CENVAT CREDIT RULES

AND

PLACE OF PROVISION OF SERVICE RULES

04/11/2023 1

CONCEPT OF VALUE ADDED TAX STRUCTURE

• Single and double entry system of accounting :

Distinguish

• Two Nails Theory : Match

• No entity based exemptions initially, now SEZ

can be billed without charging Tax.

• Provision of refund for embassies and

exporters.

CONCEPT OF CREDIT

• Credit is hard currency : immediately available

• Credit affects bottom lines: Credit lost is money

lost

• Credit affects purchase decisions

• Credit is a business booster

• Wrong Credit : Large Penalty

Step Towards Integration

In the budget 2004-2005 the idea to extend credit of service tax and excise duty across goods and services was mooted. Zero charge by sub-contractor - credit same category - credit under different categories – present system.

The CENVAT Credit Rules, 2004 came into force from 10-9-2004, and have replaced the CENVAT Credit Rules, 2002 and Service Tax Credit Rules, 2002.

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Who is eligible to credit

Credit is available to the “Provider of OUTPUT Service”.

Thus bare liability to pay service tax as recipient of service does not entitle one to be eligible to CENVAT credit.

But credit not available unless “input”, Capital Goods” or “Input service” has been used for provision of output service.

Tax deposited under reverse charge mechanism can be claimed as credit where applicable.

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Who is eligible to crediteffective 1-07-2012

With introduction of negative list Cenvat Credit Rules define “Output Service” as:

“output service” means any service provided by a provider of service located in the taxable territory but shall not include a service,-1. specified in section 66D (Negative List) of the

Finance Act; or2. where the whole of service tax is liable to be

paid by the recipient of service.

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Who is eligible to crediteffective 1-07-2012

Thus credit is available only to the Output service provider and that too only if he is in taxable territory, the services provided are not in negative list and 100% reverse charge is not applicable on the respective output services.

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What is available as credit

Basic Excise Duty (Except on Specified goods taxed @1% ad valorem)

Special and additional excise duty in specified cases service tax Education Cess & SHE

paid on: – Inputs– Capital Goods AND– Input ServicesReceived by the provider of output service

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What are inputs

For the purpose of an Output service provider inputs are:– All goods used for providing output service. – The definition is specific and crisp. There would

be goods which are used by the service provider but use of such goods would not be specifically in providing output service.

– In exclusionary clause certain goods are not eligible as inputs:

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What are not inputs

1. LDO, HSD, Petrol, 2. any goods used for

a) construction or execution of works contract of a building or a civil structure or a part thereof; or

b) laying of foundation or making of structures for support of capital goods,

except for the provision of service portion in the execution of a works contract or construction service as listed under clause (b) of section 66E of the Act; (Declared Services)

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What are not inputs

Thus works contract service and construction service providers would be eligible to claim credit for inputs used for rendering of service.There are nine declared services and only two are eligible for credit of inputs on construction related activity.

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What are not inputs• Nine declared services. a) renting of immovable property;b) construction of a complex, building, civil structure or a part thereof, including a

complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion-certificate by the competent authority.

c) temporary transfer or permitting the use or enjoyment of any intellectual property right;

d) development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software;

e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

f) transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods;

g) activities in relation to delivery of goods on hire purchase or any system of payment by installments;

h) service portion in the execution of a works contract;i) service portion in an activity wherein goods, being food or any other article of human

consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity.

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What are not inputs

3. Motor Vehicles Though credit in specified situations is available in category of capital goods. No credit shall however be available for Motor Vehicles in the category of inputs.

4. any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee; The term “such as” indicates the vast application of this definition. This list can be really large.

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Capital GoodsFollowing items are eligible for CENVAT credit as “Capital goods" if they are used for providing output service:-

(A)(i) all goods falling under Chapter 82 (Tools, Implements, Cutlery) , Chapter 84 (Nuclear Reactors, Boilers, Machinery etc.), Chapter 85(Electrical Mach. Sound Recorders, etc.), Chapter 90 (Optical, Photographic, Medical, Surgical apparatus etc.), heading No. 6805 grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to the Excise Tariff Act;

(ii) pollution control equipment;

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(iii)components, spares and accessories of the above; (irrespective of the entry they fall in. Components are revenue expense in books but are eligible in capital goods category) (Components / spares of other capital goods mentioned in iv to vii below are not eligible and there is no logical answer to exclude them. However spares in appropriate cases may be eligible as inputs)

(iv) moulds and dies, jigs and fixtures;(v) refractories and refractory materials;(vi) tubes and pipes and fittings thereof; and(vii) storage tank, (viii) motor vehicles other than those falling under tariff

headings 8702, 8703, 8704, 8711 and their chassis, but including dumpers and tippers

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Tariff heading 8702 /8703 /8704 /8711 apply to all passenger cars and motor bikes. Thus motor vehicles falling in other than the stated category shall be eligible as capital goods if they are used for providing output service. Dumpers and Tippers shall be capital goods for all categories of output service providers.Motor vehicles which are excluded from capital goods as above have been separately allowed as capital goods as per following provision:

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B. motor vehicle designed for transportation of goods including their chassis registered in the name of the service provider, when used for-

ii. providing an output service of renting of such motor vehicle; or

iii. transportation of inputs and capital goods used for providing an output service; or

iv. providing an output service of courier agencyC. motor vehicle designed to carry passengers including their

chassis, registered in the name of the provider of service, when used for providing output service of-

ii. transportation of passengers; oriii. renting of such motor vehicle; oriv. imparting motor driving skills

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Thus following conditions must cumulatively be satisfied:

1. Must satisfy definition of motor vehicle as per Motor Vehicles Act 1988.

2. Must be registered in the name of provider of output service

3. Must be used for providing specified services. Use of vehicle for any other purpose will deny eligibility.

4. Components and accessories are also treated as eligible capital goods.

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What is input service

The definition has three parts:1. Specific2. Inclusive3. Prohibitive

In specific part: “Input service” means any service used by provider of output service for providing an output service.In other words, service not used for providing output is not eligible for credit. Thus there would be services used by service provider but not all of them are used for providing output service. Some such services are eligible to credit in the inclusive part :

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What is input service

Inclusive Part:1. Services used in relation to modernization, (setting

up is excluded w.e.f. 1-4-11) renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises,

2. Advertisement or sales promotion, 3. Market Research, 4. Procurement of inputs, 5. Accounting, 6. Auditing, 7. Financing, 8. Recruitment

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What is input service9. Quality control, 10. Coaching and training,11. Computer networking12. Credit rating, 13. Share registry 14. Security, 15. Business Exhibition16. Legal Service17. Inward transportation of inputs or capital goods

Item 5-14 were illustrations of “activities relating to business- such as”. This phrase was replaced by specific services thereby narrowing the scope of input service.

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What is input service

Service used for providing an output service restricts the input service to direct inputs. The list of indirect inputs as suggested in inclusive part has been narrowed down. Thus many services would apparently not form part of this list and may thus be not eligible for credit:

1. Telecommunication Services2. Management Consultancy3. Office Maintenance / facility management4. Repair & Maintenance of office equipment (AMC)5. Hiring of equipment6. Insurance7. Event Management

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What is NOT input serviceProhibitory Part:

1. Construction related specified services when used under specified circumstances.

2. Motor Vehicle related specified services except under specified circumstances.

3. Services related to personal use or consumption by employees under all circumstances.

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What is NOT input service Construction related specified services

Service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act (hereinafter referred as specified services) in so far as they are used for –

a) construction or execution of works contract of a building or a civil structure or a part  thereof; or

b) laying of foundation or making of structures for support of capital goods,

except for the provision of one or more of the specified services

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What is NOT input service Motor Vehicle related specified services

Services provided by way of renting of a motor vehicle, in so far as they relate to a motor vehicle which is not a capital goods; or Service of general insurance business, servicing, repair and maintenance , in so far as they relate to a motor vehicle which is not a capital goods, except when used by –

a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by such person ; or

b) an insurance company in respect of a motor vehicle insured or reinsured by such person; or

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What is NOT input serviceEmployees personal use / consumption

Such as those provided in relation to:1. Outdoor Catering2. Beauty Treatment3. Health Services4. Cosmetic & Plastic Surgery5. membership of a club6. Health Fitness Centre7. Life Insurance, Health Insurance8. Travel benefits extended to employees on vacation such

as Leave or Home Travel Concession Whenever used primarily for personal use or consumption of any employee. List is not exhaustive.

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Restrictions on Input Credit(a) CENVAT credit is not allowed on such quantity of inputs or

input services which are used in the manufacture of exempted goods or provision of exempted services except in the manner specified.

Utilization of CENVAT Credit on capital goods for payment of service tax under reverse charge - Demand of service tax on Intellectual Property Rights Service - Assessee discharged service tax liability by paying major portion of service tax by availing CENVAT Credit - Whether Cenvat credit can be utilized for payment of service tax on 'Intellectual Property Rights Service' received by them or not - Held that:- according to Rule 3(4)(e) of Cenvat Credit Rules, 2004, Cenvat credit may be utilized for payment of service tax on any output service.

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Restrictions on Input CreditAccording to provisions of Section 66A(1) of the Finance Act, 1994, for all purpose, when demand are made under Section 66A, the service received has to be treated as 'output service'. Restriction applies for availing credit of duty only in respect of excise duty paid on input or service tax paid on any input services and not capital goods. In such a situation, the appellant has made out prima facie case in their favour for correctness of payment made by them. However, it seen that payment was made after two years from the receipt of services and therefore, the appellant is liable to pay interest - Stay granted partly. MLR MOTORS LTD VERSUS CCE, HYDERABAD (2013 (11) TMI 769 - CESTAT BANGALORE)

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Restrictions on Input Credit

(b) No CENVAT credit is allowed on capital goods which are used exclusively in the manufacture of exempted goods or in providing exempted services, other than the final products which are exempt under SSI exemption scheme under central excise.

(c) No CENVAT credit is allowed on inputs/capital goods/input services to a service provider who has opted for threshold exemption scheme (Rs.10 lakhs)

(d) CENVAT credit on capital goods is not allowed in respect of that part of value of capital goods which represents the amount of duties/taxes on such capital goods which the manufacturer of final products or service provider claims as depreciation under Section 32 of Income Tax Act, 1961.

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Restrictions on Input Credit(e) In cases where deduction of value of goods sold/used is

claimed by the service provider under Notification No. 12/2003, credit of excise duty paid on inputs is not allowed. However, credit of service tax paid on inputs services and excise duty paid on capital goods is allowed.

(f) In cases where under Notification No. 26/2012– ST dated 20-06-2012 abatements have been claimed by specified service provider, input credit can be availed subject only to restrictions provided therein.

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1 Services in relation to financial leasing including hire purchase (exclude principal repayment)

10

2 Transport of goods by rail 30

3 Transport of passengers, with  or without accompanied belongings by rail

30

4 Bundled service by way of supply of food or any other article of human consumption or any drink, in a premises (including hotel, convention center, club, pandal, shamiana or any other place, specially arranged for organizing a function) together with renting of such premises

70

Sl.No.

Description of taxableservice

TAXABLE PERCENTAGE

Conditions

Input Input Service

Capital Goods

Yes Yes Yes

Yes Yes Yes

Yes Yes Yes

CENVAT of any inputs eligible u/ Chap. 1 to 22 of Central Excise Tariff Act, not taken

Yes Yes

5 Transport of passengers by air, with or without accompanied belongings

40

6 Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes.

60

7 Services of goods transport agency in relation to transportation of goods.

25

8 Services provided in relation to chit

70

9 Renting of any motor vehicle designed to carry passengers

40

Input Input Service

Capital Goods

No Yes No

No Yes No

No No No

No No No

No No No

10 Transport of goods in a vessel

50

11

 

Services  by a tour operator in relation to,-

(i)  a package tour25

(ii)  a tour, if the tour operator is providing services solely of arranging or booking accommodation for any person in relation to a tourAny service other than specified in (i) & (ii) above

10

40

Input Input Service

Capital Goods

No No No

No No No

No No No

No No No

12. Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority:

i) For residential unit having carpet area upto 2000 sq ft. and where amount charged is less than Rs. One crore.

ii) For other than (i) above

25

30

Input Input Service

Capital Goods

No Yes Yes

The value of land is included in the amount charged from the service receiver.

IMPORTANCE OF A DUTY DOCUMENTTaxability of services provided to customers situated abroad: SGS India Pvt. Ltd. vs. CST, Mumbai reported in [2011 (2) TMI 54 - CESTAT MUMBAI] - The appellant is paying service tax from Mumbai main office in respect of all the branch offices and, therefore, we do not find anything wrong in taking credit just because the invoices are in the name of branch offices. The appeal on this count is allowed - in favour of assessee.

• If broad requirements of law are duly complied with, reliance can be placed on the principle laid down in Mangalore Chemicals & Fertilizers Ltd vs. Dy. Commissioner (1991) 55 ELT 437 (SC) viz.:There is a distinction between the procedural condition of a technical nature and substantive condition and that non – observance of the former is condonable while that of a latter was not condonable”.

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When can credit be takenINPUTS: When inputs are delivered to output service provider. He must maintain documentary evidence of delivery and location of inputs. Payment to supplier is not important.CAPITAL GOODS: When CG are delivered to output service provider. He must maintain documentary evidence of delivery and location. Hire Purchase / finance options do not disturb the claim. Payment to supplier is not important.INPUT SERVICE:

1. Where Reverse Charge is applicable: On or after payment is made to the supplier.

2. Where Reverse Charge is not applicable: On receipt of invoice. Payment to supplier must be made in 3 months.

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When can credit be taken

In case of non payment the credit shall be reversed. Reversal of credit shall take place before 5th of the following month and before March 31st in case of end of financial year. [sub-rule (7) of Rule 4].

Prior to 1.4.2011 credit was available on payment only. The shift to system of accrual is in line with GST and is welcome. However the restriction of 3 months for payment as a condition to avail credit makes it mandatory to monitor the entire payment data. This shall be a tedious manual exercise.

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When can credit be taken

Credit shall be available again on actual payment to the vendor.

Professionals permitted to pay tax on cash basis also eligible to follow these provisions in respect of CENVAT credit.

No specific provision covering part payment of invoices with in three months. Logically, credit proportionate to unpaid amount be reversed.

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QUANTUM OF CREDIT AVAILABLEQUANTUM OF CREDIT FOR CAPITAL GOODS

50% in the financial year of receipt of goods. Balance 50% in any subsequent FY.Depreciation should not be claimed on the duty portion of the capital goods.Capital goods used exclusively for exempted activity do not qualify for credit.QUANTUM OF CREDIT FOR INPUTS AND INPUT SERIVCESFor Inputs and Input Services full credit is available at once.

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REMOVAL W/O OF INPUTS, CAPITAL GOODSBEFORE / DURING USE1. Remove as such without use: Credit to be reversed.

Non-use of inputs– Inputs procured and credit taken –sold as such also – CENVAT credit sought to be denied as goods not used in manufacture – Sale price higher than Purchase Price – Duty paid at clearance amounts to reversal of credit –credit availed on inputs to consider utilized - credit reversal not required [Vickers Systems International Ltd vs. CCE (2008) 10 STR 378 (Tri – Mumbai)].

2. Write off without use: Credit to be reversed.

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REMOVAL W/O OF INPUTS, CAPITAL GOODSBEFORE / DURING USE3. Removal for Job Work: Is permitted without payment /

credit reversal provided goods are returned back after job work with in 180 days.

4. Removal for use: Is permitted without payment / credit reversal. Inputs and capital goods can be removed for use without restriction of 180 days.

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REMOVAL W/O OF INPUTS CAPITAL GOODSREMOVAL OR Write Off AFTER USE1. For inputs removal as scrap after use there is no reversal

provision.2. In case of capital goods the law assumes a life of 5 years for

computer & peripherals and 10 years for other capital goods. If capital goods are disposed of prior to the prescribed life period a portion of credit availed depending on the actual period of holding shall be sustained and balance of credit shall be reversed. For computers and peripherals it is 10%, 8%, 5% and 1% per quarter for I, II, III and IV&V years respectively. For other assets it is 2.5% for each quarter.

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Outdoor Catering to provide meals to employees at subsidized rates

• CCE, Mumbai-V Vs. GTC Industries Ltd. 2008 (12) STR 468 : Credit was admissible even when a part of the expenditure incurred was recovered from the employees. The tax paid formed part of expenditure towards manufacture.

• The situation changes with amendments disallowing personal nature expenses.

Group Medical Policy for WorkmenCCE &C Aurangabad Vs. Endurance Systems (P) Ltd. , cenvat credit of service tax paid on group medical policy allowable. The situation changes with amendments disallowing personal nature expenses.

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Mobile Phone and Landline phone at Directors’ / officials’ residence

Keltech Energies Ltd. Vs. CCE, Mangalore Where the bills were paid by the company as expenditure, the same was eligible to be treated as input service.

CCE Vs. Excel Crop Care Ltd. 2008(12) STR 436 (Guj)Revenue’s appeal that credit for service tax paid on telephone bill could not be allowed if the phone was not installed at the factory premises, was dismissed.Telephone Expenses no more allowable to credit unless the service has been used for providing output service. Besides, now there are specific provisions for disallowance of credit relating to personal expenses of employees. The department may find it handy to raise dispute on unavoidable personal element involved.

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Inclusive and broad definition

• The spirit of the service tax provisions adopting an inclusive and broad definition has been killed by recent amendments making exhaustive list of eligible services for credit and disallowing credit on personal expenses of employees. This shall result in cascading impact on taxes.

• Credits, hitherto allowable due to interpretations by the courts in India shall now be restricted:• Repair of employees residences.• Rent a cab for ferrying employees from

residence to office and back.

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Utilization / Application of credit

Once accumulated in CENVAT account the credit becomes a common kitty and loses its identification as CG /Inputs/ Input Service. Utilization amounts to drawl from the pot.

The CENVAT credit showing on the last day of the month or quarter, as the case may be shall only be available for drawl [sub-rule (4) of Rule 3].

However for delayed payment of arrears of tax on demand raised by the department the adjustment can be made out of the balance standing on the day of adjustment.

The credit can not be used to discharge liability under reverse charge.

Refund of unused credit can be allowable to exporters. Excess credit not likely to be consumed in future be better written off.

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Utilization / Application of credit

Reversal / utilization of CreditThe CENVAT credit may be utilized for payment of-• An amount equal to CENVAT credit taken on inputs

if such inputs are removed as such or• an amount equal to the CENVAT credit taken on

capital goods if such capital goods are removed as such or

• service tax on any output service• Amount payable when inputs / capital goods sent

for job work are not received back in 180 days.

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Exempted Services (Rule 2(e) of CCR2004: means • Taxable services which are exempt from whole of

service tax leviable thereon• Services on which no service tax is leviable u/s 66B of

the Finance Act• Taxable services whose part value is exempted on

condition that no credit for input / input services shall be taken

• but shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994

• Trading being service not taxable u/s 66B shall be considered as exempt service.

Credit for inputs used in exempt services

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Credit for inputs or input services used exclusively for exempt services not allowable. Same way credit for inputs or input services used exclusively for taxable services should be allowable in full.

Prior to April 1,2008 credit in respect of common inputs was restricted to 20% of output tax and balance was eligible to be carried forward indefinitely. Though the brought forward balance was eligible for credit but further availability of credit got restricted.

Common inputs: Taxable and Exempt services

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Where a manufacturer or a service provider avails CANVAT credit in respect of inputs / input services used for both taxable as well as exempt goods / services he must maintain separate books of accounts in prescribed manner.

Common inputs: Maintenance of separate accounts

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Separate accounts shall be maintained for:(a) the receipt, consumption and inventory of inputs

used- (i) in or in relation to the manufacture of exempted

goods; (ii) in or in relation to the manufacture of dutiable final

products excluding exempted goods; (iii) for the provision of exempted services; (iv) for the provision of output services excluding

exempted services; and 04/11/2023 51

Common inputs: Maintenance of separate accounts

(b) the receipt and use of input services- (i) in or in relation to the manufacture of exempted

goods and their clearance upto the place of removal;

(ii) in or in relation to the manufacture of dutiable final products, excluding exempted goods, and their clearance upto the place of removal;

(iii) for the provision of exempted services; and

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Common inputs: Maintenance of separate accounts

(iv) for the provision of output services excluding exempted services, and shall take CENVAT credit only on inputs under sub-clauses (ii) and (iv) of clause (a) and input services under sub-clauses (ii) and (iv) of clause (b).]

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Common inputs: Maintenance of separate accounts

• Major changes in the spirit of section 6(2) incorporated effective April 1, 2011 thereby giving an option to maintain separate accounts only of inputs and claiming proportionate option in respect of input services.

• The amended provisions are a wider version of earlier provisions requiring detailed accounting in respect of “receipt, consumption & inventory” of inputs and “receipts and use” of input services attributable to various taxable and exempt permutations.

• The changes however fail to address treatment in respect of common expenses such as auditing, financing, interior decoration, telephone etc. while maintaining separate accounts.

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Common inputs: Maintenance of separate accounts

The manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow any one of the following options, as applicable to him, namely:-

(i) pay six per cent. of value of the exempted goods and exempted services; or

(ii) Apply for proportionate option u/r 6(2) (3A); or (iii) Apply combination of “separate accounts” for inputs and “proportionate option” for input services.

OPTION OF NOT MAINTAINING SEPARATE ACCOUNTS

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• Value of exempted goods shall be the gross amount charged.

• Where part value is exempt on condition that CENVAT shall not be claimed, the said exempt portion shall be the relevant portion.

• Different options for different exempt goods or exempt services can not be availed.

• Any option once exercised shall apply to the remaining part of the year. This implies that switching from separate accounts to one of the options is possible during the year.

Pay 6% of value of exempted goods / services

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Withdrawal of circular : Unjust Enrichment

Possible to charge Service Tax from Client

Where option to pay 6% on exempted services is exercised, the service provider can charge tax on the client, mentioning specifically “amount paid under rule 6 of the cenvat credit rules.”

Provisions of unjust enrichment shall not apply.

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Procedure to exercise proportionate option

Intimate to the Superintendent the intention to exercise this option along with other details and balance of cenvat credit unused, description of dutiable and exempted goods and services.

Pay provisionally, every month, the cenvat credit attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services. This shall be calculated with a formula E/F*G where G is the total of cenvat credit on input services taken during the month and E and F are calculated as under:

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Procedure to exercise proportionate option

E is the sum total of the value of exempted services provided and exempted goods manufactured and removed during the preceding financial year

and F is the sum total of the value of taxable and exempted services provided and the dutiable and exempt goods manufactured and removed during the preceding financial year.

Similar formula shall apply separately in respect of inputs. However CENVAT credit relating to inputs used for manufacture of exempted goods has to be excluded from the total value of CENVAT on Inputs taken during the month. Accordingly total value of exempt goods manufactured is also not considered as part of the denominator.

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Proportionate optionTrading services value shall be included in E & F for

this purpose.Trading service shall be valued as the difference

between the sale price and COGS (as per generally accepted accounting principles, but excluding expenses towards purchase) subject to a minimum of 10% of COGS.

Similarly value of services covered by composition scheme shall also be included in E & F. The corresponding value shall be determined based on formula: Tax amount (under composition scheme) / rate of service tax (under composition scheme)* present rate (12%)

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Proportionate option In case of trading in securities the difference between sale

and purchase price of securities traded or1% of purchase price whichever is more.

Value of service by way of extending loans, deposits where consideration is interest, shall not be included as exempt service value.

Following two services can not any of the options and shall reverse credit on adhoc basis:Banking and financial service provider shall reverse 50%

of credit every month.Provider of Life Insurance / Management of ULIP shall

reverse 20% of credit every month. Service provided to SEZ – No reversal required. Exporters who do not get full money in foreign exchange

would not get covered for this purpose.

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Proportionate option

Payment amounts to debit to CENVAT credit account or otherwise on or before 5th of following month / quarter, except March where March 31st shall be the last date.

The option of payment or reversal of credit can be chosen by the Assessee and shall not be thrust upon him.

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Proportionate option

On completion of year the differential between the provisional and actual figures of the whole year shall be paid (by 30th June) along with interest at 24%. Where the full year yields a lesser figure, the amount excess paid can be adjusted as part of cenvat credit under intimation to the Superintendent in 15 days.

For this purpose export of service shall be treated as taxable service and shall form part of denominator.

Where capital goods are used partly for taxable purpose full credit shall be allowable.

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Input Service Distributor

"input service distributor" means an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be;

Input Service DistributorThe input service distributor may distribute the CENVAT credit subject to the following conditions:

a) the credit distributed against an invoice does not exceed the amount of service tax paid thereon;

b) credit of service tax attributable to service used in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed;

c) credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit; and

d) credit of service tax attributable to service used in more than one unit shall be distributed pro rata on the basis of the turnover during the relevant period of the concerned unit to the sum total of the turnover of all the units to which the service relates during the same period.

Input Service DistributorExplanation 3. The relevant period shall be the month previous to the month

during which the CENVAT credit is distributed. a) In case if any of its unit pays tax or duty on quarterly basis

then the relevant period shall be the quarter previous to the quarter during which the CENVAT credit is distributed.

b) In case of an assessee who does not have any total turnover in the said period, the input service distributor shall distribute any credit only after the end of such relevant period wherein the total turnover of its units is available.

PARTNER S REMUNERATION WHETHER TAXABLE UNDER SERVICE TAX

• In the negative list all services, other than services specified in the negative list would be taxed under section 66B. Service‘ means and includes - any activity - for consideration - carried out by a person for another - and includes a declared service - But does not include MAGIC

• Two Persons Must• The phrase 'provided by one person to another' signifies that

services provided by a person to self are outside the ambit of taxable service. Example of such service would include a service provided by one branch of a company to another or to its head office or vice-versa.

• As service is an activity involving two persons- one as service provider and other as service receiver, explanation 2 to the definition clarifies that any unincorporated association or body or persons and its members, both will be treated as distinct persons.

PARTNER S REMUNERATION WHETHER TAXABLE UNDER SERVICE TAX

• Thus, if a person who is member of body of persons or association which is not incorporated or registered, provides service to such body or association, it will be considered as a service. In an incorporated body the distinct identity of the member is already acknowledged by law. A partner is not an employee of a firm.

• The remuneration paid to partners is a part of profit which is given for extra human efforts. Remuneration is given to working partners only and not to dormant partners because they provide their services to the business and in return they receive extra profit in form of remuneration.

• It may be considered a case of different form of distribution of profit. It is also a transaction in money and, hence may not be covered under the definition of services, because the definition of service u/s 65B (44)clearly excludes the transaction in money from the scope of service.

PLACE OF PROVISION OF SERVICE (POPS)

Place of Provision of Service Rules, 2012.

• Section 66B: There shall be levied a tax at the rate of twelve per cent on the value of all services, other than those specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another.

• Purpose is to identify taxing jurisdiction for a service;• In earlier regime focus was to determine taxability in case

of exports and imports only. Present rules to replace existing Export and Import Rules as well as to define local jurisdiction;

• Meant for cross border services, services to J & K, service providers operating from multiple locations, determining services wholly consumed in SEZ and A PRECURSOR TO GST.

POPS. Important Terms:• Taxable Territory : Article 1 of the constitution, territorial waters, sea

bed, continental shelf, sub-soil, air space installations, structures, vessels in the relevant zone..

• Location of Service Provider or Receiver• Business Establishment (Place Where essential decisions concerning

the general management are adopted and functions of its central administration are carried out. A service provider or receiver can have only one business establishment )

• Fixed Establishment (Place other than Business Establishment which has permanent presence of human and technical resources to provide or receive service)

• Usual Place of Residence ( Body Corporate : place where incorporated, Individual : place where he spends most of his time for the period in question or where he lives with his family and is in full time employment. An individual cannot have more than one place of usual residence.)

Importance of Location

• Taxation of service is based on the place of provision of service.

• Place of provision can either of the two:– Location of the provider at a given point of time.– Location of the receiver at a given point of time.

• The person paying for service may not necessarily be the receiver or provider of service. It is the obligation to pay that matters.

PPS Rules, 2012 Location of Service Provider or Recipient means:-A. Premises for which registration is obtained in case of

single registration whether centralized or otherwise;B. If ‘A’ is not applicable – Location of business establishment;– If services are provided/received from a place other

than business establishment, location of such fixed establishment;

– When services are provided/received from more than one establishment – establishment most directly concerned with use or provision of service;

– In absence of all above, usual place of residence of provider / recipient;

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Rule 3- Default Rule

• Place of provision - service is deemed to be

provided where receiver is located;

• Default rule applies when none of later rules

apply.

Rule 3- Default Rule

‘A’Service Provider

‘X’Service Provider

‘B’Service Receiver

‘Y’Service Receiver

Taxable Territory Non- Taxable Territory

Taxable for A

Taxable for B

Not Taxable

Person paying is different from person receiving – Global Agreements

• ‘A’ as agent makes payment on behalf of ‘B’. ‘B’ is the receiver of service.

• Head office paying on behalf of branches, HO is the receiver.

• Global Agreements covering different countries..

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Rule 4- Performance based services

Place of provision is the location where services are actually performed; Examples:• services in respect of goods to be physically made

available by receiver (repair, storage / warehousing, technical testing, dry-cleaning, cargo handling etc). Market research reports, CA reports do not fall here.

• Indian engineers going to US to repair a ship not taxable in India.

• Foreign engineers coming to India to repair a ship – taxable in India.

• Services provided from a remote location by electronic means – taxable where goods located at that time.

Rule 4- Performance based services• Services provided in conjunction with supply of goods

under another contract (erection, commissioning, AMC bundled with sale of goods)

• Services provided predominantly in physical presence of receiver (photography, Cosmetic / plastic surgery, personal security, health fitness, classroom coaching, internet cafe)

• These may be rendered in a clinic, at the place of the recipient or on board a conveyance or a third place.

• Person liable to pay may be different from the actual recipient. Location of actual individual recipient is important.

Rule 5-Services relating to immovable property

• Place of provision - where immovable property is located.• Applicable for services directly connected with immovable

property. Examples of services covered • Services in course of construction, alteration, repair,

maintenance etc;• Renting of immovable property;• Services of real estate agents, architects, engineers etc

relating to land, building or civil engineering works;• Services connected with oil / gas / mineral exploration;• surveying; property management services, hotel

accommodation

Rule 5-Services relating to immovable property

Criteria to determine ‘Direct Connection’• Services performed or agreed to be performed on

immovable property (maintenance) or property to come in to existence (Construction)

• Direct object of service is immovable property (which enhances value of property, affects nature of property, relates to development of property )

• Purpose of service is transfer or conveyance (as real estate agent service, lease, legal service to owner or beneficiary as a result of will or testament) , determination of title to property.

Rule 5-Services relating to immovable property

• Examples of services not directly related to immovable property– advice or information as to land prices in or around an

area not being a specific site.– General feasibility studies on investment potential of

area not being a specific site. – Repair of movable machinery– Tax assessment based on figures provided by the

owners.

Rule 6- Service relating to Events

• Place of provision -Place where event is actually held. • Covers admission to events , organizing events and

ancillary services Examples• Conventions• Conferences• Exhibitions• Fairs• Seminar• Workshops , wedding , sports etc.

Rules 7

Rule 7- Part performance of service at different locations• Where any service stated in 4, 5, 6 is provided at more than

one locations including a location in taxable territory and one or more location is outside taxable territory - The place of provision shall be the location in taxable territory where greatest proportion of service is provided.

Example:• Technical inspection and certification of a product by

carrying out testing at two locations in India and one outside India. Taxable in the Indian state where a higher stake is involved.

Rules 8

Rule 8 – where provider and recipient is in taxable territory - Location of Receiver’.

• Where provider and recipient are both in taxable territory even when the actual provision takes place outside taxable territory the taxation shall arise in India.

Example• Indian plane needs repair while in US. Indian maintenance

agency sends its engineers to US for repairs or hires engineers in US to repair the plane.

• This transaction will be taxable in India superseding earlier clauses.

Rules 9

Rule 9- specified services –location of service provider;

• Banking service (to account holders). Thus only account related services such as opening, cheque book, statement, credit card, lockers etc. would be identified on this basis. Services such as leasing, issue management, foreign exchange, asset management, advisory etc. would not be covered even if provided to account holder.

• Telecommunication service (to subscribers)

Rules 9

Rule 9- specified services –location of service provider;

• Online information and database access or retrieval; A server in India providing such service to a US user will attract tax in India without it being treated as export. A server in US providing service to a Indian consumer would not attract tax even in the import of service category. E-commerce activity would not fall in this criteria.

Rules 9

Rule 9- specified services –location of service provider;

• Intermediary Services; Intermediary is a broker or a agent or any other person, by whatever name called, who arranges or facilitates a provision of service between two persons but does not include a person who provides the main service on his behalf. Thus intermediary for supply of goods is not covered here. Similarly an agent who himself provides main service is not an intermediary. Thus agent can not alter the nature or value of the main service.

• Hiring of means of transport up to a month. Means can be sea, air or road. It may cover goods or passengers. Location of the means at the time of hiring is not relevant. Thus a vehicle owned by an entity in India but located outside and used for hiring for short durations would be taxable in India.

Rules 10

Rule 10- Transportation of goods other than by mail or courier – place of destination of goods – except in GTA by road where place of provision is location of person liable to pay tax. Thus in case of GTA, if goods are transported to J&K and sender pays to transporter service tax will apply while if recipient pays to transporter it would not apply. Exports will become tax free. Inwards transportation up to customs station by air or sea is already part of negative list 66D(p)Courier is door to door transportation of time sensitive documents, goods, articles utilizing service of a person to carry or accompany such articles..

Rules 11 & 12 & 14

• Rule 11 – Passenger transportation services – place where passenger embarks on conveyance for continuous journey.

• Rule 12- services provided onboard conveyances –First scheduled point of departure of conveyance for journey

Eg – on board service of provision of movies, music, games, beauty treatment etc.

Rule 14- Order of application of Rules- where more than one rule applies, rule that occurs later is relevant rule.

IMPORTS AND EXPORTS• Under the new regime a service provided outside the taxable

territory is already not taxable. It may seem irrelevant to treat it as export.

• Exports are zero rated and the entitlement to CENVAT is not lost.

New Export Guidelines• New Export provisions have been made. Export of services

shall now be governed by new provisions in the Service Tax Rules 1994, namely Rule 6A. The essential requisites before a service can be designated as export service are:

• It must be a service as defined under sub-section 44 of section 65B

• It should be provided by a service provider located in the taxable territory.

• It should be provided to a service receiver is located outside India. Thus service provided to recipient in J&K may be exempt but not export.

New Export Guidelines• The service is not a service specified in the negative list• The place of provision of the service is outside India• The payment for such service is received by the service

provider in convertible foreign exchange.• The service provider and service receiver are not merely

distinct establishments of same person.• The answer to all questions above must be yes to avail the

status of export of service.

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THANKS