Cenvat Credit

V S Datey
Website http://www.dateyvs.com

Welcome

My Introduction
V

S Datey (Age 69), B Tech (Hons),

FCS, FCMA
Worked as Finance Manager and
Secretary in leading listed companies
during 1965-1993
Writing books on indirect taxes and
corporate laws and consultancy in
indirect taxes since 1994

Conventional Tax System

Detail

110

165

Value Added

100

40

35

Sub-Total

100

150

200

10

15

20

110

165

200

Purchases

Add Tax 10%

Total

Tax credit System under Vat

Transaction without Transaction

VAT
VAT

Purchas
es

B
110

Value
Adde
d

100

Subtot
al
Add Tax

Details

Total

With

B
100

40

100

40

100

150

100

140

10
110

15
165

10
110

14
154

Highlights
Instant

Credit
One to one co-relation not required in
Vat/Cenvat
Credit of excise duty on inputs and capital
goods and service tax on input services.
The credit is inter-changeable, except that
credit of education cess and SAHE cess for
education cess and SAHE cess only

Utilisation of Cenvat Credit

All

taxes and duties specified in rule 3(1)

of Cenvat Credit Rules form a pool.
This credit can be utilised by
manufacturer of excisable goods or
provider of taxable service, for payment
of any tax or duty as specified in rule
3(4) of Cenvat Credit Rules
One to one relation not required

Eligible duty paying documents

Original

or Duplicate Invoice, Dealers

Invoice, Bill of Entry, Supplementary
Invoice
Xerox not permitted. Endorsed
Invoice/Bill of Entry permissible
Defect in document Permission of
AC/DC required to avail Cenvat Credit

Inputs for manufacturer

All

goods used in factory by

manufacturer having some relation with
manufacture
Accessories and warranty spares
supplied along with main final product
Power generation for captive
consumption
Goods for providing output service

Inputs for service provider

Definition

restricted
Only inputs used for providing taxable
services eligible
Consumable eligible
If property in inputs transferred to buyer
not eligible for Cenvat

Ineligible Inputs

Goods on which 1%/2% excise duty is paid [proviso to

rule 3(i)
Goods (and services) used for civil construction not
eligible except when used for construction itself
Canteen food (and services), goods for personal not
eligible - hand gloves Is it personal use or
consumption of employee?
Goods having no relation with manufacture As per
CBE&C circular, even office furniture and stationery is
eligible as input

Reversal of Cenvat if inputs partially or fully

written off
Cenvat

credit reversal is required even if the

inputs are written off fully or partially in
books of account (w.e.f. 1-3-2011) [so far,
such reversal was required only if inputs
were completely written off]
Not applicable when general provision
made in books of account
Finished goods write off remission from
Commissioner reversal of Cenvat

Capital Goods

Capital goods (machinery, plant, spare parts of

machinery, tools, dies, etc. ) as defined in rule 2(a), used
for manufacture of final product and/or used for providing
output taxable service will be available.
Capital goods should be used in the factory. Capital
goods used outside the factory for generation of
electricity for captive use within the factory eligible
50% credit is available in current year and balance in
subsequent financial year or years, except in case of SSI
Assessee should not claim depreciation on duty portion
on which he has availed Cenvat credit

Capital Goods
Only

those defined as capital goods eligible

check chapter heads
Steel, cement for construction not eligible
Spare parts, components, tools covered under
the definition though normally not capitalised in
books of account

Motor vehicles Eligibility to

manufacturers effective 1-4-2012

Cenvat Credit is allowable on motor vehicles (except

under heading Nos. 8702, 8702, 8704, 8711 and their
chassis) to manufacturers. The excluded chapter heads
are relating to motor vehicles for transport of 10 or more
persons (including driver), motor cars, station wagons, tor
vehicles for transport of goods and motor cycles.
In effect, Cenvat credit is available only in respect of
tractors, special purpose motor vehicles, work trucks,
bicycles, baby carriages and trailers and parts and
accessories of all motor vehicles to the manufacturers,
w.e.f. 1-4-2012.

Cenvat Credit of Motor Vehicles

to Service Providers
Cenvat

credit of motor vehicles covered

under headings 8702, 8703, 8704 and
8711 and their chassis is available only to
specified service providers like courier,
renting or hire of motor vehicles,
transportation of passengers, motor
driving training schools, transportation of
inputs and capital goods used for
providing an output service

Removal of capital goods after

use
If

capital goods are cleared after use as scrap

or second hand goods, an amount payable by
reducing the original Cenvat credit @ 2.5% per
quarter ( [rule 4(5A)] (Higher reduction in case
of computers)
If excise duty calculated on basis of
transaction value of the old capital goods is
higher, then amount equal to that duty
payable.

Ineligible Input Services

Rent-a-cab services, insurance of motor vehicles,

repair of motor vehicles not eligible, except where
motor vehicle is eligible as capital goods
Architect and Construction services for building, civil
structure, laying of foundation or structures for capital
goods except when used for construction itself
Canteen, club membership of employees, insurance of
employees, LTA of employees not eligible

Inclusive part of Input Service

includes services used in relation to

modernisation,

renovation or repairs of a
factory, premises of provider of output service
or an office relating to such factory or
premises, advertisement or sales promotion,
market research, storage upto the place of
removal, procurement of inputs, accounting,
auditing, financing,
(Continued)

Input Service (Contiued)

recruitment

and quality control, coaching

and training, computer networking, credit
rating, share registry, security, business
exhibition, legal services, inward
transportation of inputs or capital goods
and outward transportation upto the place
of removal (The words activities relating
to business such as removed in new
definition)

Includes
If

the word include/s is used it means that

the definition is not exhaustive but it is
inclusive, i.e. it expands the meaning Doypack Systems (P.) Ltd. v. UOI (1988) 2
SCR 962 = 1988 2 SCC 299 = 65 Comp Cas
1 = 36 ELT 201 = AIR 1988 SC 782 * Lucknow
Development Authority v. M K Gupta (1994) 1
SCC 243 = 1994 AIR SCW 97 = AIR 1994 SC
787.

In relation to
The

expression in relation to (so also

pertaining to) is a very broad expression, which
pre-supposes another subject matter. These are
words of comprehension which might both have
a direct significance as well as an indirect
significance depending on the context. -. Relating to is equivalent to or synonymous with
as to concerning with and pertaining to. The
expression pertaining to is an expression of
expansion and not of contraction

Services in inclusive part of definition

These

relate to procurement, marketing,

administration, accounting, raising of
finance, human resources
All five resources i.e. M s Men,
Material, Machines, Money and Minutes
covered
Except services specifically excluded, all
other services should get covered

Wasteful Expenditure as per department

for non-eligibility of Cenvat credit
Open

society - Building for office or

factory is a waste
Employees, staff, should travel by public
bus or airplane. Motor vehicle, taxi is
luxury
Employee benefit is a luxury employ
only casual labour

Credit on receipt of Invoice

In

respect of invoices of service tax, on or

after 1-4-2011, credit can be taken on
receipt of invoice, but if payment is not
made to service provider within 3 months,
credit is to be reversed [Rule 4(7) of
Cenvat Credit Rules as amended w.e.f. 14-2011]
In respect of invoices upto 31-3-2011,
earlier provision continues

Zero rated and exempt transactions

Basic

principle is that Cenvat credit

available only when tax payable on final
product or output services
In zero rated transaction, tax not payable on
final product, but Credit of input taxes is
available (e.g. exports)
In exempted transaction, tax is not payable
on final product and input credit is not
available

Rule 6 of Cenvat Credit Rules

Rule

6 applies where both exempted

goods and taxable goods are
manufactured or exempted and taxable
services provided
Payment of amount increased to 6% in
case of exempted services w.e.f. 1-42012
4 options are available to assessee

Four Options

(1) Maintain separate inventory and accounts of

receipt and use of inputs and input services used for
exempted goods/exempted output services Rule
6(2) of Cenvat Credit Rules
(2) Pay amount equal to 6% of value of exempted
goods (if he is manufacturer) and of value of
exempted services (if he is service provider) Rule
6(3)(i) as amended w.e.f. 1-4-2012 [The amount
payable was 5% 31-3-2012]. (Continued)

Four Options (Continued)

(3)

Pay an amount equal to proportionate

Cenvat credit attributable to exempted final
product/ exempted output services, as
provided in rule 6(3A) Rule 6(3)(ii) of Cenvat
Credit Rules
(4) Maintain separate accounts for inputs and
pay amount as determined under rule 6(3A) in
respect of input services - Rule 6(3)(iii) of
Cenvat Credit Rules as inserted w.e.f. 1-42011.

Exempted Services w.e.f. 1-42011

Exempted services means taxable services which

are exempt from the whole of the service tax leviable
thereon, and includes services on which no service tax
is leviable under section 66 of Finance Act and taxable
services whose part of value is exempted on the
condition that no credit of inputs and input services,
used for providing such taxable service, shall be
taken. Explanation For removal of doubts, it is
hereby clarified that exempted services includes
trading [Words in italics inserted w.e.f. 1-4-2011]

Exempted goods w.e.f. 1-4-2011

As

per Rule 2(d) of Cenvat Credit Rules,

'exempted goods' means goods which are
exempt from whole of duty of excise leviable
thereon and includes goods which are
chargeable to 'Nil' rate of duty and the goods in
respect of which the benefit of an exemption
under Notification No. 1/2011-CE dated 1st
March 2011 is availed [The words in italics have
been inserted w.e.f. 1-4-2011].

Provision in case of traded

goods
Difference

between sale price and cost

of goods sold is to be treated as value of
exempted service
Good and sensible provision should
apply to past also

Exemptions subject to condition of nonavailment of Cenvat Credit

Rule

6(3D) (inserted w.e.f. 1-4-2011)

states that payment of amount under rule
6(3) means Cenvat credit not taken for
purpose of an exemption notification
where exemption is granted on condition
that no Cenvat on input and input services
is availed
Good provision even Tribunal had held
so earlier

Value for Services under abatement

scheme
Entire

Value will be treated as value of

exempted service for rule 6
However, if 6% amount is payable, it will
be on amount on which service tax not
paid (e.g. if service tax paid on 33%,
amount of 6% will be on balance 67%.

Value of service for services under composition

Schemes for rule 6
In

case of services covered under composition

scheme, value for applying rule 6 will be tax
amount divided by rate of service tax applicable
under general exemption. Present rate is 12%
If gross amount Rs. 1,000, service tax paid Rs.
48. Then value of taxable service for rule 6
would be Rs. 400.
If service tax rate 10% then service tax would
be Rs 400 and vale will be Rs 400.

Overriding Provisions
In

respect of banking service, the Bank or

NBFC is required to pay amount equal to
50% of Cenvat Credit availed on inputs and
input services [Rule 6(3B) of Cenvat Credit
Rules as inserted w.e.f. 1-4-2011].

No reversal in case of zero rated

transactions
Export

of goods and export of services

Supplies to SEZ, EOU
Goods supplied against international
competitive bidding, goods supplied to
UN organisations, foreign diplomats
Provision of services to SEZ (where
exemption is available)

Principle Behind Calculations

Take

entire Cenvat credit of inputs and

input services used in exempted as well
as taxable final products and exempted
as well as taxable services.
At the end of month, assessee should
calculate and reverse Cenvat credit
attributable to exempted final products and
exempted services on provisional basis

Rule 6(3A)
(b)(i)

Inputs used for exempted final products

Rule 6(3A)
(b)(ii)

Inputs used for exempted services (On

proportionate basis, based on ratio of
previous year)

Rule 6(3A)
(b)(iii)

Input services used for exempted final

products and exempted services (On
proportionate basis based on ratio of
previous year).

Total

1+2+3 = amount to be reversed every

month on provisional basis

Calculations at the end of the year

Assessee

should calculate the ratios on

actual basis and make fresh calculations
and pay difference, if any, before 30th
June.
If it is found that he had paid excess
amount based on provisional ratio, he
can adjust the difference himself by
taking credit.

Input Service Distributor Rule 7

HO

or Branch or Depot can pass on

credit to factories.
They have to register, file returns etc.
Monthly Invoice
No credit where input service exclusively
for exempted goods or exempted service
Distribution on turnover basis of previous
month

Refund of Cenvat Credit Rule 5

Refund

of Cenvat credit on proportionate

basis of exports of goods and services
General Experience is bad some
excuse is found to reject the refund
claim

Removal for job work

Own

challan
Return within 180 days.
Dutiability of scrap at job workers place

Thanks
Thank

you very much.

You are welcome to send queries on
www.taxmann.com/servicetaxqueries.as
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Your suggestions/feedback welcome.
Website - http://www.dateyvs.com