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TAXMANN’S

CENVAT LAW & PRACTICE

CHAPTER-HEADS

PAGE

Contents I-7

Table of cases I-49

CHAPTER 1 : CENVAT CREDIT SCHEME 1

CHAPTER 2 : RULE 2 : DEFINITIONS 27

CHAPTER 3 : CAPITAL GOODS 52

CHAPTER 4 : INPUTS 77

CHAPTER 5 : INPUT SERVICE/OUTPUT SERVICE 177

CHAPTER 6 : RULE 3 : CENVAT CREDIT 248

CHAPTER 7 : RULE 4 : CONDITIONS FOR ALLOWING CENVAT

CREDIT 350

CHAPTER 8 : RULES 5 AND 5A : REFUND OF CENVAT CREDIT 431

CHAPTER 9 : RULE 6 : OBLIGATION OF A MANUFACTURER OR PRODUCER OF FINAL PRODUCTS AND A PRO-

VIDER OF TAXABLE SERVICE 483 CHAPTER 10 : RULES 7 & 7A : MANNER OF DISTRIBUTION OF

CREDIT BY INPUT SERVICE DISTRIBUTOR AND DISTRIBUTION OF CREDIT ON INPUTS BY OFFICE OR ANY OTHER PREMISES OF OUTPUT SERVICE

PROVIDER 582

CHAPTER 11 : RULE 8 : STORAGE OF INPUT OUTSIDE THE FAC-

TORY OF THE MANUFACTURER 586

CHAPTER 12 : RULE 9 : DOCUMENTS, ACCOUNTS AND RETURNS 592

CHAPTER 13 : INVOICES OF MANUFACTURERS, DEALERS AND

SERVICE PROVIDERS 672

CHAPTER 14 : RULE 9A : INFORMATION RELATING TO PRINCIPAL

INPUTS 734

CHAPTER 15 : RULE 10 & 10A : TRANSFER OF CENVAT CREDIT 745

CHAPTER 16 : RULE 11 : TRANSITIONAL PROVISION 752

CHAPTER 17 : RULE 12 : SPECIAL PROVISIONS FOR NORTH-EAST REGION, KUTCH DISTRICT OF GUJARAT, STATE OF

JAMMU AND KASHMIR AND STATE OF SIKKIM 758

CHAPTER 18 : RULE 12A : PROCEDURE AND FACILITIES FOR

LARGE TAXPAYER 829

CHAPTER 19 : RULE 12AA/12AAA : POWER TO IMPOSE

RESTRICTIONS IN CERTAIN TYPES OF CASES 858

CHAPTER 20 : RULE 13 : DEEMED CREDIT 868

CHAPTER 21 : RULE 14 : RECOVERY OF CENVAT CREDIT

WRONGLY TAKEN OR ERRONEOUSLY REFUNDED 870

CHAPTER 22 : RULES 15 AND 15A : CONFISCATION AND

PENALTY/GENERAL PENALTY 913

CHAPTER 23 : RULE 16 : SUPPLEMENTARY PROVISION 935

CHAPTER 24 : JOB WORK 937

APPENDIX

Indirect Tax Ombudsman Guidelines, 2011 991

Validation Provisions Pertaining to Cenvat Credit Rules 999

LIST OF CIRCULARS/TRADE NOTICES 1021

LIST OF BASE NOTIFICATIONS 1025

CONTENTS

PAGE

Chapter-heads I-5

Table of cases I-49

1

CENVAT CREDIT SCHEME

1.1 The backdrop to the 2004 Rules 1

1.2 2002 Rules v. 2004 Rules - A broad comparison 1

1.3 General outline of CENVAT Credit Scheme, 2004 for

manufacturers 2

1.4 General outline of CENVAT Credit Scheme, 2004 for service

providers 5

1.5 Judicial principles 7

1.6 Opting for or opting out of Cenvat Scheme 9

1.7 Departmental Manual 10

1.8 Departmental circulars 10

1.8-1 Circulars whether retrospective or prospective 10

1.8-2 Circulars are binding on revenue 10

1.9 Services provided in Jammu & Kashmir are excluded 11

1.10 Indirect tax Ombudsman Guidelines 12

Annex 1.1 Text of Chapter Five of CBEC‟s Excise Manual of

Supplementary Instructions, 2005 13

2

RULE 2 : DEFINITIONS

Text of rule 2 27

2.1 Classification of the definitions 34

2.2 „Customs Tariff Act‟ 35

2.3 „Excise Act‟ 35

2.4 „Excise Tariff Act‟ 35

2.5 „Finance Act‟ 35

2.5A „Manufacturer‟ or „Producer‟ 35

2.6 „Notification‟ 36

2.7 „Residual clause‟ 36

2.8 Exempted goods 36

2.9 Final products 36

2.9-1 Excisable goods 37

2.9-2 Element of manufacture must be present 37

2.9-2a The statutory definition 37

2.9-2b Judicial rulings 37

2.9-2c Certain relevant decisions 38

2.9-3 Waste and scrap 39

Annex 2.1 Rule 12AA of Central Excise Rules, 2002 40

Annex 2.2 Notification No. 1/2011-CE, dated 1-3-2011 42

Annex 2.3 Rule 4(1A) of Central Excise Rules 51

3

CAPITAL GOODS

3.1 Definition as applicable to „manufacturer‟ 52

3.1-1 Goods must fall under specified Chapters/Headings 53

3.1-1a Material handling equipments 53

3.1-1b Ventral diesel hydro loco 53

3.1-1c Goods used in mines 54

3.1-1d Universal measuring machine 54

3.1-1e Tapping ladle car 54

3.1-1f Ingot white metal 54

3.1-1g Battery charger 54

3.1-1h Electric bulbs/Rubber strips 55

3.1-1i Computer system 55

3.1-1j Washing machines 55

3.1-1k Elevator 55

3.1-2 Spare parts/components/accessories are included 55

3.1-2a Meaning of „component‟ 56

3.1-2b Meaning of „spare part‟ 58

3.1-2c Meaning of „accessory‟ 59

3.1-2d Goods can be processed before use 61

3.1-2e Foundation structures and roofing materials 61

3.1-2f Rope asbestos/graphite asbestos/hoists 62

3.1-2g Asbestos gasket sheet 62

3.1-2h Resin bonded insulation material 62

3.1-2i Surface miner 62

3.1-2j Iron/steel ingots 62

3.1-2k MS items 63

3.1-2-l Flooring components 63

3.1-2m Channels/angles/joints etc. 63

3.1-2n Cables used for electric feeder line 63

3.1-2o Goods used in Ceramic Tiles Industry 63

3.1-2p Welding Electrodes 63

3.1-2q Asbestos Joining Sheets 64

3.1-3 Other specified items 64

3.1-3a Motor vehicles 64

3.1-4 The „user‟ requirement 65

3.1-4a Capital goods used in mines 65

3.1-4b Definition of „factory‟ 66

3.1-4c Whether factory can be located at different

places 68

3.1-4d Manufacture/process must be present 68

3.1-4e Use must be in manufacturer‟s factory 69

3.1-4f User need not be exclusive 69

3.1-4g Use need not be continuous 69

3.1-4h Use can be on exempt intermediate goods 69

3.1-4i Bought-out capital goods exported as such 70

3.1-4j Capital goods not made functional 70

3.1-4k Consumables are not excluded 70

3.1-4-l Pipes and fittings 70

3.1-4m Capital Goods used in R&D section 71

3.1-4A Goods used outside the factory 71

3.1-5 Relevance of purpose of use 71

3.1-6 Exclusion of equipment/appliances used in an office 71

3.1-7 Requirements must be satisfied at the time of receipt 71

3.1-8 Importance of tariff classification 72

3.1-9 Ownership is not a relevant factor 72

3.1-10 Old/Used capital goods are not excluded 72

3.2 Definition as applicable to output service provider 72

3.2-1 Motor vehicles 73

3.2-2 Dumpers/Tippers 73

3.2-3 Components, spares and accessories 73

3.2-4 Telecommunication towers/equipments 74

Annex 3.1 Cenvat credit on capital goods used in manufacture of

exempt intermediate goods 75

Annex 3.2 Items used in Ceramic Tiles Industry 76

4

INPUTS

SECTION A - DEFINITION OF ‘INPUT’ AS APPLICABLE TO BOTH MANUFACTURERS AND SERVICE PROVIDERS FROM 1-4-2011

4.1 The statutory definition 77

4.1-1 Departmental clarifications 78

4.1-2 The specifically covered items 79

4.1-3 The excluded items 80

SECTION B - DEFINITION OF ‘INPUT’ AS APPLICABLE TO MANUFACTURER TILL 31-3-2011

4.1-4 Input, definition of 81

4.1-4a The specific part 81

4.1-4b The inclusive part 81

4.1-4c The place of use 82

4.2 Use in or in relation to manufacture 82

4.2-1 Supreme Court rulings 82

4.2-2 Larger Bench view in Union Carbide case 83

4.2-3 Other judicial propositions 83

4.3 Certain settled basic propositions 85

4.3-1 The common understanding 85

4.3-2 The three acid tests 85

4.3-3 Functional test is relevant 85

4.3-4 State of delivery at factory gate is relevant 86

4.3-5 Onus on claimant 86

4.3-6 Benefit cannot be curtailed through Trade Notices 86

4.3-7 Department has no say on manufacturing methods 86

4.3-8 Finished products can also be „inputs‟ 86

4.3-9 Adjudicating authority cannot decide eligibility on the

basis of his personal knowledge 86

4.4 Considerations which are not relevant 87

4.4-1 Physical presence of inputs not necessary 87

4.4-2 Input need not go into product mix 89

4.4-3 Both direct and indirect participation are covered 89

4.4-4 Repetitiveness of use or one-time use is not relevant 89

4.4-5 Necessity for use is not relevant 89

4.4-6 Frequency of use/rapidity of consumption are

not relevant 90

4.4-7 No distinction between consumables and

non-consumables 90

4.4-8 Full consumption of inputs is not a must 90

4.4-9 Benefit is not confined to raw materials 90

4.4-10 Direct conversion into final product is not a must 90

4.4-11 Components must be judged by their indispensability 91

4.5 Situations based on purpose of use or stage of use 91

4.5-1 Inputs used out of technical necessity 91

4.5-2 Inputs used in machines for various purposes 96

4.5-2a Welding electrodes and gases used for repair/

maintenance 97

4.5-2b Goods used for repair/maintenance 100

4.5-2c Lubricants/greases 101

4.5-2d Other inputs 101

4.5-3 Inputs used to meet marketing requirements/necessities 104

4.5-4 Inputs used for purification purposes 108

4.5-5 Inputs used in ancillary/preparatory processes 109

4.5-6 Inputs used in intermediate products 114

4.5-7 Inputs used in post-manufacture stage 115

4.5-8 Inputs used as cleaning/cleansing agents 116

4.5-9 Inputs held to have directly participated in the process

of manufacture 117

4.5-10 Goods supplied free along with final product 120

4.5-11 Bed sheets/blankets 120

4.5-12 Other cases 121

4.6 Inputs used as packing material 126

4.6-1 All types of containers are covered 126

4.6-2 Benefit cannot be restricted to ready-to-use materials 126

4.6-3 No distinction between duty-paid and exempt items 126

4.6-4 No distinction between primary and peripheral packing 126

4.6-5 Manner of sale of goods is relevant 127

4.6-6 Packing material damaged while packing 127

4.6-7 Boomer Tattoo 127

4.6-8 Holograms 128

4.6-9 Jumbo bags 128

4.6-10 Hanging cards 129

4.6-11 Packing materials used for local transportation of raw

materials 129

4.6-12 Biscuits 129

4.6-13 Judicial rulings 129

4.7 Inputs used as fuel 134

4.7-1 Meaning of „fuel‟ 134

4.7-2 Fuel not confined to oils only 135

4.7-3 Furnace oil 135

4.7-4 Oxygen/Hydrogen 135

4.7-5 Naphtha 135

4.7-6 Low Sulphur Heavy Stock (LSHS) 135

4.7-7 Carbon Black Feed Stock (CBFS) 136

4.8 Inputs used for generation of steam or electricity 137

4.8-1 Scope of the expression „within the factory of production‟ 137

4.8-1a Whether 100% should be captively consumed 138

4.8-1b Supply to residential colony/township 138

4.8-1c Supply to canteen in factory premises 139

4.8-2 Light Diesel Oil/High Speed Diesel Oil/Motor Spirit 139

4.8-3 Supply of electricity to another unit of same assessee 140

4.8-3A When one unit purchases power from another unit 141

4.8-4 Partial disallowance of credit 142

4.8-5 Case where notional disallowance had to be made 142

4.8-6 Treatment of water 143

4.8-7 Furnace oil 143

4.8-8 Electricity consumed in administrative office 144

4.8-9 When excess electricity is wheeled outside the factory

and sold by assessee 144

4.8-10 Exchanging captively generated electricity with

electricity from the grid 145

4.9 Lubricants/Greases, etc. 145

4.10 Inputs used for testing/inspection/trial runs 146

4.10-1 Inputs used for testing/inspection 146

4.10-2 Inputs used for trial runs 148

4.10-3 Input samples drawn for testing 148

4.10-4 Inputs used in in-house pre-testing of parts/components 149

4.11 Accessories 149

4.11-1 Clearance must be along with final product 150

4.11-2 Inclusion of value in assessable value 150

4.11-2a Meaning of „accessories‟ 150

4.11-2b Disposable syringes/needles 151

4.11-2c Tucks used for razors/blades 151

4.11-2d Free supply of blades 151

4.11-2e Windscreen wiper kit 151

4.11-2f Support angles/brackets 152

4.11-2g Tubes and flaps 152

4.11-3 Inputs which are essential/compulsory fittings or

attachments 152

4.12 Paints 155

4.13 Use of „input‟ need not necessarily be within the factory 155

4.13-1 Supreme Court reverses its earlier ruling 156

4.13-2 When input is stored within the precincts of the factory 156

4.13-3 Explosives used in cement industry 157

4.13-4 Battery Lead Acid used in mines 157

4.14 Inputs captively produced and used 157

4.15 Light Diesel Oil/High Speed Diesel Oil/Petrol 159

4.15-1 Whether Cixon and SBPS are excluded 159

4.15-2 Position in respect of HSD Oil for the period 16-3-1995

to 12-5-2000 159

4.16 Inputs contained in waste/refuse/by-product, or used in

intermediate product 160

4.17 Inputs used in capital goods which are used captively 160

4.17-1 Items excluded 161

4.17-1a The Vandana Global case 161

4.18 Design and development charges 162

4.18A Facility charges 162

4.19 Inputs used for effluent treatment of plant 162

4.20 Inputs used for research 163

4.20A Inputs sent for job work and then exported 163

4.20B Inputs used for repairs 164

4.20C Cement used as construction material 164

4.20D Inputs used in combination packs 164

4.20E Inputs subjected to testing/inspection and then exported 165

4.20F Raw materials used for trial run of plant 165

4.20G EPABX System 165

4.20H Liquified Petroleum Gas (LPG) used in factory canteen 165

SECTION C - DEFINITION OF ‘INPUTS’ AS APPLICABLE TO OUTPUT SERVICE PROVIDER, TILL 31-3-2011

4.21 The statutory definition 166

4.21-1 The eligible goods 166

4.21-1a Jetty used in port service 166

4.21-2 User requirement 166

4.22 Supply of tangible goods service 167

4.23 Telecom structures/equipments 167

Annex 4.1/4.2 Admissibility of Modvat credit on transformer oil 168

Annex 4.3 Admissibility of Modvat credit on thinners used in spray

painting of automobiles/Admissibility of credit on Thinners

used as dilutents for paints for spray painting of Excisable

products 169

Annex 4.4 Admissibility of Cenvat credit on inputs and capital goods

used by the manufacturer outside the factory premises 170

Annex 4.5 Notification No. 67/95-C.E., dated 16-3-1995 171

Annex 4.6 Credit on „Tangible goods‟ supplied during the course of

providing Taxable service under section 65(105)(zzzzj) 173

Annex 4.7 Availability of Cenvat credit on inputs used in the

manufacture of capital goods 174

Annex 4.8 Clarification on issues relating to definition of „Input‟ as

substituted with effect from 1-4-2011 176

5

INPUT SERVICE/OUTPUT SERVICE

SECTION A - POSITION FROM 1-4-2011

5.1 Statutory definition 177

5.1-1 The departmental clarification 178

5.1-2 The two main parts of the definition 179

5.1-3 Significance of the words „means‟ and „includes‟ 180

5.1-4 „Used‟ is not synonymous with „consumed‟ 180

5.1-5 Scope of the expression „in relation to‟ 180

5.2 The specifically included services 181

5.2-1 Services which are relevant 181

5.3 Purpose-based exclusion of certain services 182

5.3-1 Eligibility of various services as input services 184

SECTION B - POSITION FROM 1-4-2011

5.4 Scope of the term „activities relating to business‟ 191

5.4-1 High Court Rulings 191

5.4.2 Larger Bench Ruling 193

5.4-3 Overall analysis by High Court 193

5.5 Issues relating to scope and ambit of the definition 194

5.5-1 Whether any service will be an „input service‟ if its value

forms part of the cost of final product 194

5.5-1a The Press Note 195

5.5-1b Reliance on Accounting Standards 195

5.5-1c High Court Rulings 196

5.5-2 Whether services covered under the inclusive part should

also satisfy the „user test‟ 197

5.6 Outward transportation of goods 201

5.6-1 „Place of removal‟ 201

5.6-2 Availment/utilisation of credit by consignors/consignees

using goods transport agency‟s service 201

5.6-2a Utilisation of Credit 202

5.6-2b Availment of Credit 202

5.7 Stage upto which credit can be availed 202

5.7-1 Board‟s clarification 203

5.7-2 Larger Bench decides in favour of assessee 206

5.7-3 High Court affirms Larger Bench decision 208

5.8 Other Judicial decisions and departmental clarifications relating

to various taxable services 210

5.8-1 Advertising Agency‟s service 210

5.8-2 Airport Service 212

5.8-3 Air Travel Agent‟s Service 212

5.8-4 Authorised Service Station Service 213

5.8-5 Business Auxiliary Service 213

5.8-6 Cargo Handling Service 214

5.8-7 Chartered Accountant‟s service 214

5.8-8 Cleaning Activity Service 215

5.8-9 Clearing & Forwarding Agent‟s Service 215

5.8-10 Construction Service 216

5.8-11 Consulting Engineer‟s Service 217

5.8-12 Courier service 217

5.8-13 Custom House Agent‟s Service 217

5.8-14 Dry Cleaning Service 218

5.8-15 Erection, Commissioning or Installation Service 218

5.8-16 Event Management Service 218

5.8-17 Goods Transport Agency‟s Service 219

5.8-18 Insurance/landscaping services 219

5.8-19 Management or Business Consultants‟ Service 221

5.8-20 Management, maintenance or repair service 221

5.8-21 Manpower recruitment and supply agency‟s service 224

5.8-22 Outdoor Caterer‟s Service 225

5.8-23 Pandal or Shamiana Contractor‟s Service 227

5.8-24 Photography service 227

5.8-25 Rent-a-cab Scheme operator‟s service 227

5.8-26 Renting of immovable property service 228

5.8-27 Security Service 229

5.8-28 Technical Testing & Analysis Service 230

5.8-29 Telephone Services (Landline/Mobile) 230

5.8-30 Tour Operator‟s Service 235

5.9 Output service 235

5.10 „Person liable for paying service tax‟ 235

5.11 „Provider of taxable service‟ 236

Annex 5.1 List of services liable to service tax (As on 1-5-2011) 238

Annex 5.2 Service tax credit on transportation of goods from factory

to depot 242

Annex 5.3 Certain issues relating to „Transport of goods by road service‟ 243

Annex 5.4 Service tax credit on imported services 246

Annex 5.5 Clarification on issues relating to amended definition of

input service from 1-4-2011 247

6

RULE 3 : CENVAT CREDIT

Text of rule 3 248

6.1 Arrangement of the Chapter 260

A. ALLOWANCE OF DUTY CREDIT TO THE MANUFACTURER

6.2 Basic requirements for allowing duty credit 261

6.2-1 Manufacturer v. Producer 261

6.2-2 Final products 262

6.2-3 Inputs used in intermediate products by job worker 262

6.2-4 Receipt need not be routed through the original supplier 262

6.2-5 Goods must be duty paid 263

6.2-6 Ownership is not a relevant consideration 264

6.2-7 Burden of proof 264

6.2-8 Relevance of balance sheet figures 265

6.2-9 Prior registration is not necessary 265

6.3 Types of duties eligible for credit 265

6.3-1 Basic excise duty 265

6.3-2 Special excise duty 266

6.3-3 Other duties 266

6.3-4 National Calamity contingent duty 266

6.3-5 Education Cesses 266

6.3-6 Countervailing duty 266

6.3-7 Additional duty levied by Finance Acts 266

6.3-8 Project imports 266

6.3-9 Additional customs duty 267

6.3-10 Additional customs duty paid in cash or through DFCE/

TPS certificates 267

6.3-11 Credit allowable to 100% EOUs 267

6.4 Transitional credit on inputs only 267

6.5 Allowability of credit in certain situations 268

6.5-1 Inputs destroyed prior to, during or after use 268

6.5-2 Inputs damaged in transit 269

6.5-2a When assessee receives insurance money 270

6.5-3 Inputs destroyed at intermediate stage 270

6.5-4 Inputs lost in storage 270

6.5-5 Material handling losses 271

6.5-6 Returned goods 271

6.5-6a Text of rule 16 of Central Excise Rules, 2002 273

6.5-6b Contents of the rule 273

6.5-6c Source of manufacture is no longer relevant 274

6.5-6d Self-manufactured goods are also covered 275

6.5-6e Removal of refinished goods 275

6.5-6f Payment can be made on monthly basis 275

6.5-6g Departmental instructions 275

6.5-6h Some decided cases 276

6.5-7 When duty is paid by job worker 277

6.5-8 Receipt of goods in packed condition 278

6.5-9 Inputs/capital goods which are written off 279

6.5-9a Position prior to 11-5-2007 279

6.5-9b Position from 11-5-2007 280

6.5-9c Rule 3(5B) made applicable to service providers

from 7-7-2009 280

6.5-10 Credit on CVD debited to DEPB Pass Book 280

6.5-11 Input delivered to another factory of same

manufacturer 281

6.5-12 Materials used by job worker 281

6.5-13 Attempt to use inputs proving infructuous 281

6.5-14 Burning losses and invisible processing losses 282

6.5-15 Inputs cleared as final product after minor processing 283

6.5-16 Dismantling and erection charges 284

6.5-17 Labour charges 284

6.5-18 Line Rejections/Store Rejections 284

6.5-19 Denial of credit based on uncorroborated evidence 284

6.5-20 Stolen inputs 284

6.5-21 When assessee has no plant/machinery/manpower in

its factory 284

6.5-22 Broken inputs 285

6.5-23 Storage of inputs in sister unit 285

6.5-24 Where buyer of inputs had not borne the duty burden 286

6.5-25 Fixed facility charges 286

6.5-26 When there is only trading activity 286

6.5-27 Inputs received in a different unit 286

6.5-28 Inputs procured duty-free but later made duty-paid 286

6.5-29 Inputs received in one unit and then transferred to

another unit 287

6.5-30 Whether doctrine of unjust enrichment applies 287

6.5-31 Inputs getting damaged/defective during job work 287

6.5-32 Finished goods obtained on stock transfer for sale 288

6.6 When finished goods are dutiable 288

6.7 When waste or scrap is removed 289

6.8 Restricted credit 289

6.9 Storage of non-duty paid goods outside the factory 291

6.10 Availment of credit on molasses and its utilisation 291

6.11 Availment and utilisation of GSI duty credit on inputs 291

6.12 Storage of duty-paid goods inside factory premises 292

6.12A When remission of duty is obtained 292

6.12B Availment of credit by CNG manufacturers 293

B. ALLOWANCE OF SERVICE TAX CREDIT TO THE MANUFACTURER

6.13 Basic requirements for allowing service tax credit 293

6.13-1 Receipt of input service 293

6.13-2 Use of input service 294

6.13-3 Input services used by job worker 294

6.13-4 Eligible items for tax credit 294

6.13-5 Tax must have been paid 294

6.13-6 Depot sales 294

6.13-7 Issues relating to input service tax credit on goods

transport agency‟s service 294

6.13-8 Restricted credit 294

C. ALLOWANCE OF DUTY CREDIT TO THE OUTPUT SERVICE PROVIDER

6.14 Basic requirements to be satisfied 295

6.14-1 Meaning of „output service provider‟ 295

6.14-2 Receipt of inputs/capital goods 295

6.14-3 Use of inputs/capital goods 295

6.14-4 Types of duties eligible for credit 296

6.14-5 Duty on goods must have been paid 296

6.14-6 Restricted credit 296

6.14-7 Availment of credit on tippers 297

D. ALLOWANCE OF SERVICE TAX CREDIT TO THE OUTPUT SERVICE PROVIDER

6.15 Basic requirements to be satisfied 298

6.15-1 Receipt of „input service‟ 298

6.15-2 Use of input service 298

6.15-3 Eligible items for tax credit 298

6.15-4 Service tax must have been paid 298

6.15-5 Prior registration is not a condition 298

6.16 Transitional credit on input services 299

E. UTILISATION OF CENVAT CREDIT BY A MANUFACTURER OR OUTPUT SERVICE PROVIDER

6.17 The normal rule 299

6.17-1 Some relevant rulings 300

6.17-1a When both duty paid and non-duty paid inputs

are used 300

6.17-1b When inputs are common for different products 301

6.17-1c When final product is initially exempt but later

becomes dutiable 302

6.17-1d When inputs are different for different

varieties of same final product 302

6.17-2 Principle of „first come, first out‟ cannot be applied for

utilisation of inputs 303

6.17-3 Credit erroneously utilised must be restored while

demanding duty 303

6.17-4 When assessee stops manufacturing activity 303

6.17-5 Credit should not be allocated raw material-wise or

product-wise 304

6.18 Restriction on quantum of credit utilisable 304

6.18-1 Meaning of „credit is available‟ 304

6.18-2 When assessee avails exemption benefit 305

6.19 Restriction applicable to units in N.E. Region/Kutch District/State

of Jammu & Kashmir/Sikkim 305

6.19A Clean Energy Cess 305

6.20 Restrictions on utilisation of credit 306

6.20-1 Utilisation of credit on payment of service tax on goods

transport agency‟s services 307

6.20A Clearance of capital goods as waste and scrap on or after 16-5-2005 307

F. OTHER ISSUES APPLICABLE BOTH TO MANUFACTURER AND OUTPUT SERVICE PROVIDER

6.21 Removal of inputs/capital goods as such 309

6.21-1 Action by the manufacturer 309

6.21-2 Action by output service provider 309

6.21-3 Limited scope of the sub-rule 309

6.21-3a Removal must be physical and not deemed 311

6.21-3b Packing material kept separately in consignment 312

6.21-3c When burnt out capital goods were sold as scrap 312

6.21-3d Clearance of remnants of inputs 312

6.21-3e Lubricating oil getting drained and cleared as

waste oil 312

6.21-3f Packing material getting damaged during packing 313

6.21-3g Service tax credit is not required to be reversed 313

6.21-3A Reversal of credit when inputs/capital goods/works-in-

progress (WIP)/finished goods are written off 313

6.21-4 Payment can be on monthly basis 314

6.21-5 Credit is admissible on such payment 314

6.21-6 Inputs/capital goods exported under bond 315

6.21-7 When input can no longer be put to use 315

6.21-8 When empty container is removed 315

6.21-9 Department cannot demand payment of transaction

value 315

6.21-10 Removal of waste is not covered 316

6.21-11 Used capital goods cannot be treated as „capital goods

removed as such‟ 316

6.21-12 Inter-unit transfer of inputs 316

6.21-13 Inputs cleared as such at very high assessable value 317

6.21-14 When intermediate product is cleared 317

6.21-15 When there is transfer of ownership of entire factory 317

6.21-16 When capital goods are removed to 100% EOUs 317

6.21-17 When inputs removed were found to be not required

for manufacture 318

6.21-18 Capital goods destroyed by fire after long use 318

6.21-19 Capital goods sold but not removed from premises 319

6.21-20 Inter-unit removal of capital goods 319

6.21-21 Capital goods removed for job work after use 319

6.21-22 When bought-out items are supplied along with the

final product 320

6.21-23 Purchase of entire factory, in which a plant was situated 320

6.22 Removal of capital goods after putting them to use 320

6.22-1 Position prior to 27-2-2010 321

6.22-2 Position from 27-2-2010 to 16-3-2012 321

6.22-3 Position from 17-3-2012 onwards 322

6.23 CENVAT credit on goods and services subject to conditional

exemption 322

Annex 6.1 Availment of credit on CVD paid on imported car kits 323

Annex 6.2 Project imports - Relevant extracts from Chapter 98 of the

First Schedule to the Customs Tariff Act 324

Annex 6.3 Clarification regarding return of duty paid goods for

refining, remaking, etc. 327

Annex 6.4 Procedure for receipt of duty paid goods for repairs,

reconditioning, etc., under rule 16 of Central Excise

Rules, 2002 328

Annex 6.5 Admissibility of credit on the input/capital goods which are

written off 334

Annex 6.6 Storage of non-duty paid goods outside the factory

premises - Waiver of merchant overtime charges 335

Annex 6.7 Availment of accumulated Modvat/Cenvat credit on

molasses for payment of duty on sugar 336

Annex 6.8 Diversion of credit taken on inputs for exempted products

under the North-East notifications for payment of central

excise duty on other products 337

Annex 6.9 Storage of duty paid goods inside factory premises 338

Annex 6.10 Inadmissibility of Cenvat credit on countervailing duty 339

Annex 6.11 Clarification with regard to valuation of goods 340

Annex 6.12 Availing of Cenvat Credit of Additional Customs Duty (CVD)

paid through Duty Free Credit Entitlement (DFCE)/Target

Plus Scheme (TPS) Certificates 341

Annex 6.13 CNG manufacturers : Single registration and Cenvat credit

availability 343

Annex 6.14 Credit of duty under rule 16 of Central Excise Rules on

goods brought into the factory 345

Annex 6.15 Reversal of credit when value of work-in-progress or

finished goods is written off 346

Annex 6.16 Leviability of duty on capital goods cleared after being put

into use for over 10 years 347

Annex 6.17 Clarification regarding restricted service tax credit 348

Annex 6.18 Allowability on credit on duty paid on exempted goods 349

7

RULE 4 : CONDITIONS FOR ALLOWING CENVAT CREDIT

Text of rule 4 350

7.1 Contents of the Rule 354

CONDITIONS APPLICABLE TO MANUFACTURER

7.2 Time-limit for availment of duty credit on inputs 355

7.2-1 Meaning of „immediately‟ 355

7.2-2 Deferred availment of credit 356

7.2-2a When supplier paid duty after clearance of

goods 356

7.2-2b When duty on final product was later paid on

demand 356

7.2-2c When claim is made at appellate stage 358

7.2-2d When process is held as „manufacture‟ 358

7.2-2e When duty is demanded during adjudication

proceedings 358

7.2-2f When duty liability itself was determined at

appellate stage 358

7.2-2g When credit was taken two days earlier 359

7.2-2h When there was doubt about eligibility to credit 359

7.3 Quantum of duty credit on inputs 359

7.3-1 Notional/Proportionate credit is not contemplated 359

7.3-2 When manufacturing premises is unlicensed 361

7.3-3 Adjudicating authority cannot reassess duty 362

7.3-4 Discrepancies in weight of inputs 362

7.3-4a Relevant factors laid down by Tribunal 363

7.3-5 When assessee weighs the inputs on its receipt 364

7.3-6 Transit losses 365

7.3-6a Transit loss of petroleum products 366

7.3-7 Duty paid by supplier must be allowed credit in full 367

7.3-8 Non-receipt of inputs 367

7.3-9 Shortages in inputs 368

7.3-9a Shortages noticed during stock verification 368

7.3-9b Value written off in balance sheet 369

7.3-9c Shortages stated to be made good by supplier

later 369

7.3-10 Shortages detected by the department 369

7.3-11 When receipt of inputs was not established 370

7.3-12 When input loses its identity 371

7.3-13 Process losses 371

7.3-14 When consumption of inputs is believed to be excessive 371

7.3-15 Inputs not established as fully used 371

7.3-16 When department believes that costlier inputs have

been used 372

7.3-17 When there was no actual receipt of inputs 372

7.3-18 When supplier reimbursed cost of shortages 373

7.3-19 When supplier‟s duty liability is under dispute 373

7.3-20 Shortages detected from account entries 373

7.3-21 When supplier has paid duty under protest 373

7.3-22 When supplier has paid excess duty 374

7.3-23 Evaporation loss prior to use 374

7.3-24 When supplier has misclassified the goods 375

7.3-25 When inputs are received short 375

7.3-26 When supplier later suo motu paid differential duty 375

7.3-27 When supplier later allows discount 375

7.3-28 When full credit was taken before receipt of full

consignment of inputs 376

7.3-29 When purchaser issues debit notes on supplier 376

7.3-30 When assessee fails to produce Sales Tax Form 376

7.3-31 Breakage loss of aerated water bottles 376

7.3-32 When supplier subsequently reduces the price 377

7.4 Regularisation of differential/erroneous credits 377

7.4-1 Differential credit due to departmental adjudication 377

7.4-2 Restoration of credit pursuant to demand by

department 378

7.4-3 When erroneous utilisation of credit is regularised 378

7.4-4 Restoration of credit when goods are damaged in transit 379

7.4-5 Restoration of expunged credit when department holds

that final product was dutiable 379

7.4-6 Suo motu restoration of credit 379

7.4-7 Restoration of excess debit due to excess duty paid on

final product 380

7.4-8 Reversal of credit due to difference between physical

balance and recorded balance of inputs 380

7.4-9 Demanding duty again when irregular credit had been

reversed 380

7.4-10 Department cannot order reversal of credit without

assigning reasons 381

7.4-11 Suo motu reversal of credit availed on the strength

of unrelated document 381

7.4-12 Omission to make account entries 382

7.4-13 When supporting document had been seized by the

department 382

7.4-14 Ordering reversal of credit without detailed enquiry

about nature of input 383

7.4-15 When supplier had availed credit on the strength of

original copy of invoice 383

7.4-16 Questioning supplier‟s liability to pay duty 383

7.4-17 When assessee requests for inspection of documents

and retesting of samples 384

7.4-18 When the supplying dealer is believed to have received

goods from non-existent units 384

7.4-19 When basis of allegation itself vanishes 384

7.4-20 Correlation in quantity between inputs and final

products 384

7.4-21 Supply of inputs proved fictitious 385

7.4-22 Reversal and re-availment of credit 385

7.4-23 Reversal of duty credit on light diesel oil 385

7.4-24 Reversal of credit on packages/containers 386

7.4-25 When supplier has fraudulently availed credit 386

7.4-26 When supplier has defaulted in payment of duty on

monthly basis 386

7.4-27 Recredit of reversed credit 386

7.4-28 Reversal of credit on damaged goods/inputs 387

7.4-29 When assessee is directed to pay duty twice 387

7.4-30 When assessee irregularly withdrew option to avail SSI

exemption 388

7.4-31 When capital goods are alleged to have been

transferred 388

7.4-32 Imported inputs sold as such in India 388

7.4-33 Non-reversal of credit ordered under notification 388

7.4-34 Disallowance of credit due to non-accountal of inputs 389

7.4-35 Effect of progressive increase in wastage of inputs 389

7.4-36 Availment of credit when process does not amount to

manufacture 390

7.4-37 Availment of credit after correcting the address of the

consignee in the invoice 391

7.5 Availment of duty credit on capital goods 391

7.5-1 Quantum of credit 391

7.5-1a Relaxation to certain goods and to certain

assessees 392

7.5-1b Foregoing credit in initial year 393

7.5-1c Crucial date for determining eligibility to credit 393

7.5-1d Relaxation to imported goods 393

7.5-1e When capital goods are cleared as waste and

scrap on or after 16-5-2005 393

7.5-1f When components, etc., are consumed in the

first year itself 394

7.5-1g When final product becomes exempt in

subsequent year 394

7.5-1h When excess credit taken in first year was

rectified in that year itself 394

7.5-1i Exemption on possession of moulds 394

7.5-1j Capital goods sent for job work 395

7.5-2 Installation of goods no longer relevant 395

7.5-3 Capital goods acquired on lease/hire-purchase/loan

agreement 395

7.5-4 Meaning of „lease‟ 396

7.5-5 Meaning of „Hire-purchase‟ 397

7.5-5a Hire-purchase v. Sale 399

7.5-5b Hire-purchase v. Lease 400

7.5-5c Hire-purchase v. Financial arrangement 400

7.5-6 Meaning of „Loan agreement‟ 401

7.5-7 Variations/unusual features in agreement 402

7.5-8 Inter-unit movement of capital goods 402

7.5-9 Recalculating duty payable after accepting supplier‟s

calculation 402

7.5-10 Transferring capital goods to finance company and

taking it back on lease 402

7.6 CENVAT credit or depreciation benefit - Not both 403

7.6-1 Amendment to Income-tax Act 404

7.6-2 Department should look into accepted income-tax

return 404

7.6-3 Whether depreciation can be claimed on the unavailed

portion of credit in the first year 405

7.7 Goods can be sent for job work 406

7.7-1 Time-limit must be computed in days and not months 407

7.7-2 The three conditions that must be cumulatively

satisfied vis-a-vis „inputs‟ 408

7.7-3 Jigs, fixtures, moulds and dies 408

7.7-4 Furnace oil sent to job worker for generation and

supply of steam 408

7.7-5 When supplier of inputs is himself the job worker 409

7.7-6 When inputs remained unprocessed in job worker‟s

premises 409

7.7-7 Power plant set up outside the factory for generation

and supply of steam/electricity can be treated as „job

worker‟ 409

7.7-8 Imported inputs sent abroad for repairs 411

7.7-9 Procedure for job work 411

7.8 Direct movement of goods from job worker‟s premises 411

7.9 Goods covered under project imports 412

7.10 Date on which credit on input services is allowable 412

7.11 Order for non-reversal of Cenvat credit 413

CONDITIONS APPLICABLE TO OUTPUT SERVICE PROVIDER

7.12 Conditions in a nutshell 414

Annex 7.1 Modvat credit on sulphuric acid used in manufacture of

detergents 416

Annex 7.2 Cenvat credit involved on stock of Light Diesel Oil as

on 28-2-2003 417

Annex 7.3 Payment of duty on waste package/containers used

for packing Modvatable inputs when cleared from the

factory of the manufacturer availing Modvat/

Cenvat credit 419

Annex 7.4 Clearance of goods from premises of job worker 420

Annex 7.5 Notifications ordering non-reversal of credit in certain cases 424

Annex 7.6 Reversal of credit when supplier allows discount or reduces

the price 426

Annex 7.7 Rule 3 of the Cenvat Credit Rules, 2004 - Cenvat credit -

Irregular availment of Cenvat credit on certain activities

not amounting to manufacture 427

Annex 7.8 Tolerance limit of breakage of bottles due to handling during

storage and clearance 428

Annex 7.9 Clarifications regarding availment of credit on input services 429

8

RULES 5 AND 5A : REFUND OF CENVAT CREDIT

Text of rules 5 & 5A 431, 432

REFUND OF CENVAT CREDIT

8.1 The contents of rule 5 434

8.1A Position prior to 14-3-2006 434

8.1A-1 Position for the period 10-9-2004 to 13-3-2006 435

8.1B Position from 14-3-2006 435

8.1C Date of effect 435

8.1D Input must ab initio be eligible for credit 435

8.1E Refund cannot be claimed on notional basis 436

8.1F Refund is permissible only for export of goods and for

no other reason whatsoever 436

FACILITIES EXTENDED TO EXPORTER OF GOODS

8.2 The two facilities extended 437

8.2-1 Treatment of unutilized credit 437

8.2-2 Refund of unutilized credit 437

8.2-2a Scope of the term „for any reason‟ 437

8.2-3 Safeguards, conditions and limitations 438

8.2-3a Procedure for export 439

8.2-3b Periodicity of claim 439

8.2-3c Dispensing with furnishing of undertaking 440

8.2-3d Submission of application with enclosures 440

8.2-3e Circumstances warranting refund 440

8.2-3f Limit on refund of unutilised Input Service

Credit 440

8.2-3g Where to send the application 441

8.2-3h Time-limit for filing application 441

8.2-3i Who will allow the refund 442

8.2-3j Contents of application 442

8.2-3k Departmental clarifications 442

8.3 Certain decided issues 443

8.3-1 Export need not be direct by the manufacturer 443

8.3-2 Exports under DEEC Scheme 443

8.3-3 When credit gets accumulated due to forced payment

out of PLA 445

8.3-4 Exports under the DEPB Scheme 445

8.3-5 Whether clearances to 100% EOUs can be treated as

„export‟ 445

8.3-6 Department has no jurisdiction to probe into reasons

for non-utilisation of credit 446

8.3-7 Where merchant exporter had claimed only customs

drawback 447

8.3-8 When assessee stops production and closes its factory 447

8.3-9 Refund cannot be denied to SSI unit working under

exemption 447

8.3-10 Manufacture of an excisable item is not necessary 448

8.3-11 Transitional credit is also eligible for refund 448

8.3-12 Refund to 100% EOUs 448

8.3-13 Accumulation of credit due to distortion in duty rates 449

8.3-14 Where assessee is manufacturing only exempted goods 449

8.3-15 Refund claim should not be rejected on technical

grounds 449

8.3-16 Clearances by DTA units to SEZ units are not „export‟

under rule 5 450

8.3-17 Necessity for excise/service tax registration 450

8.3-18 Exports under advance licence scheme 451

8.4 Departmental clarifications/judicial rulings on refunds 451

8.5 When cenvatted inputs are themselves exported under bond 455

8.6 Interest on delayed refund 455

8.7 Refund of unutilised credit on GSI duty 456

8.8 Choice between refund and rebate/drawback 456

FACILITIES EXTENDED TO EXPORTER OF OUTPUT SERVICES

8.9 The two facilities extended 457

8.9-1 Utilisation of accumulated credit 457

8.9-2 Refund of unutilised credit 457

8.9-3 Safeguards, conditions and limitations 458

8.9-3a Procedure for export 458

8.9-3b Periodicity of claim 458

8.9-3c Submission of application with enclosures 458

8.9-3d Circumstances warranting refund 458

8.9-3e Limit on refund of unutilised input service

credit 458

8.9-3f Where to send the application 459

8.9-3g Time-limit for filing application 459

8.9-3h Who will allow the refund 459

8.9-3i Contents of application 459

8.9-3j Departmental clarifications 459

POSITION FROM TO 1-4-2012

8.9A Refund of Cenvat credit 459

8.9A-1 Departmental clarification 460A

REFUND FACILITY TO UNITS IN SPECIFIED AREAS

8.10 The background to Rule 5A 460A

8.11 Contents of Rule 5A 460B

8.12 Procedure for obtaining refund 460B

VALIDATION PROVISIONS

8.13 Departmental clarification & validation provisions 460D

Annex 8.1 Notification No. 5/2006-C.E. (N.T.), dated 14-3-2006 461

Annex 8.1A Amendment to Notification No. 5/2006-C.E. (N.T.), issued

under rule 5 of the Cenvat Credit Rules, 2004 466

Annex 8.2 Cash refund of the accumulated Modvat credit 468

Annex 8.3 Cash refund of unutilised credit to exporters who had

availed drawback on customs portion of duties 469

Annex 8.4 Utilisation of Cenvat credit in respect of inputs on which

credit is availed but the inputs are exported as such under

bond 471

Annex 8.5 Refund of unutilized Credit of Additional Duty of Excise

(Goods of Special Importance) in terms of rule 5 473

Annex 8.6 Simplified procedure for sanction of refund of unutilised

credit/rebate claims in cases of export 475

Annex 8.7 Procedure for claiming refund of Cenvat credit by units in

specified areas 477

Annex 8.8 Clarification regarding problems faced by exporters in

availing refund of excess credit 478

9

RULE 6 : OBLIGATION OF A MANUFACTURER OR PRODUCER OF FINAL PRODUCTS AND A PROVIDER OF TAXABLE SERVICE

Text of rule 6 483

PROVISIONS RELEVANT FOR MANUFACTURER WHO IS NOT AN OUTPUT SERVICE PROVIDER

9.1 Scope of rule 496

9.1-1 Effect of sub-rule (1) 497

9.1-1a Meaning of „exempted goods‟ 497

9.1-1b Tribunal‟s analysis 497

9.1-1c When by-product is dutiable 498

9.1-1d Captive generation of electricity 498

9.1-1e When manufacturer switches over to exemption

benefit 498

9.1-1f Credit on wastes of inputs used in packing

materials in the medicine industry 499

9.2 Goods to which rule 6 will not apply 500

9.2-1 Final products destroyed and remission of duty

obtained 501

9.2-1a Tribunal‟s views 501

9.2-1b Departmental views 503

9.2-1c When remission of duty is obtained for

unmarketability of finished goods 504

9.2-1d Law amended to overcome the decisions 504

9.2-2 Goods exported without payment of duty 504

9.2-3 Inter-factory clearances 505

9.3 Applicability to 100% EOUs 505

9.4 Applicability to manufacturers of both dutiable goods and

exempted goods (Position prior to 1-4-2008) 506

9.4-1 Applicability to by-products/intermediate products 508

9.4-1a When by-product emerges on its own 510

9.4-1b Clearance of by-product to sister unit 511

9.4-1c Applicability to hazardous waste arising on its

own 511

9.4-1d Applicability to floor sweepings arising during

manufacture of dutiable final product 511

9.4-2 Option to manufacturer 512

9.4-2a Constitutional validity 513

9.4-2b Inputs need not be stored separately 514

9.4-2c Physical segregation of inputs is not

contemplated 514

9.4-2d Simultaneous reversal of credit is not required 514

9.4-2e Both dutiable product and exempt product

need not simultaneously emerge 514

9.4-2f Use of input need not be direct 514

9.4-2g When exempt final product is exported under

bond 515

9.4-3 Payment of „total price‟ 515

9.4-3a Goods notified for MRP assessment 515

9.4-3b Stock transfers between units 515

9.4-3c Trade discount must be excluded 516

9.4-3d When final product is conditionally exempt 516

9.4-3e Whether mere reversal of credit will suffice 516

9.4-3f Retrospective validating amendments through

the Finance Act, 2010 520

9.4-3g When process does not amount to

„manufacture‟ 521

9.4-3h When product is ab initio not excisable 521

9.4-3i Manufacture of both types of goods need not

be on day-to-day basis 521

9.4-3j Applicability to packing material 522

9.4-3k When 8% price is disproportionate to credit

taken 523

9.4-4 Receiver/User of goods not entitled to avail credit 523

9.4-5 Should goods be distinct and different 523

9.4-6 Mode of payment 523

9.4-7 Consequences of non-payment 524

9.4A Applicability to manufacturer of both dutiable goods and

exempted goods and provider of both taxable and exempted

services (Position from 1-4-2008) 524

9.4A-1 Departmental clarifications 525

9.4A-2 Mere reversal of credit is permitted on a conditional

basis 525

9.4A-3 Consequences of non-payment 526

9.4A-4 Form in which accounts should be maintained 526

9.4A-5 Quantification of payments and attendant conditions

provided in sub-rule (3A) 526

9.4A-5a Exercise of option [Clause (a)] 527

9.4A-5b Provisional determination of amount

[Clause (b)] 527

9.4A-5c Final determination of amount [Clause (c)] 528

9.4A-5d Final payment to be made [Clause (d)] 528

9.4A-5e Excess amount to be adjusted [Clause (f)] 528

9.4A-5f Intimation of department [Clause (g)] 528

9.4A-5g Relaxation for certain manufacturers/service

providers [Clauses (h) and (i)] 529

9.4A-5h Meanings of certain expressions 529

9.4A-5i Payment through cenvat account 529

9.4A-5j Recovery provisions will apply 530

9.4B Modifications/Changes made with effect from 1-4-2011 530

9.4B-1 Sub-rule (1) 530

9.4B-2 Sub-rule (2) 530

9.4B-3 Sub-rule (3) 530

9.4B-4 Definition of „exempted goods‟ enlarged 531

9.4B-5 Definition of „exempted services‟ enlarged 531

9.4B-6 Definition of „value‟ enlarged 531

9.4B-7 Sub-rule (3A) 532

9.4B-8 Ad hoc payment by two services - Sub-rules (3B)

and (3C) 532

9.4B-9 Conditional exemption can be availed - Sub-rule (3D) 532

9.4B-10 Other issues 533

9.4B-11 Departmental clarifications 533

9.5 Final product becoming exempt after availment of credit 534

9.5-1 Judicial views under Modvat Scheme 534

9.5-1a Kirloskar Oil Engines Ltd.’s case 534

9.5-1b Super Cassettes Industries Ltd.’s case 534

9.5-1c Khanbhai Esoofbhai case 535

9.5-1d Premier Tyres Ltd.’s case 536

9.5-1e Ashok Iron & Steel Fabricators’ case 536

9.5-1f The preferable view 537

9.5-1g Subsequent Tribunal view 538

9.5-1h Other judicial views 539

9.5-2 Position under the Cenvat Credit Scheme 540

9.6 Other decided issues under MODVAT scheme 540

9.6-1 When final product is non-excisable 540

9.6-2 When exemption is conditional 541

9.6-3 When intermediate product is exempt 541

9.6-4 Foregoing of exemption in order to avail credit 542

9.6-5 Samples cleared duty-free 542

9.6-6 When final products are partially exempt 542

9.6-7 When final products are partly cleared on payment of

duty and partly at nil rate of duty 543

9.6-8 When final product is discarded as waste 543

9.6-9 When credit is utilised prior to utilisation of inputs 543

9.7 Position when amount is realised from buyers 544

9.8 Effect of non-payment of amount 545

9.9 Demands/appeals raised prior to 1-3-2002 545

9.10 Supplies made for Gujarat earthquake relief 546

9.11 Credit not allowable on capital goods in certain situations 546

9.11-1 User test must be applied at the time of receipt of

capital goods 547

9.11-2 Use in exempted goods which become dutiable later 548

9.11-3 When capital goods are yet to be fully installed 549

9.11-4 When a new plant is integrated with an existing plant 549

9.11-5 Capital goods capable of use in both exempt and

dutiable goods 549

9.12 Exception in respect of certain services - Position prior to 1-4-2011 550

PROVISIONS RELEVANT FOR AN OUTPUT SERVICE PROVIDER WHO IS NOT A MANUFACTURER OF FINAL PRODUCTS

9.13 Prohibition on use in exempted services 550

9.13-1 Meaning of „input service‟ 551

9.13-2 Scope of the expression „exempted services‟ 551

9.14 General option to all output service providers 552

9.14-1 Option under sub-rule (2) 552

9.14-2 Option under sub-rule (3) - Position prior to 1-4-2008 552

9.14-2a Where service provider is also engaged in

trading activities 552

9.14-3 Option under sub-rules (3) and (3A) from 1-4-2008/

7-7-2009 553

9.15 Position in respect of capital goods 553

9.16 Units/developers in Special Economic Zones 554

Annex 9.1/2 Availment to credit on inputs used exclusively for the

manufacture of exempted finished goods 555


Annex 9.4 Admissibility of MODVAT/CENVAT credit on inputs used in

the manufacture of finished goods on which duty has been

remitted 560

Annex 9.5 Reversal of Cenvat credit on clearance of goods under

rule 19(2) of Central Excise Rules, 2002 under Notification

No. 43/2001-C.E. (N.T.), dated 26-6-2001 562

Annex 9.6 Determination of price under rule 57CC 563

Annex 9.7 Reversal of Modvat credit taken on inputs under rule 57CC 564

Annex 9.8 Realisation of amount paid under erstwhile rule 57CC(1)

and its retention by manufacturers 565

Annex 9.9 Recovery of „amounts‟ which are not duly paid under rule 6

of the Cenvat Credit Rules, 2001 567

Annex 9.10 Availment of Cenvat/Modvat credit when common inputs

are used for both dutiable and exempted goods 569

Annex 9.11 Reversal of inputs credit in respect of supplies made for

Gujarat earthquake relief 570

Annex 9.12 Clarification on amendments to rule 6 effected from

1-4-2008 572

Annex 9.13 Utilization of accumulated Cenvat credit restricted in terms

of erstwhile rule 6(3)(c) of Cenvat Credit Rules, 2004 575

Annex 9.14 Non-applicability of rule 6 to developer of a Special

Economic Zone 576

Annex 9.15 Cenvat credit of CVD on imported goods - Utilisation

towards payment of service tax 577

Annex 9.16 Practice being adopted by leading hotel chains to utilize

Cenvat credit beyond permissible limits 578

Annex 9.17 Clarification on issues relating to amendments in rule 6

with effect from 1-4-2011 (Relevant extracts) 580

10

RULES 7 & 7A : MANNER OF DISTRIBUTION OF CREDIT BY INPUT SERVICE DISTRIBUTOR AND DISTRIBUTION OF CREDIT ON INPUTS BY OFFICE OR ANY OTHER PREMISES OF OUTPUT SERVICE PROVIDER

Text of rules 7 & 7A 582, 583

10.1 Definition of „input service distributor‟ 583

10.2 Necessity for input service distributor 584

10.3 Scope of rule 7 584

10.4 The prescribed conditions 584

10.4-1 The departmental clarification 585A

10.4-2 No fresh condition should be imported into the rule 585A

10.5 Scope of rule 7A 585A

11

RULE 8 : STORAGE OF INPUT OUTSIDE THE FACTORY OF THE MANUFACTURER

Text of rule 8 586

11.1 Scope of the rule 586

11.1-1 A case of departmental inaction 587

11.1-2 Tribunal‟s view in another case 587

11.1-3 A case of illegal confiscation 587

11.2 Procedure to be followed 588

Annex 11.1 Procedure for storing inputs outside the factory premises 589

12

RULE 9 : DOCUMENTS, ACCOUNTS AND RETURNS

Text of rule 9 592


REQUIREMENTS AS APPLICABLE TO MANUFACTURERS

12.2 Supporting documents 597

12.2-1 For availing duty credit 597

12.2-1a Supplementary invoice 598

12.2-1b Self invoice 598

12.2-2 For availing service tax credit 599

12.3 Meanings of „first stage dealer‟ and „second stage dealer‟ 599

12.4 Admissibility of credit in certain situations 599

12.4-1 Invoices are not endorsable 600

12.4-2 When invoice is in the name of head office 601

12.4-3 Discrepancies in bill of entry 601

12.4-4 Validity of photostat copies 601

12.4-5 Sales on high seas basis 602

12.4-6 Endorsing bill of entry after completion of import 603

12.4-7 When bill of entry is in the name of the registered office 604

12.4-8 When user is a mere division of importer 604

12.4-9 Ex-bond bill of entry 604

12.4-10 Relevance of port of importation 605

12.4-11 Difference in consignee‟s name 605

12.4-12 Clerical mistake in account entries 605

12.4-13 Imported inputs taken on loan 605

12.4-14 Imports through customs houses 605

12.4-15 Imports through post parcel 606

12.4-16 Imported inputs warehoused duty-free 606

12.4-17 Restructured/Endorsed bill of entry 606

12.4-18 When proof of payment is properly endorsed in the bill

of entry 606

12.4-19 Unendorsed bill of entry 606

12.4-20 Attested bill of entry 606

12.4-21 Invoice showing different consignee 607

12.4-22 When dealer has not proved that manufacturer has

discharged duty liability 607

12.4-23 When imported goods are transferred before customs

clearance 607

12.4-24 Suo motu credit of duty paid in excess 607

12.4-25 Bar on availment of credit on additional duty of

customs 608

12.4-26 Suo motu credit of amount pre-deposited for filing appeal 609

12.4-27 Where duty-paying document does not contain the name

of the input 609

12.4-28 When invoice is in the name of job worker 609

12.4-29 When credit was availed on the basis of customs certificate 609

12.4-30 Where importer gave a separate certificate instead of

endorsing bill of entry 610

12.5 Imports through couriers 610

12.6 Defects/discrepancies in supporting documents 610

12.6-1 Tribunal‟s earlier views 611

12.6-2 When invoice is not addressed to consignee factory 617

12.6-3 Recording of reasons in show-cause notice 618

12.6-4 Credit availed on the basis of transit challan 618

12.6-5 Omission to make entries in accounts 618

12.6-6 Supplier presumed to be fictitious by the department 618

12.6-7 Mistakes/omissions attributable to supplier 619

12.6-8 When assessee is not shown as consignee in the invoice 623

12.6-9 Where invoice is not in the name of assessee 623

12.6-10 Where wrong address in invoice was later got corrected 623

12.6-11 Discrepancy in the description of input 623

12.6-12 Minor discrepancies between manual invoice and

computerised invoice 624

12.6-13 Invoice showing a different plant 624

12.6-14 When dealer undersells the goods 624

12.6-15 When supplier is known to be a trader and not a

manufacturer 625

12.6-16 When assessee has both manufacturer‟s invoice and

dealer‟s invoice 625

12.7 Loss of invoice/bill of entry 625

12.8 Onus on manufacturer 626

12.8-1 Meaning of „reasonable steps‟ 627

12.8-2 Burden of proof 628

12.8-3 When supplier-dealer is found to be non-existent 629

12.8-4 When invoice issued by manufacturer to dealer is

found to be fake 629

12.8-5 When dealer has shifted his premises 630

12.9 Condition applicable to dealer invoices 630

12.10 Maintenance of records 630

12.10-1 Departmental clarifications 631

12.10-2 Daily Stock Account 631

12.10-3 Suo motu correction of entries in PLA 631

12.11 Burden of proof on manufacturer 632

12.12 Submission of returns 632

12.12-1 The prescribed forms 632

12.13 Electronic filing of returns 633

12.14 Submission of Annual Financial Information Statement 633

12.14A Submission of Annual Installed Capacity Statement 634

REQUIREMENTS APPLICABLE TO OUTPUT SERVICE PROVIDER

12.15 Supporting documents 634

12.16 Entitlement to credit 636

12.17 Defects/discrepancies in supporting documents 636

12.18 Onus on output service provider 637

12.19 Conditions applicable to dealer invoices 637

12.20 Maintenance of records 637

12.21 Burden of proof 638

12.22 Submission of returns 638

Annex 12.1 Problems faced in availing Modvat on rule 52A invoice in the

name of the registered office/head office but credit to be

availed by the factory 639

Annex 12.2 Problems faced in availing Modvat on bill of entry in

the name of registered office/head office but credit to be

availed by the factory 640

Annex 12.3 Availment of credit on the basis of original copy of invoice 642

Annex 12.4 Maintenance of records by First Stage and Second Stage

dealers and pre-authentication of invoices issued by Second

Stage dealers/dealers of imported goods 643

Annex 12.5 Chapter Six of CBEC‟s Manual of Supplementary

Instructions 2005 : Records and returns 644

Annex 12.6 Mandatory e-filing of Central Excise Returns in ACES

from 1-10-2011 649

Annex 12.7 Annual Financial Information Return 651

Annex 12.8 Filing of quarterly returns by registered dealers 656

Annex 12.9 Annual Installed Capacity Statement 657

Annex 12.10 Instruction issued by CBEC for electronic filing of returns

and electronic payment of duty/service tax 660

13

INVOICES OF MANUFACTURERS, DEALERS AND SERVICE PROVIDERS

13.1 Introductory 672

13.2 Invoice for duty credit - Requirements to be satisfied 672

13.2-1 Manufacturers/dealers invoice 672

13.2-1a Requirements specified in excise rules 672

13.2-1b Requirements laid down in departmental

manual 675

13.2-1c Certificates to be furnished by dealers 675

13.2-2 Supplementary invoice 675

13.2-2a Meaning of „additional duty‟ 676

13.2-2b Bar on availment of credit applies to sale and

not to stock transfer 676

13.2-2c When Settlement Commission found that

there was no suppression of facts 676

13.2-2d Where short levy was attributable only to an

inadvertent mistake 677

13.2-2e When differential duty was paid voluntarily 677

13.2-2f When there was undervaluation of inputs 677

13.2-2g Where short payment was due to

misclassification 677

13.2-2h When there was no evidence of collusion/

evasion 678

13.2-3 Taking out invoices for typing 678

13.2-4 Invoices issued by oil depots 678

13.3 Registration requirements 678

13.3-1 Persons already registered 679

13.3-2 Persons not requiring registration 679

13.3-3 Conditions to be satisfied 679

13.3-4 Departmental instructions 679

13.3-5 Whether depot of manufacturer requires separate

registration 680

13.3-6 When manufacturer is also a dealer 680

13.4 Invoice for tax credit - Requirements to be satisfied 680

13.4-1 Documents to be issued by every service provider 680

13.4-1a Contents of the document 680

13.4-1b Serial numbering of document 680

13.4-1c Who should sign the document 680

13.4-2 Documents to be issued by input service distributor 680

13.4-2a Contents of the document 681

13.4-2b Serial numbering of the document 681

13.4-2c Who should sign the document 681

13.4-3 In case of banking financial company 681

13.4-4 Additional document to be issued by goods transport

agency 681

13.4-5 When service is provided continuously 682

13.4-6 Issue of consignment by goods transport agency 682

13.4-7 Aircraft operator 682

Annex 13.1 Chapter Four of CBEC‟s Manual of Supplementary

Instructions, 2005 683

Annex 13.2 Invoice can be taken out for typing 693



Annex 13.5 Chapter Two of CBEC‟s Manual of Supplementary

Instructions, 2005 713

Annex 13.6 Certificates to be furnished by dealers on invoices 732

14

RULE 9A : INFORMATION RELATING TO PRINCIPAL INPUTS

Text of rule 9A 734

14.1 Contents of the Rule 735

14.2 Annual declaration 736

14.2-1 Form of the declaration 736

14.2-2 Periodicity of the declaration 736

14.2-3 Meaning of „principal inputs‟ 736

14.2-4 Only excisable goods are covered 737

14.2-5 Amending the declaration 737

14.2-6 Electronic filing of declaration 737

14.3 Monthly return 737

14.3-1 Form of the return 737

14.3-2 Periodicity of the return 737

14.3-3 Filing of return in electronic format 737

14.4 Exemption to certain manufacturers 738

Annex 14.1 Form ER-5 739

Annex 14.2 Form ER-6 741

Annex 14.3 Exemption to certain class of manufacturers 743

Annex 14.4 Clarification regarding exemption from filing of ER-4,

ER-5 and ER-6 Returns 744

15

RULE 10 : TRANSFER OF CENVAT CREDIT

Text of rules 10 and 10A 745, 746

15.1 Scope of Rule 10 747

15.2 Transfer of CENVAT credit by manufacturer 747

15.3 Conditions for transfer of credit by manufacturer 748

15.3-1 When there is physically no stock of inputs 749

15.3-2 Entire balance is transferable 750

15.3-3 Prior permission or fresh accountal is not required 750

15.3-4 When merely name of assessee-company is changed 750

15.3-5 Obtaining single registration in place of two registrations 751

15.3-6 Differential credit availed after closure of unit 751

15.3-7 Shifting of machinery on completion of work 751

15.3-8 Shifting of capital goods to new factory manufacturing

only exempted goods 751

15.4 When duty was paid out of PLA instead of from Cenvat Account

at the instance of the Department 751

15.5 Transfer of CENVAT credit by output service provider 751A

15.6 Scope and ambit of rule 10A 751A

16

RULE 11 : TRANSITIONAL PROVISION

Text of rule 11 752

16.1 Carry-over of unutilised credit 754

16.2 Switch-over from CENVAT to exemption 754

16.3 When credit balance is insufficient to make payment 755

16.4 Repayment and lapse of Cenvat credit 756

17

RULE 12 : SPECIAL PROVISIONS FOR NORTH-EAST REGION, KUTCH DISTRICT OF GUJARAT, STATE OF JAMMU AND KASHMIR AND STATE OF

SIKKIM

Text of rule 12 758

17.1 The contents of rule 12 759

17.2 Scope and content of rule 12 760

17.3 Points to be noted by the CENVAT beneficiary 760

17.4 Scope of the term „substantial expansion‟ 761

Annex 17.1 Text of Notifications relating to units in North-East

Region/Kutch in Gujarat/State of Jammu and Kashmir/State

of Sikkim 762

Annex 17.2 Clarification on Notification Nos. 56/2002-CE and 57/2002-CE,

dated 14-11-2002 822

Annex 17.3 Clarifications on the term “Substantial Expansion” in the

area-based exemptions 825

Annex 17.4 Area based exemptions - Changes in refund scheme 827

18

RULE 12A : PROCEDURE AND FACILITIES FOR LARGE TAXPAYER

Text of rule 12A 829

18.1 Definition of „large taxpayer‟ 833

18.1-1 Conditions to be satisfied 834

18.1-2 Procedure to be followed 834

18.2 Procedure and facilities extended under rule 12A 835

18.2-1 Removal of inputs/capital goods 835

18.2-1a Payment of „amount‟ dispensed with 836

18.2-1b Document in support of removal 836

18.2-1c Action by the recipient premises 836

18.2-2 Payment of „amount‟ by the recipient premises 836

18.2-3 Availment of credit on „amount‟ paid 837

18.2-4 Transfer of credit and utilisation thereof 837

18.2-4a Document in support of transfer 837

18.2-4b Availment of credit by recipient premises 838

18.2-4c Utilisation of transferred credit 838

18.2-5 Non-applicability to certain units 838

18.3 Residual matters 838

18.3-1 Protection to sender premises 838

18.3-2 Submission of monthly return 839

18.3-3 Validation of earlier notices 839

18.3-4 Applicability of other rules 839

18.4 Departmental instructions 839



Annex 18.3 Instructions regarding Large Taxpayers Unit 847

Annex 18.4 Instructions regarding sharing of information between

CBEC and CBDT 856

19

RULE 12AA/12AAA : POWER TO IMPOSE RESTRICTIONS IN CERTAIN TYPES OF CASES

Text of rule 12AA and 12AAA 858

19.1 The backdrop 859


19.3 The notified measures and restrictions 860

19.4 Providing opportunity of hearing to assessee 860

19.5 No one-to-one correlation between offences and facilities to be

withdrawn 860A

19.6 Department must establish motive 860A

Annex 19.1 Facilities to be withdrawn and restrictions to be imposed

for specified offences 861

Annex 19.2 Authorised Officer 864

Annex 19.3 Measures to provide deterrence for tax evaders in the

manufacturing sector 865

20

RULE 13 : DEEMED CREDIT

Text of rule 13 868

20.1 Scope of the Rule 868

21

RULE 14 : RECOVERY OF CENVAT CREDIT WRONGLY TAKEN OR ERRONEOUSLY REFUNDED

Text of rule 14 870

21.1 Scope of the Rule 870

21.2 Erroneous availment/utilization of duty of credit 871

21.2-1 The statutory requirement 871

21.2-2 Issue of show-cause notice 871

21.2-3 Proper officer for issue of notice 873

21.2-4 Time-limit for issue of notice 874

21.2-5 Inordinate delay in finalising adjudication proceedings 874

21.2-6 Recovery of credit towards shortages 875

21.2-7 When ground taken loses its basis 875

21.2-8 When agent of assessee committed a fraud 875

21.2-9 Right to claim credit cannot be put forth as defence 876

21.3 Applicability of extended time-limit 876

21.3-1 Meaning of „wilful mis-statement‟ 876

21.3-2 Meaning of „collusion‟ 877

21.3-3 Meaning of „suppression‟ 877

21.3-3a Supreme Court‟s clarification on „suppression

of facts‟ 878

21.3-3b Burden of proof is on department 879

21.3-3c Illustrative cases 879

21.3-4 Meaning of “fraud” 881

21.3-4a Observations of Supreme Court 882

21.3-5 Contravention of Act/Rules 883

21.3-6 Dropping of proceedings if duty demand with reduced

penalty is paid within 30 days 883

21.4 Applicability of extended time limit - Decided cases 883

21.4-1 Extended time limit held not applicable 883

21.4-1a Supporting documents 884

21.4-1b Wrong availment of credit 884

21.4-1c Reversal of credit 885

21.4-1d Movement of inputs 886

21.4-1e Classification as intermediate product 886

21.4-1f Others 886

21.4-2 Extended time limit held applicable 888

21.5 Time schedule for completion of proceedings 890

21.5-1 Designated authority for adjudication 890


21.6 Interest on delayed payments 890

21.6-1 When credit is merely taken in the books but has not

been utilised on payment of duty 890

21.6-1a High Court‟s views 891

21.6-1b Tribunal‟s views 891

21.6-1c CBDT takes contrary view 892

21.6-1d Supreme Court overrules High Court decision 892

21.6-1e High Court‟s subsequent interpretation 893

21.6-1f Amendment to the rule 893

21.6-2 Payment of demand before issue of show-cause notice 893

21.6-3 Whether issue of show-cause notice is necessary 894

21.6-4 Other cases 894

21.7 Limitation for claiming refund 895

21.8 Erroneous availment/Utilisation of Service Tax Credit 895

21.8-1 The statutory requirement 895

21.8-2 Requirements under section 73 of Service Tax Act 895

21.8-2a Adjudicating authority 896

21.8-2b The conditions and situations warranting

recovery 896

21.8-2c Time limit for issue of notice 896

21.8-2d Some judicial rulings on extended time-limit 897

21.8-2e Contents of the show-cause notice 898

21.8-2f Procedure to be followed by adjudicating

authority 898

21.8-2g Relevant date 899

21.8-2h Situations where no notice will be issued 899

21.8-3 Dropping of proceedings if tax demand with reduced

penalty is paid within 30 days 900

21.8-4 Interest on delayed payment of tax 900

Annex 21.1 Adjudication of cases relating to Cenvat credit 902

Annex 21.2 Chapter 13 (demand notice/show cause notice, adjudication,

interest, penalty, confiscation, duty payment under protest) 903

Annex 21.3 Liability of interest where Cenvat credit was wrongly taken

but reversed by assessee before utilisation 911

22

RULES 15 AND 15A : CONFISCATION AND PENALTY/ GENERAL PENALTY

Text of rules 15 and 15A 913, 914

22.1 Scope of the rule - Position prior to 27-2-2010 914

22.2 Confiscation of goods - Position prior to 27-2-2010 915

22.3 Levy of penalty - Position prior to 27-2-2010 915

22.3-1 Penalty under rule 15(1) 915


22.3-2a Contents and scope of section 11AC 917

22.3-2b The Dharmendra Textile Processors cases 918

22.3-2c The Rajasthan Spg. & Wvg. Mills case 918

22.3-2d Other Illustrative cases 920

22.3-2e Benefit of reduced penalty 923

22.3-2f Prior adjudication and demand of duty is not

necessary 923



22.3-4a Penalty under section 78 924

22.3-5 Principles of natural justice must be observed 925


22.4 Confiscation of goods - Position from 27-2-2010 925

22.5 Levy of penalty - Position from 27-2-2010 925

22.6 General penalty in unspecified cases 926

Annex 22.1 Chapter thirteen (Part III) of CBEC‟s Manual of

Supplementary Instructions, 2005, interest, penalty,

confiscation, duty payment under protest 927

Annex 22.2 Levy of penalty under section 11AC when duty was paid

before issue of SCN 932

Annex 22.3 Benefit of reduced penalty under provisos to section 11AC 933

Annex 22.4 Enforcement of penal provisions for non-submission of

returns 934

23

RULE 16 : SUPPLEMENTARY PROVISION

Text of rule 16 935

23.1 Scope of sub-rule (1) 936

23.2 Scope of sub-rule (2) 936

24

JOB WORK

24.1 Position vis-a-vis Modvat Scheme 937

24.2 Definition of „job work‟ 937

24.3 Movement of inputs for job work under Notification 214/86 938

24.4 Removal of inputs/semi-finished goods/finished goods for

specified purposes 939

24.5 Job work facility for SSIs 940

24.5-1 Clarification for manufacturers in bicycle industry 941

24.6 Movement of capital goods for job work 941

24.7 Credit availed by job worker working under Notification 214/86 942


Annex 24.2 Procedure for movement of goods for job work 948



Annex 24.5 Procedure for movement of goods for job work under

Notification Nos. 83/94-C.E. and 84/94-C.E., both

dated 11-4-1994 960

Annex 24.6 Procedure for removal of capital goods under rule 57S(5)

for test, repair or reconditioning 970

Annex 24.7 Clarification on the availability of the exemption under

Notification Nos. 83/94 and 84/94 to manufacturers in

bicycle industry 975

Annex 24.8 Procedure for removal of inputs as such or partially

processed inputs to job-worker 977

Annex 24.9 Conditions/procedure for removal of semi-finished goods

for manufacturing process and excisable goods for testing 979

Annex 24.10 Special procedure for removal of excisable goods for

carrying out certain processes under rule 16C of Central

Excise Rules, 2002 985

Annex 24.11 Procedure for removal of inputs as such/partially pro-

cessed inputs to job-work under rule 16A of Central Excise

Rules, 2002 986

APPENDIX

Indirect Tax Ombudsman Guidelines, 2011 991

Validation Provisions Pertaining to Cenvat Credit Rules 999

LIST OF CIRCULARS/TRADE NOTICES 1021

LIST OF BASE NOTIFICATIONS 1025