1. Sushil Aggarwal
9560196060

2. Cenvat Credit Rules
03/12/12 ASAP & Associates, CAs 2

3. Features of VAT
 VAT is designed to be a WOMB to TOMB
indirect tax mechanism boasting of multiple
stages of taxation without cascading tax effect.
It is a domestic consumption tax and not a
transaction or a business tax.
03/12/12 ASAP & Associates, CAs 3

4. Cascading Effect: Why
CENVAT and state VATs clubbed with CST
present a grim tax scenario having cascading tax
effects.
The Centre is restrained by the constitution from
collecting tax on goods beyond the point of
manufacture. Similarly States are restrained by
the constitution from levying tax on services and
interstate transactions.
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5. Cascading Effect: Why
Neither VAT nor Excise or Service Tax is a
comprehensive tax. With each one encroaching
upon the domain of the other, inefficiencies,
complexities and duplicity are order of the day.
Tangibility is no more a criteria to define goods
thereby making copyrights and trade marks as
tradable goods.
03/12/12 ASAP & Associates, CAs 5

6. Cascading Effect: Why
Real estate transactions are outside the scope of
both VAT and CENVAT. Both authorities see a
tax potential here without appropriate
constitutional rights.
The exempt sectors are not allowed to claim any
credit for the CENVAT or the service tax paid on
their inputs.
Answer to many of these problems lies in GST
03/12/12 ASAP & Associates, CAs 6

7. CONCEPT OF VALUE ADDED TAX
STRUCTURE
Single and double entry system of accounting :
Distinguish
Two Nails Theory : Match
No entity based exemptions
Provision of refund for embassies and exporters
SEZs.

8. 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

9. 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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10. Who is eligible to credit
 Credit is available to the “Provider of Taxable
Service”.
 Provider includes “person liable to pay service tax” -
recipient in specified cases.
 But credit not available unless “input”, Capital
Goods” or “Input service” has been used for provision
of output service.
 Credit not available on reverse charge mechanism.
However tax deposited under reverse charge
mechanism can be claimed as credit .
03/12/12 ASAP & Associates, CAs 10

11. What is available as credit
 Excise duty (+ additional excise duty etc.)
 service tax
 Education Cess & SHE
paid on:
 Excisable goods and taxable services, which are:
a Inputs
a Input Services
a Capital Goods
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12. What are inputs
All goods used in or in relation to the
manufacture of final product whether directly
or indirectly and whether contained in the final
product or not.
All goods used for providing an output service,
Goods used for manufacture of capital goods
which are further used in the factory for
manufacture. Exclude: Cement, Angles, TMT CTD
bars, material for construction of shed/ supporting
structure, foundation.
03/12/12 ASAP & Associates, CAs 12

13. What are not inputs
Exclusions from Inputs:
LDO, HSD, Petrol, Motor Vehicles whether or not used
for manufacture or provision of services, including:
lubricating oils, greases, cutting oils, coolants
Accessories of the final products cleared along with
the final products,
goods used as paint, or as packing material, or as
fuel, or for generation of electricity or steam used in
or in relation to manufacture of final products or for
any other purpose, within the factory of
production.
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14. When credit is available
for Inputs
 The CENVAT credit in respect of inputs may be
taken immediately on receipt of the inputs in the
premises of the provider of output services.
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15. What is input service
“Input service” means any service used by -
provider of taxable service for providing
an output service, or
manufacturer, whether directly or
indirectly, in or in relation to
• manufacture of final products and
• clearance of final products upto
the place of removal,
Inputs Continue…
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16. What is input service
and includes:
Services used in relation to setting up, modernization,
renovation or repairs of a factory, premises of provider
of output service or an office relating to such factory or
premises,
advertisement or sales promotion, market research,
storage upto the place of removal,
procurement of inputs,
activities relating to business such as accounting,
auditing, financing, recruitment and quality control,
coaching and training,
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17. What is input service
 computer networking
 credit rating,
 share registry and security,
 inward transportation of inputs or capital goods and
 outward transportation upto the place of removal
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18. •Input service must be directly related to provision
of output service.
•Apparently strict definition.
•Inclusive definition and use of words “such as”
soften it substantially.
•While the intended use of service is important to
be related to the output, direct relation to
manufacture and restriction up to pre-production
stage is not compulsory as far as provider of
service is concerned.
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19. 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 shall
form part of expenditure towards manufacture.
Group Medical Policy for Workmen
CCE &C Aurangabad Vs. Endurance Systems (P) Ltd. ,
cenvat credit of service tax paid on group medical policy is
allowable.
03/12/12 ASAP & Associates, CAs 19

20. 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 be allowed if the phone was not
installed at the factory premises, was dismissed.
Group Medical Policy for Workmen
CCE &C Aurangabad Vs. Endurance Systems (P)
Ltd. , cenvat credit of service tax paid on group
medical policy is allowable.
03/12/12 ASAP & Associates, CAs 20

21. Extended place of removal
Metro Shoes (P) Ltd. Vs. CCE Mumbai I 2008 CESTAT - MUM
Where the company manufactured shoes and also had its own
showrooms from where the shoes were sold, the cenvat credit in
respect of expenses like telephone, internet, insurance, courier,
warehousing etc could be allowed even though the same was post
manufacture, as the showrooms were extended place of removal.
CCE, Rajkot Vs. Rolx Rings (P) Lt. CESTAT AHM
A sale is completed on transfer of property in goods. Delivery and
payment are not germane to a sale transaction. In case of exports
the place of removal is the custom frontiers. Where the sale takes
place at the destination of the buyer the place of removal shall get
extended accordingly.
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22. Extended place of removal
Ambuja Cement Ltd. Vs. Union of India and Others 2009 P&H
HC
Asssessee supplied cement to customers on FOR Destination basis.
Freight up to the place of the customer is borne by the assessee and
so is the service tax thereon. Board Circular no. 97/6/2007 dt.
23.08.07 clarifies that in case of a destination base sale if (i) the
ownership of goods and the property in the goods remained with
the seller of the goods till the delivery of the goods in acceptable
condition to the purchaser at his door step; (ii) the seller bore the
risk of loss of or damage to the goods during transit to the
destination; and (iii) the freight charges were an integral part of the
price of goods, then credit for service tax on transportation up to
that place shall be allowable. The definition of sale and transfer of
property in goods as per sale of goods Act shall be more relevant
that the definition of place of removal of goods as per excise laws.
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23. Address on Invoice
General Electric International Inc Vs. CCE, Delhi 2009
CESTAT DEL
Invoice was addressed to the office of the appellant outside
India and the cenvat credit was denied by the commissioner
on that ground. The tribunal rejected the contention of the
department.
Relevance of premises of manufacturer
CCE, Vapi Vs. Alidhara Textool Engineers (P) Ltd. 2009
CESTAT AHM
Erection & Commissioning service availed by the manufacturer
and seller of machinery at the buyer’s premises through a
subcontractor. The tribunal held that credit could not be denied
on the ground that service not availed in manufacturer’s
premises.
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24. Cases regarding ‘Input
Service’
An advertisement is undertaken not for the promotion of
concentrates but for promotion of sales of aerated water
manufactured out of concentrates which are manufactured
by bottlers and not the appellant. The tribunal held that
this cannot be considered to be covered by the definition
as being input services used by the manufacturer whether
directly or indirectly in or in relation to the manufacture
of final products. [Coca Cola India Pvt. Ltd. v CCE, Pune
2007-TIOL-723-CESTAT-MUM; Pepsi Foods Limited v
CCE- 1996(82) ELT 33 (Tri.)]
Similar view has been taken by the Hon’ble Supreme
Court in the case of CCE, Mumbai v Parle International
Limited 2006 (198) E.L.T. 486 (S.C.).
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25. Inclusive and broad definition
• Income tax law of the country allows deduction for all expenses
incurred to earn the income. Tax Auditor identifies personal and
non-business expenditure for the purpose of disallowance. While
department may take an adverse stand on allowing credit for
service tax paid on disallowed expenditure, as a corollary service
tax paid on all allowable expenditure can not be denied.
• Transportation incurred on after sales maintenance and free
replacements is an allowable expense and credit should therefore
be allowed.
• Credit for input service in respect of commission expenditure
incurred for making sales should also be allowed as the same is
an allowable business expenditure.
• FBT is personal tax compensation of benefit passing on to an
employee. Even when the benefit is expressly provided to
employee as part of salary the same is allowable business
expense though taxable in hands of employee. Any personal
element can thus not be used to deny tax credit.
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26. Payment of input service
is pre-condition
 The credit is allowed only after the payment of
service tax as indicated in invoice. [sub-rule (7) of
Rule 4].
 There is no express provision for partial allowance
based on part payment or settlement for a lower
value.
 Contrarily liability of tax on output service arises
even on receipt of advance or a part of payment.
 A logical presumption is that credit should be
available on proportionate basis.
03/12/12 ASAP & Associates, CAs 26

27. Capital Goods
“Capital goods" means:-
(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. 68.05 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;
(iii) components, spares and accessories of the above;
(iv) moulds and dies, jigs and fixtures;
(v) refractories and refractory materials;
(vi) tubes and pipes and fittings thereof; and
(vii) storage tank,
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28. used-
(1) in the factory of the manufacturer of the final
products, but does not include any equipment or
appliance used in an office; or
(2) for providing output service;
(B) motor vehicle registered in the name of provider of
output service for providing taxable service as specified
in sub-clauses (f)(courier), (n)(tour operator), (o)(rent a
cab), (zr)(cargo handling), (zzp)(GTA), (zzt)(outdoor
caterer) and (zzw)(pandal-shamiana contractor) of
clause (105) of section 65 of the Finance Act;
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29. • Removal of capital goods attracts surrender of cenvat
claimed. However, removal for providing out put service
does not attract this if the time limit of 180 days for
return of goods is adhered to.
• Removal after partial use also attracts surrender but
adjustment at 2.5 per cent of the cenvat credit for each
quarter of a year or part thereof from the date of taking
the Cenvat Credit, will be allowed;
• If the capital goods are cleared as waste and scrap, the
manufacturer shall pay an amount equal to the duty
leviable on transaction value.
03/12/12 ASAP & Associates, CAs 29

30. • 50% of the cenvat credit allowed in the first year
when asset is received in premises. Balance in
subsequent year(s).
• Hire Purchase / finance options do not disturb the
claim
• Income Tax Depreciation benefit not allowable in
respect of value claimed as cenvat.
03/12/12 ASAP & Associates, CAs 30

31. Impractical condition for availing
CENVAT Credit for input on capital
goods
The assessee company utilized area outside the
factory for laying pipeline connecting factory to a
river situated around 12 kms away for the purpose of
drawing water for the factory. The court held this was
only an extension of the pipeline inside the factory
and hence Modvat /Cenvat Credit is permissible. [M/s
Pepsico India Holding Ltd. v CCE, 2001 (130) E.L.T.
193 (T); and Hindustan Coco Cola Beverages Pvt.
Ltd. v CCE, Thane-I, 2005 (190) ELT 287 (Tri-West
Zonal Bench, Mumbai)]
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32. Utilization / Application of
credit
 When to utilise
The CENVAT credit may be utilized for payment of
service tax on any output service, but the CENVAT
credit shall be utilized only to the extent such credit
is available on the last day of the month or quarter,
as the case may be [sub-rule (4) of Rule 3].
 A question may arise, whether CENVAT credit can be
used to pay interest and penalty.
 Refund of unused credit shall not be allowable under
any circumstances. (Rule 4(2))
Continue…
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33. Utilization /
Application of credit
 Reversal / utilization of Credit
The 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 after being
partially processed’ 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:
Continue…
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34. Utilization / Application
of credit
 Availing of credit is subsequent to recording of credit.
Recording and reversing amounts to not availing the
credit and no penalty can be invoked.
 credit can be denied to an assesse under the rule only
on two grounds, firstly for having failed to use the
inputs in the manufacture of goods and secondly for
having removed the inputs as such. The credit cannot
be denied to the assessee for having failed to utilize the
inputs for a long time or for having written off the
value of the inputs in the books. (CCE, Indore v. M/s
Kinetic motors Co. Ltd.)
03/12/12 ASAP & Associates, CAs 34

35. Utilization / Application
of credit
 However Rule 3 (5B) requires reversal of credit if the
value of input or capital goods is written off before
they are put to use.
 The credit in such a case shall be re-available when
such inputs or capital goods are put to use.
03/12/12 ASAP & Associates, CAs 35

36. Credit for inputs used in
exempt services
The expression “in the manufacture of goods” should
normally encompass the entire process carried on by
the dealer, converting raw material into finished
goods. It was also held that where any particular
process is so integrally connected with the ultimate
production of goods but for that process, manufacture
or processing of goods would be commercially
inexpedient, goods required in that process would fall
within the expression “in the manufacture of goods”.
[J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v Sales Tax
Officer, Kanpur reported in 1997 (91) ELT 34 (SC)]
03/12/12 ASAP & Associates, CAs Continue…
36

37. Common inputs: Taxable and
Exempt services
 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 shall 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 shall be eligible for credit
but further availability of credit shall get restricted.
03/12/12 ASAP & Associates, CAs Continue…
37

38. Common inputs: Taxable and
Exempt services
 Separate books of accounts be kept where both taxable
and non-taxable services are being rendered. Record of
receipt, consumption and inventory should be
maintained.
 In the absence of separate record the provider of service
shall pay 6% (8% up to 07/07/2009) of service tax on
the value of exempted service. OR
 Pay back/ reverse an amount equal to the Cenvat credit
claimed on the inputs or input services used for
exempted services. Rule 6(3A)
03/12/12 ASAP & Associates, CAs Continue…
38

39. Common inputs: Taxable and
Exempt services
 The option of payment or reversal of credit is to be
chosen by the Assessee and shall not be thrust upon
him.
03/12/12 ASAP & Associates, CAs Continue…
39

40. Procedure to exercise
option
Intimate to the Superintendent the intention to
exercise this option along with other details and
balance of cenvat credit unused.
Pay provisionally, every month, the cenvat
credit pertaining to exempt services. This shall
be calculated with a formula E/F*G where G is
the total of cenvat credit taken during the month
and E and F are the exempt and total services
rendered respectively in the preceding financial
year.
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41. Procedure to exercise
option
Pay the differential, if any, on completion of
year along with interest at 24%, based on actual
figures of the whole year. Where the full year
yield a lesser figure, the amount excess paid can
be adjusted as part of cenvat credit under
intimation to the Superintendent.
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.
03/12/12 ASAP & Associates, CAs 41

42. 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.
03/12/12 ASAP & Associates, CAs 42

43. Procedure to exercise
option
 Where: Assessee providing many services,
For some services, separate input record is
maintained
For others common inputs are used
Earlier law did not prohibit use of different method
of claiming credit in respect of different services
Now the rules clearly specify that same method
shall be used for all services and option once
exercised shall apply to the whole year.
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44. CA / CWA Certificate
Where the assessee maintains separate
records it may not be possible to
accurately bifurcate all inputs.
The basis of calculation of CENVAT
Credit amount attributable to inputs
used in or in relation to the
manufacture of exempted goods shall
be:
44

45. CA / CWA Certificate
Actual consumption of inputs used and for
this purpose quantification shall be based
upon the stores / production records
maintained by the manufacturer.
Certificate from Cost Accountant/Chartered
Accountant may be submitted at year end
specifying various detail.
45

46. Trading activities covered
under exempted services under
Rule 2(e)
“The question whether a given activity is one of
sale or service is a vexed question…… it is
possible that an activity may be service for
purposes of one Act and sale for purposes of
another Act. It may also be that in a given case
…. a particular activity can be treated as service
but in a different fact situation the same could be
sale under the same Statute”. [State of Uttar
Pradesh v Union of India 2004 (170) ELT 385
(SC): 2006 (3) STR 98 (S.C.) : (2004) 170 ELT
385 (SC)]
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47. Trading activities covered
under exempted services under
Rule 2(e)
If Trading could be service it could have also
been subjected to service tax. Constitution does
not allow centre to tax sale of goods. Trading can
not be treated as exempt service. Taxing
provisions that get attracted in the absence of
separate books should not be invoked where
service is rendered with trading of goods.
However to avoid litigation assessee may be
forced to chose one of the two options.
03/12/12 ASAP & Associates, CAs 47

48. Input Service Distributor
An input services distributor can not go for
the options and shall have to maintain
proper accounts only because he is like a
trader who distributes the service tax but
does not provide any service as such.
48

49. Full Credit for Sixteen
Services
 Law provides for full credit for 16 input
services unless they are inputs, exclusive to
exempt services. Following services are
included here.
Consulting Engineer
Architect
Interior Decorator
03/12/12 ASAP & Associates, CAs 49

50. Full Credit for Sixteen
Services
• Management, Maintenance or Repair
Foreign Exchange broker other than Banking &
Financial Institution with NBFC & Body
Corporate
• Intellectual property service other than copy
right
• Management Consultant
Real Estate Agent
03/12/12 ASAP & Associates, CAs 50

51. Full Credit for Sixteen
Services
• Security Agency
• Technical Testing and Analysis
• Scientific or Technical Consultancy
• Banking & Other Financial Services
• Erection, Commissioning or Installation
• Technical Inspection or Certification
• Construction services in respect of
Commercial or Industrial Buildings or Civil
Structures
03/12/12 ASAP & Associates, CAs 51

52. Full Credit for Sixteen
Services
• How to claim full credit of these services
while applying proportionate formula:
• Exclude these services for the purpose of
calculation.
03/12/12 ASAP & Associates, CAs 52

53. Abetments and exemptions
 a service provider who claims an abetment shall not
be eligible to input credit.
 Where a construction job is sub-contracted the
contractor will not be able to claim credit of input
service tax charged on the bill of the subcontractor
simultaneous to his claim for abetment. Abetment
relates to value of goods used while providing
services and thus has no relation to the eligible credit.
03/12/12 ASAP & Associates, CAs 53

54. Credit under composition
scheme
 Rule 3(2) of the Works Contracts (Composition
Scheme for payment of Service tax Rules 2007
provides that the provider of taxable service opting to
pay service tax under the scheme is not entitled to
take CENVAT credit of duty on inputs used in or in
relation to the said works contract.
 There is no restriction under notification N. 32/2007
dated 22.05.07 to take CENVAT credit of duty paid
on capital goods and service tax paid on input
services. Master circular 96/7/2007 dt. 23-08-2007.
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55. THANKS
03/12/12 ASAP & Associates, CAs 55