In order to remove the cascading effect of excise duty and service tax, the Excise Duty paid on the inputs, capital goods and input services, which are used in or in relation to the manufacture of final product or for providing output services is permissible to be set-off against the excise duty liability on the final products or paying service tax under the CENVAT Credit Rules, 2004. These rules have been notified to regulate the availment and utilization of the CENVAT credit. The salient features are as follows:
(A) the following goods, namely:
(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule to the Excise Tariff Act;
(ii) Pollution control equipment;
(iii) Components, spares and accessories of the goods specified and (i) and (ii)
(iv) Moulds and dies, jigs and fixtures;
(v) Refractories and refractory materials;
(vi) Tubes and pipes and fittings thereof; and
(vii) Storage tank.
1. in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or
1A. outside the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or
2. for providing output service;
1. The credit of duty paid on capital goods classifiable under specified chapter heading/ sub-heading is eligible for CENVAT credit.
2. The items specified on (ii) to (vii) in the definition are treated as capital goods irrespective of the classification.
3. The use of the said capital goods must be, in case of manufacturer, in his factory. If the same is used in office no CENVAT credit is available to manufacturer. However, capital goods used outside factory for generating of electricity for captive use within the factory is also eligible for credit.
4. In case of output service provider, capital goods should be used for providing the output service.
(B) motor vehicle registered in the name of provider of output service for providing taxable service as specified in sub-clauses (f), (n), (o), (zr), (zzp), (zzt) and (zzw) of clause (105) of section 65 of the Finance Act; Components spares and accessories of Motor Vehicle is also considered as capital goods.
The cenvat of excise duty paid on motor vehicle is available only to the following output service providers as capital goods:
1. Courier Services.
2. Tour Operator Services.
3. Rent-a-Cab Services.
4. Cargo Handling Services.
5. Transport of Goods by Road Services.
6. Outdoor Catering Services.
7. Pandal or Shamiana Contractors Services.
(C) Dumper or tripper falling under chapter 87 registered in the name of provider of output service which provides services taxable under the category of (a) site formation and clearance, excavation and earthmoving and demolition or similar activities (b) mining of mineral oil or gas.
(D) Conditions for availment of credit on capital goods. CENVAT Credit Rules also provide certain conditions for availment of credit on capital goods. These are:
(i) The CENVAT Credit in respect of capital goods shall not be allowed on that part of the value of capital goods, which represents the amount of duty on such capital goods which the manufacturer claims as depreciation under section 32 of the Income-tax Act.
(ii) The capital goods shall not be exclusively used for the purpose of manufacture of the exempted product.
(iii) The credit of capital goods shall be allowed to the manufacturer even if the capital goods are acquired by him on lease, hire purchase or loan agreement from financing company.
( iv) The credit shall be taken only for an amount not exceeding 50% of the duty paid on capital goods in the same financial year in which capital goods is received. The balance 50% shall be taken in the subsequent financial year. The capital goods except for some of the capital goods shall be in the possession of the manufacturer. However, in case of small scale manufacturer the credit of 100% of the duty can be taken in the year of receipt of capital goods.
(a) "Input" means
(i) all goods used in the factory by the manufacturer of the final product; or
(ii) any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or
(iii) all goods used for generation of electricity or steam for captive use; or
(iv) all goods used for providing any output service; but excludes
(A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol;
(B) any goods used for
(a) construction of a building or a civil structure or a part thereof; or
(b) laying of foundation or making of structures for support of capital goods, except for the provision of any taxable service specified in sub-clauses (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act;
(C) capital goods except when used as parts or components in the manufacture of a final product;
(D) motor vehicles;
(E) any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee; and
(F) any goods which have no relationship whatsoever with the manufacture of a final product.
Explanation For the purpose of this clause, "free warranty" means a warranty provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer;]
(b) The use of input must be:
A) For manufacture in the factory :
i) In the factory of the manufacturer
ii) Accessories cleared along with the final product value of which is included in the manufacturer.
iii) used in providing free warranty of final product.
iv) used for generation of electricity of steam for captive use.
B) For output service provider input must be used for providing output service. For example, paper used by CA, Photographic chemicals & paper used by photographer for providing services is treated as INPUTS
III. Input Service
(a) Definition of Input Service
(l) "input service" means any service,
(i) used by a provider of taxable service for providing an output service; or
(ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal,
and 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 up to the place of removal, procurement of inputs, accounting, auditing, financing, 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 up to the place of removal; but excludes services,
(A) specified in sub-clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act (hereinafter referred as specified services), in so far as they are used for
(a) construction of a building or a civil structure or a part thereof; or
(b) laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or
(B) specified in sub-clauses (d), (o), (zo) and (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods; or
(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee
(b) The definition can be bifurcated into following broad category
i. Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products,
ii. Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal,
iii. Services used in relation to setting up, modernisation, renovation or repairs of a factory, or an office relating to such factory,
iv. Services used in relation to advertisement or sales promotion, market research, storage up to the place of removal, procurement of inputs,
v. Some of the other services like accounting, auditing, financing, recruitment and quality control, coaching and training, computer network, credit rating, share registry, security have been specified as input services. The manufacturer must substantiate that it is used in the manufacturer of final product and service provider shall substantiate that it is used for providing output services.
The Honble Bombay High Court in case of Coca Cola has widely interpreted the definition of activity relating to business appearing in the definition of input services. This judgment may be referred for understanding the meaning of the word input services. However, from 1.4.2011, the word activities relating to business has been deleted from the definition of input services. Therefore, the ratio of the judgment shall not apply after 1.4.2011.
(c) Conditions for availing the Cenvat Credit on Input Service
1. The input Service provided on or after 10-9-2004 is only eligible for CENVAT credit.
2. The credit on input services after 1.4.2011 can be taken on receipt of bill of input service provider subject to condition of payment specified in rule.
IV. Input Service Distributor
(a) Meaning of Input Service Distributor
(i) "input service distributor" means an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be;
(b) Manner of Distribution of the Credit
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, namely:
(i) Distributing office must comply with registration formalities and compliances prescribed for first/second stage dealers under the Central Excise Rules, 2002;
(ii) The credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon; or
(iii) Credit of service tax attributable to service used in a unit exclusively engaged in manufacture of exempted goods or provision of exempted services shall not be distributed.
(c) Mandatory details in Input Service Invoice
1. Invoice Sl. No., date of document,
2. Input service providers service tax Registration No., Name and Address,
3. Description of taxable service,
4. Classification of the taxable service,
5. Assessable value of input service.
6. Amount of service tax (bifurcated into service tax and Education Cess on Service Tax separately.)
7. Be duly signed by the input service provider or his authorised person.
V. Under the CENVAT Credit Rules, 2004, the credit of following duties/tax is allowed
(i) The duty of excise specified in the First Schedule to the Tariff Act, leviable under the Act;
(ii) The duty of excise specified in the Second Schedule to the Tariff Act, leviable under the Act;
(iii) The additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978 (40 of 1978);
(iv) The additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957);
(v) The National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001), as amended by section 169 of the Finance Act, 2003 (32 of 2003) which was amended by section 3 of Finance Act, 2004 (13 of 2004);
(vi) The Education Cess on excisable goods leviable under clause 81 read with clause 83 of the Finance Bill (No. 2), 2004, which by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act, 1931 (16 of 1931), has the force of law;
(vii) The additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv), (v) and (vii) above; and
(viia) The additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act.
Provided that a provider of taxable service shall not be eligible to take credit of such additional duty.
(viii) The additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003).
(ix) The service tax
(x) The education cess on service tax paid on the input or capital goods or input services received on or after 10-9-2004.
VI. The CENVAT credit may be utilised for payment of
(a) any duty of excise on any final product; or
(b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or
(c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or
(d) an amount under sub-rule (2) of rule 16 of the Central Excise Rules; 2002
(e) Service Tax on any output services: Provided that while paying duty, the CENVAT credit shall be utilised only to the extent such credit is available on the last day of the month for payment of duty relating to the month.
W.e.f. 1-3-2008 Goods Transport Agency are not considered "output service provider" and cannot utilise CENVAT credit for the service tax paid on their other inputs and hence have to pay service tax on value of services after abatement of 75%.
VII. Availment of credit when input received from EOU/EPZ
CENVAT credit in respect of inputs or capital goods produced or manufactured, by a hundred per cent export oriented undertaking or by a unit in an Electronic Hardware Technology Park or in a Software Technology Park other than a unit which pays excise duty levied under section 3 of the Excise Act read with serial numbers 3, 5, 6 & 7 of Notification No. 23/2003-Central Excise, dated 31st March, 2003, [G.S.R 266 (E) dated the 31st March, 2003] and used in the manufacture of the final products or in providing an output service, in any other place in India, in case the unit pays excise duty under section 3 of the Excise Act read with serial number 2 of the notification No. 23/2003-Central Excise, dated the 31st March, 2003 [G.S.R. 266 (E), dated the 31st March, 2003], shall be admissible equivalent to the amount calculated in the following manner namely:
Fifty per cent of [X multiplied by (1+BCD/100) multiplied by (CVD/100)], where BCD and CVD denote ad valorem rates, in per cent, of basic customs duty and additional duty of customs leviable on the inputs or capital goods respectively and X denotes the assessable value.
Provided that the cenvat credit in respect of inputs and capital goods cleared on or after 1st March, 2006 from EOU on which the unit has paid the excise duty by availing exemption under notification no. 23/2003, the credit shall be equal to X multiplied by [(1+BCD/200) multiplied by (CVD /100)].
VIII. Removal of Inputs or Capital goods from the registered premises
1. As and when inputs or capital goods are removed as such from registered premises, the assessee must prepare excise invoice and pay an amount equal to CENVAT availed in respect of same. If the capital goods are removed after being used, the manufacturer or provider of output services shall pay an amount equal to cenvat credit taken on such goods reduced by the percentage calculated by straight line method as specified below:
For Computer and Computer peripherals (For each quarter)
First Year - 10%
Second Year 8%
Third Year - 5%
Fourth and fifth year - 1%
For any other capital goods 2.5%
2. The excise duty on scrap of capital goods is required to paid on the price at which such scrap has been sold.
3. Such payment shall not be made wherein inputs are removed for providing free warranty for final product.
IX. INPUTS/INPUT Services used in export of Final goods/Output services
Where any input or input service is used in the final products which is cleared for export or used in the intermediate products cleared for export, or used in providing, output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilized by the manufacturer or provider of output service towards payment of,
(i) Duty of excise on any final products cleared for home consumption or for export on payment of duty; or
(ii) Service tax on output service.
And where for any reason such adjustment is not possible, the manufacturer or output service provider shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification.
Provided that no refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback allowed under the Customs and Central Excise Duties Drawback Rules, 1995, or claims a rebate of duty under the Central Excise Rules, 2002, in respect of such duty. The Export of services shall be determined in terms of provisions contained in Export of Service Rule, 2005.
X. Obligation of manufacturer of dutiable and exempted goods
Where the manufacturer or output service provider avails of CENVAT credit in respect of inputs or input service and manufactures such final products or provide output service which are chargeable to duty as well as exempted goods or services, then the manufacturer or output service provider can except in cases of some specified items follow any of the following options given below:
1. He shall maintain separate accounts for
(a) the receipt, consumption and inventory of inputs used
(i) in or in relation to the manufacture of exempted goods;
(ii) in or in relation to the manufacture of dutiable final products excluding exempted goods;
(iii) for the provision of exempted services;
(iv) for the provision of output services excluding exempted services; and
(b) The receipt and use of the input services
(i) in or in relation to the manufacture of exempted goods and their clearance up to the place of removal;
(ii) in or in relation to the manufacture of dutiable final products, excluding exempted goods, and their clearance up to the place of removal;
(iii) for the provision of exempted services; and
(iv) for the provision of output services excluding exempted services,
and take credit to the extent of use of input or input services in the manufacture of dutiable goods or providing dutiable output service.
2. Pay an amount equal to 5% of the value of exempted goods or exempted services.
3. pay an amount attributable to use of inputs and input services in the manufacture of exempted goods or provision of exempted services as per the formula provided in sub-rule 3A
The formula basically provides that the credit of excise duty on inputs and service tax on input services shall be reversed based on the proportionate turnover of exempted goods or exempted services compared to total turnover.
4. Maintain separate records as mentioned above for inputs and reverse the credit of service tax taken on input services on the basis discussed above.
XI. Documentation Required
The CENVAT credit of excise duty or service tax paid would be available on the following documents viz:
(A) An invoice issued by
(I) A manufacturer for clearance of
(i) Inputs or capital goods from his factory or depot or from the premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer.
(ii) Inputs or capital goods as such;
(II) An importer;
(III) An importer from his depot or from the premises of the consignment agent of the said importer if the said depot or the premises, as the case may be, is registered in terms of the provisions of Central Excise Rules, 2002.
(IV) A first stage dealer or a second stage dealer, as the case may be, in terms of the provisions of Central Excise Rules, 2002; or
(B) A supplementary invoice, issued by a manufacturer or importer of inputs or capital goods in case additional amount of excise duties has been paid, except where the additional amount of duty became recoverable from the manufacturer or importer of inputs or capital goods on account of any non levy or short-levy by reason of fraud, collusion or any wilful misstatement or suppression of facts with intent to evade payment of duty.
For removal of doubts, it is clarified that supplementary invoice shall also include challans or any other similar document evidencing payment of additional amount of additional duty leviable under section 3 of the Customs Tariff Act; or
(C) A bill of entry; or
(D) A certificate issued by an appraiser of customs in respect of goods imported through a Foreign Post Office; or
(E) A challan evidencing payment of service tax by the person liable to pay service tax under sub-clauses (iii) and (v) of clause (d) of sub-rule (1) of rule (2) of the Service Tax Rules, 1944 or
(F) An invoice, a bill or challan issued by a provider of input service on or after the 10th day of September, 2004; or
(G) An invoice, bill or challans issued by an input service distributor under rule 4A of the Service Tax Rules, 1994.
(H) Supplementary invoice, bill or challan issued by a provider of output services in terms of the provisions of Service Tax Rules except where the additional amount of tax became payable by the service provider on account of fraud, collusion, wilful mis- statement or suppression of facts or contravention of any of the provisions of the Finance Act or the rules made thereunder.
No prescribed form of maintaining the record has been specified. However, the assessee must maintain record to substantiate the consumption of input and input services in manufacture of goods or provision of output services. The private record like stores, ledger or batch records are sufficient to substantiate the same. The cenvat register giving details of invoice number of supplier, duty, description of input, quantity, assessable value, cenvat credit, opening balance, credit taken, credit utilized and closing balance shall be maintained. The same shall be submitted along with return.
The provider of output service availing CENVAT credit, shall submit a half yearly return in form specified, to the Superintendent of Central Excise, by 25th day of the month following the particular half year.
The input service distributor, shall submit a half yearly Statement, giving the details of credit received and distributed during the said half year to the Superintendent of Central Excise, by the end of the month following the half year.
XIV. Abatement in value claimed by output service provider as provided in notification