Cenvat Credit Rules from scratch.pdf

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Cenvat Credit Rules from scratch Saurabh Maheshwari on 21 October 2013

Before we begin: Hello friends! Greetings of the day to all ofyou. In this article we will be discussingsome basic concepts in Cenvat creditRules,2004Cenvat Credit Rules is reallyone of the most important topic not onlyfrom exam view but also in practicallifeand no need to say that most of thelitigations in excise and ST is on a singlequestion-whether Cenvat credit can beclaimed or not ?This topic is also the mostinteresting topic in indirect taxes

This article is written keeping in mind all beginners like me and I have tried my best todiscuss the concepts comprehensively backed by suitable examples believe that it will beuseful for you Q-1 What is Cenvat Credit? Ans-The word CENVAT Credit is composed of two words CENVAT and Credit, where CENVATmeans Central Excise Duty or Service Tax and also Custom duty (in a few cases) Credit means a subsequent claim of set-off of something paid earlier. Therefore , Cenvatcredit means credit of ST/excise and customs(additional duty) paid on purchase of inputs ,input services and capital goods..such credit can be used/utilized/set-off against ST/excisepayable on clearance of manufactured products and rendering of services For Instance-Bata India Ltd. a shoe manufacturing co. use the leather as raw material whichis purchased with excise duty as charged by supplier.Bata also uses the services of fashiondesigners to make fashionable shoes, thus it paid ST on bills raised by fashiondesigners.Now Bata Ltd manufactured shoes and want to clear the same from factory, inthat case Bata Ltd liable to pay excise duty on manufactured shoes..such excise duty canbe paid by utilizing the credit of input excise and input ST as paid and still if anything leftunpaid the same to be paid in cash.. Q-2 How Cenvat Credit is different from Modvat Credit? Ans-2 In fact Cenvat is the refined version of Modvat .in Modvat system you can takecredit of input excise against output excise.but you cannot claim credit of input service taxagainst output service tax or against output excise..In short service sector was notintegrated in credit system.. But in 2004 Modvat Credit Rules were repealed(withdrawn) by introduction of Cenvat CreditRules, 2004..Under Cenvat system, you can take the credit of both input excise and inputST to pay output excise or to pay output ST.thats why Cenvat system is also termedas Cross-sectional credit system.

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So, obviously Cenvat is far better than Modvat

Special Note:(But if you have noted that still many companies are in fact recording Cenvatby the name of Modvat.aur toh aur h apne tax Audit form 3CD ka clause No.-22(a) hi dekhlijiye waha bhi Modvat hi milega jo ki really mein Cenvat hi h:-)

Q-3 What is the scope of Cenvat credit?

Ans-3 As per Rule 3(1) of Cenvat Credit Rules(CCR),2004 credit of following input tax orduties paid on purchase of inputs(raw mat.), input services and capital goods can beclaimed subject to specific restrictions as provided in Rules: a. Excise duty or Service tax or Special/Additional duty of customs (CVD) chargeable u/3(1)or Sec3 (5) of of Customs Tariff Act(CTA), 1975 can be claimed as Cenvat Credit. b. But here it is important to note that as per Proviso to Rule 3(1) of Cenvat CreditRules,2004 the credit of additional/special custom duty(CVD) as paid under Sec 3(5) ofCTA,1975 cannot be claimed by a service provider to pay output ST or excise.howevermanufacturer can claim the same to pay output excise. Q-4 We know that Cenvat credit can be taken of Excise, ST or Additional customs,as the case may be, paid on inputs or input services or capital goods?...So explainhow to identify that what qualifies as inputs , input servs and capital goods? Ans-4 A) Inputs: Simply we can call as raw material. As per Rule 2(k) of CCR, 2004, Inputs means and includes the following: i) All goods used in factory by manufacturer for manufacturing final products and alsoincludes goods used by service provider to provide output service.(service provider can usethe same even outside the service station/premises) ii) Input also include goods used for generation of electricity or steam for use in factory(captive consumption) inputs may be used outside the factory i.e. at electricity plant sitebut electricity/steam to be used in factory only) iii)All accessories cleared along with final product provided the value of the same is includedin the value of Final product For Instance: Colgate Limited manufacture toothpaste but clear the toothpaste in packedbox with a free toothbrush attached therewith but in reality the same is not at all freebecause the value of same is included in the MRP of paste itself and thus toothbrushqualify as inputs:-) iv) Any goods used for providing free warranty (after sale services) (B) Input Services: Input services means and include the following: i) Any service used by provider of output service to provide the sameii) Any service used whether directly or indirectly in or in relation to: manufacture of final products and clearance of final products upto place of removal and not beyond that. (Where place of removal = factory or warehouse or in some cases premises of consignee ifgoods were sold through consigneeSee Sec 4(3)(c) of Cent Ex Act,1944) iii) Input services also include these 18 services listed below (Inclusive clause) These 18 services are eligible as input service for both manufacturer and serviceproviderand these services are always deemed to be use for manufacturing/serviceoperation

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1. Modernization/repairs & maintenance of factory or service station /premises2. Advertisement or Sales Promotion..3. Market Research4. Storage up to place of removal5. Procurement of inputs6.Accounting7. Auditing8. Financing9.Recruitment & Quality control10.Caoching & training11. Computer networking12.credit rating13.share registry14. Security15.Business exhibition16.legal services17. inward transportation18.outward transportation upto place of removallist thodi lambi ho gayi na The above 18 services can be remembered by remembering these 3 sentences: (In bracket the services serial no. has been indicated) 1. Advertisement-(2) in modern(1) factory to store(4) the procured inputs(5) so that therequality(9) could be maintained and the accountant(6) may easily audit/verify(7) the stock.2. Using Security(14) and legal services(16) to get shares registered(13) thereby getting good credit rating(14) which would help in financing by banks(8)3. Remaining 6 services to be crammed-(See point No.3, 10,11,15,17&18) (C) Capital goods: Capital goods means and include the following: i) All goods specified under First Schedule of Central Ex. Tariff Act(CETA),1985(Like machineries, boilers, various tools , spare parts and accessories of various equipmentsand instruments) ii) Pollution control equipment iii) moulds and dies, jigs and fixtures: a. mould-a container used to design liquid in desired shapeb. dies-a device/equipment for cutting metalsc. jigs-a device that guides the tools used in any manufacturing processd. fixtures-a piece of equipment which is in fixed position iv) refractories and refractory materials where refractory means lining consisting ofmaterials with a high melting point used to line the inside walls of a furnace v) tubes, pipes and their fittings vi) storage tanks and vii) Motor vehicles (other than meant for transport of goods or persons.but includingdumpers, tippers , cranes and loader used for handling of machineries etc. ) However, Motor vehicles used for transport of goods shall be capital goods for those serviceproviders who are using the same as: 1. For renting the motor vehicles and the same are used by lessee in his goods transportbusiness 2. For transportation of inputs and other capital goods in connection with rendering ofoutput services

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Example: Unique Techno Sales & Service is using its trucks to carry spare parts andmachineries at the premises of its customer where the repairs and maintenance services arebeing provided, and then the trucks will qualify as capital goods for Unique Sales & Service

3. For providing courier agency servicesso trucks, tempos used by First Flight couriers willqualify as capital goods for it.

Further, Motor vehicles used for transport of passengers will qualify as capital goods for thefollowing service providers using the same as:

1. For transportation of passengers2. For renting the motor vehicle.so if I own some buses and give the same on hire thenthe same will qualify as capital goods for me.3. Imparting motor driving training Q-5 We have discussed what is input and input servicesso now discuss whichraw materials or services which seems as input or input services but actual thesame are specifically excluded? Ans- Following are not inputs (As per Explanations to Sec2 (k) 1. Light diesel Oil, High speed Oil or Petrol 2. Capital goods except when used as parts in manufacture of a final product(say veryheavy machineries) 3.Motor vehicles..in some cases motor vehicles are not capital goods(See Ans-4) so manymanufacturers started to treat the same as inputs for claiming Cenvat credit so for thesame it was clarified that in no case motor vehicles will qualify as inputs 4.Any goods used for personal consumption of employeesso if packed dry fruits gifted to employees on the occasion of Diwali will not qualify as inputs so excise duty charged byUrmin Products Ltd(Supplier) cannot be claimed as Cenvat credit :-) 5. Any goods used for: a. Construction or execution of works contract of a building or its partb. Laying of foundation for support of capital goods For Instance: Wipro Ltd.using bricks, cement for constructing a factory buildingthen thesame will not qualify as input for Wipro Ltdand therefore Wipro Ltd cannot claim the creditof excise However, if Wipro Ltd has signed a contact with Niddhi Construction to construct thebuilding then M/s Niddhi Construction can claim the credit of excise paid on cement, bricksand accordingly discharge its ST liability by utilizing the credit .. (Point 5 inserted w.e.f Apr 1,2012 to overrule the judgment of Customs, Ex. And STAppellate Tribunal (CESTAT),New Delhi in the case of Oberoi Mall vs Commissioner ofCentral Excise.thank god the amendment was not retrospective) 6. Any goods which have no relation with the manufacturing of final product or providingoutput service cannot be considered as input. Following are not input services as per Explanations to Sec2 (l): 1. Construction or Works contract servicescontinuing with the example in point4(above)Wipro Ltd as per agreement with M/s Niddhi Construction paid the contractedprice with ST as applicablenow its a million dollar question that whther Wipro Ltd canclaim the credit of that ST . The answer is NO.Wipro Ltd whether self construct or sign a contract in both cases noCenvat credit.

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Published in ExciseSource : IDT Refrence book and othersViews : 1259

Other Articles by Saurabh Maheshwari

*CA Deepak Dargad Wrote on 23 October 2013

(This point also inserted w.e.f Apr 1,2012 to overrule the judgment of Customs, Ex. And STAppellate Tribunal(CESTAT) ,New Delhi in the case of Oberoi Mall vs Commissioner ofCentral Excise)

2. Input services excludes service of general insurance, repairs & maintenance in relation tomotor vehicles which are not capital goods [as per Rule 2(a)-See above]

But credit is available to manufacturer for insurance , repairs & maintenance of motorvehicles manufactured by himSo Hero Motocorp can claim the credit of bikes insured withNational Insurance co,..but say Reliance Industries insured its motor vehicles, thenReliance cannot claim credit as such..

3. Input services related to hiring of motor vehicles cannot be claimed as credit if the motorvehicles are not capital goods as per Rule 2(a). For Instance: Reliance Industries hiring some tempos so that the raw materials could bebrought to factory from suppliers godown.in that case tempos will not qualify as capitalgoods therefore hiring services taken by Reliance is not input services and therefore creditof ST paid with hiring charges cannot be claimed 4. Servicees used primarily for personal consumption of employees like health services,beauty treatment, life insurance, travel benefits(not for business purpose) etc. are alsoexcluded from the definition of input services With this we finish the discussion here only, the remaining concepts will be discussed innext articles very soon..So Good Bye.:-) Thanks for your reading.For any feedbacks, queries and comments feel free to mail me. With Warm RegardsSaurabh MaheshwariCA Final [email protected] The will to win, the desire to succeed and the urge to reach your full potential these are the

keys that will unlock the doors of you excellence.

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Nice One Saurabh ..........Thanx For Sharing

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Bhavya Wrote on 23 October 2013

Kartik Hemmady Wrote on 23 October 2013

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Very efeective Article. Infact the Concept of Iputs for servicetax was exact.recently we reversed the input tax on Employee Insurance as an Audit Para.Looking for the next article. Keep it up

very good article...luking fwd to next one....:-)

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Cenvat Credit Rules from scratch.pdf

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