Answer : No
 ISD is like a trader.
30
Clarification by Department w.r.t.
Rule 6
Circular No. 868/6/2008-CX dated 09.05.2008
Question 6 : Whether export of service without payment of service
tax under Export of Service Rules shall be treated as exempted
service for the purpose of rule 6(3)?
Answer : No
31
Clarification by Department w.r.t.
Rule 6
Circular No. 868/6/2008-CX dated 09.05.2008
Question 7 : What is the manner for calculation of CENVAT Credit
amount attributable to inputs used in or in relation to the manufacture of
exempted goods?
Answer :
 On the basis of actual consumption of inputs used
 Quantification may be made based upon the stores/production
records maintained by the manufacturer
 Certificate from Cost Accountant/Chartered Accountant giving
details of quantity of inputs used in the manufacture of
exempted goods, value thereof and CENVAT credit taken on
these input may be submitted at the end of the year.
32
Clarification by Department w.r.t.
Rule 6
Circular No. 868/6/2008-CX dated 09.05.2008
Question 8 : Whether credit in respect of input services covered by rule
6(5) would be required to be taken into account for determination of amount
payable as per formula provide in rule 6(3A).
Answer : No
33
Rule 6 not applicable to services rendered to
J&K as these are not exempted services.

Services provided to establishment located in J&K shall
not be considered as exempted service.

ECIL Rapicscan Ltd. V Commissioner of Service
Tax, Hyderabad-2010(17) S.T.R. 433 (Tri.-Bang)



Appellant providing services to various establishment in
the Country including establishment located in J&K.
Held J&K region falls outside the purview of Chapter
V of Finance Act 1994
Cenvat Credit Rules shall not be applicable in such
case.
34
CENVAT Credit Is Indefeasible

Vijayanand Roadlines v. CCE, Belgaum, 2007
(7) STR 219 (Tri-Bang)



CENVAT Credit Rules, 2004 only entails the
allowability of Cenvat Credit
Does not provide any conditions for its
availment or utilization
It is at the discretion of the service provider as to
at what point of time it intends to avail and utilize
the CENVAT credit accumulated with it
35
Important Case Law

Credit utilization of 20% not applicable to
capital goods


Idea Celllular Ltd. Vs CCE Rohtak [2009] 16 STR
712 (Tri-Delhi)
If Services becomes taxable during the year
CENVAT available proportionately even if falls
under Rule 6(5)

G.H.C.L Ltd. Vs CCE Bhavnagar[2009] 16 STR 588
36
Important Case Law

If exempted service started during the year, full
CENVAT credit till exempted service was not
provided


Mount Mettur Pharmaceuticals Ltd. Vs CCE
Chennai [2009] 13 STR 414
Cenvat credit reversal equal to credit not taken
2004 [174] ELT 422 (All)
 Mount Mettur Pharmaceuticals Ltd. Vs CCE
Chennai [2009] 13 STR 414

37
Important Case Law

Maintenance of separate accounts initially not a
pre-condition for claiming exemption


CCE vs. Ashima Dyecot Ltd. [2008] 12 STR 701
(Guj)
Rule 6(5) Non-Obstante clause, for claiming
100% CENVAT on specified services, one need
not make separate accounts

CCE Goa vs V.M.Salgaonkar & Bros. Pvt. Ltd
[2008] 10 STR 609 (Tri-Mumbai)
38
Important Case Law

Rule 6(5) has used the word ‘allowed’ and it
covers both taking and utilization. No reason for
allowing credit and not permitting utilisation.

CCE Goa vs V.M.Salgaonkar & Bros. Pvt. Ltd [2008] 10
STR 609 (Tri-Mumbai)
39
Important Case Law
M/s AVAYA GLOBAL CONNECT LTD Vs CCE,
AHMEDABAD, 2010-TIOL-397-CESTAT-AHM
 Department’s view that even if CENVAT credit on
common input services is not taken, appellant is
required to maintain separate accounts not proper
 Unless the department shows that appellants have
availed credit of input services which have also
been used for providing any of the exempted
services, the demand cannot be sustained
40
Important Case Law


Very vide meaning has been given to the term
‘Input Services’ under various judgments.
Activity in relation to business has also been given
very wide meaning.


Case laws: ABB, Coco Cola
An activity which has got the remotest connection
has been held as Input Service.

Victor Gaskets India Ltd. [2008] 12 STR 468 (Tribunal Larger
Bench) – Outdoor caterer services availed for running canteen in
factory premises for employees, CENVAT allowed
41
M/s ABB Ltd. v. CCE, Bangalore, 2009-TIOL-830CESTAT-BANG-Larger Bench (the ABB Case)
Scope of definition of ‘input service’ – examined:-
“3. The above definition can be conveniently divided into the following
five categories, insofar as the manufacturers are concerned:
(a) Any service used by the manufacturer, whether directly or
indirectly, in or in relation to the manufacture of final products,
(b) Any service used by the manufacturer whether directly or indirectly,
in or in relation to clearance of final products from the place of
removal,
(c) Services used in relation to setting up, modernization, renovation or
repairs of a factory, or an office relating to such factory,
42
M/s ABB Ltd. v. CCE, Bangalore, 2009-TIOL-830CESTAT-BANG-Larger Bench (the ABB Case)
(d) Services used in relation to advertisement or sales promotion,
market research, storage upto the place of removal, procurement of
inputs,
(e) Services used in relation to activities relating to business and
outward transportation upto the place of removal.
 Extensive meaning assigned to the phrase ‘in relation to
business’ by relying on OECD guidelines
 Held, Cenvat credit of outward transportation is eligible.
 Held that for eligibility of Cenvat Credit, there is no
precondition that expense/cost forms part of transaction
value/Assessable Value.
43
COCA COLA V. CCE, BOM, 2009-TIOL-449HC-MUM-ST (“THE COCA COLA
CASE”)

Extensive meaning to the phrase ‘in relation to
business’ assigned by ABB Case was upheld.

Held, that the basic approach adopted by India
is to tax services on the destination cum
consumption principle, which is in line with
international norms. Therefore, OECD
Guidelines can be safely considered.
44
COCA COLA CASE (CONTD.)

Upheld the observation of ABB case which held
that service tax and excise duty are consumption
taxes to be borne by the consumer and, therefore, if
credit is denied on transportation service, the levy
of service tax on transportation will become a tax
on business rather than being a consumption tax.

On a limited issue held that since the expense of
advertisement forms part of Assessable value,
Cenvat credit cannot be denied.
45
THANKS
M/S A.K.BATRA & ASSOCIATES
A-36, RAJOURI GARDEN
FIRST FLOOR , DELHI-27
46