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Cenvat Credit Rules, 2004

Written By Admin on Friday, 4 July 2014 | Friday, July 04, 2014

Cenvat Credit Rules, 2004
Rule 1: Applicability
­    To entire India except the State of Jammu and Kashmir.

Rule 2: Definitions
(a) Capital Goods (In two parts A and B)
­    A- List of goods given where End Use shall be- inside the factory of the manufacturer of Finished Products (FP) (otherwise than an equipment/appliance in an office); or for providing output service (OPS)
­    B- Motor Vehicle registered in the name of the provider of OPS for providing the following taxable services u/s 65 (105) of Finance Act, 1994: Seven services listed. These should be compulsorily owned by the assessee.
(d) Exempted Goods
­    Means goods exempt from the whole of Excise duty u/s 5A and includes goods of NIL rate of duty also.
­    These are excisable goods but non-dutiable goods.
(e) Exempted Services
­    Means the taxable services which are exempt from the whole of the Service Tax leviable thereon and includes non-taxable services too.
(h) Final Products
­    means excisable goods manufactured or produced from inputs (IP) or using input service (IPS)
­    May be dutiable or non-dutiable, but not non-excisable.
(ij) First Stage Dealer
­    Means dealer who purchases goods directly from the manufacturer/depot/ consignment agent/ any other place of sale under cover of “Excise” invoice OR dealer who purchases goods directly from an importer / depot / consignment agent under cover of an invoice.
(k) Inputs
­    A – All goods (except LDO, HSD Oil and motor spirit i.e. Petrol) used in or in relation to the manufacture of Finished Products directly or indirectly whether contained in Finished product or not.
­    The words used are “all goods” and not “all excisable goods”.
­    B - All goods (except LDO, HSD Oil and motor spirit i.e. Petrol and motor vehicles) used for providing any output service (OPS).
­    Other points:
o    Lubricating oils, greases, cutting oil and coolants – always inputs.
o    Accessories of Finished Products cleared along with Finished products: inputs if three conditions as laid down by SC in the case of Jay Engineering works are fulfilled:
·         They are essential for the operational needs of the gadget.
·         They are compulsorily supplied with the gadgets at the point of delivery through factory gate; and
·         Their value stands included in the value of the gadgets at the factory gate.
o    Goods used as paint – always inputs
o    Goods used as packing material – always inputs
o    Goods used as fuel – All fuels except LDO, HSD Oil and motor spirit i.e. Petrol qualify for inputs.
o    Goods used for the generation of electricity or steam used within the factory for manufacture of Finished Product’s or any other purpose are inputs.
(l) Input service
­    means: any service (taxable or non taxable)
­    used by a provider of taxable service for providing an Output Service (OPS);
­    used by the manufacturer, whether directly or indirectly, in relation to the manufacture of Finished Products (FP) and clearance of FP up to the place of removal.
­    advertisement or sale promotion, market research, storage up to the place of removal; procurement of Inputs;
­    activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security, inward transportation of Inputs or Capital Goods and Outward Transportation up to the place of removal.
(m) Input service (IPS) Distributor
­    an office of the manufacturer or producer of Finished Goods or provider of Output Service
­    which receives invoices received under Service Tax Rule 4A towards purchase of Input Services; and
­    Issues invoices/bill/challan for the purposes of distributing the credit of Service Tax paid on the said services to such manufacturer, producer or provider.
(n) Job Work
­    processing or working upon of raw materials or semi-finished goods supplied to the job worker,
­    so as to complete a part or whole of the process resulting in the manufacture or finishing of an article.
(p) Output Service (OPS):
­    means any taxable service, excluding GTA service provided by the provider of taxable service to a customer, client, subscriber, policy-holder or any other person and the expressions “provider” and “provided” shall be construed accordingly.

­    GTA service stands excluded from the definition of OPS w.e.f. 01.03.2008. Thus:
a)       The transporter cannot avail Cenvat credit.
b)       The consignee cannot avail Cenvat credit. However, Cenvat credit of tax paid on GTA service may be taken by the consignee.
(s) Second Stage Dealer
­   Means a dealer who purchases the goods from the First Stage Dealer.

Rule 3 – Cenvat Credit
1.       A manufacturer of Finished Products or a provider of taxable service shall be allowed to take credit of:
­    Cenvat; SED; AED(TTA); AED(GSI); NCCD; Education Cess; CVD; i.e. ACD = ED(CVD) (equivalent to above)
­    Special CVD i.e. SPL CVD = Vat/Sales tax; (not available to service provider)
­    AED (TTW); AED (pan masala)
­    Service Tax; Education Cess on Service tax;
­    On Inputs or Capital Goods received in a factory of manufacture of Finished Goods or a provider of Output Service (OPS) (on or after 10.09.2004);
­    On Input Services received by the manufacturer of Finished Products or by the provider of Output Service.

2.       Credit may be availed in respect of Input Goods (IP) or Input Services (IPS) used in the manufacture of Intermediate Product (IMP) by a Job Worker and received by the manufacturer for use in or in relation to manufacture of Finished Products on or after 10/09/2004.

3.       Capital Goods can be imported and kept in EOU without payment of customs duty for a maximum period of 5 years. EOU is treated as customs bonded warehouse. Thereafter, the EOU is de-bonded and the unit enters DTA. Excise Duty is payable on the de-bonded capital goods on their depreciated value at the rate prevalent on the date of de-bonding. The excise duty thus paid can be availed as Cenvat credit.

4.       Cenvat credit on the IP in stock or IP in process or IP in FP in stock may be taken on the date on which FP ceases to be exempted goods or FP becomes excisable.

5.       Cenvat Credit on the IP received on or after 10.09.2004 and lying in the stock on the date on which OPS ceases to be exempted service may also be taken and used for providing such service.

6.       Cenvat credit may be utilized for the payment of:
­    ED on FP;
­    Amount equal to Cenvat Credit when IP is removed as such or after partial processing;
­    Amount equal to Cenvat Credit when CG is removed as such
­    Service tax on OPS.

7.       While paying ED or Service Tax, Cenvat Credit shall be utilized to the extent it is available on the last day of the month/quarter (to which the ED relates).
E.g. Credit from 1st to 5th November is not available for the duty of October payable on 5th of November.

8.       When the manufacturer or provider of OPS removes IP or CG as such, then he shall pay a mount equal to the credit taken and the removal shall be under cover of invoice referred to in Credit Rule 9.
­    The provider of OPS need not make such a payment if he removes IP or CG for providing OPS.
­    CG used and removed (still a machine but with poor quality. Not a scrap), still do reversal of credit;
­    Reversal amount = Original credit – 2.5% for each quarter form the date of taking the credit.

9.       If CG is cleared as waste and scrap, the manufacturer shall pay an amount equal to duty payable on transactional value.

10.    If the IP/CG on which credit has been availed but written off fully (or provision made therefore) before being put to use, then the credit availed initially shall be reversed. On the IP/CG being put to use, the reversed credit shall be restored.

11.    When duty on the FP destroyed/lost is remitted under CE Rule 21, the Cenvat Credit on the IP used in the manufacture of FP shall be reversed.

12.    Even though the amount paid under Rule 3(5) or Rule 3(5A) is ED equivalent and not ED proper, yet the receiver can take the credit.

13.   Cenvat benefit is available to goods liable to duty on ad valorem basis as well as the specific rate basis. No specific denial for the latter.

Rule 4: Conditions for availing the Cenvat Credit
1.       For IP – Availment before utilization – credit immediately on receipt of IP in factory premises
Exception: the principal manufacturer can take credit on receipt of inputs in his premises though they are sent to a job worker for making jewellery.

2.       For Capital goods –
-          CG actually recd in the factory of manufacturer or premises of OPS;
-          Received at any point of time in the financial year;
-          Credit is permissible for the year of receipt irrespective of the date of receipt
-          In same F.Y. – no credit more than 50% of the duty paid (CENVAT)
-          Credit for the balance can be taken in any subsequent year.
-          At the time of availment of credit in future years, the Capital Goods must be in the possession of the manufacturer. Possession and not the USE.
-          This condition of possession is, however, not applicable to components, components, spares and accessories, refractory materials, moulds and dies, abrasive cloth and grinding wheel.

3.       100% credit can be taken on the capital goods received in a financial year if they are cleared as such in the same financial year.

4.       100% credit of Special CVD (i.e. ACD = ST/VAT, etc) may be taken immediately on receipt of capital goods in the factory of the manufacturer.

5.       Capital goods acquired on Lease, Hire-purchase or Loan agreement: Credit can be availed in any formal of purchase if they are obtained by paying duty.

6.       No Cenvat credit on the ED component of the value of CG, if the manufacturer claims depreciation u/s 32 of the Income Tax Act on that part of the value which represents ED.

7.       If goods (IP or CG) sent to job worker for further processing and not returned within 180 days (and benefit of no touch to Cenvat credit is taken), then –
The manufacturer shall pay an amount equivalent (or debit Cenvat A/c) to the Cenvat credit availed on such input or capital goods. Later, when received back the goods, take Cenvat credit again.

8.       If jigs, fixtures, moulds or dies are given to a job worker for manufacturing, then nothing to be debited to CENVAT credit even if more than 180 days, if following conditions are fulfilled:
-          the job worker shall use them for the production of goods;
-          the production shall be exclusively on behalf of the manufacturer, and
-          the goods shall be according to the specification of the manufacturer.

9.       If finished goods are directly removed from the factory premises of the job worker, since they are completed there itself (not bringing back to manufacturer), then the duty shall be paid by the job worker only, but subject to the following conditions:
-          There should be a special permission for enabling such clearances by the Job Worker;
-          The permitting authority is the jurisdictional AC/DC of the manufacturer;
-          The conditions may include the manner of payment of duty.

10.    Cenvat credit in respect of IPS shall be allowed on or after the day on which the provider of OPS pays the value of IPS and the Service Tax paid or payable as per the Invoice in support of IPS.

Rule 5: Refund of Cenvat credit
­    Where any input or input service is used in the manufacture of final product which is cleared for –
o    export under bond or letter of undertaking
o    in the intermediate product cleared for export
o    used in providing output service which is exported
­    then CENVAT credit in respect of the input or input service so used shall be allowed to be utilized towards payment of –
o    duty of excise on any final product cleared for home consumption or for export on payment of duty; or
o    service tax on output service.
­    Provided that no refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback.

Rule 6(1): No Cenvat credit for IP and IPS in relation to exempt services and exempt FP’s
Provided that the Cenvat credit on inputs shall not be denied to job worker.
(Except Rule 6(2) if separate inventory is maintained)
Rule 6(2): If separate inventory is maintained:
­    manufacturer produces dutiable and exempt FP’s
­    service provider provides taxable and exempt services,
­    separate inventory of IP and IPS is maintained for dutiable and exempt FP’s or taxable and exempt services;
­    Then take Cenvat credit of IP and IPS in respect of dutiable FP’s or taxable services only.
­    But if not separate inventory maintained, then got to 6(3);

Rule 6(3) – If separate inventory is not maintained: (new provisions from 01.04.2008)
­    Avail credit in total for all IP and IPS
­    Two options of settlement of availed credit:
­    Rule 6(3)(i): Reversal of credit to be done as follows:
o    Exempted FP: @10% of the value of exempted FP;
o    Exempted OPS: @ 8% of the value of exempted OPS;
­    “Value” as per Valuation Rules.

If Final amount > Provisional amount
­    Pay the amount short paid on or before 30th June of the succeeding financial year.
­    For delay, pay interest @ 24% p.a.
If Provisional amount > Final amount
­    Make self adjustment of excess amount paid by taking credit.
­    Send intimation of payment / adjustment with full details to Superintendent of Central Excise within 15 days.

Rule 6(6): The following goods can be cleared without payment of duty.
­    Cenvat Credit can be availed for IP, IPS and CG. They are:
1.       Clearances to SEZ;
2.       Clearances to 100% EOU;
3.       Clearances to EHTP/STP;
4.       Supplies to UN / International Organisations and the projects funded by them;
5.       Clearance for Export under bond without payment of duty (CE Rule 19)
6.       Gold/Silver arising in the course of manufacture of copper/Zinc by smelting;
7.       Goods exempted from BCD and ACD, when supplied against the international competitive bidding.

Rule 7: Manner of distribution of credit by input service distributor
­    The input service distributor may distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, subject to the following condition:
o    The credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon; or
o    Credit of service tax attributable to service use in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed.

Rule 7A: Credit by output service provider
­    A provider of output service shall be allowed to take credit on inputs and capital goods received, on the basis of an invoice issued by the said provider of output service, towards the purchase of inputs and capital goods.

Rule 8: Storage of IP outside the Factory of the manufacturer
­    In exceptional circumstances, having regard to the nature of goods and shortage of storage space inside the factory, the AC/DC can permit the manufacturer to store the IP (on which Cenvat Credit has been taken) outside the factory.
­    However, if the IP so stored outside the factory is not so used in manufacture, then the manufacturer shall pay an amount equal to the credit taken on the IP
­    The concession is only for IP and not for CG.

Rule 9A: Principal IPs
­    An assessee who in the previous year has paid ED of Rs.100 lakhs or more through PLA shall file:
o    A declaration of information relating to the principal IP’s in Form ER5 by 30th April every year; and
o    A monthly return in Form ER6 by 10th of next month for the Principal IP’s received and consumed with reference to the quantity of F.P. manufactured.

Rule 10: Transfer of Cenvat Credit
­    If a manufacturer of the final products shifts his factory to another site or the factory is transferred on account of change in ownership for transfer of liabilities of such factory, then, the manufacturer shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated factory.
­    The transfer of the CENVAT credit shall be allowed only if the stock of inputs as such or in process, or the capital goods is also transferred along with the factory or business premises to the new site or ownership.

Rule 11: Transitional provision
­    A manufacturer who opts for exemption from the whole of the duty of excise leviable on goods manufactured by him in a financial year and who has been taking CENVAT credit on inputs before such option is exercised shall be required to pay an amount equivalent to the CENVAT credit, if any, allowed to him in respect of inputs lying in stock or in process or contained in final products; the balance, if any, still remaining shall lapse and shall not be allowed to be utilized for payment of duty on any excisable goods, whether cleared for home consumption or for export.
­    A manufacturer or producer of a final product shall be required to pay an amount equivalent to the CENVAT credit, if any, taken by him in respect of inputs received for use in the manufacture of the said final product and is lying in stock or in process; if –
o    he opts for exemption from whole of the duty of excise leviable on the said final product manufactured or produced by him; or
o    the said final product has been exempted absolutely under section 5A of the Act

Rule 12A: Large Taxpayer
­   A large taxpayer may remove inputs, except motor spirit, commonly known as petrol from the date of receipt of the inputs in the recipient premises under the cover of invoice from any of his registered premises to his other registered premises other than a premises of a first or second stage dealer for further use in the manufacture of final products subject to final products are manufactured and cleared on payment of appropriate duties of excise leviable thereon within a period of six months or capital goods, as such, on which CENVAT credit has been taken, without payment of an amount. (If appropriate duties of excise not paid, it shall be paid along with interest).

Rule 15: Confiscation and Penalty
­    If any person, takes CENVAT credit in respect of input or capital goods, wrongly or in contravention of any of the provisions of these rules, then, all such goods shall be liable to confiscation and such person, shall be liable to a penalty not exceeding the duty on the excisable goods
­    In a case, where the CENVAT credit in respect of input or capital goods has been taken or utilized wrongly on account of fraud, willful mis-statement, collusion or suppression of facts with intention to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Excise Act.
­    If any person, takes CENVAT credit in respect of input services, wrongly or in contravention of any of the provisions, then, such person, shall be liable to a penalty which may extend to an amount not exceeding Rs. 2,000.

Rule 15A: General Penalty
­    Whoever contravenes the provisions of these rules for which no penalty has been provided in the rules, he shall be liable to a penalty which may extend to Rs. 5,000.
Some points to remember
o    Basic conditions for taking Cenvat credit:
­    There should be manufacture or taxable output service.
­    Input goods should be ‘used in or in relation to manufacture’ of final product or for provision of output service.
­    No credit is available if final product is exempt from duty or output service is not taxable.

o    If a manufacturer manufactures some capital goods within the factory, goods used to manufacture such capital goods will be eligible as ‘inputs’ i.e. 100% Cenvat credit will be available in same F.Y.

o    If manufacturer is unable to store the inputs inside the factory for want of space, hazardous nature of goods etc, he can store the inputs out side the premises. The storage point will be treated as extension of the factory.

o    Cenvat credit is available on entire quantity of input even if part of input goes in process loss. It includes all inputs used in manufacture of final product, even if it is not reflected in final product.

o    Loss of inputs during handling – Cenvat credit can not be denied.

o    Excessive loss is also permissible to avail Cenvat credit.
o    Cenvat credit on inputs will be eligible even if there is excess use or loss due to abnormal operating conditions.

o    Inputs used for trial production which turned into scrap (are used in or in relation to manufacture) are eligible for Cenvat credit.

o    If the inputs are lost or destroyed in the store room, credit of duty paid on such inputs will not be available, as it can not be said that they are used ‘in or in relation to manufacture’.

o    If waste is before actual manufacture starts, such waste is not ‘during manufacture’ and thus, Cenvat credit will have to be reversed.

o    If inputs are found short in stock, they are not used in or in relation to manufacture of finished product. Hence, Cenvat credit is not admissible.

o    If unused inputs or capital goods are written off in the books of accounts, Cenvat credit should be reversed.

o    If there is some loss/shortage in transit during receipt of inputs, no Cenvat credit is available, except in case there is any natural cause.

o    If intermediate product is exempt, but the capital goods used in manufacture of such intermediate goods are dutiable, then Cenvat credit is available on such capital goods.

o    Building material used for factory building, office equipments such as fans, coolers etc. is not eligible to take Cenvat credit. Structural used within factory for construction is not eligible as inputs.

o    Outward freight after place of removal should be eligible as ‘input service’ if it is in relation to activities of business.

o    Credit of input service can be availed only after the output service provider makes payment of value of input service and the service tax payable on it, as shown in invoice of service provider.

o    In case of excise duty, Cenvat credit is available as soon as goods are received in the factory. There is no condition that credit can be availed only after payment is made to supplier of goods.

o    Capital goods should be used in factory. They can be sent outside for jobwork but should be brought back within 180 days.

o    Capital goods used for manufacture of exempted goods are not eligible for Cenvat credit.

o    Capital goods obtained on hire purchase/lease/loan are eligible for Cenvat credit.

o    Depreciation u/s 32 of Income Tax Act should not be claimed on the excise portion of the capital goods.

o    Motor vehicle are not ‘capital goods’ for purpose of manufacture, but Cenvat credit on motor vehicle would be allowed as ‘capital goods’ only to some service providers: Courier, Tour operator, Rent-a-cab scheme operator, Cargo handling agency, Goods transport agency (GTA), Outdoor caterer, Pandal or Shamiana contractor.

o    Equipments or appliances used in an office will not be eligible as ‘capital good’. This restriction is only for manufacturer and not for service provider.

o    If capital goods are outside the factory but integrally connected with factory, these will be eligible for Cenvat credit.

o    Ropeway extended outside the factory premises is eligible as ‘capital goods’, as the extension proceeded form factory.

o    Cenvat credit of ‘education cess’ paid on input or input service can be utilised for payment of education cess on final product or output service.

o    Credit of excise duty and service tax can be used for payment of any duty.
o    Following formula is to be used if a unit in DTA purchases goods from EOU:
­    Cenvat credit = A.V. {(1+BCD/400)CVD/100}
­    Suppose, A.V. = Rs. 770 p.u., Quantity cleared = 77,770 units, BCD = 20%, CVD = 16%
­    Cenvat credit = 770{(1+20/400)16/100} = Rs. 129.36 p.u.
­    Total Cenvat credit allowable on 77,770 units = 77,770 x 129.36 = Rs. 1,00,60,327.20

o    It may happen that the final product may be subsequently exempt. At that time, some inputs will be in stock. These inputs will be used for manufacture of exempted final product. In such case, Cenvat credit is available only if duty is paid on final product. Cenvat credit availed on stock is required to be reversed.

o    If input originally entitled to Cenvat credit, but subsequently became ineligible for Cenvat credit, in such case, Cenvat credit already availed need not be reversed.

o    Payment of ‘amount’ means Cenvat credit has not been taken.

o    If assessee opts not to maintain separate accounts in respect of inputs and input services utilised for exempted goods, he has to pay ‘amount’ of 10% of total price (excluding taxes) of exempted final product (also by-product and subsidiary product).

o    No education cess and S&H EC on the ‘amount’.

o    Manufacturer can recover the ‘amount’ paid on exempted final product from buyer.

o    If assessee (here, service provider) does not maintain separate accounts, he can utilise Cenvat credit only upto 20% of tax payable on taxable output service.

o    Manufacturer can remove inputs/capital goods ‘as such’ for any reason (sale/disposal) after payment of an ‘amount’. In other words, it amounts to reversal of Cenvat credit taken.

o    If input becomes waste and sold as scrap, it can not be said that input is cleared ‘as such’ and duty will be payable as if waste has been removed.

o    One should show the figure as ‘amount’ and not as ‘excise duty’ in his invoice. This ‘amount’ can be paid through Cenvat credit account on monthly basis by 5th or 15th of the next month.

o    After use, capital goods can be removed either as scrap or as second hand capital goods.
1.       If capital goods are removed as scrap, the manufacturer shall pay an ‘amount’ equal to duty payable on transaction value.
2.       If capital goods are removed as second hand capital goods, the manufacturer shall pay an ‘amount’ equal to “Cenvat credit taken on the said capital goods minus 2.5% for each quarter of a year or part thereof” from the date of taking Cenvat credit.

o    If manufacturer sold factory along with inputs and machinery to another manufacturer, it does not amount to removal of inputs and capital goods. In such case, no duty is payable on inputs and capital goods.

o    Waste and scrap arising out of packing material in which inputs were received, is not dutiable.

o    A manufacturer can remove excisable goods manufactured in his factory for carrying out tests or any other process (not amounting to manufacture) to any other premises without payment of duty. (with specific permission of commissioner)

o    Prototype can be sent out for trial purposes by actually putting it to effective use after conducting test. It will be cleared on payment of duty. After its return to factory, remission of duty can be obtained.

o    Returns under Cenvat
§  First/Second stage dealer – Quarterly return – within 15 days from close of quarter.
§  Provider of Input service/output service – half yearly return – From ST3 – within 1 month from close of half year.
§  Revised return – service provider – within 60 days of filing of original return. (this facility is not for manufacturer)

o    If a manufacturer manufactures various products, he has to avail Cenvat credit for all items or opt for exemption from Cenvat credit for all products. It is not permissible to avail Cenvat credit for some items and avail SSI exemption for other products.

o    Two major export incentives are available to a manufacturer:
­    No duty is payable on finished products exported.
­    Duty paid on inputs or tax paid on input services is refunded/not charged or Cenvat credit is allowed to be used for other final products.

o    If the Cenvat credit of inputs used in exported final products can not be used for payment of duty on any other final goods, then only manufacturer or service provider can get cash refund of the same if final products were exported without payment of duty (either under bond or after giving Letter of undertaking).

o    Cash refund of Cenvat credit is not admissible, if –
­    Supply is to EOU units, EHTP or STP.
­    Exports are to Nepal or Bhutan.
­    If exporter claims rebate of duty in inputs/service tax.
­    Duty drawback of excise portion should not have been claimed (customs portion of duty drawback can be claimed).

o    If Cenvat credit has been taken or utilised wrongly, the same shall be payable along with interest.

-  Pushkar Sawarkar, Nasik.
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