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Union Budget 2015
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A2Z TAXCORP LLP
NEW DELHI, INDIA
Union Budget, 2015 Communique:
Changes in the Cenvat Credit Rules, 2004
and its impact
This bulletin brings to
you the highlights of
recent updates and
pivotal changes in the
Cenvat Credit Rules,
2004 under the Union
Budget, 2015 along with
certain open issues.
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CONTENTS Page No
Changes in the Cenvat Credit Rules, 2004 and its impact
Changes in Rule 4 of the Cenvat Credit Rules, 2004: Conditions for allowing
Cenvat credit [w.e.f. March 1, 2015]
Rule 4(1) and Rule 4(2)(a) amended –Availability of Cenvat credit on
Inputs/ Capital Goods directly despatched to job worker
5
Rule 4(5)(a) substituted – Provisions pertaining to Cenvat credit in
case of Inputs/ Capital Goods sent to job workers
6
Third proviso to Rule 4(1) and Sixth Proviso to Rule 4(7) amended –
Enhancement of time limit for availing Cenvat credit on Inputs/
Input Services from 6 months to 1 year
7
Applicability of the Explanations I and II of Rule 4(7) extended to
Rule 4 thereof
7
Changes in Rule 4 of the Cenvat Credit Rules, 2004: Conditions for allowing
Cenvat credit [w.e.f. April 1, 2015]
Rule 4(7) amended – Cenvat credit in respect of Partial Reverse
Charge allowed immediately after the payment of the Service tax by
Service Recipient
7
Changes in Rule 5 of the Cenvat Credit Rules, 2004: Refund of Cenvat credit
on Inputs/ Input Services used for Export of Goods
Definition of Exports goods inserted [W.e.f. March 1, 2015] 8
Changes in Rule 6 of the Cenvat Credit Rules, 2004: Obligation of
manufacturer of dutiable and exempted goods and provider of taxable and
exempted services
Scope of reversal of Cenvat credit under Rule 6 of the Credit Rules
extended to non-excisable goods [W.e.f. March 1, 2015]
8
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Proviso to Rule 9(4) of the Cenvat Credit Rules, 2004
Provisions of Rule 9(4) of the Credit Rules, 2004 applicable to First
Stage Dealer or Second Stage Dealer shall also apply mutatis
mutandis to importer who issues an invoice on which Cenvat credit
can be taken [W.e.f. March 1, 2015]
9
Provision of Rule 12AAA of the Cenvat Credit Rules, 2004 amended: Power
to impose restrictions in certain types of cases
Provision of Rule 12AAA extended in case of registered importer
9
Rule 14 of the Credit Rules substituted to segregate Recovery of Cenvat
credit wrongly availed but not utilized from the cases of Cenvat credit
wrongly availed and utilized [W.e.f. March 1, 2015]
Rule 14(1)(i): Cenvat credit availed wrongly but NOT UTILIZED –
recoverable under Section 11A of the Central Excise Act, 1944 or
Section 73 of the Finance Act, 1994
10
Rule 14(1)(ii): Cenvat credit availed AND UTILISED wrongly –
recoverable along with interest under Section 11A/ 11AA of the
Central Excise Act, 1944 or Sections 73/ 75 of the Finance Act, 1994
10
Manner of determining utilization of Cenvat credit 10
Rule 15 of the Cenvat Credit Rules, 2004 substituted: Confiscation and
Penalty [With effect from the date on which the Finance Bill, 2015 receives
the assent of the President]
Penalty provisions amended in terms of Section 11AC of the Central
Excise Act, 1944 or Section 78 of the Finance Act, 1994
10
Discussion Forum – Articles
Increase in time limit for availing Cenvat credit on Input services
and Inputs – Whether applicable on invoices issued prior to March
1, 2015?
12
Interest on Wrong availment of Cenvat Credit but not utilised – a
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tale of never ending litigation and interpretational issues 13
Aftermath of non-excisable goods being equated to exempted
goods/ final products for the purpose of Rule 6 of the Cenvat Credit
Rules, 2004
17
Doubtful fate of refund on Deemed exports 20
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UNION BUDGET 2015: CHANGES IN THE CENVAT CREDIT RULES, 2004 AND ITS
IMPACT
In the Union Budget, 2015 presented by the Hon’ble Finance Minister Shri Arun Jaitley on
February 28, 2015, Saturday, numerous changes in the Indirect taxes, have been introduced to
combat/ surpass the challenges encountered in the way of progress of continued growth and to
pave way for smooth implementation of Goods and Services tax (“GST”).
We are discussing here the changes made in the Cenvat Credit Rules, 2004 (“the Credit Rules”)
under the Union Budget, 2015 viz-a-viz existing/ old provisions for easy digest as under:
Changes in the Credit Rules vide Notification No. 6/2015-Central Excise (N.T) dated March
1, 2015
Changes in Rule 4 of the Credit Rules: Conditions for allowing Cenvat credit
W.e.f: March 1, 2015
A: Rule 4(1) and Rule 4(2)(a) of the Credit Rules amended –Availability of Cenvat credit
on Inputs/ Capital Goods directly despatched to job worker: Rule 4(1): Cenvat credit of
Inputs can be taken immediately on receipt of Inputs in the premises of the job worker,
in case where the Inputs are sent directly to the job worker’s premises on the direction
of the manufacturer or the provider of output service.
Hitherto, Cenvat credit was available only on receipt of Inputs in the factory of the
manufacturer or in the premises of the provider of output service.
Rule 4(2)(a): Parallel amendment has also been incorporated in Rule 4(2)(a) of the Credit
Rules dealing with conditions for availing Cenvat credit on Capital Goods. Accordingly,
effective from March 1, 2015, Cenvat credit on Capital Goods can be taken immediately
on receipt of the Capital Goods in the premises of the job worker, in case where the
Capital Goods are sent directly to the job worker’s premises on the direction of the
manufacturer or the provider of output service.
Hitherto, Cenvat credit was available only on receipt of Capital Goods in the factory of
the manufacturer or in the premises of the provider of output service or outside the
factory of the manufacturer of the final products for generation of electricity for captive
use within the factory.
Therefore, through the stated amendment, the manufacturer or the output service provider
would be able to dispatch the Inputs/ Capital goods directly to the job workers’ premises and
avail Cenvat credit, thereby removing the blockage in Cenvat credit when Inputs/ Capital
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goods are directly sent to job worker’s premises.
B: Rule 4(5)(a) of the Credit Rules substituted – Provisions pertaining to Cenvat credit in
case of Inputs/ Capital Goods sent to job workers:
Rule 4(5)(a)(i): Cenvat credit on Inputs sent to job worker
Availment of Cenvat credit would be permissible even if Inputs as such or after being
partially possessed are sent to a job worker and from there subsequently sent to
another job worker and likewise, for further processing, testing, repairing, re-
conditioning or for the manufacture of intermediate goods necessary for the
manufacture of final products or any other purpose provided that the Inputs or the
products produced therefrom are received back by the manufacturer or the provider of
output service within 180 days of being sent.
Cenvat credit of Inputs can be taken immediately where the Inputs are directly sent to
the job worker’s premises without their being first brought to the premises of the
manufacturer or the provider of output service. Here the time limit of 180 days shall be
counted from the date of receipt of the Inputs by the job worker.
Rule 4(5)(a)(ii): Cenvat credit on Capital Goods sent to job worker
Time limit for receipt of Capital Goods from job worker: Availment of Cenvat credit
would be permissible even if Capital Goods as such are sent to a job worker, for further
processing, testing, repairing, re-conditioning or for the manufacture of intermediate
goods necessary for the manufacture of final products or any other purpose provided
that the Capital Goods are received back by the manufacturer or the provider of output
service within 2 years of being sent.
Cenvat credit of Capital Goods sent directly to job worker’s premises: Cenvat credit of
Capital Goods can be taken immediately where the Capital Goods are directly sent to the
job worker’s premises without their being first brought to the premises of the
manufacturer or the provider of output service. Here the time limit of 2 years shall be
counted from the date of receipt of the Capital Goods by the job worker.
Rule 4(5)(a)(iii): Reversal of Cenvat credit
If the Inputs/ Capital Goods are not received back within the above stipulated time, the
manufacturer or the provider of output service shall pay an amount equivalent to the
Cenvat credit attributable to the Inputs/ Capital Goods, as the case may be, by debiting
the Cenvat credit or otherwise.
However, Cenvat credit can be taken again on receipt of such Inputs/ Capital Goods in the
factory or in the premises of the provider of output service.
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C: Third proviso to Rule 4(1) and Sixth Proviso to Rule 4(7) of the Credit Rules amended –
Enhancement of time limit for availing Cenvat credit on Inputs/ Input Services from 6
months to 1 year
Till September 1, 2014, there was no time limit prescribed under the Credit Rules for
availment of Cenvat credit. However, effective from September 1, 2014, the said liberty
in respect of availment of Cenvat credit on Inputs/ Input Services was withdrawn vide
Notification No. 21/2014-CE dated July 11, 2014 (Applicable w.e.f September 1, 2014),
amending Rule 4(1) [for Inputs] and Rule 4(7) [for Input services] of the Credit Rules in
order to fix a time limit of 6 months from the date of issue of any of the documents
specified in Rule 9(1) thereof, for availment of the Cenvat credit.
Considering the hue and cry created in the Industry, the Union Budget, 2015 has
enhanced the stated time limit (effective from March 1, 2015) for availing Cenvat credit
on Inputs and Input services to 1 year (as against 6 months earlier) from the date of
issue of any of the documents specified in Rule 9(1) of the Credit Rules.
D: Applicability of the Explanations I and II of Rule 4(7) of the Credit Rules extended to Rule
4 thereof
In the Explanations I and II, for the words “sub-rule”, the word “rule” has been
substituted.
Thereby, the amount mentioned in Rule 4 of the Credit Rules and not just Rule 4(7)
thereof, shall be paid by the manufacturer of goods or the provider of output service by
debiting the Cenvat credit or otherwise, on or before the 5th day of the following month
except for the month of March, when such payment shall be made on or before the
31stMarch.
Further, provisions of Rule 14 of the Credit Rules will be invoked for recovery of the Cenvat
credit wrongly taken in case the manufacturer of goods or the provider of output service fails
to pay the amount payable under Rule 4 thereof.
W.e.f: April 1, 2015
A: Rule 4(7) amended – Conditions for availment of Cenvat credit on Input services under
Partial Reverse Charge:
Cenvat credit in respect of Partial Reverse Charge allowed immediately after the
payment of the Service tax by Service Recipient: Proviso to Rule 4(7) of the Credit Rules
has been amended to provide that effective from April 1, 2015, Cenvat credit in respect
of Partial Reverse Charge can be availed immediately after payment of Service tax by the
Service recipient and there is no requirement of payment of the value of Input services
as indicated in invoice, bill or, as the case may be, challan referred to in Rule 9 of the
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Credit Rules.
Hitherto, in case of Partial Reverse Charge, the Cenvat credit of Input services were
allowed on or after the date on which the payment of the amount of Service tax as well
as value of Input services were made.
Here, it would not be out of place to mention that vide Notification No. 21/2014-CE (NT),
dated July 11, 2014 (Applicable w.e.f September 1, 2014) in case of Service tax paid
under Full Reverse Charge, the condition of payment of invoice value to the service
provider for availing Cenvat credit of Input services was withdrawn.
Changes in Rule 5 of the Credit Rules: Refund of Cenvat credit on Inputs/ Input Services
used for Export of Goods
Definition of Exports goods inserted w.e.f. March 1, 2015
The term “Exports goods” has been defined to include within its ambit any goods which
are to be taken out of India to a place outside India.
Hitherto, in terms of Rule 5 of the Credit Rules, the manufacturer who clears a final
product or an intermediate product for export without payment of duty under bond or
letter of undertaking, or a service provider who provides an output service which is
exported without payment of Service tax, was allowed refund of Cenvat credit as
determined by the formula, procedure, conditions etc. specified therein.
Accordingly, intention of stated change warrants that Deemed exports benefits would
not qualify for refund under Rule 5 of the Credit Rules (Elaborated in Article - Discussion
Forum)
Changes in Rule 6 of the Credit Rules: Obligation of manufacturer of dutiable and exempted
goods and provider of taxable and exempted services
Scope of reversal of Cenvat credit under Rule 6 of the Credit Rules extended to non-
excisable goods w.e.f. March 1, 2015:
Explanation-1 has been inserted in Rule 6(1) of the Credit Rules, which provides that, for
the purpose of this Rule, exempted goods or final products as defined in Rule 2(d) and
Rule 2(h) thereof shall include non-excisable goods cleared for a consideration from the
factory.
Therefore, requirement of Cenvat credit reversal under Rule 6 of the Credit Rules in
respect of clearance of exempted goods has been extended to clearance of non-
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excisable goods also.
Further Explanation – 2 provides that Value of such non-excisable goods shall be the
invoice value and where such invoice value is not available, such value shall be
determined by using reasonable means consistent with the principles of valuation
contained in the Central Excise Act, 1944 (“the Excise Act”) and the Rules made
thereunder.
Proviso to Rule 9(4) of the Credit Rules
Provisions of Rule 9(4) of the Credit Rules applicable to First Stage Dealer or Second Stage
Dealer shall also apply mutatis mutandis to importer who issues an invoice on which
Cenvat credit can be taken [W.e.f. March 1, 2015]:
Rule 9(4) of the Credit Rules provides as under:
“(4) The CENVAT credit in respect of input or capital goods purchased from a first stage
dealer or second stage dealer shall be allowed only if such first stage dealer or second
stage dealer, as the case may be, has maintained records indicating the fact that the
input or capital goods was supplied from the stock on which duty was paid by the
producer of such input or capital goods and only an amount of such duty on pro rata
basis has been indicated in the invoice issued by him”
Provision of Rule 12AAA of the Credit Rules Amended: Power to impose restrictions in
certain types of cases
Provision of Rule 12AAA of the Credit Rules extended in case of registered importer:
In order to prevent the misuse of the provisions of the Cenvat credit, power of the
Central Governmenthas been extended to impose restrictions on registered importer
apart from the following existing categories:
Manufacturer;
First stage and second stage dealer;
Provider of taxable service;
Exporter
The nature of restrictions may include restrictions on utilization of Cenvat credit and
suspension of registration.
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Rule 14 of the Credit Rules substituted to segregate Recovery of Cenvat credit wrongly
availed but not utilized from the cases of Cenvat credit wrongly availed and utilized [W.e.f.
March 1, 2015]
Rule 14(1)(i): Cenvat credit availed wrongly but NOT UTILIZED – recoverable under Section
11A of the Excise Act or Section 73 of the Finance Act, 1994 (“the Finance Act”)
Where the Cenvat credit has been availed wrongly but not utilised, the same shall be
recovered from the manufacturer or the service provider, as the case may be, and the
provisions of Section 11A of the Excise Act (Recovery of duties not levied or not paid or
short-levied or short-paid or erroneously refunded) or Section 73 of the Finance Act
(Recovery of Service tax not levied or paid or short-levied or short-paid or erroneously
refunded), as the case may be, shall apply mutatis mutandis for effecting such
recoveries;
Rule 14(1)(ii): Cenvat credit availed AND UTILISED wrongly – recoverable along with
interest under Section 11A/ 11AA of the Excise Act or Sections 73/ 75 of the Finance Act
Where the Cenvat credit has been availed and utilised wrongly or has been erroneously
refunded, the same shall be recovered along with interest from the manufacturer or the
service provider of output service in terms of the provisions of Sections 11A and Section
11AA (Interest on delayed payment of duty) of the Excise Act or Sections 73 and 75
(Interest on delayed payment of service tax) of the Finance Act, as the case may be, shall
apply mutatis mutandis for effecting such recoveries.
Manner of determining utilization of Cenvat credit
For the purposes of Rule 14(1) of the Credit Rules, all credits taken during a month shall
be deemed to have been taken on the last day of the month and the utilisation thereof
shall be deemed to have occurred in the following manner, namely: -
i. Opening balance of the month has been utilised first;
ii. Cenvat credit admissible in terms of the Credit Rules taken during the month has been
utilised next;
iii. Cenvat credit inadmissible in terms of the Credit Rules taken during the month has
been utilised thereafter.
Rule 15 of the Credit Rules substituted: Confiscation and Penalty [With effect from the date
on which the Finance Bill, 2015 receives the assent of the President]
Penalty provisions amended in terms of Section 11AC of the Excise Act or Section 78 of the
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Finance Act
Sub-
Rule of
Rule 15
Cenvat credit
taken or
utilised
wrongly by
Cenvat credit in respect of
Input or Capital Goods or
Input services
Old Provision New Provision
Rule
15(1)
Any Person In contravention of any of the
provisions of the Credit Rules
Goods liable
to confiscation
and penalty
not exceeding
duty or Service
tax on such
goods services
or Rs. 2000/-,
whichever is
greater.
Goods liable to
confiscation
and penalty in
terms of
Section 11AC
(1)(a) or 11AC
(1)(b) of the
Excise Act or
Section 76(1)
of the Finance
Act, as the
case may be.
Rule
15(2)
Manufacturer By reason of fraud, collusion
or any wilful mis-statement or
suppression of facts, or
contravention of any of the
provisions of the Excise Act,
or of the rules made
thereunder with intent to
evade payment of duty
Section 11AC
of the Excise
Act
Penalty in
terms of
Section
11AC(1)(c) or
11AC(1)(d) or
11AC(1)(e) of
the Excise Act
Rule
15(3)
Service
provider
By reason of fraud, collusion
or any wilful mis-statement or
suppression of facts, or
contravention of any of the
provisions of the Credit rules
or of the Finance Act or of the
rules made thereunder with
intent to evade payment of
Service tax
Section 78 of
the Finance
Act
Section 78(1)
of the Finance
Act
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DISCUSSION FORUM – ARTICLES
INCREASE IN TIME LIMIT FOR AVAILING CENVAT CREDIT ON INPUT SERVICES AND
INPUTS – WHETHER APPLICABLE ON INVOICES ISSUED PRIOR TO MARCH 1, 2015?
Till September 1, 2014, there was no time limit prescribed under the Credit Rules for availment
of Cenvat credit. Various Courts have held that in the absence of any time limit prescribed
under the Credit Rules, Cenvat credit can be taken at any time even in some cases, Assessees
have been allowed to avail Cenvat credit even after year(s).
However, effective from September 1, 2014, the said liberty in respect of availment of Cenvat
credit has been withdrawn. The Central Board of Excise and Customs (“the CBEC” or “the
Board”) vide Notification No. 21 (Applicable w.e.f September 1, 2014), amended Rule 4(1) [for
Inputs] and Rule 4(7) [for Input services] of the Credit Rules in order to fix a time limit of 6
months from the date of issue of any of the documents specified in Rule 9(1) thereof, for
availment of the Cenvat credit.
In this regard, following are the eligible documents specified under Rule 9(1) of the Credit
Rules:
Invoice issued by a manufacturer, importer, first stage dealer;
Supplementary invoice by supplier-manufacturer or service provider, except where such
payment was on account of fraud, suppression of facts etc.
Bill of entry;
A certificate issued by an appraiser of customs in respect of goods imported through a
Foreign post office;
A challan evidencing payment of Service tax, by the service recipient as the person liable
to pay Service tax;
An invoice, a bill or challan issued by a provider of input service on or after the September
10, 2004;
An invoice, bill or challan issued by an Input Service Distributor under Rule 4A of the
Service Tax Rules.
After the said insertion under Rule 4(1) and Rule 4(7) of the Credit Rules, the same became a
debatable issue in the Trade, raising concerns about applicability of time frame of 6 months in
various situations such as:
Taking re-credit in terms of the Credit Rules;
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Invoices issued prior to September 1, 2014;
Payment of Service tax paid by service recipient under partial reverse charge etc.
Thereafter, on November 19, 2014, the CBEC vide Circular No. 990/14/2014-CX-8 dated
November 19, 2014 (“the Circular”) has clarified that the purpose of the amendment made by
Notification No. 21 is to ensure that after the issuance of a document under Rule 9(1) of the
Credit Rules, Cenvat credit is taken for the first time within 6 months of the issue of the
document. Once this condition is met, the limitation has no further application.
Although the Circular on one hand clarifies that purpose of the amendment made by
Notification No. 21 is to ensure that after the issuance of a document under Rule 9(1) of the
Credit Rules, Cenvat credit is taken for the first time within six months of the issue of the
document. Once this condition is met, the limitation has no further application.
However, it is pertinent to note that the Circular in later part further provides that “It is,
therefore, clarified that in each of the three situations described above pertaining to Rule 4(7),
Rule 3(5B) or Rule 4(5)(a) of CCR, 2004, the limitation of six months would apply when the credit
is taken for the first time on an eligible document”
Thus, even though the CBEC has clarified non-applicability of six months’ time limit while
availing re-credit in terms of the Credit Rules but, there are certain other issues still existing in
this regard, which were left unexplained by the Board.
Now, with extension of time limit for availment of Cenvat credit from 6 months to 1 year
(supra) w.e.f 1st March, 2015, the same issue may still crop up again as to whether the Assessee
would be eligible avail Cenvat credit on Invoices issued prior to March 1, 2015 for which time
period of 6 months expired but 1 year period is open on March 1, 2015.
Conclusion: The Board is required to clarify the matter at the earliest keeping in mind the very
purpose of introduction of the Cenvat credit scheme i.e. not to collect duty on duty and avoid
cascading effect.
INTEREST ON WRONG AVAILMENT OF CENVAT CREDIT BUT NOT UTILIZED – A TALE
OF NEVER ENDING LITIGATION AND INTERPRETATIONAL ISSUES
Over the years, Rule 14 of the Credit Rules has always been the matter of concern/ litigation for
both the Revenue and the Assessee. Even the Courts have taken divergent views while
interpreting the provisions of Rule 14 of the Credit Rules. Before we proceed to understand the
changes made in Rule 14 of the Credit Rules vide the Union Budget, 2015, it is imperative here
to understand the erstwhile provisions therein which had been a tale of never ending
litigations.
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Rule 14 of the Credit Rules as it existed prior to April 1, 2012: Taken OR Utilized
Prior to April 1, 2012, Rule 14 of the Credit Rules provided for recovery of Cenvat credit taken
or utilized wrongly or had been erroneously refunded along with interest from the
manufacturer or the provider of output service. Erstwhile Rule 14 of the Credit Rules is
reproduced hereunder:
“14. Recovery of CENVAT credit wrongly taken or erroneously refunded.-
Where the CENVAT credit has been taken or utilized wrongly or has been
erroneously refunded, the same along with interest shall be recovered from the
manufacturer or the provider of the output service and the provisions of sections
11A and 11AB of the Excise Act or sections 73 and 75 of the Finance Act, shall
apply mutatis mutandis for effecting such recoveries.”
As observed from above, the use of the word “OR” in erstwhile Rule 14 of the Credit Rules was
constantly disputed as regards its interpretation on account of chargeability of interest in case
the Assessee has taken but not utilized the Cenvat credit and if at all, the interest is leviable at
the starting point to reckon the same.
The Hon’ble Supreme Court in the case of Union of India Vs. Ind-Swift Laboratories Ltd. [2011
(2) TMI 6 - Supreme Court] has held that the word "or" used in Rule 14 of the Credit Rules
should not be interpreted as "and" and thus, interest would be payable even if the Cenvat
credit is wrongly taken but the same is not utilized.
Rule 14 of the Credit Rules w.e.f April 1, 2012 till February 28, 2015: Taken AND Utilized
Above discussed lack of clarity paved way to enormous litigations, which was at last addressed
by the amendment made in erstwhile Rule 14 of the Credit Rules in the year 2012 vide
Notification No. 18/2012-CE(NT) dated March 17, 2012 (Effective from April 1, 2012). The
relevant extract of Rule 14 of the Credit Rules since April 1, 2012 is reproduced hereunder:
“Recovery of CENVAT credit wrongly taken or erroneously refunded.
14. Where the CENVAT credit has been taken and utilized wrongly or has been
erroneously refunded, the same along with interest shall be recovered from the
manufacturer or the provider of the output service and the provisions of sections
11A and 11AA of the Excise Act or sections 73 and 75 of the Finance Act, shall
apply mutatis mutandis for effecting such recoveries.”
Inferred from above, Rule 14 since April 1, 2012 was in favour of Assessee as it explicitly
conveyed that interest would not be charged in cases where Cenvat credit has been taken but
not utilized. Further, interest was chargeable in case of Cenvat credit taken and utilized but,
again the question of starting point to reckon the interest amount was still ambiguous.
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Rule 14 of the Credit Rules post amendment vide the Union Budget, 2015:
Effective from March 1, 2015, the Union Budget, 2015 has substituted Rule 14 of the Credit
Rules to provide separate treatment of recovery of Cenvat credit wrongly availed when utilized
and when not utilized as under:
“14. Recovery of CENVAT credit wrongly taken or erroneously refunded. -
(1) (i) Where the CENVAT credit has been taken wrongly but not utilised, the same shall
be recovered from the manufacturer or the provider of output service, as the case may
be, and the provisions of sections 11A of the Excise Act or section 73 of the Finance Act,
1994 (32 of 1994), as the case may be, shall apply mutatis mutandis for effecting such
recoveries;
(ii) Where the CENVAT credit has been taken and utilised wrongly or has been
erroneously refunded, the same shall be recovered along with interest from the
manufacturer or the provider of output service, as the case may be, and the provisions of
sections 11A and 11AA of the Excise Actor sections 73 and 75 of the Finance Act, 1994,
as the case may be, shall apply mutatis mutandis for effecting such recoveries.
(2) For the purposes of sub-rule (1), all credits taken during a month shall be deemed to
have been taken on the last day of the month and the utilisation thereof shall be deemed
to have occurred in the following manner, namely: -
(i) the opening balance of the month has been utilised first;
(ii) credit admissible in terms of these rules taken during the month has been utilised
next;
(iii) credit inadmissible in terms of these rules taken during the month has been utilized
thereafter.”
As observed from above, in terms of substituted Rule 14 of the Credit Rules, if the Assessee has
wrongly taken Cenvat credit but has not utilized the same, then interest is not leviable but the
Department can recover from the amount of tax. However, in case of Cenvat credit wrongly
taken and utilized or where the Cenvat credit has been erroneously refunded to the Assessee
then such tax along with interest is recoverable from the Assessee.
To the extent of afore stated provisions, substituted Rule 14 of the Credit Rules seems to
remove the mist surrounding the aspect of interest. But Rule 14 of the Credit Rules does not
end here. Sub-Rule (2) of substituted Rule 14 of the Credit Rules further provides that all credits
taken during a month shall be deemed to have been taken on the last day of the month and a
deeming procedure shall be followed for determining utilization of Cenvat credit, which is as
under:
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(i) The opening balance of the Cenvat credit in beginning of month has been utilized
first i.e. ‘first in fist out method (FIFO)’ has been followed.
(ii) Thereafter the Cenvat credit which was admissible during the month has been
utilized next.
(iii) Lastly, the Cenvat credit which was inadmissible during the month has been utilized.
Apparently, with the introduction of Rule 14(2) of the Credit Rules, the recourse adopted by the
Assessee for avoiding payment of interest by stating that since, balance of Cenvat credit in the
books of Assessee was more than the amount of the disputed Cenvat credit, hence the
disputed amount of Cenvat credit availed has not been utilized, has now come to an end.
Albeit, substituted Rule 14 of the Credit Rules appears to have redressed the ambiguities and
apprehensions surrounding erstwhile Rule 14 thereof, yet such an the endeavor is futile to the
extent it will crop certain another issues in future warranting clarification. Some of them are:
Different interpretations of the procedure for determining utilization of Cenvat credit
provided under newly inserted Rule 14(2) of the Credit Rules
One way to read the provisions of the Rule 14(2) of the Credit Rules is that in case the amount
of inadmissible Cenvat credit is not utilized in a particular month, then such inadmissible Cenvat
will become a part of the opening balance of Cenvat credit of the Next month. In Next month,
since the opening balance of Cenvat credit is deemed to be utilized first, the inadmissible
amount of Cenvat credit which forms part of the opening balance can be said to have utilized
first before utilization of the admissible Cenvat credit which was availed during the subsequent
month. Consequently, even if such amount of the inadmissible Cenvat credit is less than the
closing balance in the subsequent month, the same will become part of opening balance
and therefore will result in interest liability in the subsequent month when the said opening
balance is so utilized.
On the other hand, another view which can be adopted to interpret Rule 14(2) of the Credit
Rules is that the opening balance of Cenvat credit should only include the admissible amount of
Cenvat credit and the inadmissible amount of Cenvat credit should be recorded separately. In
such a scenario, while computing the amount of Cenvat credit utilized in a particular month, the
total admissible amount of Cenvat credit available with the Assessee will have to be taken into
account first and the inadmissible amount of Cenvat credit will be said to be utilized only after
the admissible Cenvat credit is exhausted. In such a case, an Assessee will become liable to pay
interest only in those cases where the balance of admissible Cenvat credit available with the
Assessee is less than the Cenvat credit utilized in a month.
Time limit of 1 year for availing Cenvat credit – another stumbling block
In terms of amended Rule 4(7) of the Credit Rules with effect from March 1, 2015, the time
limit for availment of Cenvat credit on Inputs and Input services has been increased from 6
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months to 1 year. Therefore, even where the eligibility of Cenvat credit on Inputs and Input
services is under dispute, Cenvat credit has to be availed within a period of 1 year from the
date of the relevant document under Rule 9 thereof. Now substituted Rule 14 of the credit
Rules read with Rule 4(7) thereof will emerge as stumbling block. If Cenvat credit amount is
taken within 1 year then in terms of Rule 14(2) of the Credit Rules, the disputable amount of
Cenvat credit availed by the Assessee will become a part of the opening balance of the Cenvat
credit in the next month and may be said to be utilized by it in the month subsequent to the
month of availment of Cenvat credit, resulting in payment of tax along with interest.
Congruence required under Rule 15 of the Credit Rules - Still uses the words taken OR
utilized
Though this year Budget has segregated treatment for recovery of Cenvat credit wrongly
availed when utilized and when not utilized, penalty provisions under Rule 15 of the Credit
Rules needs to be amended in congruence with substituted Rule 14 thereof. Rule 15 of the
Credit Rules still uses the phrase “taken or utilized” which means that penalty is still imposable
in the case where the Cenvat credit is wrongly taken but not utilized.
Conclusion: As observed from above, the substituted Rule 14 of the Credit Rules demands
clarification from the Board for its successful implementation.
AFTERMATH OF NON-EXCISABLE GOODS BEING EQUATED TO EXEMPTED GOODS/
FINAL PRODUCTS FOR THE PURPOSE OF RULE 6 OF THE CREDIT RULES
Vide Notification No. 6/2015-CE(NT) dated March 1, 2015, Explanation-I to Rule 6(1) of the
Credit Rules have been inserted to state that w.e.f March 1, 2015, for the purpose of this Rule,
exempted goods and final products shall include non-excisable goods cleared for a
consideration from the factory:
“Explanation 1. - For the purposes of this rule, exempted goods or final products as
defined in clauses (d) and (h) of rule 2 shall include non-excisable goods cleared for a
consideration from the factory.
Further, by virtue of the Explanation-2 inserted in Rule 6(1) of the Credit Rules, the value of
non-excisable goods shall be the invoice value and where such invoice value is not available,
the value of non-excisable goods shall be determined by using reasonable means consistent
with the principles of valuation contained in the Excise Act and the Rules made thereunder:
“Explanation 2. - Value of non-excisable goods for the purposes of this rule, shall be
the invoice value and where such invoice value is not available, such value shall be
determined by using reasonable means consistent with the principles of valuation
contained in the Excise Act and the rules made thereunder."
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It is clear from the above Explanations that exempted goods and final products now include
non-excisable goods also for the purpose of Rule 6 of the Credit Rules, which provides the
mechanism for availment of Cenvat credit by a manufacturer of dutiable and exempted goods
and providers of taxable and exempted services. In such cases, the manufacturer/ service
provider has following four options, effective from April 1, 2011:
Option I: Maintain separate inventory and accounts of Inputs and Input services – Rule 6(2)
Option II: Pay prescribed ‘amount’ on value of exempted goods or exempted services if
separate inventory and records not maintained – Rule 6(3)(i)
Option III: Proportionate reversal of Cenvat credit – Rule 6(3)(ii)
Option IV: Maintain Separate inventory and accounts of Inputs but common records of Input
services – Rule 6(3)(iii)
The first point to be noted here is that the Explanation is applicable only for the purpose of Rule
6 and there is no amendment in the definition of 'exempted goods' or in the definition of 'final
product' under the Credit Rules. Therefore, Rule 6 is now applicable for the manufacturer of
dutiable goods and non-excisable goods also. Moreover, it is apposite to highlight that the
achievement of the objective of insertion of the aforesaid Explanation, which was applicable for
the provision relating to reversal for Cenvat credit in Rule 6 of the Credit Rules to non-excisable
goods apart from existing applicability to exempted goods and services is at stake in the plight
on certain issues, for which clarification is much needed:
Whether reversal of Cenvat credit also requited for by-products and wastes: By-products
and wastes arising in the manufacture due to the technological necessity are not treated as
finished goods for the purpose of erstwhile Rule 57CC of erstwhile Central Excise Rules,
1944/ Rule 6 of the Credit Rules as held by the Hon’ble Supreme Court in case of Union of
India Vs. Hindustan Zinc Ltd. [2014 (303) E.L.T. 321 (S.C.)]. Therefore, prior to March 1,
2015, Rule 6 of the Credit Rules was not applicable in case of by-products and wastes. But,
now in view of Explanation-I inserted in Rule 6(1) of the Credit Rules, question may arise in
this regard as to whether such by-products and waste arising out of the technological
necessity shall be treated as non-excisable goods for the purpose of Rule 6 of Credit Rules.
Fate of goods mentioned in CETA but without any rate of duty: It is imperative to state
here that the term ‘non-excisable goods’ is not defined under the Excise Act. However, the
definition of ‘excisable goods’ has been provided under Section 2(d) of the Excise Act to
mean goods specified in first and second schedule to the Central Excise Tariff Act, 1985
("CETA") as being subject to a duty of Excise and includes salt.
Therefore goods which do not have any rate specified in the CETA are treated as non-
excisable goods. E.g., electricity which is mentioned in the CETA but without any rate of
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duty, the same is considered to be non-excisable. Now, the question may arise on the fate
of treatment of such goods.
Whether reversal would be required in case of removal of used goods as scrap: It is a
common practice of removing worn out goods, used furniture etc., as scrap from the
factory along with dutiable goods. Now, again the issue may crop up as to whether such
removal of scrap will also trigger reversal provisions under Rule 6 of the Credit Rules.
Whether the Explanations also applicable for past period: Though the Insertion of
Explanations should be applicable w.e.f March 1, 2015 but still calls for clarification
regarding applicability of Rule 6 of the Credit Rules to non-excisable goods manufactured
for the past periods also.
Meaning of the term ‘Consideration’: Firstly, Explanation-I inserted in Rule 6(1) of the
Credit Rules specifically includes “non-excisable goods cleared for a consideration”,
implying that, if the non-excisable goods are cleared without any consideration, or not
cleared from the factory, the same will result in redundancy of application of the
Explanation so inserted.
Further, the word ‘Consideration' has not been defined under the Credit Rules or in the
Excise Act. In such a scenario, the same has been left open to multiple views and
interpretations. Further, it is not made clear that whether the consideration will cover in its
ambit only monetary consideration or both monetary and non-monetary consideration.
Valuation related issues: Value of non-excisable goods shall be the invoice value in terms
of Explanation-2 inserted to Rule 6(1) of the Credit Rules. But, there are chances that the
Department may litigate the same on the grounds of invoice value being influenced by
related party, lower than market value charged etc.
Non-excisable goods equated with exempted goods, but only for the purpose of Rule 6 of
the Credit Rules: The present Explanations inserted in Rule 6 of the Credit Rules very
clearly states to be “for the purpose of this Rule”. In such a case, one may confront as to
whether Rule 7 thereof is also to follow same provisions or an Input Service Distributor
may ignore such provisions while distribution of Cenvat credit.
Whether Total Turnover under Rule 5 of the Credit Rules would also include non-
excisable goods: Again, with insertion of Explanations specifically for the purpose of Rule 6
of the Credit Rules, poses a question of its applicability while determining Total turnover
under Rule 5 of the Credit Rules.
Conclusion: The clear clarification of the terms used and corresponding valuation in the stated
Explanations to Rule 6(1) of the Credit Rules is very much required from the Board so as not to
create another area of future litigation.
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DOUBTFUL FATE OF REFUND ON DEEMED EXPORTS
The Hon’ble Prime Minister, in order to encourage Companies to manufacture their products in
India has launched initiative named ‘Make in India’ on September 25, 2014. This had not only
helped Indian manufacturers to enhance their capital base as there are proposed relaxations in
the policy of Foreign Direct Investment but also produce their products in India by
benchmarking the International Standards.
The Government issued a Notification No. 114 (RE-2013)/2009-2014 dated March 12, 2015
which is one more step forward in improving 'Ease of Doing Business' by reducing the
compulsory documents required for import and export of goods. Further as per CBEC Circular
No. 1/2015 – Customs dated January 12, 2015, the Customs have also merged the 'Commercial
Invoice' with the 'Packing List' and provided acceptance to 'Commercial Invoice cum Packing
List' that combines the required details of both the documents.
On the other hand, in the Union Budget, 2015 vide Notification No. 06/2015-C.E. (N.T.) dated
March 1, 2015 (Effective from March 1, 2015), Export goods have been defined by inserting a
Clause (1A) in Explanation 1 to Rule 5 of the Credit Rules, which is reproduced as under:
"(1A) "export goods" means any goods which are to be taken out of India to a place outside
India".
Similarly, Notification No. 8/2015–C.E. (N.T.) dated March 1, 2015 has substituted the existing
explanation to Rule 18 of the Central Excise Rules, 2002 (“the Excise Rules”) to narrow down
the meaning of the term ‘Export’ in the following manner:
“Explanation. – For the purposes of this rule, “export”, with its grammatical variations and
cognate expressions, means taking goods out of India to a place outside India and includes
shipment of goods as provision or stores for use on board a ship proceeding to a foreign port
or supplied to a foreign going aircraft.”.
Hitherto, in terms of Rule 5 of the Credit Rules, the manufacturer who clears a final product or
an intermediate product for export without payment of duty under bond or letter of
undertaking, or a service provider who provides an output service which is exported without
payment of Service tax, was allowed refund of Cenvat credit as determined by the formula,
procedure, conditions etc. specified therein.
Furthermore, in terms of Rule 18 of the Excise Rules, in case of export, the Central Government
may grant rebate of duty paid on such excisable goods or duty paid on materials used in the
manufacturing or processing of such goods subject to certain conditions or limitations, if any,
and fulfilment of certain procedure, as may be specified.
Hence, with the insertion of the words “taking goods out of India to a place outside India”, the
Government has made it clear that the actual export will only be given benefit under the Excise
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Rules & the Credit Rules and not the “Deemed export”, which is defined under Para 8.1 of
Chapter 8 of the Foreign Trade Policy 2009-14 (“the FTP”) as under:
“Deemed Exports refer to those transactions in which goods supplied do not leave country,
and payment for such supplies is received either in Indian rupees or in free foreign exchange”
Accordingly, with the stated amendment, the issue that arise for consideration is that how the
Assessee who supplies goods to Export Oriented Units (“EOUs”)/ Special Economic Zones
(“SEZs”), will get refund of the duties suffered by him.
Our Comments: It is worth observing that recently, the Hon’ble High Court of Gujarat in the
case of E I Dupont India Pvt. Ltd. Vs. Union of India [2014 (305) E.L.T. 282 (Guj.)] has confirmed
the fact that even Deemed exports are eligible for refund under Rule 5 of the Credit Rules. In
pursuant to the above decision, the Board also issued an Instruction F. No. 201/01/2014-CX.6
dated June 26, 2014 wherein it has been strictly instructed to follow the judicial discipline by
the adjudicating authorities when the issue is covered by decisions of High Courts or Supreme
Court. This instruction also clearly states that if there exists any precedent judgement which
has been decided against the revenue then the officers shall be bound by it. Moreover, even if
the appeal has been filed against the precedent judgment by the revenue department, still the
same is required to be followed for deciding the issue in case of other assessees in view of the
decision given by the Hon’ble Supreme Court in the case of Union of India Vs. Kamalakshi
Corporation Ltd. [1991 (55) E.L.T. 433 (S.C.)].
However, with the stated amendments in Rule 5 of the Credit Rules read with Rule 18 of the
Excise Rules, fate of refunds in case of Deemed exports has raised concerns among the Trade. If
Deemed exports are excluded from the purview of Rule 5 of the Credit Rules and Rule 18 of the
Excise Rules, then in such a scenario, taxes and duties paid on Inputs though available as credit
would add to the cost of products supplied to EOUs/ SEZs as they will remain unutilised in case
substantial part of the clearances are to EOUs/ SEZs. This will ultimately result in export of taxes
and duties which has never been the intention of the Government. Thus, in turn it will hamper
the Government’s broad vision of making all manufactures self-reliant and create India’s
Product image in the global market. Hence, achievement of mission ‘Make in India’ is at stake.
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ABOUT US
A2Z TAXCORP LLP having professionals from Multi disciplines which provides services under the
Indirect Tax Laws, DGFT, Foreign Trade Policy, SEZ, EOU, Export – Import Laws, Free Trade
Policy, Accounting, Auditing, Law, Company Laws, etc.
Executive Consultant:
Bimal Jain
FCA, FCS, LLB, B.Com (Hons.)
CONTACT
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Readers are advised to consult the professional for understanding applicability of this newsletter
in the respective scenarios. While due care has been taken in preparing this document, the
existence of mistakes and omissions herein is not ruled out. No part of this document should be
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A2Z Taxcorp LLP Editorial Team:
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Niraj Kumar, ACA
Impreet Kaur, ACS
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