Change The Practices In New Financial Year 2016-17 (April 2016)

Hon. Finance Minister – Shri. Arun Jaitely have presented the budget on 29th February 2016. Though changes made in the Finance Bill, will be effective only after Finance Bill is passed in Lok Sabha & Rajya Sabha and thereafter giving ascent to the bill by Hon. President of India. However, the changes which has been made through Non-Tariff notifications, amending Central Excise Rules, Rules under Custom Act 1962 & Service Tax Rules will be effective from the date specified in such notifications.

There are substantial changes, which will be effective from 1st April 2016, which has been enumerated below:

Central Excise Rules 2002

  • Rule 8: Payment of duty: An assessee, engaged in the manufacture or production of articles of Jewellery, other than articles of silver Jewellery but inclusive of articles of silver Jewellery studded with diamond, ruby, emerald or sapphire having the turnover of Rs. 12 Cr. in the year 2015-16 then such units will have to pay excise duty on monthly basis after crossing the turnover of Rs. 6 Cr.
  • Rule 11 (8): Goods to be removed on Invoice: Now, digitally signed invoice can be handed over to the transporter while removing the goods from the Factory / Warehouse. There is no need to sign / attest the invoice copy.
  • Rule 12 (2) : Filing of Returns: From April 2016 onwards, only monthly returns in the form of ER-1/ER-2 or Quarterly Return for SSI Units in Form ER-3 needs to be filed. Assesses paying 1% duty will have to file quarterly ER-8 Return. Annual Return in the format to be prescribed (not yet prescribed) to be filed on or before 30th November 2016 by all the assesses.

Kindly note, following returns have been discontinued and hence no need to file.

* ER-4 : Annual Financial Information Statement- in case of duty payment either through PLA or Cenvat or both together is more than Rs. 1 crore in previous financial year.

* ER-5 : Information relating to Principal Inputs-in case of duty payment either through PLA or Cenvat or both together is more than Rs. 1 crore in previous financial year.

* ER-6 : Monthly return of receipt and consumption of each of Principal Inputs- to be filed by the assessee required to submit ER-5

* ER-7 : Annual Installed Capacity Statement

 

It is always advisable to carry out internal audit of monthly returns submitted and if errors are noticed, it can be corrected through filing the revised return by end of same calendar month. In other words, April Return is filed on or before 10th May. Internal Audit shall be carried out immediately after filing the return, so that necessary corrections, if any, required to be made through revised return which needs to be filed by 31st May.

Similarly, Annual Return required to be filed on or before 30th November and it is advisable to carry out the internal audit for confirming the accuracy after reconciling with financial statement. However, if required, revised Annual Return can be filed within one month from the date of filing the original Annual Return.

Rather it is advisable, no sooner, financial accounts are audited Annual Return to be prepared and the same can be audited prior to submission of Original Annual Return.

  • Rule 26: Personal Penalty: If the assessee have paid duties, interest and 25% of penalty (25% of duty) then no personal penalty can be imposed on Directors, officers who have been alleged to be abated for evasion of duty or carrying goods needed to be confiscated.

 

Cenvat Credit Rules 2004:

  • Rule 2(a): Cenvat on Capital Goods: Now, Output Service Provider can avail cenvat credit on wagons of sub-heading 860692. Needless to say, 50% in first year and 50% in the subsequent year
  • Rule 2(a): Cenvat on Capital Goods: Cenvat Credit can be availed on all office equipments received in the factory on or after 1st April 2016. Office equipments includes all assets such as furniture & computers that are absolutely essential for operations. However, it is necessary to receive the same in the factory for availing the cenvat credit.

“Equipment’ means “The act of equipping or fitting or state of being equipped, to supply with whatever is necessary to efficient action in the way“. Equipment received in the factory or office located in the factory premises, considering the definition of “Equipment” will include Air Conditioners, Coolers, Printers, Photocopiers, Computers and anything which equips for running operations. In other words, even the electrical fittings, telephones, washing machine, Vacuum Cleaner, etc. will also be entitled for Cenvat benefits.  

Cenvat Credit on capital goods i.e. any goods for water pumping which is installed outside of the factory, can be availed.

  • Rule 2 (k): Enhancement of definition of Inputs : Now, any capital goods having value of Rs. 10,000/- per piece will be considered as input instead of capital goods, thereby will be entitled for 100% cenvat credit in the first year of receipt itself. Further Goods (other than capital goods) used for pumping of water for captive use will be entitled for Cenvat Credit as Inputs. It is compulsory to take credit as Input Credit. No option to take as Capital goods credit. Compulsory tracking in the credit availment system. In other words cenvat Credit has to be taken as input and not as capital goods. It is also to be noted that, if credit under capital goods is taken then balance 50% cannot be taken in the subsequent year considering the period of limitation for availing cenvat credit. Still, it will not be free from litigation. It is also advisable to track in ERP in the purchase order itself under the rate column and decide the tax code accordingly.

 

  • Rule 2(m): Enlargement of scope of Input Service Distributor: Now even office of an outsourced manufacturing unit also will be considered as Input Service distributor Registration of Input Service Distributor can be obtained by the office / warehouse of outsourced manufacturing unit or address of such unit to be included in the ISD Registration for distribution of Cenvat Credit to the outsourced manufacturing unit also. This is very beneficial provision to all assesses which are getting goods manufactured under loan licensing or the merchant exporters.

 

  • Rule 4(5): Conditions for allowing Cenvat Credit: Now cenvat credit can be allowed even if jigs, dies & fixtures directly sent by the vendors to the job workers. There is no necessity that these goods to be received first at the factory then only to be sent to the Job Worker. Further, Jigs, dies & fixtures can remain with the job workers for three years instead of one year. There is no need of taking any permission to send the jigs, fixtures, etc. which will be returned within 180 days. But if it is going to be more than 180 days, then necessary permission is to be obtained from the office of Asst. Commissioner / Deputy Commissioner, then such jigs, fixtures can be retained at Job workers premises for 3 years.

 

  • Rule 4(6): Conditions for allowing Cenvat Credit: The cenvat credit on the service tax paid on payment on right of natural resources will available as Cenvat Credit proportionately over the period of assignment of such right.

 

  • Rule 6: Obligation of a manufacturer or producer of final products & a provider of output service : Each assessee who is manufacturing excisable goods or exempted goods, trading, providing taxable output services or providing exempted services including non-taxable services will have to intimate in writing exercising option / selecting the option, whether such assessee will pay amount to 6% on clearance of exempted goods or 7% on value of exempted service or non-taxable service or assessee will opt for cenvat reversal in accordance with formula prescribed under Rule 6 (3A) of Cenvat Credit Rules 2004. This exercise has to be furnished immediately in the month of April but not later than 5th May (Payment date). Now, there is no requirement to keep separate books of accounts for input and input services when manufacturer or output service provider provides excisable / taxable / non-taxable goods / service. This is the big relaxation. However, now precautions needs to be taken to ensure correct reversal under the said rule. The principles followed for such reversal will have to also match with cost statements and cost accounting policy of the assessee.

 

  • Rule 6. Obligation of a manufacturer or producer of final products and a provider of output service.
  • Rule 6 Sub-rule (1) has been substituted w.e.f. 1.4.2016.

1. CENVAT credit shall not be allowed on such quantity of input and input services as is used in or in relation to manufacture of exempted goods and exempted service.

 

Sub-rule (2) has been substituted w.e.f. 1.4.2016.

A manufacturer who exclusively manufactures exempted goods for their clearance up to the place of removal or a service provider who exclusively provides exempted services shall not be eligible for credit of any inputs and input services used.

Sub-rule (3) has been substituted w.e.f. 1.4.2016

Rule 6(3) – Options to a manufacturer of exempt & non-exempt goods and rendering of exempt & non-exempt services

In case of manufacture of exempt & non-exempt goods and rendering of exempt & non-exempt services the assessee has 2 options –

(a) pay an amount equal to six per cent of value of the exempted goods and seven per cent of value of the exempted services, subject to a maximum of the total credit taken or

(b) pay an amount as determined under sub-rule (3A).

The maximum limit prescribed in the first option would ensure that the amount to be paid does not exceed the total credit taken. The purpose of the rule is to deny credit of such part of the total credit taken, as is attributable to the exempted goods or exempted services and under no circumstances this part can be greater than the whole credit.

Sub-rule 3A of Rule 6:

(3A) For determination of amount required to be paid under clause (ii) of sub-rule (3), the manufacturer of goods or the provider of output service shall follow the following procedure and conditions, namely :-

(a) the manufacturer of goods or the provider of output service shall intimate in writing to the Superintendent of Central Excise giving the following particulars, namely :-

1. name, address and registration number of the manufacturer of goods or provider of output service;

2. date from which the option under this clause is exercised or proposed to be exercised;

3. description of inputs and input services used exclusively in or in relation to the manufacture of exempted goods removed or for provision of exempted services and description of such exempted goods removed and such exempted services provided;

4. description of inputs and input services used exclusively in or in relation to the manufacture of non-exempted goods removed or for the provision of non-exempted services and description of such non-exempted goods removed and non-exempted services provided ;

5. CENVAT credit of inputs and input services lying in balance as on the date of exercising the option under this condition;

 

Checkpoint:

1. Option to be intimated immediately.

2. Whenever there is change in Bill of Material (BOM), the changes also to be informed, especially item which has been newly added and which was not included in earlier intimation should be added and intimated and the same has to be tagged for taking the credit and identifying with “A” or ”B” as stated in the formula given below.

3. Whenever new product is going to be manufactured, the details of direct input also needs to be intimated and the same has to be tagged for taking the credit and identifying with “A” or ”B” as stated in the formula given below.

(b) the manufacturer of final products or the provider of output service shall determine the credit required to be paid, out of this total credit of inputs and input services taken during the month, denoted as T, in the following sequential steps and provisionally pay every month, the amounts determined under sub-clauses (i) and (iv), namely:

i. the amount of CENVAT credit attributable to inputs and input services used exclusively in or in relation to the manufacture of exempted goods removed or for provision of exempted services shall be called ineligible credit, denoted as A, and shall be paid

ii. the amount of CENVAT credit attributable to inputs and input services used exclusively in or in relation to the manufacture of non-exempted goods removed or for the provision of non-exempted services shall be called eligible credit, denoted as B, and shall not be required to be paid;

iii. credit left after attribution of credit under sub-clauses (i) and (ii) shall be called common credit, denoted as C and calculated as,-

                    C = T – (A + B);

Explanation – Where the entire credit has been attributed under sub-clauses (i) and (ii), namely ineligible credit or eligible credit, there shall be left no common credit for further attribution.

iv. the amount of common credit attributable towards exempted goods removed or for provision of exempted services shall be called ineligible common credit, denoted as D and calculated as follows and shall be paid, –

D = (E/F) x C;

where E is the sum total of :

(a) value of exempted services provided; and

(b) value of exempted goods removed, during the preceding financial year;

where F is the sum total of-

(a) value of non-exempted services provided,

(b) value of exempted services provided,

(c) value of non-exempted goods removed, and

(d) value of exempted goods removed, during the preceding financial year:

Provided that where no final products were manufactured or no output service was provided in the preceding financial year, the CENVAT credit attributable to ineligible common credit shall be deemed to be fifty per cent. of the common credit;

v. remainder of the common credit shall be called eligible common credit and denoted as G, where,-

G = C – D;

Explanation.- For the removal of doubts, it is hereby declared that out of the total credit T, which is sum total of A, B, D, and G, the manufacturer or the provider of the output service shall be able to attribute provisionally and retain credit of B and G, namely, eligible credit and eligible common credit and shall provisionally pay the amount of credit of A and D, namely, ineligible credit and ineligible common credit.

vi. where manufacturer or the provider of the output service fails to pay the amount determined under sub-clause (i) or sub-clause (iv), he shall be liable to pay the interest from the due date of payment till the date of payment of such amount, at the rate of fifteen per cent. per annum;

(c) the manufacturer or the provider of output service shall determine the amount of CENVAT credit attributable to exempted goods removed and provision of exempted services for the whole of financial year, out of the total credit denoted as T (Annual) taken during the whole of financial year in the following manner, namely :-

i. the CENVAT credit attributable to inputs and input services used exclusively in or in relation to the manufacture of exempted goods removed or for provision of exempted services on the basis of inputs and input services actually so used during the financial year, shall be called Annual ineligible credit and denoted as A(Annual);

ii. the CENVAT credit attributable to inputs and input services used exclusively in or in relation to the manufacture of non-exempted goods removed or for the provision of non-exempted services on the basis of inputs and input services actually so used shall be called Annual eligible credit and denoted as B(Annual);

iii. common credit left for further attribution shall be denoted as C(Annual) and calculated as,

      C(Annual) = T(Annual) – [A(Annual) + B(Annual)];

iv. Common credit attributable towards exempted goods removed or for provision of exempted services shall be called Annual ineligible common credit, denoted by

D(Annual) and shall be calculated as,

D(Annual) = (H/I) x C(Annual);

where H is sum total of-

(a)value of exempted services provided; and

(b) value of exempted goods removed;

during the financial year ;

        where I is sum total of –

(a) value of non-exempted services provided,

(b) value of exempted services provided,

(c) value of non-exempted goods removed; and

(d) value of exempted goods removed;

during the financial year;

(d) the manufacturer or the provider of output service shall pay on or before the 30th June of the succeeding financial year, an amount equal to difference between the total of the amount of Annual ineligible credit and Annual ineligible common credit and the aggregate amount of ineligible credit and ineligible common credit for the period of whole year, namely, [{A(Annual) + D(Annual)} – {(A+D) aggregated for the whole year)}], where the former of the two amounts is greater than the later;

(e) where the amount under clause (d) is not paid by the 30th June of the succeeding financial year, the manufacturer of goods or the provider of output service, shall, in addition to the amount of credit so paid under clause (d), be liable to pay on such amount an interest at the rate of fifteen per cent. per annum, from the 30th June of the succeeding financial year till the date of payment of such amount;

(f) the manufacturer or the provider of output service, shall at the end of the financial year, take credit of amount equal to difference between the total of the amount of the aggregate of ineligible credit and ineligible common credit paid during the whole year and the total of the amount of annual ineligible credit and annual ineligible common credit, namely, [{(A+D) aggregated for the whole year)} – {A(Annual) + D(Annual)}], where the former of the two amounts is greater than the later;

(g) the manufacturer of the goods or the provider of output service shall intimate to the jurisdictional Superintendent of Central Excise, within a period of fifteen days from the date of payment or adjustment, as per the provisions of clauses (d), (e) and (f) , the following particulars, namely :-

(i) details of credit attributed towards eligible credit, ineligible credit, eligible common credit and ineligible common credit, month-wise, for the whole financial year, determined as per the provisions of clause (b);

(ii) CENVAT credit annually attributed to eligible credit, ineligible credit, eligible common credit and ineligible common credit for the whole of financial year, determined as per the provisions of clause (c);

(iii) amount determined and paid as per the provisions of clause (d), if any, with the date of payment of the amount;

(iv) interest payable and paid, if any, determined as per the provisions of clause (e); and

(v) credit determined and taken as per the provisions of clause (f), if any, with the date of taking the credit.

Analysis :

Sub-rule (3A) has been substituted w.e.f 1.4.2016.

If option of reversal of cenvat credit in terms of sub rule 3A of Rule 6 has been opted then amount required to be reversed needs to be availed in the following manner.

  1. Avail Cenvat credit on all the inputs and input services received in the factory or through Input Service Distributor except for abnormality like theft, fire etc. This amount will be denoted as “T”
  2.  Derive the amount as denoted “A”

a.  Identify the inputs as described in the bill of material of the exempted goods / non-taxable services and as described in the cost sheet in accordance with Cost Accounting Standards No. 6.

 b. Non-taxable service includes services which are exempted

 c. Non-taxable services appearing in negative list of services or any activity which is not included in the definition of service excluding activity of transfer of title of the movable and immovable goods.

 d. Further, if service is exported but amount has not been realized either in foreign currency or within 6 months or extended period as allowed by RBI will be also considered as exempted service.

 e. Identify the input services which are directly attributable to the exempted goods or non- taxable services. The same can be  identified from the cost sheet as required to be work out in accordance with Cost Accounting Standard No. 10.

4.4 Direct Expenses: Expenses relating to manufacture of a product or rendering a service, which can be identified or linked with the cost object other than direct material cost and direct employee cost4. Examples of Direct Expenses are royalties charged on production, job charges, hire charges for use of specific equipment for a specific job, cost of special designs or drawings for a job, software services specifically required for a job, travelling Expenses for a specific job.

 f. Abated value also to be considered as a part of turnover of exempted service.

3. Derive the amount as denoted “B”

a. Identify the inputs as described in the bill of material of the non-exempted goods and as described in the cost sheet in accordance with Cost Accounting Standards No. 6.

b. Non-taxable service includes services which are exempted or

c. Non-taxable services appearing in negative list of services or any activity which is not included in the definition of service excluding activity of transfer of title of the movable and immovable goods.

d. Further, if service is exported but amount has not been realized either in foreign currency or within 6 months or extended period as allowed by RBI will be also considered as exempted service.

e. Identify the input services which are directly attributable to the exempted goods or non- taxable services. The same can be identified from the cost sheet as required to be work out in accordance with Cost Accounting Standard No. 10

4.4 Direct Expenses: Expenses relating to manufacture of a product or rendering a service, which can be identified or linked with the cost object other than direct material cost and direct employee cost4. Examples of Direct Expenses are royalties charged on production, job charges, hire charges for use of specific equipment for a specific job, cost of special designs or drawings for a job, software services specifically required for a job, travelling Expenses for a specific job.

4. Cenvat availed on Common input and input services will be denoted as “C”:

C = T – (A+B)

       5. Reversal of Cenvat Credit will be as follows :

D= (E/F)*C

E=Value of exempted services+ value of exempted goods during the preceding financial year.

F=sum of value of exempted services & goods and value of non-exempted services & goods

G= common eligible credit

G=C-D.

Total credit to be retained = B+G

     6. Valuation of Goods & Services to derive the turnover :

a. Value needs to be determined in accordance with transaction value in terms of Sec 3 / 4/ Sec 4A of Central Excise Act 1944 read with Central Excise (Determination of Price of Excisable goods) Rules, 2000.

In other words, value of the goods needs to be determined as follows:

i. Value in terms of Section 4, when excisable goods other than applicable under section 4A are sold to non-related party and price is sole consideration then transaction value needs to be taken.

ii. When excisable goods covered under section 4A are removed then assessable value should be considered at MRP less abatement and the same should be considered as turnover of such goods.

iii. Whenever excisable goods are cleared to the related party or transaction value is not the sole criteria then valuation rules needs to be considered in accordance with rule 4 , 5 , 6 , 7, 8, 9 & 10 of the Central Excise (Determination of Price of Excisable goods) Rules, 2000.

iv. When goods are exempted then value needs to be determined w.r.t transaction value. However, the principles of valuation will be the same as applicable for the excisable goods even for determination of turnover of exempted goods.

b. Value of taxable service needs to be determined in accordance with Sec 67 of the finance act read with Service Tax (Determination of value) Rules 2006.

When service tax is paid on the abated value then taxable value should be considered as turnover for determination of taxable service and abated value will be considered in the turnover of non-taxable value and the same principle will apply for the determination of turnover of non-taxable service except for trading. E.g. if services are provided w.r.t. outdoor catering and transaction value is Rs. 1 lac in such circumstances taxable value will be Rs. 40,000/- and turnover will be Rs. 60,000/-. Each such service wise turnover to be ascertain for taxable and non- taxable services.

In the case of a taxable service, when the option available under sub-rules (7), (7A),(7B) or (7C) of rule 6 of the Service Tax Rules, 1994, has been availed, shall be the value on which the rate of service tax under section 66B of the Finance Act, read with an exemption notification, if any, relating to such rate, when applied for calculation of service tax results in the same amount of tax as calculated under the option availed; or

c. In case of trading, turnover value to be ascertained as follows :

      1. 10% of Cost of goods sold of traded item OR
      2. Trading Turnover – Cost of Goods sold

The higher amount of (i) or (ii) should be considered as turnover of exempted service w.r.t. traded goods. In any case, cost of goods sold, should be determined from the cost sheet / working of cost audit / financial statement.

d. In case of trading of securities, shall be the difference between the sale price and the purchase price of the securities traded or one per cent. of the purchase price of the securities traded, whichever is more.

 

Sub-rule (3AA) has been Inserted w.e.f 1.4.2016.

Analysis:

in case a manufacturer or a provider of output service who has failed to follow the procedure of giving prior intimation, the Central Excise officer, competent to adjudicate such case may allow to follow the procedure as per sub-rule 3A of Rule 6 of Cenvat Credit Rules, 2004 and ask him to pay the amount prescribed subject to payment of interest calculated at the rate of fifteen per cent. per annum.

 

Sub-rule (3AB) has been Inserted w.e.f 1.4.2016.

Analysis:

The existing rule 6 of CCR (v) would continue to be in operation upto 30.06.2016, for the units who are required to discharge the obligation in respect of financial year 2015-16.

 

Sub-rule (3B) has been Substituted w.e.f 1.4.2016.

Analysis:

From 1st April 2016 onwards Banking and financial institutions can either reverse cenvat credit @ 7% on the total value of exempted services or reverse the Cenvat credit as per Sub-rule (3A) of rule 6 or reverse credit in respect of exempted services on actual basis in addition to the option of flat 50% reversal of Cenvat credit.

(3C) [* * *].

(3D) Payment of an amount under sub-rule (3) shall be deemed to be CENVAT credit not taken for the purpose of an exemption notification wherein any exemption is granted on the condition that no CENVAT credit of inputs and input services shall be taken.

Explanation I. – ” Value” for the purpose of sub-rules (3) and (3A),

  1. shall have the same meaning as assigned to it under section 67 of the Finance Act, read with rules made thereunder or, as the case may be, the value determined under section 3, 4 or 4A of the Excise Act, read with rules made thereunder;
  2. in the case of a taxable service, when the option available under sub-rules (7), (7A),(7B) or (7C) of rule 6 of the Service Tax Rules, 1994, has been availed, shall be the value on which the rate of service tax under section 66B of the Finance Act, read with an exemption notification, if any, relating to such rate, when applied for calculation of service tax results in the same amount of tax as calculated under the option availed; or
  3. in case of trading, shall be the difference between the sale price and the cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase) or ten per cent of the cost of goods sold, whichever is more.
  4. in case of trading of securities, shall be the difference between the sale price and the purchase price of the securities traded or one per cent. of the purchase price of the securities traded, whichever is more.
  5. shall not include the value of services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount;

Explanation II.- The amount mentioned in sub-rules (3), (3A) and (3B), unless specified otherwise, shall be paid by the manufacturer of goods or the provider of output service by debiting the CENVAT credit or otherwise on or before the 5th day of the following month except for the month of March, when such payment shall be made on or before the 31st day of the month of March.

Explanation III.- If the manufacturer of goods or the provider of output service fails to pay the amount payable under sub-rule (3), (3A) and (3B), it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT credit wrongly taken.

Explanation IV.- In case of a manufacturer who avails the exemption under a notification based on the value of clearances in a financial year and a service provider who is an individual or proprietary firm or partnership firm, the expressions, “following month” and “month of March” occurring in sub-rules (3) and (3A) shall be read respectively as “following quarter” and “quarter ending with the month of March”.]

(4) No CENVAT credit shall be allowed on capital goods used exclusively in the manufacture of exempted goods or in providing exempted services for a period of two years from the date of commencement of the commercial production or provision of services, as the case may be, other than the final products or output services which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made or services provided in a financial year.

Provided that where capital goods are received after the date of commencement of commercial production or provision of services, as the case may be, the period of two years shall be computed from the date of installation of such capital goods.

Sub-rule (4) has been Substituted w.e.f 1.4.2016.

Analysis: –

No Cenvat credit on capital goods used exclusively for manufacture of exempted goods or provision for exempted services shall be allowed for a period of 2 years from the date of commencement of commercial production or provision of service and where capital goods are received after the date of commencement of commercial production or provision of service, the period of two years shall be computed from the date of installation of such goods. However this provision will not be applicable for SSI.

(5) Omitted.]

(6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods removed without payment of duty are either –

(i)      cleared to a unit in a special economic zone or to a developer of a special economic zone for their authorized operations; or]

(ii)     cleared to a hundred per cent. Export oriented undertaking; or

(iii)    cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or

(iv)    supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No.108/95Central Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August, 1995; or

(iva) supplied for the use of foreign diplomatic missions or consular missions or career consular offices or diplomatic agents in terms of the provisions of notification No. 12/2012 Central Excise, dated the 17th March, 2012, number G.S.R. 163(E), dated the 17th March, 2012; or

(v)   cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002; or

(vi)    gold or silver falling within Chapter 71 of the said First Schedule, arising in the course of manufacture of copper or zinc by smelting, or

(vii)   all goods which are exempt from the duties of customs leviable under the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and the additional duty leviable under sub-section (1) of section 3 of the said Customs Tariff Act when imported into India and are supplied,

(a)     against International Competitive Bidding; or

(b)    to a power project from which power supply has been tied up through tariff based competitive bidding; or

(c)     to a power project awarded to a developer through tariff based competitive bidding, in terms of notification No. 12/2012 Central Excise, dated the 17th March, 2012]

(viii) supplies made for setting up of solar power generation projects or facilities.

 

Analysis :

Export of Exempted and non-exempted goods also will be considered for exclusion for the purpose of reversal of cenvat credit under Rule 6 of Cenvat Credit Rules.

As per the rules, exports under bond is mentioned under the exclusion list in Rule 6(6) of Cenvat Credit Rules 2004. However export of exempted goods are also treated as export under bond, since these goods are excisable and exported under Nil rate of duty and Nil rate of duty is also the duty and therefore cenvat will be allowed on the same and therefore are excluded from the provisions of Rule 6.

The decisions of the following High Court:

  • REPRO INDIA LTD. Versus UNION OF INDIA [2009 (235) E.L.T. 614 (Bom.)]
  • UNION OF INDIA Versus SHARP MENTHOL INDIA LTD. [2011 (270) E.L.T. 212 (Bom.)]
  • COMMISSIONER OF CENTRAL EXCISE Versus DRISH SHOES LTD. [2010 (254) E.L.T. 417 (H.P.)
  • Commissioner v. Drish Shoes Ltd. – 2015 (322) E.L.T. A112 (S.C.)] 

(6A) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the taxable services are provided, without payment of service tax, to a Unit in a Special Economic Zone or to a Developer of a Special Economic Zone for their authorised operations.

(7) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the taxable services are provided, without payment of service tax, to a unit in a Special Economic Zone or to a developer of a Special Economic Zone for their authorised operations or when a service is exported or when a service is provided or agreed to be provided by way of transportation of goods by a vessel from customs station of clearance in India to a place outside India.

Sub-rule (7) has been Substituted w.e.f 1.4.2016.

Sub-rule (7) is being amended so as to provide that credit taken on inputs and input services used in providing a service by way of “transportation of goods by a vessel from customs station of clearance in India to a place outside India” shall not be required to be reversed by the shipping lines. It may be mentioned here that this service presently qualifies as an “exempted service” on account of Rule 10 of Place of Provision of Supply Rules. Service by way of transportation of goods by a vessel from customs station of clearance in India to a place outside India is being excluded from the definition of „exempted service‟ by amending rule 2(e) of the rules as discussed above. Amendment in sub-rule (7) coupled with the corresponding amendment in the definition of Exempted Service is aimed at allowing credit of eligible inputs, input services and capital goods for providing the said service and providing Indian shipping lines a level playing field vis a vis the foreign shipping lines. The credit available may be used by Indian shipping lines to pay service tax on the services of transportation of goods by a vessel from outside India to the customs station of clearance in India, which would become taxable w.e.f 1st June 2016 after enactment of Finance Bill 2016.

 

(8) For the purpose of this rule, a service provided or agreed to be provided shall not be an exempted service when:

(a)     the service satisfies the conditions specified under rule 6A of the Service Tax Rules, 1994 and the payment for the service is to be received in convertible foreign currency; and

(b)    such payment has not been received for a period of six months or such extended period as maybe allowed from time to time by the Reserve Bank of India, from the date of provision.

Provided that if such payment is received after the specified or extended period allowed by the Reserve Bank of India but within one year from such period, the service provider shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier in terms of sub-rule (3) to the extent it relates to such payment, on the basis of documentary evidence of the payment so received.

 

Rule 7. Manner of distribution of credit by Input Service Distributor

The input service distributor shall distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or unit providing output service or an outsourced manufacturing units, as defined in Explanation 4, subject to the following conditions, namely :—

(a)   the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon;

(b)   the credit of service tax attributable as input service to a particular unit shall be distributed only to that unit;

(c)   the credit of service tax attributable as input service to more than one unit but not to all the units shall be distributed only amongst such units to which the input service is attributable and such distribution shall be pro rata on the basis of the turnover of such units, during the relevant period, to the total turnover of all such units to which such input service is attributable and which are operational in the current year, during the said relevant period;

(d)   the credit of service tax attributable as input service to all the units shall be distributed to all the units pro rata on the basis of the turnover of such units during the relevant period to the total turnover of all the units, which are operational in the current year, during the said relevant period;

(e)   Outsourced manufacturing unit shall maintain separate account for input service credit received from each of the input service distributors and shall use it only for payment of duty on goods manufactured for the input service distributor concerned;

(f)    Credit of service tax paid on input services, available with the input service distributor, as on the 31st of March, 2016, shall not be transferred to any outsourced manufacturing unit and such credit shall be distributed amongst the units excluding the outsourced manufacturing units.

Explanation.-The provision of this clause shall, mutatis-mutandis, apply to any outsourced manufacturer commencing production of goods on or after the 1st of April, 2016;

(g)   Provisions of rule 6 shall apply to the units manufacturing goods or provider of output service and shall not apply to the input service distributor.

Explanation 1.- For the purposes of this rule, ―unit‖ includes the premises of a provider of output service or the premises of a manufacturer including the factory, whether registered or otherwise or the premises of an outsourced manufacturing unit.

Explanation 2.– For the purposes of this rule, the total turnover shall be determined in the same manner as determined under rule 5:

Provided that the turnover of an outsourced manufacturing unit shall be the turnover of goods manufactured by such outsourced manufacturing unit for the input service distributor.

Explanation 3.– For the purposes of this rule, the relevant period‘ shall be, –

(a)     if the assessee has turnover in the financial year‘ preceding to the year during which credit is to be distributed for month or quarter, as the case maybe, the said financial year; or;

(b)    if the assessee does not have turn over for some or all the units in the preceding financial year, the last quarter for which details of turnover of all the units are available, previous to the month or quarter for which credit is to be distributed.

Explanation 4. For the purposes of this rule, ― outsourced manufacturing unit means a job-worker who is liable to pay duty on the value determined under rule 10A of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 on the goods manufactured for the input service distributor or a manufacturer who manufactures goods, for the input service distributor under a contract, bearing the brand name of such input service distributor and is liable to pay duty on the value determined under section 4A of the Excise Act.

Analysis :

Rule 7 has been Substituted w.e.f. 1.4.2016.

  1. Input service distributor can also distribute the CENVAT credit in respect of the service tax paid on the input service to an “outsourced manufacturing unit” along with its own manufacturing units and units providing services whether registered or otherwise.

For the purposes of this rule, ―outsourced manufacturing unit means a job-worker who is liable to pay duty on the value determined under rule 10A of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 on the goods manufactured for the input service distributor or a manufacturer who manufactures goods, for the input service distributor under a contract, bearing the brand name of such input service distributor and is liable to pay duty on the value determined under section 4A of the Excise Act.

However credit of service tax paid on input services, available with the input service distributor, as on the 31st of March, 2016, shall not be transferred to any outsourced manufacturing unit and such credit shall be distributed amongst the units excluding the outsourced manufacturing units.

2.  Following steps to be followed for distribution of Cenvat credit through ISD

  • The credit of service tax pertaining to specific unit should be identified and distributed to such unit only
  • The credit of service tax attributable as input service to more than one unit but not to all units shall be distributed only amongst such units to which the input service is attributable and such distribution shall be pro rata on the basis of turnover of previous financial year.
  • the credit of service tax attributable as input service to all the units shall be distributed to all the units pro rata on the basis of the turnover of such units on the basis of turnover of previous financial year.
  • The Cenvat credit distributed against invoice/challan etc. document should not be more than the amount of service tax paid thereon.
  • Total turnover shall be calculated as per the provision of Rule 5 of Cenvat Credit Rules, 2004 which is as follows.

“Total turnover” means sum total of the value of –

(a) all excisable goods cleared during the relevant period including exempted goods, dutiable goods and excisable goods exported

b) export turnover of services determined in terms of clause (D) of sub-rule (1) above and the value of all other services, during the relevant period; and

(c) all inputs removed as such under sub-rule (5) of rule 3 against an invoice, during the period for which the claim is filed.

  • if the assessee has turnover in the financial year‘ preceding to the year during which credit is to be distributed for month or quarter, as the case maybe, the turnover of the said financial year to be considered for calculation of pro rata for distribution ; or;

if the assessee does not have turn over for some or all the units in the preceding financial year, the last quarter for which details of turnover of all the units are available, previous to the month or quarter for which credit is to be distributed.

  • The turnover of an outsourced manufacturing unit shall be the turnover of goods manufactured by such outsourced manufacturing unit for the input service distributor.
  • outsourced manufacturing unit has to maintain separate account for input service credit received from each of the input service distributors and shall use it only for payment of duty on goods manufactured for the input service distributor concerned
  • provisions of rule 6 shall apply to the units manufacturing goods or provider of output service and shall not apply to the input service distributor

Check Points:

  1. Cost accounting principles of allocation of overheads as laid down in Cost Accounting Standard No. 3 read with Generally Accepted Cost Accounting Principles to be followed in case of allocation of Cenvat credit identified to particular unit.
  2. Similarly, principles of apportionment of expenses as specified in Cost Accounting Standard No. 3 read with Generally Accepted Cost Accounting Principles are to be followed while distributing the Cenvat credit to more than one unit. When the Cenvat credit pertaining to input services are common to different units, these are to be apportioned to those units only on an equitable basis.
  3. Balance common inputs should be apportioned / distributed based on the turnover ratio.
  4. Ensure ISD is distributed only to the Units having appearing in the ISD Registration. It may also include the names and address of outsourced manufacturing units. It is mandatory to include such units in the ISD, since the wording is mentioned as “Shall”.
  5. It is not the option to Distribute to particular unit or not or otherwise except specifically mentioned above.

Rule 7A. Distribution of credit on inputs by the office or any other premises of output service provider

(1)   A provider of output service shall be allowed to take credit on inputs and capital goods received, on the basis of an invoice or a bill or a challan issued by an office or premises of the said provider of output service, which receives invoices, issued in terms of the provisions of the Central Excise Rules, 2002, towards the purchase of inputs and capital goods.

(2)   The provisions of these rules or any other rules made under the Central Excise Act, 1944, as made applicable to a first stage dealer or a second stage dealer, shall mutatis mutandis apply to such office or premises of the provider of output service.

7B. Distribution of credit on inputs by warehouse of manufacturer

(1)   A manufacturer having one or more factories, shall be allowed to take credit on inputs received under the cover of an invoice issued by a warehouse of the said manufacturer, who receives inputs under cover of invoices, issued in terms of the provisions of the Central Excise Rules, 2002, towards the purchase of such inputs.

(2)   The provisions of these rules or any other rules made under the Excise Act as applicable to a first stage dealer or a second stage dealer, shall, mutatis mutandis, apply to such warehouse of the manufacturer.

Rule 7B has been Inserted w.e.f. 1.4.2016.

Manufacturers with multiple manufacturing units can maintain a common warehouse for inputs and distribute inputs with credits to the individual manufacturing units. Also a manufacturer having one or more factories shall be allowed to take credit on inputs received under the cover of an invoice issued by a warehouse of the said manufacturer, which receives inputs under cover of an invoice towards the purchase of such inputs. Procedure applicable to a first stage dealer or a second stage dealer would apply, mutatis mutandis, to such a warehouse of the manufacturer.

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