1. Discussion on Cenvat Credit Rules, 2004 CA Sri Harsha harsha@sbsandco.com by

2. Overview of the Rules 2

3. Capital Goods ManufacturerService Provider Important Definitions – Rule 2 – (a) 3

4. Manufacturer/Service Provider – Capital Goods 4 goods falling under Chapter 82, 84, 85, 90, heading 6805 and 6804 – 1 st schedule to CETA; pollution control Equipment; components, Spares and Accessories of the above; moulds and dies, jigs and fixtures; refractories and refractory materials; tubes and pipes and fittings thereof; storage tank; motor vehicles other than those falling under TH 8702, 03, 04, 11 and their chassis but including dumpers and tippers –  Used in the factory of manufacturer of final products – but does not include any equipment/appliance used in office; or  Outside the factory of manufacturer of final products for generation of electricity for captive use within the factory;  For providing Output Service

5. Service Provider Transportation of Goods Transportation of Passengers Service Provider 5

6. Transportation of Goods Renting of such motor vehicle Transportation of Inputs and Capital Goods used for providing output service Courier Agency Services Transportation of Passengers Renting of such motor vehicle Imparting Motor Driving Skills Service Provider 6 components, spares and accessories of motor vehicles which are the capital goods for the assessee

7. Exempted Goods Excisable Goods which are exempt from the whole of the duty of excise leviable thereon Goods which are chargeable to ‘Nil’ rate of Duty Goods in respect of which the benefit an exemption under Notification No 1/2011-CE Entries 67 and 128 of Notification No 12/2012-CE Important Definition – Rule 2 (d) 7

8. Exempted Service Taxable service which is exempt from the whole of service tax leviable thereon Service, on which no service tax is leviable under Section 66B of the Finance Act, 1994 taxable service 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 but shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994rule 6A of the Service Tax Rules, 1994 Important Definition – Rule 2 (e) 8

9. Inputs ManufacturerService Provider Important Definitions – Rule 2 – (k) 9

10. Manufacturer/Service Provider – Inputs 10 all goods used in the factory by the manufacturer of the final product; 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; all goods used for generation of electricity or steam for captive use; all goods used for providing any output service; But excludes:  Light Diesel Oil, High Speed Diesel Oil or Motor Spirit, commonly known as Petrol;  Any goods used for – construction or execution of works contract of a building or civil structure or a part thereof; laying of foundation or making structures of capital goods Except for provision of works contract or constructions services – 66E  Capital Goods except when used as parts or components in the manufacture of final product;  motor vehicles;  any goods, such as food items, goods used in a guesthouse, residential colony, club or recreation facility and clinical establishment – such goods primarily used for employee consumption;  Any goods which have no relationship whatsoever with the manufacture of final product

11. Input Service ManufacturerService Provider Important Definitions – Rule 2 – (l) 11

12. Input Service Limb - I Limb - II Limb - III Input Service Nexus with provision of output service and/or manufacture Specific Inclusions irrespective of Nexus Theory Specific Exclusions irrespective of Nexus Theory 12

13. Manufacturer/Service Provider – Input Service 13 Limb – I:  Used by a provider of output service for providing an output service;  Used by a manufacturer – directly or indirectly – in or in relation to – manufacture and clearance up to Place Of Removal Limb – II: 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 upto 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 upto the place of removal

14. Manufacturer/Service Provider – Input Service 14 Limb – III: but excludes  service portion in the execution of works contract and construction services including mentioned under Section 66E(b) in so far as they are 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, except for the provision of one or more of the specified services  services provided by way of renting of a motor vehicles, in so far as they relate to a motor vehicle which is not a capital goods;  service of general insurance business, servicing, repair and maintenance, in so far as they relate to a motor vehicle which is not a capital goods, except when used by – a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by such person ; or an insurance company in respect of a motor vehicle insured or reinsured by such person; or  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

15. Output Service any service provided by a provider of a service in a taxable territory but shall not include services specified in Section 66D Where whole of service tax is labile to be paid by service recipient Important Definition – Rule 2 (p) 15

16. Place of Removal Factory/Any other place/Premises of Production/Manufacture of Excisable Goods Warehouse/Any other place wherein the Excisable Goods have been permitted to be deposited without payment of duty A depot/premises of a consignment agent or any other place or premises from where the Excisable Goods are to be sold after their clearance from the factory Important Definition – Rule 2 (qa) 16

17. Manufacturer/Producer of Final Products/Provider of Output Service –  ED – I and II Schedule of CETA;  Additional Duty leviable under Section 3(1) of Customs Tariff Act;  Additional Duty leviable under Section 3(5) of Customs Tariff Act;  Ed Cess and SHE Cess on above;  Service tax – 66A and 66B;  Ed Cess and SHE Cess on above;  Other Additional Duties leviable under various allied laws 17 On Inputs, Capital Goods and Input Services Service Provider cannot avail the credit of ACD 3(5) Rule 3 (1) – Cenvat Credit- Availment

18. Cenvat Credit may be utilised for payment of:  Any duty of Excise on any Final Product;  Amount = Cenvat taken on Inputs – If such Inputs are removed as such;  Amount = Cenvat taken on CG – If such CG are removed as such;  Amount = Rule 16(2) of Central Excise Rules, 2002  Service Tax on any output service Provided –  CC shall be used only to the extent such credit is available on the last day of the month/quarter – for payment of duty  No credit of ACD 3(5) shall not be used for payment of ST Liability;  CC cannot be used for payment of service tax in respect of services where the person liable to pay tax is the service recipient. 18 Rule 3 (4) – Cenvat Credit- Utilization

19. Rule 3 (5) (5A) (5B) (5C) Rule 3 (5) (5A) (5B) (5C) – Special Circumstances Inputs/Capital Goods – Removed as Such = Reversal of CC equivalent to CC availed (a) CG removed after use = reduced by %age points calculated for each quarter or year from the date of availment of CC If inputs/CG before being put to use = written off fully or partially = pay an amount equal to CC availed 19 Goods manufactured & payment of duty are order to remitted = reverse CC availed on Inputs (b) CG removed as scrap = manufacturer shall pay amount equal to ED on TV If amount calculated is less than amount equal to ED on TV, then reversal shall be ED on TV

20. Rule 4 (1) (2) (7) Rule 4 – Conditions for availing Cenvat Credit CC on inputs can be availed immediately after receiving them in the factory/premises of OSP CC - CG can be availed immediately after receiving them in the factory/premises of OSP – subject to a maximum of 50% in the first year 20 CC on Input Services can be availed immediately after the doc referred in Rule 9 is received The balance can be availed in subsequent years subject to availability of such CG – exemption to certain CG’s. Manufacturer/OSP shall not take credit after 6 months from the date of issue of document referred in Rule 9(1)

21. Rule 4 (7) Normal Services Reverse Charge Services Partial Reverse Charge Services Rule 4 (7) – Timing of availment for CC on Input Service Provided if the payment of input service + service tax is not paid within 3 months from the date of invoice, the CC availed shall be reversed Credit shall be allowed only after payment of service tax to the central government 21 Credit shall be allowed only after payment of value of input service + service tax as indicated in the vendor’s bill. After the payment of value of input service + service tax, re- credit can be taken

22. Refund of Cenvat Credit 5 - Export 5A – Units in Specified Areas 5B – SP falling under Reverse Charge Obligations Rule 5, 5A, 5B – Refund of Cenvat Credit Manufacturer/OSP can avail refund of CC on inputs & input services – Export of Services/Goods without payment of duty/ service tax Manufacturer cleared goods in terms of Notification No 20/2007- CE dated 25.04.2007 22 SP falling under the reverse charge obligation – not in a position to utilize the CC, he can claim refund of such CC Not in a position to use the CC, he can claim the refund of such CC 27/2012-CX (NT) dated 18.06.2012 – Conditions Notified 12/2014-CE (NT) dated 03.03.14 – Conditions Notified

23. Obligations for Manufacturer/OSP (1) (4) (6) Rule 6 – Obligation for Manufacturer/OSP CC on Input/Input Service shall not be allowed which are exclusively used for manufacture of exempted goods and/or provision of exempted services CC on CG shall not be allowed if such CG are used exclusively for provision of exempted services or manufacture of exempted goods 23 Clearances to SEZ, 100% EOU, EHTP, STP and other notified are immune from restriction of CC in specified cases However, there is no restriction for availment of CC on CG if such CG is used for both taxable and non- taxable activities.

24. Obligations for Manufacturer/OSP (2) (3) Rule 6 – Obligation for Manufacturer/OSP If manufacturer/OSP avails CC in respect of common inputs/input services which are used for both taxable and non-taxable activities, then 24 If the manufacturer/OSP does not wish to maintain separate set of accounts for recording consumption of common inputs and input services, then He has an option to maintain separate book of accounts for consumption of inputs and input services and CC can availed in respect of taxable activities

25. 6 (3) (i) (ii) (iii) Rule 6 – Obligation for Manufacturer/OSP 25 Pay an amount = 6% of value of the exempted goods and exempted services Pay an amount as determined under Rule 6(3A) For Inputs = Maintain Separate books and For Input Services = Pay an amount as determined in 6 (3A)

26.  Concept:  ISD – Rule 2(m) – means an office of provider of output service, which receives invoices issued under Rule 4A of STR, 1994 for purchase of input services and issues invoices for the purposes of distributing credit of service tax paid.  ISD may distribute Cenvat Credit of Service Tax paid on Input Services to various units providing Output Services subject to certain conditions.  This method is convenient when the HO receives various services which are common to all the other units of the service provider. 26 Rule 7 – Manner of distribution of CC by ISD

27. Conditions:  The ISD can distribute the credit subject to following conditions:  the credit distributed does not exceed amount of service tax paid;  the credit of service tax attributable to a service used by one or more units exclusively engaged in provision of exempted services cannot be distributed;  the credit of service tax attributable to a service used wholly by a unit shall be distributed to such unit;  credit of service tax attributable to service used by more than one unit shall be distributed pro rata on basis of turnover of such units during the relevant period to the total turnover of all the operational units in the current year during the said relevant period.  Expn -1 – Unit includes premises of service provider whether registered or otherwise;  Expn- 2 – Total Turnover has to be determined as per Rule 5 of CCR, 2004  Expn- 3 – Relevant Period –  If assesse has turnover in the FY preceding to the distribution of credit – such FY  If assesse does not have turnover for some or all the units - the last quarter having turnover 27 Rule 7 – Manner of distribution of CC by ISD

28.  Rule 8 – Storage of Inputs outside the factory of the manufacturer:  AC/DC may in exceptional circumstances may allow storage of goods outside the factory – without reversal of CC on inputs – subject to certain conditions.  Rule 9 – Documents and Accounts:  Provides documents and accounts to be maintained by manufacturer/OSP for availing and distribution of the CC  Rule 9A – Information relating to Principal Inputs:  Provides filing of an annual declaration to the Superintendent in relation to the principal inputs in respect of goods manufactured or to be manufactured by him and quantity of such principal inputs required to manufacture final products. 28 Other Rules – 8, 9, 9A

29.  Rule 10 – Transfer of Cenvat Credit:  Manufacturer- shifts his factory to another site or factory is transferred on account of change in ownership or an account of sale, merger, amalgamation, lease or transfer of factory to a JV with the specific provisions for transfer of liabilities, then the manufacturer shall be allowed to transfer of CC lying unutilized to the new company/site.  Output service provider shifts or transfers his business on account of change in ownership or an account of sale, merger, amalgamation, lease or transfer of factory to a JV with the specific provisions for transfer of liabilities, then the OSP shall be allowed to transfer of CC lying unutilized to the new company/site.  The transfer of CC shall be allowed only if the stock of inputs as such or in process, or the CG is also transferred along with the factory or business premises to the new site or ownership and the inputs, or CG, on which credit has been availed of are duly accounted for to the satisfaction of the DC/AC. 29 Other Rules – 10

30.  Rule 14 – Recovery of CC wrongly taken or erroneously refunded:  Where the CC is irregularly availed and utilised, or erroneously refunded, the same shall be recovered along with interest – from manufacturer or OSP – 11A & 11AA - CEA + 73 & 75 - FA.  Rule 15 – Confiscation and Penalty:  Manufacturer/OSP – takes or utilised CC wrongly or in contravention to the provisions – the goods shall be confiscated and liable to penalty not exceeding ED on such goods and ST on such services or Rs 2,000/- which ever is greater.  Manufacturer – Liable to Penalty under Section 11 AC of Central Excise Act, 1944 – Intention to evade payment of duty  OSP – Liable to Penalty under Section 78 of Finance Act, 1994 – Intention to evade payment of duty 30 Rules – 14 & 15 – Interest & Penalty for Irregular CC Availment

31. Frequently Asked Questions – Cenvat Credit 31 1. Whether the capital goods has to be owned for availing cenvat credit on such goods? 2. Can depreciation be claimed on the ED component after availing the cenvat credit of such ED? 3. Is registration mandatory to claim cenvat credit? 4. Can all services used in or in relation to business can be claimed as cenvat credit? 5. Can ST paid under RCM/PCM can be availed as credit? 6. Can cenvat credit be used for payment of interest and penalty under ST or CE Laws? 7. Can cenvat credit can be used for payment of ST liability under RCM/PCM? 8. Can cenvat credit can be availed on the basis of the supplementary invoice issued by SP? 9. Can a trader is entitled to avail credit on ST paid towards GTA services? 10. Can ST paid on catering services procured for employees can be availed as credit? 11. I am exporter, can I claim credit of ST paid on input services?

32. Frequently Asked Questions – Cenvat Credit 32 1. I have irregularly availed cenvat credit but has not utilised the same, whether I am liable to pay interest? Please explain the position prior to 17.03.2012 also? 2. I am a mall owner. I have availed various input services for construction of such mall, can I avail the credit of such services and knock off the output ST liability on Rental Incomes? Please explain the position prior to 01.04.2012? 3. I am a chartered accountant intending to renovate my office. I have engaged a contractor for carrying such renovation. Can I avail ST paid on the contractor’s service bills? 4. I am a business entity engaged in development of software. I engage cabs for pick and drop of my employees. Can I avail service tax paid on such cab services? 5. I am a business entity engaged in provision of restaurant services. Can I avail the complete credit of service tax paid on my input services or is there any restriction on the availment? 6. Is the restriction of availment of cenvat credit – 6 months is prospective or retrospective? 7. I have paid service tax on reverse charge obligation pertaining to Dec 2012 in Dec 2014. Can I avail the said credit of service tax since 6 months has been lapsed from Dec 2012?

33. 33 Thank You for your patient hearing ! Please reach me for any queries – harsha@sbsandco.comharsha@sbsandco.com – +91 95 81 00 03 27