Cenvat Credit (Credit and Conditions)

• 1978- Jha Comm -> 1986 Profroma Credit -> Movdat
Expanded yr after yr -> 1994 Capital Goods +
Dealers Passing on -> 2000 CENVAT credit-> CR2004 Cross sectional -> list contracted yr after yr ->
2014 - 6 Months Restriction
CA Madhukar N Hiregange
Outline Of Cenvat Credit
• Cenvat Credit is a beneficial piece of legislation –
unless specifically excluded – cannot be denied.
• Final product is dutiable – Cenvat on inputs used is
to be allowed as credit cannot be denied – Formica
India division V/s CCE 1995 (77) E.L.T. 511 (S.C.)- Arti
CA Madhukar N Hiregange
Utilization Of Cenvat Credit
• All taxes and duties specified in rule 3(1) of Cenvat Credit
Rules form a ‘pool’.
• This credit can be utilised by manufacturer of excisable goods
or provider of taxable service.
• Cross utilisation
• The credit can be used for the payment of any tax or duty as
specified in rule 3(4) of Cenvat Credit Rules.
• One to one relation not required.
Capital Goods – Rule 2(a)
• All goods falling under
Chapter 82
Chapter 84
Chapter 85
Chapter 90
Heading 6805
Grinding wheels and parts
thereof falling under heading
Outside the factory of the manufacturer of the final products
for generation of electricity for captive use within the factory
• Pollution control equipment;
• Components, spares and accessories
• Moulds and dies, jigs and fixtures;
Capital Goods – Rule 2(a)
• Refractories and refractory materials
• Tubes and pipes and fittings thereof
• Storage tank and……
Capital Goods – Rule 2(a)
 Motor Vehicle other than CETA 8702, 8703, 8704 & 8711
chassis (but including dumpers and tippers)
 Used in the factory of manufacturer–equipments/appliances
used in office excluded
 Used for providing output service
 Motor Vehicle and its components/spares/accessories–
Restricted to specific purposes- motor vehicle designed for
transport of goods/carry passengers etc
Capital Goods – Rule 2(a)
• motor vehicle designed for transportation of goods including their
chassis registered in the name of the SP, when used for• (i) providing an output service of renting of such motor vehicle; or
• (ii) transportation of inputs and capital goods used for providing an
output service; or
• (iii) providing an output service of courier agency;]
• [(C) motor vehicle designed to carry passengers including their
chassis, registered in the name of the provider of service, when
used for providing output service of• (i) transportation of passengers; or
• (ii) renting of such motor vehicle; or
• (iii) imparting motor driving skills;]
When Can The Credit Be Availed On
Capital Goods?
 50% on receipt of the goods in the factory on the basis of
 Excise Invoice
 Bill of Entry (in case of import of goods)
 Any other documents as per Rule 9 of CCR, 2004
 Internal records (GRN receipt note).
 Balance in the subsequent Financial Year.
 SSI - can avail 100% Cenvat credit on the CG
Capital Goods – Some Random
 CGs do not include office appliances - in factory
 Used for providing output services – SP can take such credit
 Procured on hire purchase/lease/loan eligible for Cenvat - 4(3)
of CCR, 2004.
Capital Goods – Some Random
 Used exclusively for exempted final products and output
services - Ineligible.
 Depreciation cannot be availed on Cenvat portion.
Eg: Cost of the capital asset - Rs.10K including duty of Rs.1K
Depreciation to be claimed only on Rs.9K.
Capital Goods - Benefits
• On spare parts credit can be taken – it is just like capital
goods-what if used for providing services-AMC printers?
• Dealer – more competition – credit will be passed on –
benefit same at lesser price.
• Credit can be taken on AC, Computer – proof– used for
manufacturing purpose or providing services
• Partial usage of capital goods – full credit available.
Capital Goods – Issues
• SSI Exemption Vs Cenvat Credit availment.
• Capital goods not covered under specified chapter heading as
per the definition-parts of the CG such as of heading 84/85??
• Rule 6 of CCR Vs Capital Goods Credit.
Input – Rule 2(k) - Inclusions:
 All goods used in the factory by the manufacturer of the final
 Any goods including accessories cleared along with the final
product and goods used for providing free warranty.
 Goods used for generation of electricity or steam for captive
use also constitute inputs.
 All goods used for providing any output service.
Input – Rule 2(k) - Exclusions:
 Light/ high speed diesel oil, Motor spirit,-petrol
 Any goods used for
(a) Construction/execution of WC of a building/civil structure
(b) laying of foundation/making of structure for support of
(c) except for provision of specified services
Input – Rule 2(k) - Exclusions:
 CGs except - parts and components in manufacture of final
 motor vehicles.
 Goods - personal use or consumption of any employee incl.
food items etc-uniforms?.
 Goods- no relationship with manufacture of final product.
Eligible Inputs For Service Providers
 Duty paid on inputs by service provider while providing the
taxable service
 Used directly for providing taxable services
 Chemicals/paper??
Inputs - Benefits
• Reduction in purchase cost.
• No Cascading - From start to finish.
• Includes cap goods-can treat as inputs + spares.
• SSI planning.
• Job Work Planning.
• Initial setting up.
• Centralized registration.
Input Service – Rule 2 (l)
Used by a provider of output service for providing
output service; or
ii. Used by a manufacturer, whether directly or indirectly,
in or in relation to
 Manufacture of final product and
 Clearance of final products upto the place of
Input Service - Inclusions
• input service" means any service,• (i) used by a provider of output service for providing an output
service; or
• (ii) used by a manufacturer, whether directly or indirectly, in or in
relation to the manufacture of final products and clearance of final
products upto the place of removal,
• and includes services used in relation to modernisation, renovation
or repairs of a factory, premises of provider of output service or an
office relating to such factory /premises, advertisement or sales
promotion, market research, storage upto the place of removal,
procurement of inputs, accounting, auditing, financing, recruitment
and quality control, coaching and training, computer networking,
credit rating, share registry, security, business exhibition, legal
services, inward transportation of inputs or capital goods and
outward transportation upto the place of removal;
Input Service - Exclusions
(A) Following declared services:
 Service portion in the execution of works contract,
 Construction services including services listed under clause (b)
of section 66E of the Finance Act
in so far as they are used for
 Construction/execution of WC of a building/civil structure/ part
thereof; of
 laying of foundation/making of structures for support of CG,
EXCEPT for the provision of one or more of the specified service.
Input Service - Exclusions
(B) Following specified services:
 Renting of motor vehicle  to extent MV is not CG
 General insurance business, servicing, repair and maintenance
In so far as they relate to a motor vehicle which is not a capital
EXCEPT when used by:
 Manufacturer of a motor vehicle.
 Insurance company in respect of motor vehicle insured or
Input Service - Exclusions
(C) Services such as those provided in relation to:
Outdoor catering,
Beauty treatment, health service, cosmetic and plastic surgery,
Membership of a club, Health and fitness centre,
Life insurance, Health insurance and
Travel benefit is extended to employees on vacation such as
leave or home travel concession
When such services are used primarily for PERSONAL USE or
consumption of any EMPLOYEE.
As Such Removal Of Capital
Goods/Inputs – Rule 3(5)
Availed once the goods are received in to the factory/premises.
inputs and
goods are
Removed as such
Sale or Disposal from
factory or premises
 Shall pay an amount
equal to the credit
availed in respect of such
inputs or capital goods
 Such removal be made
under cover of an invoice
as per Rule 9 of CCR,
Whenever the inputs or capital goods are removed outside the premises
of SP for providing the output service no payment is required
Removal Of Capital Goods After Use
If capital goods, on which Cenvat credit has been taken
Are removed after being used
As capital goods
As scrap
As waste
By a manufacturer or provider of output services
Shall pay an amount (not excise duty)
If capital goods, equal to Original Cenvat Credit taken, as reduced
by prescribed percentage on the basis of number of years used
Equal to excise duty payable on transaction value
Cenvat Credit – Job Work
• Goods cleared under job work exemption are not exempted goods,
as ultimately duty is paid by the principal manufacturer.
• The job worker is permitted to use his own capital goods / inputs /
input services in the job work.
• When the job worker uses his own capital goods / inputs / input
services in job work, he is entitled to take credit of duty.
In this case, final product should not be exempted goods.
Disputes In Cenvat
Common Disputes in
 CENVAT credit availability on free issue of material
 CENVAT credit availed on photocopy of invoice
 CENVAT credit availed on courier Bill of Entry
Common Disputes in Cenvat
 CENVAT credit availed on invoice where buyer and consignee
are different
 CENVAT credit on goods directly delivered to job worker/
depot from the supplier
Avoiding Disputes in Cenvat
 All items checklist on eligibility, disclosure, Prompt availment,
Prudence- 5% on possible personal use, valid invoice ( bank
charges), system to ensure no duplication/ completeness,
written clarifications in case of doubt.
 Reconciliation &
regular verification
before/ post filing of return.
Value Addition under CCR, 2004
Inputs / Input Services
• Credit on inputs – on receipt of the inputs in the
factory or on delivery to the service provider
• Credit on input services – to be allowed on or after
the receipt of the invoice or bill. On payment at
times of vendor + ST. RC- on payment of ST only
CA Madhukar N Hiregange
Value Addition under CCR, 2004
Inputs / Input Services
• Time limit for availment of credit on inputs and input
services – No TL at present.
• W.e.f., 1st September 2014 - Credit on inputs or input
services shall not be allowed after the expiry of six
months from the date of invoice or bill.
CA Madhukar N Hiregange
Value Addition under CCR, 2004
Input Services
• Credit of tax paid on input services under RCM- Credit allowed
on or after the date of payment of value of input service +
service tax – Current provision
w.e.f., 1st September 2014
ST payable under RCMcredit allowed after ST
ST payable under JCMcredit allowed after
payment of value + ST.
CA Madhukar N Hiregange
Value Addition under CCR, 2004
Input Services
• Credit on input service to be reversed- on failure to pay
value of input service + ST within 3 months.
• Credit to be re-taken on making of payment.
• Distribution of input service by ISD under Rule 7 of CCR,
2004- effective from 17.05.2012.
CA Madhukar N Hiregange
Value Addition under CCR, 2004
• Removal as such - duty to be reversed on inputs.
• Write off of inputs- duty to be reversed on inputs.
• On remission of duty on final products u/r 21 of CER,
2002- Credit on inputs to be reversed.
CA Madhukar N Hiregange
Options- R 6(3)
A. Separate Records of Inputs/ IS- actual- best
B. If not possible then:
(i) 6% reversal on removal of exempted goods
or provision of exempt service.
(ii) Separate for Inputs + IS- Proportion 3A.
CA Madhukar N Hiregange
Reversal R 6(3)
• Inputs – Only that used in manufacture of
dutiable goods eligible.
• Input services:
-> Exclusively used for taxable – 100%
-> Exclusively used for non taxable – 0%
-> Commonly used for taxable/ non- Proportion
-> Traded goods = SP- COGS or 10% higher is
exempted. Then apply proportion
CA Madhukar N Hiregange
Value Addition under CCR, 2004- CG
• To avail credit- Ownership of Capital goods not
• Goods procured under HP/ lease- Credit could be
• Equipment or appliance used in an office – Not eligible
unless it is part of factory or used for providing taxable
CA Madhukar N Hiregange
Value Addition under CCR, 2004
• Credit on “Capital goods” or “Inputs”- To be
• Only 50% of the credit allowed in the year of
• Balance 50% credit allowed in the subsequent
CA Madhukar N Hiregange
Value Addition under CCR, 2004
• Restriction of availing 50% credit- do not apply to the
assessees claiming SSI exemption or on removal as
• Balance 50% credit allowed- subject to the
possession of capital goods.
• Exception: components, spares, accessories, moulds,
tools, dies, refractories and refractory material.
CA Madhukar N Hiregange
Value Addition under CCR, 2004
• Removal of Capital Goods in the year of purchase100% credit allowed in the same financial year.
• Construction of Malls- eligibility of credit on capital
goods [escalators, lifts, DG sets, A/c Unit, CCTV, Fire
Protection equipment .... etc]???- Judicial
confirmation awaited.
CA Madhukar N Hiregange
Value Addition under CCR, 2004
Capital goods exclusively used for manufacturing
exempted goods or providing exempted serviceCredit not eligible.
• Partial usage of capital goods for manufacturing
excisable and exempted goods, or for providing
taxable and exempted service- Full credit eligibleunlike Inputs.
CA Madhukar N Hiregange
Best Practice – Availment of Credit
• Credits that can be availed & not availed- a list to be
prepared every year- reason also- case law?.
• Credits objected by the revenue or/ doubtful creditsto be availed but not utilised.
• Option to pay tax and avail the credits or/ Exemption
notification?- to be examined.
CA Madhukar N Hiregange
Value Addition under CCR, 2004
SAD -Additional duty under section 3(5) - Service
providers not eligible to take credit. No restriction for
• Inputs or input services used in the manufacture of
intermediate products by a job worker- Credit
allowed subject to the utilisation by manufacturer for
further use in relation to manufacture.
CA Madhukar N Hiregange
Value Addition under CCR, 2004
• Reverse charge and Joint charge credits- missed (as
they are paid by the assessee himself).
• Clearance of goods for direct exports- not exempt
sales- Credit can be availed on inputs used for
manufacture of goods cleared for direct exports.
• Credit for inputs [beyond chap. 22], input services &
capital goods- Restaurants can avail.
CA Madhukar N Hiregange
Value Addition under CCR, 2004
• Mot.veh.- allowed if used for providing output
services: motor driving school, mining, transp. of
passenger/ goods, construction, courier, logistics,
freight forwarders or mere renting of MVs.
• Supplies to contracts under International competitive
bidding, SEZ, 100% EOU are without payment of
duty- Credit can be retained.
CA Madhukar N Hiregange
Value Addition under CCR, 2004
• Inputs used as consumables in service contractsCredit to be examined. Paper credit for photography
or in study material for coaching classes.
• Credit of duty paid on inputs and input services to be
availed within six months (w.e.f., 1-09-2014)- System
to be in place to ensure credits are taken.
CA Madhukar N Hiregange
Value Addition under CCR, 2004
• Exporter of Services & Goods- two refund claims to
be submitted for each quarter.
• In refund for manufacturers the method of payment
of duty using cenvat has been found fastest.
• Manufacturers claiming drawback of customs/
procure under Adv Lic + Cenvat credit refund eligible.
CA Madhukar N Hiregange
Value Addition under CCR, 2004
• Failure to file statutory returns (like ER-1, ST-3) or
wrong filing of returns- Incomplete application Refund may be denied.
• For service providers there is a lot of delay/ red tape
and use of RTI along with massive follow can only
lead to a little faster realisation.
CA Madhukar N Hiregange
Value Addition – Job Work
• Job workers working under Not.214/86 - Credit on
consumables and capital goods/ spares can be
• Exemption to Job workers- only an option – they can
avail the credit and discharge the duty on the
finished goods. [Comm. v. Aries Dyechem Industries 2014 (299) E.L.T. A88 (Guj.)]
CA Madhukar N Hiregange
Value Addition – Job Work
• Job workers can choose to pay service tax on
processes not amounting to manufacture where the
manufacturer can avail credit against his final duty
• There are implications of scrap to the job workers
end if not returned- Quantity reconciliation are
CA Madhukar N Hiregange
Value Addition – Other Aspects
• Reversal of credit on oral instruction of visiting officers or
audit without due verification- cause issues in re credit. If
being forced, to be paid under protest.
• Dealers can also pass on cenvat credit of imported or
duty paid goods selectively.
• Proper classification of goods & services- is of utmost
importance for not losing the credits.
CA Madhukar N Hiregange
Value Addition under CCR, 2004
• Exempted goods -not include the portion on
which abatement claimed unless credit is
restricted for both inputs as well as input
services. They would also not include inputs/
input services used for export.
• Transfer of credit in case of shifting, merger etc.
CA Madhukar N Hiregange
Action Prior to 1st Sep- 14
• Confirm that excess reversals not done
• Any audits where Co has reversed credit or has
not availed credit due to lack of clarity
• Any disputes still in progress
• Post removal credits??
• GTA Outwards credit
• RC/JC credits
• Branches/ ISD credits
• …. Could be many more
CA Madhukar N Hiregange
[email protected]
[email protected]
CA Madhukar N Hiregange
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