22 nd june 2014. ca rima mehta, [email protected] 1

22 nd June 2014. CA RIMA MEHTA, [email protected] 1

Conventional Tax System DetailsABC Purchase110165 Value Added1004035 Sub Total100150200 Add Tax @ 10%101520 Total110165220 CA RIMA MEHTA, [email protected] 2

Tax Credit System under VAT DetailsABC Purchase100140 Value Added1004035 Sub Total100140175 Add Tax @ 10%101417.5 Total110154192.5 CA RIMA MEHTA, [email protected]

Need of Cenvat scheme To remove the effect of tax on tax. To remove cascading effect of tax. To reduce the value of end product and taxing value of end product by giving the credit of duty paid by previous dealer or purchaser. CA RIMA MEHTA, [email protected]

Rule 1. Short title, extent and commencement This rules extent to whole of India : Provided that nothing contained in these rules relating to availment and utilisation of credit of service tax shall apply to state of Jammu and Kashmir. CA RIMA MEHTA, [email protected]

Which duties are available as credit ? Credit of excise duty on inputs and capital goods and service tax on input services is available. Rule 3(1) : More specifically, credit of following duties paid are available. All the duties mentioned in Rule 3(1) of the said rules shall form a Pool. 1.Excise Duty (except goods exempted under 1/2011-C.E. 2.Education Cess and Secondary Higher Education Cess 3.Additional Duty under Sec 3(3) of Customs Tariff Act equivalent to duty of excise. 4.Additional Duty under Sec 3(5) of Customs Tariff Act equivalent to VAT. 5.Service Tax. 6.National Calamity contingent duty. CA RIMA MEHTA, [email protected]

For which payment credit can be utilised? [Rule 3(4)] Sr. No.Particulars 1.Any duty of excise on any final product 2.An amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed 3.An amount equal to CENVAT Credit taken on capital goods if such capital goods are removed as such or after putting in to use or as scrap 4.Service Tax on any output service. 5.An amount under Rule 16(2) of Central Excise Rules, 2002. i.e. Payment of Duty on goods brought to factory for being re made, refined, reconditioned and removed after processing. CA RIMA MEHTA, [email protected]

Certain specifications for utilising credit One to one co-relation not required in Cenvat. The credit is inter-changeable, except following: Credit ofSpecification for Utilisation Additional Duty leviable under sec.3(5) of Customs Tariff Act Cannot be utilised for payment of Service Tax on any output service National Calamity Contingent DutyCan be utiliised only against payment of said duty i.e. NCCD Any Duty or Service TaxCannot be utilised for payment of Clean Energy Cess Additional Duty of Excise under Sec 85 of Finance A ct, 2005 Can be utiliised only against payment of said duty i.e. additional duty under Sec 85. Any Duty or Service TaxCannot be utilised for liab under RCM. CA RIMA MEHTA, [email protected]

When can we avail credit what are the specifications in this regard? (Rule 4) Credit ofTime of Availment InputsImmediately on receipt of inputs in the factory of manufacturer or premises of output service provider. For Service provider maintenance of documentary evidence of delivery is required. Capital GoodsAt any point of time in given FY not exceeding 50% of the DUTY PAID. Cenvat credit of 100% can be availed when capital goods are removed as such in same FY. Credit of Additional Duty under sec.3(5) of Customs Tariff Act, : 100% available immediately on receipt of CG in factory Even if any value based exemption is availed, 100% credit is available of duty paid on such CG in same FY. CA RIMA MEHTA, [email protected]

When can we avail credit what are the specifications in this regard? Balance of credit of CG can be taken in any subsequent FY. Depreciation cannot be claimed on the duty on which credit is availed. Credit is available even if CG is acquired on lease, hire purchase or loan. Cenvat on Input and CG is available if it is sent to job worker for further processing and received back in 180 days from the day it is sent. Input ServiceOn the day on which invoice, bill or challan is received. If S.Tax is paid under RCM, on the Day on which is is paid by way of challan CA RIMA MEHTA, [email protected]

When can we avail credit what are the specifications in this regard? Input ServiceCredit is to be reversed if the payment of bill or invoice is not made within 3 month of the date of bill/invoice. Once again credit can be availed on or after the payment is made for such reversed credit. If any amount is refunded or credit note is received, credit to that extent is to be reversed. CA RIMA MEHTA, [email protected]

What are the documents on the basis of which duty can be availed? (Rule 9) Original or Duplicate Invoice issued by manufacturer or importer, First stage dealers Invoice or second stage dealers invoice, Bill of Entry, Supplementary Invoice A Challan evidencing payment of service tax, An invoice, bill or challan issued by a provider of input service, An invoice, bill or challan issued by a provider of input service distributor. CA RIMA MEHTA, [email protected]

CENVAT CREDIT OF CAPITAL GOODS [Rule 2(a)] Capital Goods Means : Following goods namely All goods falling under chapter 82,84,85,90,6805,6804 Pollution control equipment Components, spares and accessories of such goods Moulds and dies, jigs and fixtures. Refectories and refractory materials. Tubes and pipes and fittings. Storage tank. Motor vehicles for providing output services including dumpers and tippers. used. 1.In the factory of the mfg. of the final products but does not include any equipment or appliances used in an office 2.Outside the factory for generation of electricity. 2.For providing output services. CA RIMA MEHTA, [email protected]

CENVAT CREDIT OF CAPITAL GOODS Chapter Head Description of Goods Chapter 82Tools, implements, cutlery, spoons and forks of base metal; parts thereof of base metal Chapter 84Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof Chapter 85Electrical machinery and equipment and parts thereof; sound recorders and re-producers, television image and sound recorders and reproducers, and parts and accessories of such articles Chapter 90Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof Head 6804 and 6805 Articles of stone, plaster, cement, asbestos, mica or similar material CA RIMA MEHTA, [email protected]

CENVAT Credit on Motor Vehicle Cenvat Credit is allowable on motor vehicles (except under heading Nos. 8702, 8703, 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, motor 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. CA RIMA MEHTA, [email protected]

CENVAT Credit on Motor Vehicle Cenvat credit of motor vehicles covered under headings 8702, 8703, 8704 and 8711 and their chassis is available only if they are registered in the name of service provider and 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 (Servicing of motor vehicles not included) CA RIMA MEHTA, [email protected]

ANALYSIS & CASE LAWS FOR CAPITAL GOODS 1.For manufacture : term employed is Used in the factory of Manufacturer For Service Provider : term employed is Used for providing output service. 2. The term employed is for providing not in or in relation to. 3. It is burden on assessee to satisfy whether capital goods is used. However, it is required or not could not be decided by revenue. (CCE vs. Hindustan Coca Cola Beverages Ltd. 2011(271)ELT 314(T). CA RIMA MEHTA, [email protected]

ANALYSIS & CASE LAWS FOR CAPITAL GOODS 4.Scope of term Factory : Inputs used at different places nearest to factories to produce intermediate goods are eligible for input credit. Rope way used out side the factory was allowed as eligible credit as capital goods. (Birla Corporation Ltd. vs. CCE 2005(186)ELT266(SC) 5.Supporting structure of plant and machinery if it is not integral part of machinery it cannot be called as capital goods. (Vandana Global Ltd. vs. CCE 2010(253)ELT440(T-LB) Explanation 2 : Input include goods used in the manufacture of capital goods which are further used in the factory of manufacturer but shall not include cement, angles, channels etc other items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods. CA RIMA MEHTA, [email protected]

Exempted Service [Rule 2(e)] Wef. 01.04.2011, exempted service include trading as well as taxable service whose part of value is exempt on the condition that no credit of input and input service, used for providing taxable service shall be taken. Wef. 01.07.2012, any service on which service tax is not leviable in terms of sec 66B is also called exempt service which means all the activities which is not service in terms of sec 65B(44) or falling under sec 66D is also called exempt service. In exempted transaction, tax is not payable on final product and input credit is not available Services exported shall not be called as exempt service. CA RIMA MEHTA, [email protected]

Exempted Goods [Rule 2(d)] 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]. In exempted transaction, tax is not payable on final product and input credit is not available CA RIMA MEHTA, [email protected]

Input for Output Service and Final product In terms of Rule 2(k)(iv), input means all goods used for providing any output service except: (a)light diesel oil, high speed diesel oil, petrol, (b)any goods used for construction of building, civil structure or part thereof or laying of foundation or making of structure for support of capital goods, (c) capital goods, (d)motor vehicle, (e) any goods such as food items, goods used in guest house, residential colony, club or recreational facility, clinical establishment, when such goods are used primarily for personal use or consumption of any employee. CA RIMA MEHTA, [email protected]

Input for Output Service and Final product Goods having no relation with manufacture of final product shall not be eligible for credit. As per CBE&C circular, even office furniture and stationery is eligible as input. Therefore relation with the manufacture shall be construed in the wider sense. CA RIMA MEHTA, [email protected]

Input for Final Product In terms of Rule 2(k)(i), input means all goods used in the factory by a manufacturer of final product including accessories cleared along with final product, the value of which is included in the value of final product and goods used for providing free warranty for final product. Exclusions as mentioned for Service providers remain as it is for manufacturer of final product. Input consumed for quality control in laboratory, before actual process of manufacturing, is eligible for taking credit. (Tata engineering and locomotive Co. Ltd. 2010(256)ELT2010-56(Bom) CA RIMA MEHTA, [email protected]

Input Service [Rule 2(l) Definition of Input service contains 3 clauses : 1. Means 2. Includes and 3. Excludes. 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. Input Service means any service, - i. Used by a provider of output service for providing an output service or ii. Used by mfg. whether directly or indirectly in or in relation to the mfg. of final products and clearance of final products up to the place of removal, CA RIMA MEHTA, [email protected]

Input Service Input Service Includes services used in relation to folllowing: Modernization, renovation, repair of factory or premises of output service provider or office building Advertisement or sales promotion Market researchStorage up to place of removal Procurement of InputsAccounting AuditingFinancing RecruitmentQuality control Coaching and trainingComputer networking Credit ratingShare registry SecurityBusiness exhibition Legal servicesInward transportation of goods and capital goods, Outward transportation up to place of removal CA RIMA MEHTA, [email protected]

Input Service but excludes A. Service portion in the execution of a works contract and construction services used for construction or execution of works contract of bldg. & laying of foundation or making of structures for support of capital goods except for provision of one or more of specified service. B. Services of renting of motor vehicles, which is not a capital goods. BA. Service of general insurance business, servicing, repair and maintenance, in relation to motor vehicle except A. a mfger. of motor vehicle or B. An insurance co. In respect of motor vehicle C. Such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic life and health insurance and travel benefits extended to employees on leave when such services are used primarily for personal purpose of any employee. CA RIMA MEHTA, [email protected]

Input service credit relating to motor vehicle The definition of input service implies that, no other assessee can avail the credit of renting of motor vehicle and insurance of motor vehicle of specified chapter heads, except the output service is any of the following: 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 For motor vehicles other than specified chapter heads, no specification for output service. CA RIMA MEHTA, [email protected]

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 shall not be denied merely on the ground that input service was not availed within the factory premises. CCE vs. Ultra tech Cement Ltd. 2012(278)ELT523(T) CA RIMA MEHTA, [email protected]

Input service relating to construction In the first extended part, for input service, the expression employed are includes services used in relation to modernization, renovation or repair of a factory, premises of provider of output service or an office relating to such factory or premises but in excluded part, only few categories [such as wc, construction service, architect, chartered engineer, licensed surveyor] are restricted which is in relation to construction of building or civil structure or part thereof. It means combined effect is all input services except the excluded category used for setting up of factory, or office premises relating to factory or office premises relating to factory or laying of foundation or making of structure for support of capital goods shall not be permissible as input service. However such restriction is not applicable in case of modernisation, renovation or repair of such factory or civil structure or premises of office building. CA RIMA MEHTA, [email protected]

Input or Capital Goods removed as such Rule 3(5), An amount equal to credit availed in respect of such inputs or capital goods shall be paid. Such removal shall be made under the cover of invoice. Payment shall not be required where inputs are removed for providing output service. Such payment shall be made by debiting the cenvat credit or by way of cash. CA RIMA MEHTA, [email protected]

Capital goods removed after being used Manufacturer or output service provider shall have to pay an amount equal to Cenvat Credit taken on said capital goods reduced by percentage points calculated by SLM as specified below for each quarter from the date of taking cenvat credit. However if the duty leviable on transaction value is higher than amount so calculated, credit to be paid is that of duty on transaction value. If capital Goods are cleared as waste/scrap, there shall be paid amt equal to duty liability on transaction value. CA RIMA MEHTA, [email protected]

Capital goods removed after being used (a)for Computer and its peripherals : (b) for capital goods other than computers, @ 2.5% for each quarter. Particulars% reversal For each quarter in the first year @10 For each quarter in the second year @8 For each quarter in the third year @5 For each quarter in 4 th and 5 th year @1 CA RIMA MEHTA, [email protected]

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]. applicable when provision made in books of account to that effect. CA RIMA MEHTA, [email protected]

Reversal for duty remitted on goods manufactured [Rule 3(5c)] Duty on final product is remitted under Rule 21 of Central Excise Rules, 2002. Rule 21 speaks about remission of duty when goods have been lost/destroyed by natural cause or unavoidable accident or claimed as unfit for consumption at the time before removal. Cenvat credit taken on inputs and input services* used to manufacture said goods shall be reversed. * Reversal of input services added from 08.01.2014 vide notification no. 01/2014. CA RIMA MEHTA, [email protected]

Procedure for Reversal By way of debiting the Cenvat Credit account or otherwise. Before 5 th day of following month/quarter as the case may be except for the month of March, where such payment shall be made on or before 31 st March. If an assessee fails to pay, it shall be recovered under Rule 14. Applicable Penalty under Rule 15 : Not exceeding duty or S.tax liability on goods or service or 2000/- Rs. w.e. is higher. Over and above, penalties under Excise and Service Tax is also be levied. CA RIMA MEHTA, [email protected]

Refund of Cenvat Credit [Rule 5] Applicable to exporter of goods or service without payment of duty. Refund amt =(Export t/o of goods+ Export t/0 of services)/Total t/o * Net Cenvat Credit. Net cenvat credit = total credit amount reversed in terms of Rule 3(5C). i.e. remitted under rule 21 of Central excise Rules 2002. No refund is admissible if assessee avails drawback. CA RIMA MEHTA, [email protected]

Refund of Cenvat to service providers providing services taxed on RCM Rule 5B: A provider of service providing serivices notified under sub-section (2) of section 68 of Finance Act, and being unable to utilise cenvat availed on input and input services for payment of s.tax on such output services, shall be allowed refund of such unutilised cenvat credit. Definition of Output services: Output Service means any service provided by a provider of service but shall not include a service,- (1) Specified in Sec 66D of Finance act, or (2)where whole of S.tax is liable to be paid by receipient of service. CA RIMA MEHTA, [email protected]

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. 1-4-2012 4 options are available to assessee CA RIMA MEHTA, [email protected]

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), 2% in case of transport of goods or passengers by rail. W.e.f. 01.04.2012. Rule 6(3)(i) as amended w.e.f. 1-4-2012 [The amount payable was 5% 31-3-2012]. (Continued) CA RIMA MEHTA, [email protected]

Four Options (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. 1-4- 2011. CA RIMA MEHTA, [email protected]

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 40%, amount of 6% will be on balance 60%. CA RIMA MEHTA, [email protected]

Exemptions subject to condition of non- availment of Cenvat Credit Rule 6(3D) (inserted w.e.f. 1-4-2011) It states that payment of amount under rule 6(3) shall be deemed to be 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. CA RIMA MEHTA, [email protected]

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 40 and vale will be Rs 400. CA RIMA MEHTA, [email protected]

Principle Behind Calculations under Rule 6 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 CA RIMA MEHTA, [email protected]

Principle Behind Calculations under Rule 6 1.Rule 6(3A)(b)(i) Inputs used for exempted final products 2.Rule 6(3A)(b)(ii) Inputs used for exempted services (On proportionate basis, based on ratio of previous year) 3.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 CA RIMA MEHTA, [email protected]

Principle Behind Calculations under Rule 6 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. CA RIMA MEHTA, [email protected]

Provision in case of traded goods Provision in case of traded goods : Difference between sale price and cost of goods sold (determined as per generally accepted accounting principles) or 10% of Cost of goods sold w.e. is more, is to be treated as value of exempted service. Treaded goods shall be included in the exempt service as it consist in the negative list under sec 66D of the Finance Act, 1994 which is very well included in the definition of Exempt Service. Therefore credit shall be reversed in that regard. Value thereof shall be as mentioned above. CA RIMA MEHTA, [email protected]

Non applicability of reversal provision on specified transactions Export of goods and export of services, Supplies to SEZ, EOU, EHTP, STP, Goods supplied against international competitive bidding, goods supplied to UN organisations, foreign diplomatic missions or diplomatic agents, Provision of services to SEZ (where exemption is available) Supplies made for setting up of Solar power generation projects. (inserted by notification no. 25/2012 w.e.f. 08.05.2012) CA RIMA MEHTA, [email protected]

Provision for Banking Company This provision applies to not withstanding anything contained in sub-rule (1),(2),(3) of Rule 6. 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]. CA RIMA MEHTA, [email protected]

Returns [Rule 9] For Manufacturer : within 10 days from the end of the said month/quarter as the case may be. For First stage dealer/Second stage dealer : within 15 days from the close of each quarter. For Output Service provider : half yearly return in the form specified by the end of the month following particular half year. CA RIMA MEHTA, [email protected]

Returns For Input Service Distributor : Half Yearly return in a form specified giving the details of credit received and distributed during the said half year. Revised Return : this facility is available only for Output service provider and input service distributor to correct any mistake or omission within a period of 60 days from the date of filing of original return. however such revised return can be filed only once. All such returns shall be filed electronically. CA RIMA MEHTA, [email protected]

Information relating to principal inputs Rule 9A. A declaration in a specified form shall be furnished annually by 30 th April of each FY in respect of each of the excisable goods manufactured, principal inputs and quantity of principal inputs required for use in a manufacture of unit quantity of such final product. A monthly return shall be filed within 10 days from closure of the each month/quarter as the case may be in respect of receipt and consumption of each principal input with reference to quantity of final product manufactured by him. CA RIMA MEHTA, [email protected]

Information relating to principal inputs Principal inputs : means any input which is used in the manufacture of final product, cost of such input constitute not less than 10% of the total cost of raw materials for the manufacture of a unit quantity of given final product. CA RIMA MEHTA, [email protected]

Input Service Distributor Rule 7 HO or Branch or Depot can pass on credit to factories. They have to register themselves with the excise dept, file returns etc. No distribution if the credit is attributable to services used wholly by one unit. That shall be distributed to that unit only. No credit shall be added to pool where input service is exclusively used for exempted goods or exempted service. Distribution on turnover basis of previous quarter. CA RIMA MEHTA, [email protected]

Recovery of Cenvat Credit wrongly taken (Rule 14) Where the Cenvat Credit has been [taken and utilised wrongly]* or has been erroneously refunded, the same along with interest shall be recovered and the provisions of sec 11A of the Central Excise Act and sec. 73 and 75 of Finance Act, shall apply mutatis mutandis for effecting such recovery. * earlier the words were taken or utilized which were harsh enough which is libralised w.e.f. 01.04.2012 vide notification no. 18/2011 CE(NT). CA RIMA MEHTA, [email protected]

CA RIMA MEHTA, [email protected]

22 nd june 2014. ca rima mehta, [email protected] 1

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