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Cenvat Credit Rules from scratch- Part 1

Cenvat Credit Rules from scratch- Part 2

Q-1 Describe the following terms:

(a) First & Second stage dealers

(b) Input Service distributor

(c) Input credit distributor


(a) First & Second stage dealer:

--First stage dealer means a person buying goods directly from manufacturer/importer, such dealer registered with Central Excise department and is eligible to pass CENVAT credit (of excise paid to manufacturer) by issuing CENVATABLE invoices.

For Instance: Assume 3 cos.-S.Acid P Ltd, Guj Flurochem Ltd. And Star Chemicals limited…..

S.Acid P. Ltd is registered with CE deptt. as 1st stage, purchasing chemicals from Guj, Flurochem Ltd,so here Guj Flurochem will charge excise duty to S. Acid on sale of chemicals…here assume Star Engg Ltd(engaged in manufacturing of engg goods & rendering engg services) is another co. which is purchasing chemicals from S.Acid, so here S. Acid can pass the credit of excise to Star Engg as included (in sale price chargeable to Star) … Star  can claim credit of excise as passed by S.Acid(1st stage dealer)

Similarly, second stage dealer is a person who buys goods from 1st stage dealer; he is also required to obtain registration with CE deptt. and he can also pass credit by issuing CENVATABLE invoices.

(b) Input Service distributor-(Rule 2(m) read with Rule 7)

ISD is an:

-office of the manufacturer of final products or provider of o/put services

-which receives invoices issued under Rule 4A of ST Rules,1994

-towards purchase of input services

-and distribute the credit of such input service tax to the manufacturer or service provider -by issuing invoices u/Rule 9 of CCR,2004.

Example- Bata Ltd, a   shoe manufacturing co. has its factories in Delhi & Mumbai and “Marketing offices” in different parts of India like in Chennai,Kolkata,Bangalore and Ahmedabad. The marketing offices use the services of various types like Advertising, Market Survey, Courier and other services, and pay service tax on the same. So, Marketing Offices has incurred service tax on various services used by them. So here an option available is that to distribute the credit of ST to various factories so that the same can be claimed by the factories in discharging their excise liability. Bur for distributing the credit as such the marketing offices have to get them registered with ST department as Input Service Distributor under ST Rules(Registration of Special Category of Persons),2005.

Manner of distribution of credit:

The credit of ST to be distributed to manuf’ or service providing units in the ratio of their turnover…..In our above example in the ratio of turnover of factories Delhi and Mumbai.. Credit of ST attributable to a service wholly used in one unit shall be distributed to that unit only. For Example-If Delhi factory specifically instruct the marketing office of Ahmedabad to conduct a market survey for its exclusive use…then the credit of  ST incurred for such an arrangement to be wholly distributed to Delhi factory only.

Formula for working out credit to be distributed to a particular unit(in cases where services are used commonly)

--Credit to be distributed to a unit =

T/over of that unit for the period(*month/quarter) x Tax paid on input services for the pr.

Total T/over of all units for the period                                                             

*Period means month for companies, HUF etc and quarter for individuals, firms etc.

Return by ISD:

The ISD to file return in form ST-3 half yearly by the 30th of the month following the half year…..i.e. October 30 and April,30.. In the return, ISD is required to provide the particulars of various credit availed and distributed.  

(c) Input credit distributor :( Rule 7A)

--In many cases the s.provider purchase inputs & capital goods but the invoices are in the name of head office, but actually the inputs/capital goods are used at some other premises to provide output services.

So, such office may distribute credit to s.provider by issuing an invoice in the favour of s.provider.

Example: ITC Ltd provides services from its office located at Mumbai  while its HO is located at Chennai. The capital goods and inputs are purchased in the name of HO …but the same are actually being used by Mumbai office in providing services…so here ITC HO can distribute/transfer credit of input excise paid on purchase of inputs and capital goods.

Note: In service tax and excise every unit of an enterprise is treated separately unless the assessee has opted for centralized registration   and therefore HO and office providing service are treated as 2 different persons.

--Also note that such input credit distributor needs not to be registered with CE or ST deptt.Practically this concept is not much prevalent.

Q-2 Describe:

(i) Exempted goods

(ii) Exempted services

(iii) Output Service

Ans (i) Exempted goods-(Rule 2(d) of CCR,2004 define as:

-means excisable goods which are exempt from whole of excise duty

-includes goods chargeable to NIL rate of duty

-also include goods in respect of which benefit of exemption is claimed *u/N.N 1/2011 and *N.N. 12/2012(at Serial No. 67/128)

(*Please note that such notified goods are not totally exempt from excise but chargeable to concessional rate @2%...but still termed as exempted goods)

(ii) Exempted services-as defined by Rule 2(e) of CCR, 2004-

-means taxable service which is exempt form whole of ST chargeable

-services which are not taxable u/s 66B of FA,1994 (services provided in J&K or outside India)

-and also includes taxable services whose part of value is exempted conditionally by issuing an (abatement) notification that no Cenvat credit will be taken.

But an exempted service does not include:

- a service which is exported in terms of Rule 6A of ST Rules,1994

(Rule 6A provides certain conditions…so if services are provided o/side India by satisfying these conditions then only such service is an export of service otherwise it is only an exempted service)

(iii) Output service-as defined in Rule 2(p),CCR-

-means a service provided by a service provider

-located in India(other than J&K)

-but shall not include

1) Services specified in Sec66D of FA,1994(-ve services)

2) Services where the whole of ST is payable by service receiver…So GTA services provided by GTA to company where 100% ST is payable by the company is not output service for GTA.

Q-3 Describe how exempted goods and services affect CENVAT credit?

Ans-3 Suppose you are manufacturing pencils by using raw materials like graphite, wood etc…you purchased the same by paying excise duty …..and here also assume that pencil(final product) is fully exempt from output excise duty….

So, here we see that inputs are excisable but final product is fully exempt ….in such a case Rule 6(1) of CCR,2004 says that the ‘no credit’ of ST and excise can be taken if such inputs  or input services or both are used in manufacturing of exempted goods…

Therefore, Rule 6(2) says that-

- if  a manufacture(mfrer) or s.provider claims CENVAT credit in respect of inputs and input services 

- and manufacture / provides, final products or output service which are chargeable to duty tax as wells as exempted goods or services….

-- then, the mfrer or s.provider shall maintain separate accounts in the manner prescribed as under:

Separate accounts to be kept for and CREDIT ALLOWED FOR

Separate Accounts to be kept for and CREDIT NOT ALLOWED FOR

In case of inputs

-Separate accounts for receipt, consumption and stock of inputs used in manufacture of

(i) non- exempted  goods**(see note after the table)

ii) exempted goods

- Separate accounts for receipt, consumption and stock of input services used in providing

(i)taxable services

(ii)exempted services’

Credit allowed only for inputs used in manufacturing non- exempted goods and providing taxable services. In short credit not allowed for use in other than exempted goods and exempted services.

In case of inputs services

-Separate accounts for receipt and use of input services manufacture of:

(i)non- exempted  goods

(ii) exempted goods

-Separate accounts for receipt and use of input services in providing of:

(i) taxable services

(ii) exempted goods

Credit allowed only for input services used in manufacturing non- exempted goods and providing taxable services. In short credit not allowed for use in other than exempted goods and exempted services.

**Note-non- exempted goods means goods chargeable to duty of excise at some rate and such goods doesn’t include excisable goods chargeable to duty at NIL rate.

Therefore, in Rule 6, instead of using the word “excisable goods” , the word “non- exempted goods” have been used , so as to exclude excisable goods chargeable to NIL rate of duty.

In short, if inputs or input services are used in manufacture of excisable goods (chargeable NIL rate) then the credit is not allowed.

Option not to maintain separate accounts (as above)-Rule 6(3)

-If the mfrer or s.provider does not want to maintain separate accounts as required by Rule 6(2) above then he may opt any 1 of 3 options prescribed in Rule 6(3)

Option1: Fixed percentage reversal:

-No need to maintain separate accounts, just pay 6% of value of exempted goods and services….

(in lieu of said payment of 6%,  you may claim credit of all duties of  inputs/input services used in manufacturing/rendering exempted goods/services as well as  used for manufacturing non-exempted and taxable services)

-But credits of inputs/input services used exclusively for manufacturing exempted goods/rendering exempted services cannot be claimed…

For Instance: So if a company produces multiple products(A,B,C,D…) but it is using material ‘XYZ’ in exclusive production of Product A only and if A is exempt from o/put excise, then the credit in respect of ‘XYZ’ cannot be taken.

If ‘XYZ’ is used for B or C also then the co. may claim the credit in respect  of XYZ by paying 6% of value of exempted goods(here,A)

Option 2-Pro-rata reversal:

--Pay an amount determined u/Rule 6(3A) for in respect of inputs and input services. (discussed later)

Option 3-Separate accounts for inputs and pro-rata reversal for input services u/Rule 6(3A)

Now, both option 2&3 can be understood by understanding Rule 6(3A)

Rule 6(3A)

I. Provisional reversal every month:

1. In respect of inputs:

(a) used in manufacturing exempted goods-

--Input credit attributable to inputs used in mfr of exempted goods for the month.

(Amt to be determined on the basis of accounting records like stores & production records)

(b) used in providing exempted services:

--Credit to be reversed =Value of exemp services(prev FY) x (Total cr. On inputs for  current month-Input credit attributable to inputs used in mfr. exempted goods for current month)

Total value of exempted & taxable services of prev FY +Total value of goods mfrd&removed of prev FY(excluding exemp goods)

2. In respect of input services:

-used in manufacturing exempted goods or in providing exempted services

Credit to be reversed -

Formula: (Value of exempted goods+exempted services, prev FY ) x Total credit of  input services for the month    

Value of exemp& taxable services+ Value of exemp & non-exempted goods

manufactured & removed; all values in denominator for previous FY.

II. Actual reversal

-Actual reversal to be worked out after the end of FY so as to adjust the provisional reversal made monthly as per I ….

-If actually reversible amount exceed provisionally reversed, then difference to be reversed by 30th June of next FY…on the contrary if provisional reversal was excess as compared to actually reversible amount, then excess reversed can be re-taken as Cenvat credit.

-In actual reversal the base will be always the values of Current FY(and not previous FY).

Working of actually reversible amount at the end of FY–

1. In respect of inputs-

(a) used in manufacturing exempted goods-

--Input credit attributable to inputs used in mfr of exempted goods for the FY.

(Amt to be determined on the basis of audited stock records and a certificate from CA/CMA to obtained certifying the same.)

(b) used in providing exempted services:

-Credit to be reversed-

Formula- Value of exemp services x (Total credit on inputs for the FY- Input credit attributable to inputs used in mfr. exempted goods)

Total value of exempted & taxable services of current FY + value of goods mfrd&removed of current FY (excluding exemp goods)

2. In respect of input services:

-used in manufacturing exempted goods or in providing exempted services

Credit to be reversed:

Formula – (Value of exempted services + Value of exemp goods, both for current FY)

 x Total credit in  respect of input services

 Total Value of  exemp goods and non-exemp goods + Value  exempted + Value of  taxable services: all values in denominator for current FY

Therefore, manufacturer or s.provider can choose any of 3 options , option 2 & 3 is based on Rule 6(3A) (discussed above), whereas option  1 is fixed % reversal @ 6%.

Reversal in terms of Rule 6(3) means “credit not taken”-

-Such reversal made under opt 1 to 3 is deemed as not taking CENVAT credit for the purpose of obtaining benefit in respect of an exemp notification where benefit is extended on the condition that Cenvat credit in respect of input and input services shall not be taken……

-Because almost all abatements/exemp require that you cannot claim both CENVAT and exemption at the same time, but assessee reversing credit u/Rule 6(3) is not effectively taking CENVAT credit , therefore it has been deemed as that assessee making reversal in terms of Rule 6(3A) is not taking any CENVAT credit therefore eligible for exemption/abatement benefits.

Special Provision in case of Banks , Financial Institution and NBFC-Reversal @ 50% of credit taken every month-(Rule 6(3B),CCR)

-Rule 6(1) to 6(3) are not applicable to Banks , Financial Institution and NBFC.

-Such assesses required to reverse 50% of Cenvat credit availed on various inputs and input short take only 50% credit.

-The logic behind reversal is that such institutions providing both taxable and exempted services but it is practically not possible to segregate taxable and exempted services…therefore 50% straightaway reversal provision for the sake of simplicity.

Q-4 What are the situations in which Cenvat credit can be claimed as refund?

Ans- I. Refund of Cenvat credit in case of exporters (Rule 5, CCR)

Who can claim refund?

-A manufacturer who clears final products for export without payment of duty(i.e under Rule 19 of CE Rules,2002)

-A s.provider providing an output service exported in terms of Rule 6A of ST Rules,1994.

Note: Clearances to 100% Export Oriented Unit (EOU) is also treated as export for the purpose of Rule 5.

Refund of what and admissible refund?

-Refund of Cenvat credit availed in respect of inputs and input services used in manufacturing exported goods or exported services.

-Scheme of refund is quarterly.

-Admissible refund is lower of (a) and (b):

(a) As per formula- (Export turnover of goods + Export turnover of services) x Net Cenvat credit

Total turnover

Where, Net Cenvat credit = Cenvat credit availed for the qtr. - Credit reversed in terms of Rule 3(5C)(i.e in respect of goods on which excise duty is remitted)

Export t/over of goods = Payments received during quarter for export services + Export services which are now provided  of which amount was received earlier in advance – Advances received for services to be provided in future.

Export t/over of goods = Value of final & intermediate goods cleared for “export without payment of duty” during the quarter ….if exported with payment of duty then not to be included here.

Total t/over = All excisable goods cleared during the quarter(including exempted and exported goods with/without payment of duty)+Value of exempted services+ Value of exported services + Value of all other services for that quarter as per ST Valuation Rules.

(b)Balance lying in Cenvat credit account.(i.e unutilized Cenvat credit availed in respect of export goods/services)


Total credit of ST on input services

Rs. 6,000

Total t/over of o/put services

Rs. 30,000

Output service exported

Rs. 20000

Solution Refund u/Rule5 lower of:

1.Formula based amt =  (Export turnover of goods + Export turnover of services) x Net Cenvat credit

                               Total turnover

= (Nil +20000) x 6000(Cenvat cr availed)


=Rs. 4,000

2. Balance lying in Cenvat credit A/c-

Total credit taken (input services)


Less ST on taxable services other than exports (10,000*12.36%)




So, quarterly refund admissible = Rs. 4,000

II. Refund of Cenvat credit  in respect of inputs to units in specified areas:(Rule 5A)-

-where a manufacturer has cleared specified final products in terms of NN.20/2007 from Assam,Tripura,Meghalya,Sikkim, Arunachal Pradesh and other north-eastern states.

-and unable to utilize the credit of duty taken on inputs required for manufacture of said final products

-then Central govt. may allow refund of such unutilized credit subject to fulfillment of conditions of above notification.

III. Refund of Cenvat credit to service provider providing services taxed on reverse charge(Rule 5B)-

-A s.provider providing services specified in sec 68(2) of FA,1994

-where ST is payable wholly or partly by s.receiver

-and as such s.provider not being able to utilize the credit in respect of inputs and input services

-shall be allowed refund of such not utilized Cenvat credit.

With this we finish our discussion on Cenvat credit Rules…I hope it was helpful. :-)

So Good Bye and have a nice time ahead.

For any feedbacks, queries and comments you are most welcomed.

Thanks for you reading

With Warm Regards

Saurabh Maheshwari

करत करत अभ्यास के, जड़मति होत सुजान 
रसरी आवत जात ते, सिल पर परत निसान

(Like repeated up and down motion of a soft rope over the stone wear it similarly  by repeated practice even a very ordinary intellected person can become a person of knowlwdge.)


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Saurabh Maheshwari
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