Overview of Cenvat Credit Excise and Service Tax

Overview of Cenvat Credit Excise and Service Tax Bimal Jain FCA, ACS, LLB, B.Com (Hons) Member of Indirect Tax Committee of PHD/ FICCI/ Assocham Member of GST committee of ICAI/ ICSI Member of Indirect tax faculties of ICAI/ICSI/ICWAI

Message Nothing is certain except Death & Taxes

Supply Chain – GST Goods Services Inputs CG Services Manufacturing Rendering of Services Trading – Intra State/ Inter State/ Exports Receiver – Intra state/ Inter State/ Exports

Present Power of levy Goods Central Govt • Import – BCD,CVD, SAD • Manufacturing – CE/ AED • Surcharges and Cesses • State Govt • VAT • Entry Tax/Octroi • CST Services • Central Govt • Service tax • State Govt • No Power except luxuries tax, entertainment Tax, etc.

Cenvat Credit Rules, 2004 Capital Goods Inputs Input Services Manufacturing of Goods Rendering of Services • Availment of Credit Vs. Utilization of Credit • Change in the definition of Inputs/ Input Services/ Exempted Services/ Exempted Goods • Change in Rule 6 – Taxable/ Exempted Supplies • Unsettling the settled jurisprudence • - “Coca Cola India (2009) 22 STT 130 & ABB Ltd (2009) 21 STT 77 (CESTAT)” • These changes really needed before GST?

Cenvat Credit – Capital Goods • Rule 2(a) of CCR, 2004  “Capital Goods" means:- • the following goods, namely:- • All goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading 6805, (ii) Pollution control equipment; (iii) Components, spares and accessories of the goods specified at (i) and (ii); (iv) Moulds and dies, jigs and fixtures; (v) refractories and refractory materials; (vi) Tubes and pipes and fittings thereof; (vii) storage tank and • Continue

Cenvat Credit – Capital Goods • (viii) Motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711 and their chassis, but including dumpers and tippers

Cenvat Credit – Capital Goods • Used- • (1) in the factory of Manufacturer of the final products, but does not include any equipment or appliance used in an office; or • (1A) outside the factory of Manufacturer of the final products for generation of electricity for captive use within the factory; or • (2) for providing output service;

Cenvat Credit – Capital Goods • (B) Motor vehicle designed for transportation of goods including their chassis registered in the name of the service provider, when used for- • (i) providing an output service of renting of such motor vehicle; or • (ii) transportation of inputs and capital goods used for providing an output service; or • (iii) providing an output service of courier agency

Cenvat Credit – Capital Goods • (C) 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- • (i) transportation of passengers; or • (ii) renting of such motor vehicle; or • (iii) imparting motor driving skills • (D) components, spares and accessories of motor vehicles which are capital goods for the assessee

Cenvat Credit – Inputs • Rule 2(k) of CCR, 2004  “Inputs” means • (i) all goods used in the factory by Manufacturer of the final product; or • (ii) any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or • (iii) all goods used for generation of electricity or steam for captive use; or • (iv) all goods used for providing any output service; but excludes-

Cenvat Credit – Inputs • Continued.. • Explanation. – For the purpose of this clause, “free warranty” means a warranty provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer;

Cenvat Credit – Inputs • Exclusions.. • (A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol; • (B) any goods used for - • 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;

Cenvat Credit – Inputs • Continued.. • (C) Capital goods except when used as parts or components in the manufacture of a final product; • (D) Motor vehicles; • (E) 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; and • (F) any goods which have no relationship whatsoever with the manufacture of a final product.

Cenvat Credit – Input Services • Rule 2(l) of the CCR, 2004  “input service” means any service, - • used by a provider of output service for providing an output service; or • (ii) used by a Manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products up to the place of removal

Cenvat Credit – Input Services • Continued… • and includes services used in relation to modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment • and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, Inward transportation of inputs or capital goods and outward transportation upto the place of removal; but excludes,-

Cenvat Credit – Input Services • Continued… • (A) 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; or

Cenvat Credit – Input Services • Continued… • (B) 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 • (BA) 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

Cenvat Credit – Input Services • Continued • (C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee;

Cenvat Credit – Availment • Important to check Whether CG/ Inputs/ Input Services • Whether Registration is must for taking credit? • Whether Refund can be denied prior to Registration? • Varizon Data Services (I) (P) Ltd. Vs. CST, Chennai [2012-TIOL-1512-CESTAT-MAD]

Cenvat Credit – Utilization • Rule 3(4)  Cenvat credit can be utilized for payment of- • - Excise duty on any final product • - Payment of CENVAT credit taken on Inputs are removed as such or after being partially processed • - Payment of CENVAT on capital goods are removed as such • - Amount under Rule 16(2) of C E Rules, 2002 – Repair/ Reconditioning, etc. • - Service tax on any output service • Restricts Utilization of credit as available by end of Month/ Quarter • CENVAT credit Shall not be used for payment of service tax in respect of Reverse Charge/ for payment of ED on Goods – Notification no. 1/2011-CE dated. 1-3-2011 • SAD credit shall not be used for payment of Service Tax

Cenvat Credit – Utilization • Rule 3(4)  Cenvat credit can be utilized for payment of- • Whether there is need for one to one co-relation of CENVAT credit availed on input services towards payment of output services? • Jyoti Structures Ltd. Versus Commissioner of Central Excise, Nasik [2012 (10) TMI 335- CESTAT, Mumbai]

Condition for availing Cenvat Credit • Rule 4 Conditions for availing Cenvat Credit • Inputs - Immediately on receipt within the factory of Manufacturer or in the premises of the provider of output service • Capital goods – 50% in the year of receipt and balance 50% in the subsequent year – Rule 4(2) • Cenvat credit on capital goods shall be allowed even if the capital goods are acquired by him on lease, hire purchase or loan agreement, from a financing company – Rule 4(3) • Cenvat credit not available in case the depreciation U/S 32 of the Income-tax Act, 1961 is claimed • Job work - Goods can be removed for job work provided they are received back within 180 days – Rule 4(5) • Goods sent to job worker can be removed directly from Job Worker’s premises with Commissioner’s permission – Rule 4(6)

POT & Cenvat Credit • Obligation & Liability  • - Service Provider – 68(1) • - Service Recipient -68(2) • Point of Taxation (POT)  ‘Point in time when a service shall be ‘deemed to have been provided’[Rule 2(e)]. This point will determine Due date of payment of service Tax Monthly/ Quarterly • Notification No. 04/2012-ST dt. March 17, 2012  Point of Taxation (Amendment) Rules, 2012 (W.e.f 1/4/2012)

POT - General Rule 3 • POT, the earliest of the following:- • Date of Receipt of Money (Advance) • When Invoice is issued within 30 days from date of receipt of money  Date of receipt of Money • When Invoice is issued within 30 days from date of completion of Service Date of Invoice • When Invoice is not issued within 30 days from date of completion of Service Date of Completion of Service

POT – Collection basis • Rule 6 of STR (1/4/2012)  Service tax on Collection basis - Individuals and Partnership firms (including LLP) - aggregate value of taxable services < Rs. 50 lakhs in the previous FY, the service provider shall have the option to pay tax on collection basis on taxable services up to Rs. 50 lakhs in the current FY

POT – Reverse Charge • Rule 7 – Overriding clause - Determination of POT-U/S 68(2) - Recipients of Service - Date on which payment is made Provided that, where the payment is not made within a period of 6 months of the date of invoice, the POT shall be determined as if this rule does not exist  Non Payment within 6 months  Normal POT  Date of Invoice -1/10/2012 & Date of Payment -15/04/2013 – Interest/ Change of Rate ??

Cenvat Credit – Input Service • Input service credit can be taken on or after date of receipt of invoice • Payment to SP is not made with in 3 months from date of invoice - Then Reverse Credit and re-avail after payment • Payment under Reverse charge - On or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan • Payment or part thereof is returned or credit note is issued by SP, proportionate credit shall be reversed or paid • Invoice / bill issued prior to 1.4.2011 - Credit after the date of payment of value of service

EXPORT OF SERVICES – Rule 6A –N. 36 • Services to qualify as export if: • Service provider located in Taxable Territory • Service recipient located in Non Taxable Territory • Service provided is a service other than in Negative list • Payment is received in convertible foreign exchange in RBI defined time period • ‘Place of Provision of Service’ determined as per the POP Rules is outside India

Cenvat Credit – Exempted Service –R 2(e) • i. Taxable service which is exempt from the whole of the service tax leviable thereon; or • ii. Service, on which no service tax is leviable under section 66B of the Finance Act; or • iii. Taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken; • But shall not include a service which is exported in terms of Rule 6A of the Service Tax Rules, 1994. • Rule 6 of CCR applicable for Reversal of Cenvat credit for exempted Service

Service Tax – CCR • Refund to Exporter – Rule 5 – No Nexus required between exports and input services used in such exports  Duties or taxes paid on any goods or services that qualify as inputs or input services will be entitled to be refunded in the ratio of the export turnover to total turnover in line with Circular No. 868/6/2008-CE dated 09.05.2008 • Refund amount = (Export turnover of goods+ Export turnover of services) x Net CENVAT credit/ Total turnover

Cenvat Credit – Abatement • Abatement  For provision of Taxable Output Services  Notification no. 13/2012–ST dt. 17-3-2012 – superseded by Notification no. 26/2012-ST dt. 20-6-2012 (Effective  1/7/2012) • ALL abatement Merged into One Notification – 12 Services • Change in abatement Rates for Specified Services  Prior/ Post 1/7/2012 • TTL Consideration = 100 • Less: Abatement @ 50% = 50 • Net Consideration = 50 • Service Tax 12.36% = 6.18

Cenvat Credit – Abatement • Abatement  Notification no. 26/2012-ST dt. 20-6-2012  Conditional Abatement with benefit of Cenvat Credit available • Notification No. 12/2003-ST Dated 20/6/2003 & Notification No. 1/2006-ST Dated 1/3/2006 (Rescinded) • - Capital Goods – Rule 2 (a) of CCR, 2004 • - Inputs – Rule 2(k) of CCR, 2004 • - Input Services – Rule 2 (l) of CCR, 2004

Exemption vs. Cenvat credit • Notification No 1/2006-ST provides various abatements in specified services with a condition that CENVAT Credit will not be claimed by the Assessee • What if  Assessee used to claim the benefit of both Abatement and CENVAT,  Entire benefit of “Abatement” will be disallowed and Service Tax will be calculated on the 100% gross value of services provided or to be provided • What happen  if the assessee wish to reverse the credit so claimed - Litigation was there. • Now, recently, CESTAT in the case of KHYATI TOURS & TRAVELS Versus COMMISSIONER OF C. EX., AHMEDABAD 2011 (24) S.T.R. 456 (Tri. - Ahmd.) held that, later on if reversal of CENVAT credit is there, then benefit under notification cannot be denied.

Cenvat Credit – Works Contract • Overruled in LB – CESTAT Delhi – CCE vs. BSBK Pvt. Ltd. (2010) 26 STT 263 – “Turnkey project can be vivisected & service element involved in works contract”. • Other Services  Works/ Composite Contract –e.g. • Erection, Installation, Commissioning Services – 1/7/2003 – 67% • Commercial or Industrial Construction Services – 10/9/2004- 67%/ 75% • Construction of Residential Complex Services – 16/6/2005- 67%/75% • Management, Maintenance or Repair Services – 1/7/2003– No abatement • Difference between Works Contract & Other Services  When State Sales Tax/VAT payable on transfer of property in execution of Works Contract

Cenvat Credit – Valuation Rules • Valuation under Service Tax for Works Contract Services –Rule 2A Notification no. 11/2012-ST dt. 17-3-2012  superseded by Notification no. 24/2012-ST dt. 6-6-2012 ( W.e.f 1/7/2012):- • Pay service tax on Actual Service portion:- Gross Consideration LESS Value of Property LESS VAT/ Sales tax, if any ADD Value of other services; • Composition  Pay Service tax at composite rate • Pay ST on 40% value of original works • Pay ST on 60% value of all other works contract • Pay ST on 70% value of maintenance or repair or reconditioning or restoration or servicing of any goods

Cenvat Credit – Valuation Rules • Works Contract Composition Rules, 2007 rescinded - 4.8%  Notification no. 35/2012-ST dt. 20-6-2012

Service Tax – CCR • Rule 3(5) and 3(5A) - Duty payable on CG/ Scrap at higher of TV or Depreciated Value [effective from 17.03.12] • Rule 4(1) & 4(2)  Time when CENVAT could be taken - Allow credit without bringing them into premises subject to due documentation regarding their delivery and location • Rule 6(3)  Rate for Cenvat reversal for Exempt Services/ Goods has been revised from 5% to 6% • Rule 9(1)(e)  Availment of credit on the tax payment Challan in case of payment of service tax by all service receivers on reverse charge

Service Tax – CCR • Rule 7  Distribution of Credit by Input Service Distributor (ISD) • To extent Service Utilized by respective Unit or • Pro rata basis of the turnover of the concerned unit to the sum total of the turnover of all the units to which the service relates • Open Issues:- • Whether unaudited monthly/ Quarterly figures acceptable to Dept. • What happen for Capital Intensive project where Turnover starts only after a reasonable period

Service Tax – CCR –Rule 6 Common Inputs or input services Payment of 6% of value of exempted goods / services Follow Rule 6(3A) and reverse proportionate Credit attributable to exempted goods/ services Option I for inputs Option III for input services Maintenance of Separate records

Service Tax – CCR • Rule 10A  Transfer of unutilized Cenvat credit of SAD – Manufacturer having two or more factories can transfer unutilized Cenvat credit of SAD from one excise unit to another on strength of a transfer challan (W.e.f 1/4/2012) – Quarterly basis - Not available for Units availing Area based Exemption • Rule 14  No interest on wrong availment of Cenvat credit but not utilized - amended to provide that interest is chargeable if Cenvat credit is “wrongly availed and utilized”. Thus, no interest is chargeable if Cenvat credit is wrongly availed but remains unutilized • Rule 15  No Change relating to Penalty - Penalty may be charged even if Cenvat credit wrongly availed but not utilized

Thank You ! Bimal Jain A2Z Taxcorp LLP I Tax and Law Practitioners F-30/31/32, Pankaj Grand Plaza 1st Floor, Mayur Vihar, Phase–I, Delhi – 110091 India Desktel:+91-11-22757595 Mobile:+91 9810604563 bimaljain@a2ztaxcorp.com www.a2ztaxcorp.com

Overview of Cenvat Credit Excise and Service Tax