ANALYSIS OF CENVAT AS APPLICABLE TO MANUFACTURER By CA. Sudhir V S.

ANALYSIS OF CENVAT AS APPLICABLE TO MANUFACTURER

By CA. Sudhir V S.

Coverage Today• Understanding of CENVAT credit and the provisions

relating thereto.• Benefits of CENVAT credit.• Issues under CENVAT credit• Deemed Utilization of Credit • Clarification on Ed Cess availment

Dimensions• Facilitating provision and not levy provisions• Key in decision making

• Impact on Cost/Profit• Impact on Market• Impact on Finance

• Compliance

Back-ground of credit

• To avoid Cascading effect of tax• In 1986 started with Proforma Credit on selected commodities.

• Later developed into MODVAT for all commodities• 2002 CENVAT – separate CE & ST CENVAT• 2004 Intersectional Credit of CE & ST • GST aimed at intersectional credit of State & Central Taxes

Credit for which duties and taxes?

Central Excise duty – BED, SED

Additional duty of customs on imports (CVD)– Sec 3(1) –

Equal to above duties & Cess

Service tax & Ed. & SHE Cess on S.T.

Spl. CVD @ 4% on imports – 3(5) – Not available for

service provider.

Additional duty of excise T & T and GSI.

Education & SHE Cess on CE

NCCD duty

AED on Tea & Tea Waste, AED (P&TP)

Paid on what

• Inputs – Received in the Factory of manufacturer or premises of TSP - relaxed for TSP

• Capital Goods - Received in the Factory of manufacturer or premises of TSP – relaxed for TSP

• Input Services – Received by manufacturer of final product or provider of output service

Inputs

“input” means –all goods used in factory by manufacturer,goods or accessories, the value of which is

included in value of final product,goods used for providing free warranty for final

products; goods used for generation of electricity or steam

for captive use; orgoods used for providing any output service;

Inputs contd..Excludes–

LDO, HSD, MS

goods used for Construction of Building/Civil Structure/their

parts/foundation or support structures for Capital Goods – (Exceptions)

if defined as Capital goods – (Exception - if used as parts or

components in the manufacture of a final product)

motor vehicles;

goods used Primarily for personal use or consumption of any

employee.

goods which have no relationship whatsoever with manufacture.

Input Services

• Input service" means any service, -• Service provider - Used for providing output service;

• Manufacturer - Used directly or indirectly in or in relation to manufacturer and clearance of final products upto the place of removal,

Input Services contd...

Includes - services used in relation to modernization, renovation or repairs of

a factory, Service provider’s premises Office relating to such factory/premises,

advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs,

Input Services contd..

• 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/capital goods• Outward transportation

upto the place of removal

Input Services contd..

Excludes – • Service portion in works contract and construction services if used for- • construction or execution of works contract of a building

or a civil structure or a part thereof; or• laying of foundation or making of structures for support

of capital goods,

• exception – it is used for providing construction service or works contract.

Input Services contd..

• Renting of motor vehicle other than capital goods.

• General Insurance, servicing, repair & maintenance of MV other than capital goods

• Exception – Manufacturer of M. V. & insurance and reinsurance service provider

Input services contd…

Outdoor catering, beauty treatment, healthcare, cosmetic & Plastic surgery, membership of club, health & fitness centre, life insurance, health insurance and travel benefits extended to employees during vacation such as Leave or Home Travel Concession,

when such services are used primarily for personal use or consumption of any employee;

Expression “activities related to Business” has been deleted

Capital Goods (A)

Goods falling under -• chapter 82, 84, 85 and 90, heading 6805, grinding wheels

and the like, and parts thereof falling under heading 6804• 82: Tool, implements, Cutlery, spoons and forks, of base metals

• 84: Nuclear reactors, boilers, machinery and mechanical App• 85: Electrical Machinery & Equipment • 90: Optical, photographic etc• 6805:Natural or artificial abrasive powder

• pollution control equipment;• components, spares and accessories of the goods specified

above

Capital Goods (A)

• Moulds and dies, jigs and fixtures; • Refractories and refractory materials; • Tubes and pipes and fittings thereof; • Storage tank;• M.Vs including dumpers and tippers - except

• 8702 : M V for =>10• 8703 : M V for other than Passenger• 8704 : MV for transportation of goods • 8711: Motor Cycles

Capital Goods contd..

Used -• in factory of manufacturer but excludes if used in office; or

• outside factory of manufacturer of final products for generation of electricity for captive use within the factory; or

• for providing output service;

Capital Goods (B), (C) & (D)M.V. & their chassis regd. in the name of service

provider–Designed for transportation of goods used for - Providing renting of such vehicles Transportation of Inputs and capital goods used by S.P. Providing courier agency service

Designed to carry passengers used for - Transportation of passengers Renting of such motor vehicle Imparting motor driving skills

Components, spares and accessories of M.V. which are capital goods

How much to availInputs - entire duty paid immediately on receipt of the

goodsInput Service – Date on which the Invoice, Bill referred in

rule 9 is received – 3 months from the date of invoice payment to be made.

Input & input service : 6 months from Date of Invoice For capital goods not more than 50% of the duties entitled

for. But full Addl. CVD can be taken in the year of receipt.Balance credit in subsequent years on holding possession

of such goods (except for components, spares etc.,)

Based on what document

Invoice of Mfr., his agent, Importer, his agent, First Stage dealer, Second Stage dealer, Bill of Entry.

Supplementary InvoiceCertificate by appraiser of CustomsChallan evidencing payment of duty by

specified Service ProviderInvoice, Bill or Challan issued by TSP or

ISD

Conditions for credit on Inputs

Eligible input as per the definition.Receipt into the Factory or premisesCredit also available if inputs directly delivered

at project site – subject to maintenance of documents

Should not be used Exclusively in the manufacture of exempted goods or Exempted service

Cenvat credit to be reversed even if inputs or capital goods written off partially.

Conditions for Capital goods credit

Eligible Capital goods as per the definition

Receipt into the Factory or premises.

Not used exclusively in exempted goods/ service

No depreciation on credit amount.

CG used outside the factory of manufacturer for

generation of electricity for captive use within the factory is

also available as credit;

Credit available even if CG purchased on lease, hire

purchase or loan

Utilization of CreditAny duty of Excise on final productRemoval of inputs and capital goods as suchPayment of duty on removal of returned goodsService Tax on output serviceTo the extent available on the last day of the periodRestrictions

Additional CVD u/s 3(5) is not available for paying service taxAED(TTA), NCCD, Education Cess, CVD equal to these Credit,

Cess on Tea and AED (P&TP) can be utilized only for paying the respective duty.

Cannot utilise for payment of S.T. on reverse charge basis

CG removed after use

Computer & Peripherals – Credit availed less percentage points calculated on straight linefor each quarter in 1st year – 10%for each quarter in 2nd year – 8%5% for 3rd and 1% for 4th and 5th year

For Other CG - Credit availed less 2.5% per quarter

CG to be reversed or paid for which ever is higherAmount computed as above; orDuty payable on transaction value.

Job Work Related

• Credit availed materials can be sent for JW under challan.

• Same has to come back within 180 days.• There is no time limit for jigs, fixtures, moulds and dies.

• With the permission from AC/DC, goods can be directly removed from JW Premises on following certain procedures.

Rule 6 Output service = Service provided by S.P. located in taxable

territory excluding services listed in Negative list

Whole tax is liable to be paid by the recipient of service

Exempted Services = Non-taxable u/s 66B + exempted under

Section 93 + part of the service exempt subject to condition of

no-credit on inputs and input service – Exception – Export of

Service

Export of Taxable service will not be considered as exempted

services.

Exempted goods = Exempted by Notification +Nil rate of

goods+ goods mfrd. u/n 1/2011

Credit in case of exempted service

Inputs/Input service exclusively used by only taxable

services provider /dutiable goods – Full Credit

Inputs/Input service used exclusively for exempted

services /exempted credit – No credit

Inputs partially used for taxable and exempted Option 1. – Separate records - take credit only used for taxable

portion.

Option 2. – No separate records – take entire credit but Pay 6% of value of Exempted services

Pay an amount based on previous year turnover{under rule 6(3A)}

Option 3. – Separate records for inputs and No separate records for

input service – take entire credit but For inputs based on records and for input service based on turnover{under

rule 6(3A)}

Exception for manufacturerGoods Removed for SEZ, EOU, EHTP, STP,

UNO and other international organizationsGoods supplied for use of foreign diplomatic

missions, consular missions or career consular offices

Export under BondGold or silver in Mfr. of copper or ZincGoods supplied for specified ICB.

Input Service Distributor

• The Head Office, Sales Office, Corporate Office may spend on services centrally.

• These may need to distribute the credit, so that it can be availed at each of the premises of multiple registration entities.

• Distribution can be done by way of an invoice/ challan.

Input Service Distributor conditions imposedISD is a an office who receives invoice where

services are received at different places. The said credit is allowed to be distributed

It provided for distribution with only conditions that Credit distributed should not exceed ST PaidExempted units’ credit cannot be distributed

Tribunals and H.C. ruled no further condition to be imposed

Resulted in distributing the credit pertaining to one unit to other needy unit.

Input Service Distributor conditions imposed

Conditions are imposed to say – ◦ Credit distributed should not exceed ST Paid◦ Exempted units’ credit cannot be distributed◦ Services used wholly in a particular unit to be distributed only to

that unit◦ In case of common services distribution should be pro-rata on

turnover

Unit – Premises of mfr or S.P. whether registered or not

Turnover of relevant period (previous month/qtr) to be determined as per formula for refund

Input Service Distributor contd..

• Separate Registration• Receives the Invoices of SPs. • Keep Account of Services Paid for and amount distributed by way of invoice/ bill

• Half Yearly return of Credits received and distributed during such period by the end next month.

Records• For inputs and capital goods

• Receipt, disposal, consumption and inventory of the input and capital goods

• Further the value, duty paid, CENVAT credit taken and utilized and supplier name and address.

• For Input Service• The value, tax paid, CENVAT credit taken and utilized, the person

from whom the input service has been procured has to be maintained.

Concept of Dealer/Importer• Credit can be passed on

• by Importer/Depot/C&F Agent.• First Stage Dealer• Second Stage Dealer

• Invoice should contain the information as per CER• Maintain records as to duty paid and proportionate credit

transferred.• File quarterly returns

Value adds

Manufacturers can take Service Tax creditsProcurement from dealers regd. under Central

Excise is important if requiredChoice of payment of tax/duty to ensure creditBetter purchase policies.Exporters - Registration even if not liableAvail credit on ALL with intimation when in doubt.

If objected reverse under protest.

Other aspects and issuesGoods received by Job-worker (Not. 214/86) and

used by him – credit available Credit on Stock of inputs when goods or services

become chargeable.Warranty replacements - Inputs cleared, reversal

not required.Service provider need not pay

if inputs is for providing service.If Capital goods is for providing service and comes back

within 180 days + 180 days of permission.

Other aspects and issues

Duty paid on removal of inputs, capital goods - eligible for credit.

If capital goods removed in the same year – Balance 50% can be taken as credit.

Proportionate amount to pay if amount towards input service is returned back. Credit cannot be availed as to duty paid under notification no. 1/2011-CE

Credit pertaining to inputs used in the goods for which Remission of duty is sought has to be reversed

Other issues• In cases of taxes partially payable by service provider and

service receiver• Service provider would get full credit• Service receiver would get credit of both service tax paid by

service provider and service receiver

• If there is surplus credit with service provider, can claim refund.

Transfer of Credit - MfrFactory

ShiftingTransferred on account of change in ownership or sale, merger, amalgamation,

lease or transfer to a joint venture with the specific provision for transfer of liabilities of such factory,

allowed to transfer the CENVAT credit lying unutilized to such transferred, sold, merged, leased or amalgamated factory

Transfer of Credit - Conditions• 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

• the inputs, or capital goods, on which credit has been availed of are duly accounted for to the satisfaction of AC/DC

Recovery of erroneous credit• If availed AND utilised erroneous (earlier OR) would be

recovered • Provisions of 11A & 11AB of CEA and 73 & 75 of FA ‘94 is

equally applicable.• Penalty would be attracted u/r 15• Goods are liable for confiscation• General Penalty

Budget 2015 changes • CENVAT on inputs & CG can be availed on receipt in the

J/w premises • Condition that within 180 days the same has to be

received by Manufacturer • 6 months time limit foe availment of credit enhanced to 1

year • Partial Reverse charge credit also can be availed on

payment of ST to Dept.• Export of Goods: Taken out of India; Circular

1001/18/2015-Cx.8 dated 28.04.2015 clarifies SEZ to be Exports

• Changes in penalty for rationalization

Deemed Utilization

• (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 utilised thereafter.

Credit of Cess amendment • Credit if Cess received after 01.03.2015 can be used for

payment Excise Duty • Balance 50% of CG credit can also be used for payment

of ED • Issues

• What happen to opening balance of Cess? • What happen prior to 01.05.2015?• What happens to Rule 16 credit?• What happens to re-availment of Credit on payment?• What happen to reversal of Credit sent to J/W?

Important Case Laws

Credit Availed for past 3-7 years – Coromandel Fertilizers

– 2009 & SAIL – 2013-now questioned??

As such removal of material – not inputs – Credit not

deniable – Delta Corp – 2013 (Guj)

Important Case Laws

Credit on outward Freight- post 2008:

When agreement is ex factory – Place of removal is

factory and therefore no credit

When FOR destination – Risk upto delivery at customer

place on supplier – Credit available – Inox Air Products

Ltd. – 2012 – Relying on Ambuja Cement Ltd. 2009 (P&H)

Important Case Laws• Revision of ITR for CG credit : Commissioner of Central

Excise, Pune-I vs Anant Enterprises 2014 (310) ELT 0561 Tri.-Bom

• Lease of the asset No removal and hence no reversal Ultra Tech Cement Ltd. vs Commr. of C. Ex., Cus. & S.T., Bangalore-I 2014 (310) ELT 0554 Tri.-Bang

THANK YOU

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