Service Tax

CENVAT CREDIT

Sushil Aggarwal
Anil Sushil & Co.
Chartered Accountant
1, Temple Complex, Shiv Mandir, Tilak
Bridge, New Delhi 110 001.
Ph. 2337 1637, 2337 1937

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 Step Towards Integration

• In the budget 2004-2005 the idea to

extend credit of service tax and excise
duty across goods and services was
mooted.
• The CENVAT Credit Rules, 2004 came
into force from 10-9-2004, and have
replaced the CENVAT Credit Rules, 2002
and Service Tax Credit Rules, 2002.

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 What is available as credit
• CENVAT credit of excise duty (including
additional excise duty etc.) and the service
tax and the Education Cess on taxable
services and excisable goods, which is
paid on-
– Any input or capital goods received in the
premises of the provider of output service on
or after the 10th day of September, 2004, and
– Any input service received by the provider of
output services on or after the 10th day of
September, 2004,
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 Components of eligible duty & Tax
• The duty of excise specified in the First and the
Second Schedule to the Excise Tariff Act, leviable
under the Excise Act,
• The additional duty of excise leviable under
section 3 of both (i)the additional Duties of Excise
(Textile and Textile Articles) Act, 1957 and (ii)
additional Duties of Excise (Goods of Special
Importance) Act, 1957. Also the additional duty of
excise leviable under section 157 of the Finance
Act, 2003.
• The National Calamity Contingent duty leviable
under section 136 of the Finance Act, 2001,
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 Components of eligible duty & Tax
• The Education Cess on excisable goods leviable
under section 91 read with section 93 of the
Finance (No. 2) Act, 2004,
• The additional duty leviable under the Customs
Tariff Act,
• The service tax leviable under section 66 of the
Finance Act,
• The Education Cess on taxable services leviable
under section 91 read with section 95 of the
Finance (No.2) Act, 2004,
• the additional duty of excise leviable under
section 85 of the Finance Act, 2005
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 Components of eligible duty & Tax
• An importer who pays CVD (countervailing
Duty) by a debit in DEPB pass book may
not be eligible to credit in the absence of
express provisions.
When credit is available
• The CENVAT credit in respect of inputs
may be taken immediately on receipt of
the inputs in the premises of the provider
of output services
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 Payment of input service is
pre-condition
• The credit is allowed only after the payment of
service tax as indicated in invoice. [sub-rule (7)
of Rule 4].
• There is no express provision for partial
allowance based on part payment or settlement
for a lower value.
• Contrarily liability of tax on output service arises
even on receipt of part payment.
• A logical presumption is that credit should be
ava

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 What is not input
• Light diesel oil, HS diesel, petrol whether used in
relation to manufacture of goods or for provision of
service, irrespective whether used directly or
indirectly and whether contained in the final
product or not.
• Also included in the above list are lubricating oils,
greases, cutting oils, coolants, accessories of the
final products cleared along with the final
products, goods used as paint, or as packing
material, or as fuel, or for generation of electricity
or steam used in or in relation to manufacture of
final products or for any other purpose, within the
factory of production,
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 What is input and input service
• Input include goods used in the manufacture of capital goods
which are further used in the factory of the manufacturer
• “Input service” means any service,-
– used by a provider of taxable service for providing an
output service, or
– used by the manufacturer, whether directly or indirectly, in
or in relation to the manufacture of final products and
clearance of final products from the place of removal,
• A co-relation of inputs to output is thus a must.

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 What is input and input service
• Services used in relation to setting up,
modernization, 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,
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 upto the place of removal
are also input services. [clause (1) of rule 2]
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 Importance of place of removal
• Sec.4(3)(c ) of the Central Excise Act stipulates as
under:
"place of removal" means-
i. a factory or any other place or premises of production
or manufacture of the excisable goods;
ii. warehouse or any other place or premises wherein
the excisable goods have been permitted to be
deposited without payment of duty,
iii.a depot, premises of a consignment agent or any
other place or premises from where excisable goods
are to be sold after their clearance form the factory.

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 Impractical Situations
• Question may arise as to allowability of CENVAT credit on
tax paid on transportation used after place of removal.
What is the logic of such disallowance. Shall it extend to
transportation incurred on after sales maintenance and
free replacements.
• Condition relating to receipt of goods in the premises for
availing cenvat credit.
– CENVAT Credit for the excise duty paid on any input or capital
goods will be allowed as credit only if such input or capital
goods are received in premises of output services provider
– in case of a tour operator, he does not bring the motor vehicle in
its premises but are used for the rendering of output service

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 Credit of education cess only
against education cess
• The credit of the Education Cess on
excisable goods and the Education Cess
on taxable services can be utilized either
for payment of the Education Cess on
excisable goods or for the payment of the
Education Cess on taxable services
[proviso to clause (b) of sub-rule (7) of
Rule 3]

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 Utilization / Application of credit
• When to utilise
– The CENVAT credit may be utilized for payment of
service tax on any output service, but the
CENVAT credit shall be utilized only to the extent
such credit is available on the last day of the
month or quarter, as the case may be [sub-rule (4)
of Rule 3].
• A question may arise, whether CENVAT credit can
be used to pay interest and penalty. (note2 of ST3).
• Refund of unused credit shall not be allowable under
any circumstances. (Rule 4(2))

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 Utilization / Application of credit
• Reversal / utilization of Credit
– The CENVAT credit may be utilized for payment of-
– a)An amount equal to CENVAT credit taken on
inputs if such inputs are removed as such or after
being partially processed’ or
– b)an amount equal to the CENVAT credit taken on
capital goods if such capital goods are removed as
such’ or
– service tax on any output service:

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 Utilization / Application of credit
• Availing of credit is subsequent to recording of
credit. Recording and reversing amounts to not
availing the credit and no penalty can be invoked.
• credit can be denied to an assesse under the rule
only on two grounds, firstly for having not used the
inputs in the manufacture of goods and secondly
for having removed the inputs as such. The credit
cannot be denied to the assessee for having failed
to utilize the inputs for a long time or for having
written of the value of the inputs in the books.
(CCE, Indore v. M/s Kinetic motors Co. Ltd.)

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 Transition from exemption to taxability
• In case where a service which ceases to be an
exempted service, the provider of the output service
shall be allowed to take CENVAT credit of the duty
paid on the inputs (not input services) received on
and after the 10th day of September, 2004 and lying
in stock on the date on which any service ceases to
be an exempted service and used for providing such
service
• This benefit is apparently not available on transition
to taxability on crossing of 4 lac barrier.
• The credit in respect of input services availed and
lying as part of stock & WIP should be available on
logical grounds in the absence of specific denial.
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 Transition from old to new rules
• As per Rule 11, the service tax and excise duty credit lying
un-availed under the Service tax credit rules, 2002 or
CENVAT credit rules 2002 shall be allowed to be utilised
under the CENVAT credit rules, 2004.

Transition from Taxability to exemption

• As per Rule 11, the amount of credit of input or
input services as comprised in the value of closing
stock of Raw material, WIP and finished goods on
the date of transition from taxability to exemption
shall have to be paid back. This law is applicable
only for claiming value / qty based exemption
during a fy. year.
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Credit for inputs used in exempt services
• cenvat credit is not available in respect of inputs
contained in scrap (exempted goods).
• Exceptions to this rule are:
– “the credit utilized when final products is dutiable, can
not be reversed if subsequently the exemption is
withdrawn.” Commissioner of Central Excise Rajkot Vs.
ASHOK Iron & Steel Fabricators, 2002 (140) ELT 277
• Separate books of accounts be kept where both taxable
and non-taxable services are being rendered. Record of
receipt, consumption and inventory should be
maintained.

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 Credit on common inputs for taxable
and exempt services
• In the absence of separate record credit availability shall
be restricted to 20% of output tax.
• Unused balance of credit can however be carried forward
indefinitely.
• Where credit available is less than 20% of output liability
the whole credit should be allowed.
• W.E.F. 16/05/05 explanation III has been added to rule 6
(3) to restrict availability of credit where input is incurred
exclusively in respect of exempted goods/ services.
• A question may arise, can a trader, rendering taxable
services in addition to trading, adopt the 20% formula in
the light of the fact that trading is no service at all.

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 Consignment makes business sense
• Trading is not a taxable service. It is rather not a service.
• Trading as agent is covered under Business Aux.
Services.
• Agent can claim tax input on advertising, market
research etc. but trader can not.
• This is over and above the VAT free stock transfer
advantage.
ISSUES
• A question may arise as to availability of input service tax
credit to a share broker who in addition to trading on
behalf of customers and sub-brokers trades on his own.
• Similar issue may arise in case of company engaged in
wholly taxable activity but extends interest bearing loans
from it’s surplus funds.
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Option of mixed system of credit
• Assessee providing many services
• For some services, separate input record is
maintained
• For others common inputs are used
• Law does not prohibit use of different method of
claiming credit in respect of different services
• Law itself provides for full credit for 16 input services
unless they are inputs, exclusive to exempt services.
Services of the like Consulting Engineer, Architect,
IPR, Construction, Banking, Real Estate, Security,
Management consultancy are included here.

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 Abetments and exemptions
• Notif. 1/2006 provides that a service
provider who claims an abetment shall not
be eligible to input credit.
• Where a construction job is sub-
contracted the contractor will not be able
to claim credit of input service tax charged
on the bill of the subcontractor
simultaneous to his claim for abetment.

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 Matching of input to output service
• There is no specific requirement of matching
each input service to corresponding output
service for claiming the credit.
Credit for expenditure on Mobile Phone
Mobile phone expenditure was hitherto not
allowed under the Service tax credit rules,2002.
Only expenditure in respect of phones installed at
the premises from where the service is provided
was allowed. There is no such restriction with the
Cenvat Credit Rules, 2004.
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 Credit on Capital Goods
• Capital goods are:
• i. all goods falling under chapter 82, 84, 85, 90,
heading no. 68.02 and sub-heading no. 6801.10 of
the first schedule to the excise tariff act (these
chapters include defined items of machinery, tools,
optical, photographic, medical instruments, abrasive
material etc.)
• (ii) pollution control equipment, (iii) components
spares and accessories of above specified goods,
(iv) moulds and dies, jigs and fixtures,(v) refractory
and refractory materials,(vi) tubes and pipes and
fittings thereof, and (vii) storage tank,
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 Credit on CG -Restrictions
• Capital goods used in factory (and not in
office) are eligible to credit.
• In case of output service provider also the
credit is available. The restriction of use in
office is apparently not there.
• For motor vehicles the credit is available
only to couriers, tour operators, cargo
handling agency, goods transport agency,
outdoor caterer, pandal & shamiana
contractor & rent a cab operator.

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 Credit on CG - procedure
• Credit is available in two parts of 50% each. One in
the year of acquisition and the other in the subsequent
year. There is no condition of put to use or installation.
• capital goods acquired on lease, hire purchase or loan
are equally eligible to credit.
• On clearance of capital goods in the first year itself the
entire credit shall be available.
• Depreciation on duty is not allowed. Dealer to take
only one benefit.
• Credit is not denied if CG are sent for job work and
received with in 180 days. Beyond this period the
credit will have to be reversed and reclaimed once the
goods are received back.
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 Credit reversal - removal of CG

• On removal (except for providing the output

service) CENVAT credit as availed on such goods
shall have to be reversed / paid.
• Removal shall be under the cover of an invoice.
• No reversal if removal is as scrap / waste.
• However duty as applicable on scrap / waste shall
be chargeable by manufacturer. This would not
apply to service provider.
• CENVAT credit shall not be available on capital
goods used exclusively for exempted goods /
services
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 Refund of CENVAT credit
• Exports not only entail transfer of goods and services
without charging any duty or service tax they also entitle the
exporter to claim credit for duty and service tax paid on
inputs and input services against his other taxable activity.
Where adjustment is not possible, law provides for refund.
• Cenvat Credit Rules provide for refund in case of exporting
manufacturers. “Export of service rules” provide for refund in
case of services export.
• Refund of credit shall be not be allowed where the exporter
avails drawback or rebate of duty under the relevant rules.
• A question may arise on availability of credit to merchant
exporters.

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 Input service distributor
• Where several manufacturing units or service
providing units, scattered geographically, work under
an umbrella of a (say) head office and the head office
either incurs common expenses or procures inputs
centrally or even clears all bills for supplies or services
centrally, the units will be unable to claim the cenvat
credit on such payments. There may situations where
services or goods are received by units or where
expenses like marketing, management consultancy or
advertisement are incurred centrally.
• To circumvent such a situation the distribution rules
have been introduced for the first time.

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Conditions for distribution of Credit

1. Credit can not be distributed in excess of

the amount of service tax paid by the
distributor,
2. Credit attributable exclusively to
exempted goods or services shall not be
distributed.

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 Procedure for distribution
• input service distributor shall have to issue an
invoice or a challan,signed & serially numbered and
containing in addition to the amount being
distributed, the particulars of the service provider,
credit distributor and the recipient of the credit. Such
provisions did not exist in law prior to 16/06/05.

Registration of Distributor
• The distributor shall need to seek
registration and shall be required to
file regular returns.
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 Maintenance of Records
• the burden of proof regarding the admissibility of the
CENVAT credit whether on inputs, input services or on
capital goods, shall lie upon the manufacturer or
provider of output service taking such credit. [sub-rule
(5) of rule 9].
• The manufacturer of final products or the provider of
output service shall maintain proper records for the
receipt, disposal, consumption and inventory of the
input and capital goods in which the relevant
information regarding the value, duty paid, CENVAT
credit taken and utilized, the person from whom the
input or capital goods have been procured etc. is
recorded. Thus no specific record is prescribed.

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 Documents entitling credit
• Invoice issued by either the manufacturer or importer or
from a registered depot of the importer or his consignment
agent.
• Invoice issued by a first stage or a second stage dealer.
• A supplementary invoice, issued by a manufacturer or
importer of inputs or capital goods.
• A bill of entry.
• A certificate issued by an appraiser of customs in respect of
goods imported through a Foreign Post Office.
• an invoice, bill or challan issued by an input services
distributor under rule 4A of the Services Tax Rules, 1994.
[sub-rule (1) of rule 9]

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 Documents entitling credit

• A challan evidencing payment of service tax by the

person liable to pay service tax under sub-clauses (iii),
(iv), (v) and (vii) of clause (d) of sub- rule (1) of rule (2) of
the Service Tax Rules, 1994,
• The above clause has been amended, w.e.f. 16-6-2005
to provide that in case of input service of goods transport
service is utilized then CENVAT Credit can be availed on
the strength on the TR-6 Challan. This is trade facilitation
measure taken by the Government as several
representations were made to the Government in this
regard.

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 Contents of an Invoice
• The invoice / Challan shall be signed, serially
numbered and shall contain:-
– The name, address and the registration number of the
issuer,
– The name and address of the person receiving taxable
service
– Description, classification and value of taxable service
provided or to be provided; and
– The service tax payable thereon.
• In the absence of some of the above particulars the
credit may not be denied if the authorities are
satisfied that the tax under review has been paid
and the input credit is being legitimately claimed.
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 Payment of tax to ensure before
taking CENVAT Credit
• The output service provider or the input service
distributor taking CENVAT credit shall take
reasonable steps to ensure that tax on such
goods / services has been duly paid by his
input / service provider.
• To satisfy oneself about the identity and address
of the person issuing invoice is such a
reasonable step. To keep a copy of certificate of
registration of such person is also such a step.

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 THANKS

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