CENVAT CREDIT RULES, CENVAT CREDIT RULES, 2004 2004

Pradeep. K MittalPradeep. K MittalMember Central Council of Member Central Council of

The Institute of Company Secretaries of India, New The Institute of Company Secretaries of India, New DelhiDelhi

Corporate & Economic Lawyer & Corporate & Economic Lawyer & AdvocateAdvocate

Delhi High Court, DelhiDelhi High Court, Delhi

History of CENVAT CreditHistory of CENVAT Credit

• Modified Value Added Tax called MODVAT Modified Value Added Tax called MODVAT was introduced in 1986.was introduced in 1986.

• MODVAT provided credit of Central Excise MODVAT provided credit of Central Excise duty paid on inputs used in or in relation duty paid on inputs used in or in relation to manufacture of end product.to manufacture of end product.

• In 1994, MODVAT was extended to capital In 1994, MODVAT was extended to capital goods also.goods also.

• In 2000 the MODVAT was rechristened as In 2000 the MODVAT was rechristened as CENVAT i.e. Central Value Added Tax.CENVAT i.e. Central Value Added Tax.

Salient Features of CENVAT Salient Features of CENVAT 20042004

• New CENVAT Credit Rules has been New CENVAT Credit Rules has been introduced with effect from 10-9-04 in place of introduced with effect from 10-9-04 in place of earlier CENVAT Credit Rules, 2002 & Service earlier CENVAT Credit Rules, 2002 & Service Tax Credit Rules, 2002. Tax Credit Rules, 2002.

• Now credit can be taken for inputs, capital Now credit can be taken for inputs, capital goods as well as for input services used in or goods as well as for input services used in or in relation to manufacture or production of in relation to manufacture or production of final products or for providing of any taxable final products or for providing of any taxable service. service.

Direct InputsDirect Inputs

• GlassGlass

• FilamentFilament

• Copper WireCopper Wire

• CAPCAP

• GASGAS

Indirect Inputs

•Electricity/ fuel

•GAS for melting of glass

•Water

•Consumables

Capital Goods

•Furnace

•Thermo pack

•Dies

•Oven

•Chilling Plant

•Pollution Control Equipment

Salient Features (Contd.)Salient Features (Contd.)

• CENVAT credit can be utilized for payment of CENVAT credit can be utilized for payment of excise duty on final products and service tax on excise duty on final products and service tax on output services. output services.

• CENVAT credit taken on input services can be used CENVAT credit taken on input services can be used for payment of excise duty and for payment of excise duty and vice versavice versa. .

• Credit can be taken for all services used in relation Credit can be taken for all services used in relation to setting up, modernization or repairs of a factory, to setting up, modernization or repairs of a factory, services relating to advertisement or sales services relating to advertisement or sales promotion, management, recruitment etc.promotion, management, recruitment etc.

Salient Features (Contd.)Salient Features (Contd.)

• Credit in respect of following duties shall be utilized Credit in respect of following duties shall be utilized only for payment of those respective duties:-   only for payment of those respective duties:-  

•             ADE (T&T) ADE (T&T) •             NCCD NCCD •             Education cess on Excise Duty Education cess on Excise Duty •             Education cess on Service Tax Education cess on Service Tax •             Additional duty under Section 3 of Customs Tariff Act. Additional duty under Section 3 of Customs Tariff Act. •             Additional Duty under Section 157 of Finance Act, 2003   Additional Duty under Section 157 of Finance Act, 2003  

• But credit in respect of education cess on excisable But credit in respect of education cess on excisable goods and education cess on taxable services can goods and education cess on taxable services can be utilized for each other.   be utilized for each other.  

Salient Features (Contd.)Salient Features (Contd.)

• Cenvat credit taken can be utilized Cenvat credit taken can be utilized for the payment of education cess for the payment of education cess but credit taken in respect of but credit taken in respect of education cess can be utilized only education cess can be utilized only for payment of education cess. for payment of education cess.

Capital GoodsCapital Goods• Capital goods means:-Capital goods means:-

(A) the following goods, namely:- (A) the following goods, namely:- (i) (i) all goods falling under Chapter 82, all goods falling under Chapter 82,

Chapter 84, Chapter 85, Chapter 90, heading No. Chapter 84, Chapter 85, Chapter 90, heading No. 68.02 and sub- heading No. 6801.10 of the First 68.02 and sub- heading No. 6801.10 of the First Schedule to the Excise Tariff Act;Schedule to the Excise Tariff Act;

(ii) pollution control equipment;(ii) pollution control equipment;(iii) components, spares and accessories of the goods (iii) components, spares and accessories of the goods

specified at (i) and (ii);specified at (i) and (ii);(iv) moulds and dies, jigs and fixtures;(iv) moulds and dies, jigs and fixtures;

(v) refractories and refractory materials;(v) refractories and refractory materials;(vi) tubes and pipes and fittings thereof; and(vi) tubes and pipes and fittings thereof; and(vii) storage tank,(vii) storage tank,

used-used-

(1) in the factory of the manufacturer of the final (1) in the factory of the manufacturer of the final products, but does not include products, but does not include any equipment or any equipment or

appliance used in an office; or appliance used in an office; or

(2) for providing output service;(2) for providing output service;

(B) motor vehicle registered in the name of (B) motor vehicle registered in the name of provider of output service for providing taxable provider of output service for providing taxable service as service as specified in sub-clauses (f),(n), (o), (zr), specified in sub-clauses (f),(n), (o), (zr), (zzp), (zzt) and (zzw) of clause (105) of section 65 (zzp), (zzt) and (zzw) of clause (105) of section 65 of the of the Finance Act;Finance Act;

•For reference the subject matters of various chapters For reference the subject matters of various chapters referred to in the definition are as given hereunder:referred to in the definition are as given hereunder:

Chapter 82Chapter 82 - Tools, implements, cutlery etc.- Tools, implements, cutlery etc.

Chapter 84Chapter 84 - Nuclear reactors, boilers, - Nuclear reactors, boilers, machinery and mechanical appliances parts thereof.machinery and mechanical appliances parts thereof.

Chapter 85Chapter 85 - Electrical machinery and equipments - Electrical machinery and equipments and parts thereof, sound recorders and parts and and parts thereof, sound recorders and parts and accessories thereof.accessories thereof.

Chapter 90Chapter 90 - Optical photographic, medical - Optical photographic, medical and surgical instruments and apparatus’ parts and and surgical instruments and apparatus’ parts and accessories thereofaccessories thereof

Heading No. 68.02 Heading No. 68.02 -Natural or artificial -Natural or artificial abrasive powderor grain on a base of textile abrasive powderor grain on a base of textile material of paper or paperboard or of other material of paper or paperboard or of other

material, whether or not cut to shape or sewn material, whether or not cut to shape or sewn or otherwise made up,or otherwise made up,

Sub-heading No. 6801.10Sub-heading No. 6801.10- Grinding wheels - Grinding wheels and the like, parts thereof.and the like, parts thereof.

InputInput

"Input" means- "Input" means- (i) all goods, except light diesel oil, high speed (i) all goods, except light diesel oil, high speed

diesel oil and motor spirit, commonly known diesel oil and motor spirit, commonly known as petrol, used in or in relation to the as petrol, used in or in relation to the manufacture of final products whether directly manufacture of final products whether directly or indirectly and whether contained in the or indirectly and whether contained in the final product or not and includes lubricating final product or not and includes lubricating oils, greases, cutting oils, coolants, oils, greases, cutting oils, coolants, accessories of the final products cleared along accessories of the final products cleared along with the final product, goods used as paint, or with the final product, goods used as paint, or as packing material, or as fuel, or for as packing material, or as fuel, or for generation of electricity or steam used in or in generation of electricity or steam used in or in relation to manufacture of final products or for relation to manufacture of final products or for any other purpose, within the factory of any other purpose, within the factory of production; production;

(ii) all goods, except light diesel oil, high (ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for known as petrol and motor vehicles, used for providing any output service; providing any output service;

•Explanation 1Explanation 1.- The light diesel oil, high .- The light diesel oil, high speed diesel oil or motor spirit, commonly speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an known as petrol, shall not be treated as an input for any purpose whatsoever.input for any purpose whatsoever.

•Explanation 2Explanation 2.- Input include goods used in .- Input include goods used in the manufacture of capital goods which are the manufacture of capital goods which are further used in the factory of the further used in the factory of the manufacturer;manufacturer;

Input serviceInput service"Input service" means any service,-"Input service" means any service,-(i) used by a provider of taxable service for providing (i) used by a provider of taxable service for providing

an output service; oran output service; or(ii) used by the manufacturer, whether directly or (ii) used by the manufacturer, whether directly or

indirectly, in or in relation to the manufacture of indirectly, in or in relation to the manufacture of final products and clearance of final products from final products and clearance of final products from the place of removal, and includes services used in the place of removal, and includes services used in relation to setting up, modernization, renovation or relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output repairs of a factory, premises of provider of output service or an office relating to such factory or service or an office relating to such factory or premises, advertisement or sales promotion, market premises, advertisement or sales promotion, market research, storage upto the place of removal, research, storage upto the place of removal, procurement of inputs, activities relating to procurement of inputs, activities relating to business, such asbusiness, such as

accounting, auditing, financing, accounting, auditing, financing, recruitment and quality control, recruitment and quality control, coaching and training, computer coaching and training, computer networking, credit rating, share networking, credit rating, share registry, and security, inward registry, and security, inward transportation of inputs or capital transportation of inputs or capital goods and outward transportation upto goods and outward transportation upto the place of removal;the place of removal;

Input ServiceInput Service• Inward freight Inward freight • Telephone installed at factoryTelephone installed at factory• Courier charges for procurement of materials Courier charges for procurement of materials • Advertisement and sale promotion Advertisement and sale promotion • Bank charges at factory Bank charges at factory • Construction, repair and maintenance of factory and Construction, repair and maintenance of factory and

officeoffice• Royalty paid on trademark & technical know-how Royalty paid on trademark & technical know-how • Fees of chartered accountant for designated services Fees of chartered accountant for designated services • Air travel & other chargesAir travel & other charges

Input service distributorInput service distributor

"Input service distributor" means an office of "Input service distributor" means an office of the manufacturer or producer of final the manufacturer or producer of final products or provider of output service, products or provider of output service, which receives invoices issued under rule which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards 4A of the Service Tax Rules, 1994 towards purchases of input services and issues purchases of input services and issues invoice, bill or, as the case may be, invoice, bill or, as the case may be, challanchallan for the purposes of distributing the credit of for the purposes of distributing the credit of service tax paid on the said services to such service tax paid on the said services to such manufacturer or producer or provider, as manufacturer or producer or provider, as the case may be the case may be

Output ServiceOutput Service

"Output service" means any taxable service provided "Output service" means any taxable service provided by the provider of taxable service, to a customer, by the provider of taxable service, to a customer, client, subscriber, policy holder or any other person, client, subscriber, policy holder or any other person, as the case may be, and the expressions ‘provider’ as the case may be, and the expressions ‘provider’ and ‘provided’ shall be construed accordingly;and ‘provided’ shall be construed accordingly;

ExplanationExplanation.- For the removal of doubts it is hereby .- For the removal of doubts it is hereby

clarified that if a person liable for paying service tax clarified that if a person liable for paying service tax does not provide any taxable service or does not does not provide any taxable service or does not manufacture final products, the service for which he manufacture final products, the service for which he is liable to pay service tax shall be deemed to be the is liable to pay service tax shall be deemed to be the output service.output service.

Conditions for availment of Conditions for availment of CreditCredit

• (1) (1) Credit on Inputs Credit on Inputs – –

In respect of inputs may be taken In respect of inputs may be taken immediately on receipt of the inputs immediately on receipt of the inputs in the factory of the manufacturer or in the factory of the manufacturer or in the premises of the provider of in the premises of the provider of output service:output service:

Conditions for availment Conditions for availment (Contd.)(Contd.)

• (2) Credit on capital goods(2) Credit on capital goods (a) (a) The CENVAT credit in respect of capital The CENVAT credit in respect of capital

goods received in a factory or in the premises goods received in a factory or in the premises of the provider of output service at any point of of the provider of output service at any point of time in a given financial year shall be taken time in a given financial year shall be taken only for an amount not exceeding fifty per only for an amount not exceeding fifty per cent. of the duty paid on such capital goods in cent. of the duty paid on such capital goods in the same financial year:the same financial year:

The CENVAT credit in respect of capital goods The CENVAT credit in respect of capital goods shall be allowed for the whole amount of the shall be allowed for the whole amount of the duty paid on such capital goods in the same duty paid on such capital goods in the same financial year if such capital goods are cleared financial year if such capital goods are cleared as such in the same financial year.as such in the same financial year.

•(b) (b) The balance of CENVAT credit may be The balance of CENVAT credit may be taken in any financial year subsequent to the taken in any financial year subsequent to the financial year in which the capital goods financial year in which the capital goods were received in the factory of the were received in the factory of the manufacturer, or in the premises of the manufacturer, or in the premises of the provider of output service, if the capital provider of output service, if the capital goods, other than components, spares and goods, other than components, spares and accessories, refractories and refractory accessories, refractories and refractory materials, moulds and dies and goods falling materials, moulds and dies and goods falling under heading No. 68.02 and sub-heading under heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule to the No. 6801.10 of the First Schedule to the Excise Tariff Act, are in the possession of the Excise Tariff Act, are in the possession of the manufacturer of final products, or provider of manufacturer of final products, or provider of output service in such subsequent years. output service in such subsequent years.

Conditions for availment Conditions for availment (Contd.)(Contd.)

• IllustrationIllustration

A manufacturer received machinery on the A manufacturer received machinery on the 16th day of April, 2002 in his factory. 16th day of April, 2002 in his factory. CENVAT of two lakh rupees is paid on this CENVAT of two lakh rupees is paid on this machinery. The manufacturer can take machinery. The manufacturer can take credit upto a maximum of one lakh credit upto a maximum of one lakh rupees in the financial year 2002-2003, rupees in the financial year 2002-2003, and the balance in subsequent years..and the balance in subsequent years..

Conditions for availment Conditions for availment (Contd.)(Contd.)• (3) Credit on Capital goods acquired on lease/hire (3) Credit on Capital goods acquired on lease/hire

purchasepurchase The CENVAT credit in respect of the capital goods The CENVAT credit in respect of the capital goods

shall be allowed to a manufacturer, provider of shall be allowed to a manufacturer, provider of output service even if the capital goods are output service even if the capital goods are acquired by him on lease, hire purchase or loan acquired by him on lease, hire purchase or loan agreement, from a financing company.agreement, from a financing company.

• (4) No credit on the value of capital goods (4) No credit on the value of capital goods representing dutyrepresenting duty

The CENVAT credit in respect of capital goods The CENVAT credit in respect of capital goods shall not be allowed in respect of that part of the shall not be allowed in respect of that part of the value of capital goods which represents the value of capital goods which represents the amount of duty on such capital goods, which the amount of duty on such capital goods, which the manufacturer or provider of output service claims manufacturer or provider of output service claims as depreciation under section 32 of the Income-as depreciation under section 32 of the Income-tax Act, 1961.tax Act, 1961.

•(5) Credit when input/ capital goods are (5) Credit when input/ capital goods are moved for job workmoved for job work

The Rules also provide detailed The Rules also provide detailed provisions for credit in respect of job work provisions for credit in respect of job work cases.cases.

Manner of Distribution of Credit Manner of Distribution of Credit By Input service ProviderBy Input service Provider

The input service distributor may distribute the The input service distributor may distribute the CENVAT credit in respect of the service tax paid CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or on the input service to its manufacturing units or units providing output service, subject to the units providing output service, subject to the following condition, namely:-following condition, namely:-

(a) the credit distributed against a document (a) the credit distributed against a document referred to referred to in rule 9 does not exceed the in rule 9 does not exceed the amount of service tax amount of service tax paid thereon; orpaid thereon; or

(b) credit of service tax attributable to service (b) credit of service tax attributable to service use in a use in a unit exclusively engaged in unit exclusively engaged in manufacture of manufacture of exempted goods or providing exempted goods or providing of exempted services of exempted services shall not be distributed.shall not be distributed.

Documents and AccountsDocuments and Accounts

(a)(a)An An invoice invoice issued by manufacturerissued by manufacturer(b)(b)A A supplementary invoice, supplementary invoice, if anyif any(c)(c) A A Bill of entryBill of entry(d)(d)A A Certificate Certificate issued by an Appraiser of issued by an Appraiser of

Customs Customs (e)(e)An An Invoice, bill or Invoice, bill or challan challan issued by issued by

Provider of input service on or after 10-09-Provider of input service on or after 10-09-20042004

(f)(f) An An Invoice, bill or Invoice, bill or challan challan issued by issued by Input Service Distributor on or after 10-09-Input Service Distributor on or after 10-09-20042004

Special ObligationSpecial Obligation

The Explanation to Rule 9(3) casts a special The Explanation to Rule 9(3) casts a special obligation of service user:obligation of service user:

The manufacturer or producer of excisable goods or The manufacturer or producer of excisable goods or provider of output service taking CENVAT credit on provider of output service taking CENVAT credit on input or capital goods or input service or the input input or capital goods or input service or the input service distributor distributing CENVAT credit on service distributor distributing CENVAT credit on input service on the basis of, invoice, bill or, as the input service on the basis of, invoice, bill or, as the case may be, challan received by him for distribution case may be, challan received by him for distribution of input service credit shall be deemed to have taken of input service credit shall be deemed to have taken reasonable steps if he satisfies himself about the reasonable steps if he satisfies himself about the identity and address of the manufacturer or supplier identity and address of the manufacturer or supplier or provider of input service, as the case may be, or provider of input service, as the case may be, issuing the documents specified in sub-rule (1), issuing the documents specified in sub-rule (1),

evidencing the payment of excise duty or the evidencing the payment of excise duty or the additional duty of customs or service tax, as additional duty of customs or service tax, as the case may be, either- the case may be, either-

a) from his personal knowledge; or a) from his personal knowledge; or

b) on the basis of a certificate given by a b) on the basis of a certificate given by a person with whose handwriting or signature person with whose handwriting or signature he is familiar; orhe is familiar; or

(c) on the basis of a certificate issued to (c) on the basis of a certificate issued to the manufacturer or the supplier or, as the the manufacturer or the supplier or, as the case may be, the provider of input service by case may be, the provider of input service by the Superintendent of Central Excise within the Superintendent of Central Excise within whose jurisdiction such manufacturer has his whose jurisdiction such manufacturer has his factory or such supplier or provider of output factory or such supplier or provider of output service has his place of business or where the service has his place of business or where the provider of input service has paid the service provider of input service has paid the service tax, tax,

and where the identity and address of the and where the identity and address of the manufacturer or the supplier or the provider manufacturer or the supplier or the provider of input service is satisfied on the basis of a of input service is satisfied on the basis of a certificate, the manufacturer or producer or certificate, the manufacturer or producer or provider of output service taking the CENVAT provider of output service taking the CENVAT credit or input service distributor distributing credit or input service distributor distributing CENVAT credit shall retain such certificate for CENVAT credit shall retain such certificate for production before the Central Excise Officer production before the Central Excise Officer on demand.on demand.

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