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By Madhukar N Hiregange FCA
& Sudhir V S. B.com , ACA
The Cenvat Credit Rules 2004 has followed the Modvat provisions of 1987. This has replaced the Service Tax Credit Rules 2002 which was in vogue for two years where initially the service tax credit within the same service was allowed and then expanded to allow credit of all services which went into providing of output service. In understanding the new rules the earlier provisions of proforma credit as well as Modvat Credit would provide a wealth of guidance. The way in which the law developed and became more permissive would also be important. We have provided in this paper brief introduction and then a rule wise brief discussion on the aspects of: the definitions; types of credits admissible; conditions for credit: job work; refund of credit; treatment of common inputs; input service distributor; documents; transitional credit; and recovery for the tax not paid along with penalty. 
Chapter V of Finance Act, 1994 is the provisions, which governs the levy and collection of Service Tax. Clause (eee) in Section 94(1), which is a part of the said statutory provision, was introduced w.e.f. 14.5.2003 wherein the Central Government was given power to formulate rules pertaining to the credit of service tax paid on the services consumed or duties paid or deemed to have been paid on goods used for providing a taxable service. Though these changes were made in Finance Act 2004 , effect of the same was given in September 2004 along with facility of service tax credit to manufacturers.
This led to notification of Cenvat Credit Rules, 2004 w.e.f. 10.9.2004. There is no separate rule for service providers and the service tax credit rules have been subsumed into the Cenvat Credit Rules, which was earlier applicable only for the manufacturers. Now we have a common rule.
It goes without saying that for the manufacturer this measure would be useful as the total credit available for set off against the excise duty payable would be more to the extent of service tax availed. This would reduce the excise cost for the manufacturer or if he chooses to use it for service tax payment that too.
The object of this change is to provide cross sectional credit of goods and services used for rendering taxable services or used in or in relation to manufacture of excisable goods. One small step to the final Goods & Service Tax expected after merging of the major indirect taxes, which is expected to take place in 5-6 years time. This set off concept would be put in place when VAT is in place next year where it would be limited to the local sales tax. i.e. Karnataka VAT. In the case of works contract the liability under service tax and K-VAT may co-exist.
The Cenvat scheme is meant to provide for credit to the service provider, manufacturers thereby avoiding the cascading effect of taxation of input services, inputs used and capital goods use for rendering the taxable output services.
The Tribunals with regard to credit of goods has held in a plethora of cases that the CENVAT scheme is a beneficent piece of legislation and unless it is shown that the items are specifically excluded, CENVAT credit cannot be denied. In this regard reference can be made to the decision in case of CCE v. Bimetal Bearings Ltd. - 1991 (56) E.L.T. 578 (Tri).
In CCE v. Engine Valves Ltd. - 1990 (48) E.L.T. 287 (Tri), in the context of earlier Modvat Rules, it was held that the rules have to be interpreted progressively to ensure that the purpose of the scheme is preserved. Therefore, the Rules are to be read liberally and not literally. This however does not mean that the substantive conditions need not be followed. Denial of credit could be the result of such an adventure.
Here the important definitions are provided and discussion for better understanding of the same is as under:
Capital goods
As per Rule 2(a) capital goods means
(A) the following goods, namely :-
a. all goods falling under Chapter 82(Tools & implements and parts thereof), 84(Machinery, Mechanical Appliances and parts thereof), 85(Electrical/Electronics Machinery and Equipment) or 90(Optical, Photographic and surgical instruments), heading 68.02(Abrasive powder on bases like textile, paper etc) and sub-heading 6801.10(Grinding Wheels and parts) of the First Schedule to the CET ;
b.   Pollution Control Equipments
c. components, spares and accessories of the goods specified in (a) and (b) above;
d. moulds and dies, jigs and fixtures;
e. refractories and refractory materials;
f.  tubes and pipes and fittings thereof; and
h. storage tank.
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 vehicles registered in the name of provider of output service for providing taxable service as specified in sub-clauses (f)(Courier Agency), (n)(Tour Operator), (o)(Rent a Cab Operator), (zr)(Cargo Handling), (zzp)(Goods Transport Agency), (zzt)(Out Door Catering), and (zzw)(Pandal & Shamiana services),
It is important to note that definition of capital goods for manufacturer is wide enough to cover any of the above goods (other than equipment or appliances used in office), which are used in the factory though the same are not used directly in the manufacturing activity.
However as far as the service provider is concerned, the definition is not wide enough to cover all the goods listed unless the capital goods are used for providing output service. Therefore it becomes essential to establish the usage of the said capital goods for providing output service. Further service provider can take the credit even on the equipment or appliances used in office if the same are used for providing output service.[ indirect usage] Whether the credit is available on the furniture and interiors used for providing the taxable services is a matter, which would be required to be settled judicially. However for these the credit if any admissible would be under the category of “inputs” as they fall into Chapter 94 and are not covered in the Chapter mentioned supra.
In the opinion of the paper writer these should be allowed not only for service providers but also for the manufacturers.
Exempted Services
Rule 2(e) defines “exempted services” to mean taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act;
The exempted services are generally understood to mean the services, which are covered under the levy but exempted, by way of notification. This understanding of the definition has been widened not only to cover such services but also services, which are not covered under the levy at all. This definition would be important, as there are some restrictions over the input services used in such exempted services either in full or part.
It would be important to note that the export of services would not be construed as exempted services and therefore the credit on the same would be available. However if the exported service is not a taxable service then in terms of the plain reading of the provisions the credit would not be available in view of the paper writer.
Rule 2(k) defines input to mean
(i)      all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, 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;
(ii)     all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service;
Explanation 1. - The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.
Explanation 2. - Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer;
As far as the service provider is concerned, input means all goods, except light diesel oil, high-speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service;
Further there is an explanation, which clarifies that the light diesel oil, high-speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.
The general test to consider goods to be input for service provider would be to see whether:
(a)    the inputs are used for rendering output service
(b)    the inputs do not fall within the excluded category, for e.g., plant/machinery/tools, etc. which are eligible for capital goods credit.( as per the definition discussed above)
If the above tests are satisfied, then the item(excluding the specified items) would be an eligible input for the purpose of Credit for paying service tax or central excise duty.
It is the view of the paper writer that the items, which are capital goods in general understanding, which do not fall into the definition of capital goods (see definition earlier) maybe categorized under input itself provided they are used for providing of the service or in the manufacture of excisable goods. 
It is interesting to observe that portion of the input definition for service providers is having less scope than that of input definition for manufacturer. The input definition for service provider uses the different phrases/ wordings than that for manufacturer in terms of usage (for manufacturer it is wide as it uses the word in or in relation to manufacture). Therefore the eligibility of inputs for credit in so far as the service provider is concerned would have to be decided with care to avoid denials at a later stage.
Input Services
Rule 2(l) defines ‘Input Service’ as any service
(i) used by provider of taxable service for providing an output service; or
(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal
and includes services used in relation to
o        setting up; modernization; renovation or repairs of
§         premises of output service provider
§         an office relating to such premises,
o        advertisement or sales promotion,
o        market research,
o        storage up to the place of removal,
o        procurement of inputs,
o        activities relating to business, such as
§         accounting,
§         auditing,
§         financing,
§         recruitment and quality control,
§         coaching and training,
§         computer networking,
§         credit rating,
§         share registry, and
§         security,
o        inward transportation of inputs or capital goods; and
o        outward transportation up to the place of removal.
The study of definition reveals that there are two portions in the definition. In the first part the definition is general and provides eligibility for all input services, which have direct nexus to the output services. In such cases the usage maybe questioned if there is a doubt.
Output service has been specifically explained to include services on which service tax is payable as recipient of service.
However it seems that lawmakers have understood the fact that certain input services cannot be directly linked to the output services due to their general use. Therefore the second part specifically lists such services. Plain reading leads to the conclusion that there is no need to establish the fact of such service are being used for taxable output services before availing credit. However there are certain other provisions, which may impose restriction on such services, which are used in exempted services either in part or full. Therefore the link maybe necessary for the services put forth in the second part.
Input service Distributor
Rule 2(m) defines “input service distributor” (ISD) - means an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be;
Interestingly this definition could lead to many interpretations. The definition sets out that the input service distributor is not an independent person. The ISD is an office of the service provider or manufacturer in who receives the bills though the services are rendered at the factory or premises or branches.
The Input Service Distributor typically would be the marketing and selling office, corporate office, head office, which receives all the invoices for various services, which are used across the various factories, branches, sales offices, depots and service centres of the company. The Group of Companies / entities having a common marketing would not be able to work as ISD at this point of time. In the years to come this facility maybe also extended to independent service providers/ group concerns with some initial restrictions.
These ISDs are now required to be registered and file the returns indicating the credits availed and those passed on.
Job work
Rule 2(n) defines “job work” as processing or working upon of raw material or semi-finished goods supplied to the job worker, so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation, which is essential for aforesaid process. Further the expression “job worker” also should be considered based on the same.
Output Service
Rule 2(p) defines “Output service” means any taxable service provided by the provider of taxable service, to a customer, client, subscriber, policyholder or any other person, as the case may be, and the expressions ‘Provider’ and ‘Provided’ shall be construed accordingly.
It is essential to examine the scope of this definition as most of the credit provisions refer to output service. The definition of output services was enumerated in the earlier Service Tax Credit Rules also however the word ‘Taxable’ was removed in the said definition. But in this rules the same is re-introduced. Therefore to be considered as output services, the same should be taxable services and not merely a service. This may cause some problems due to the fact that the word output services is used in most of the places where there may be a case which may constitute both taxable services and non-taxable services. Similarly wherever the wordings service provider is used along with output service it may have to be construed as taxable service provider.
Types of Duties for CENVAT Credit availment
Rule 3(1) allows a provider of taxable service to take credit (referred to as CENVAT) of
    1. The duty of excise specified in the First Schedule to the Excise Tariff Act, (commonly known as BED); (incurred when purchasing from the manufacturer / registered dealer who provide valid document for credit)
    2. The duty of excise specified in the Second Schedule to the Excise Tariff Act, (commonly known as SED);
    3. The additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act,1978 (commonly known as AED(TTA));
    4. The additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (commonly known as AED(GSI));
    5. The National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (commonly known as NCCD);
    6. The Education Cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004;
    7. The additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified above in above clauses; (also called CVD, which is paid when goods imported. This will also include the additional CVD paid @ 4%)
    8. The additional duty of excise leviable under section 157 of the Finance Act, 2003;
    9. The Service Tax leviable under section 66 of the Finance Act; and
    10. The Education Cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004;,
paid on
(i) any input or capital goods received in the factory of manufacture of final products or premises of the provider of output service ; and
(ii) any input services received by the manufacturer of final product or by the provider of taxable services.
Such inputs, capital goods and input services should be received on or after 10th September 2004. It is important to note that the goods have to be received in the premises of service provider whereas for services there is no condition that such services have to be received in the premises of service provider.
This condition may not be always be practically possible to comply, as services are provided at sales offices, depots, clients/ customers premises etc. It would be ideal that the billing address maybe one of the disclosed premises and the delivery maybe to the site/ site office/ branch where the same is required.
Credit on stocks on services becoming taxable
Rule 3(3) provides for taking credit on the inputs lying with the service provider when any service comes into service tax net. Obviously for availing the said benefit, such inputs should satisfy all other condition of the provisions for availing credit. However the credit of duty paid on inputs received only on or after 10th September 2004 is only available though and it cannot be availed on the inputs received prior to 10th September. This provision would be useful and benefit can be availed for those services, which are brought under the net in future. In its present form for the services, which are already covered it has limited applicability.
No Credit for Deemed Service Providers
The recipient of services is also considered as the person responsible for payment of service tax under Rule 2(d) where the insurance auxiliary services, services received by resident from non resident outside IndIa, GTA ( other than individual and un registered partnership firm) and mutual fund distributor. This provision came into effect from 16.2.2002 and prior to that there was no machinery to recover the same. Even after the said date until 01.01.2005 there is a technical flaw in the law for enforcement of the said rules. 
Since the service receiver is deemed to be the service provider the question is whether the input credits/ input services credits would be available to him. In the Cenvat scheme the availing of the credit and the utilisation thereof is separate. The payment of taxes/ duties are also different. Therefore such a person would not be eligible for the credit, unless he is also providing taxable service or manufacturing excisable goods. ( Dept. Circular no. 345/4/2005 – Tru dt. 3.10.2005 also takes this logic.)
Utilisation of CENVAT Credit
Rule 3(4) provides for the manner in which the CENVAT credit can be utilized. Accordingly, the Cenvat credit availed can be utilised (as far as service provider is concerned):
a.      any duty of excise on any final product; or
b.      an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or
c.      an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or
d.      an amount under sub-rule (2) of rule 16 of Central Excise Rules, 2002 i.e. payment of duty on goods returned for factory for repair, remaking etc., on which credit is taken; or
e.      service tax on any output service
However the following duties can be utilised only for paying such duties alone and cannot be used for other duties
a.      AED (TTA) only for AED(TTA);
b.      NCCD only for NCCD;
c.      Education Cess only for EC (however education cess of goods can be used for education cess of service tax and visa versa);
d.      CVD Equivalent to above three;
e.      Additional duty of excise under Section 157 of Finance Act, 2003.
Further there is a restriction that the Additional CVD @ 4% which is payable in terms of Section 3(5) of Customs Tariff Act is to utilized only for payment of excise duty and not for payment of service tax.
On combined reading of the above it can be said that the credit of BED( Basic Excise Duty), SED( Special Excise Duty), ADC (Additional Duty of Customs also nomenclated as CVD excluding additional CVD), Service tax credit can be used to pay the Service Tax or the cess.
However it is important to note that though there would be time limit to pay service tax after the completion of one month from the end of the relevant the month or quarter, the credit available only upto the end of the relevant month or quarter can be utilised for payment and credit availed after that until the payment of service tax cannot be utilised for paying such tax and duty as such period is provided to finalise the liability and pay. That is to say the credit from 1st of subsequent month upto the 5th would not be admissible for payment of tax for the previous month.
Removal of inputs or capital goods after availing credit
Rule 3(5) deals with a situation wherein the credit is availed on the inputs or capital goods which is required to be removed outside the factory. Generally on such removal the amount of credit availed has to be paid. Such removal should be removed under the cover of invoice/Bill or Challan.
The duty credit availed has to be reversed, which in the case of capital goods can lead to ridiculous conclusions where the capital goods are old. There is a decision of Tribunal [2005 (190) ELT 450] wherein it is held that removal of capital goods after use is not covered under any rule therefore there is no requirement of reversal of credit. Rule 3(5A) is introduced about a year back wherein it is set out that if any capital goods on which credit is taken is removed as scrap duty has to be paid on the transaction value of such scrap.
This reversal is not applicable to a case where such inputs are removed outside the premises for providing output service.
Similarly it is also not applicable to a case where the capital good is removed outside the premises for providing output services provided such capital good is received within 180 days or further days as extended by Deputy Commissioner or Assistant Commissioner for a further period of 180 days.
It would be worth discussing a case where the capital goods are removed for providing non-taxable services (though not exclusively used for such non-taxable service). As the said provision uses the word output services, the exception of not paying the amount of credit while removing the capital goods may be in question though the same may not be the intension of the statute. Further also a case wherein the capital goods, which are not received back after 180 days or with extension, on which credit is paid, if subsequently received back, there is no provision for availing credit on subsequent receipt. Therefore whether the credit on the same can be availed or not would be in question.
Considering the nature of services it is felt that the reversal in such cases should not be insisted on unless the capital goods are not at all used in the taxable services.
However Rule 3(6) specifically enables for availment of credit of duty paid under Rule 3(5) as explained. In view of the paper writer though there is no specific provisions for availing credit, the credit can be availed resorting to this rule after paying the amount of credit using the proper documents as is required for availing credit. Such an action maybe done under intimation to the department.
Conditions for availing the CENVAT Credit
Rule 4 specifies the conditions for allowing Cenvat credit. Sub-Rule (1) allows instant credit on inputs into the premises of taxable service provider. Similarly Sub-rule (2) allows for availing credit on capital goods on receipt into the premises of service provider. However there is a restriction as to quantum of credit in respect of capital goods as under:
a.     Upto 50% in the first financial year, however if the said capital goods are removed as such in the same financial year credit full eligible credit can be availed in the same financial year.
b.     Balance in one or more subsequent financial years provided the capital goods are still in the possession and use of the manufacturer;
In respect of certain capital goods like components, spares and accessories, molds and dies, refractories and refractory materials and goods falling under Heading 68.02 / 6801.10, the condition regarding possession of the capital goods in subsequent years is not there since these are consumable items, provided they are not sold.
Sub-Rule (3) provides that Cenvat credit for capital goods acquired on lease, hire purchase or through loan is also available. The credit is available on receipt of the capital goods by the service provider and he need not own the same.
Sub-Rule (4) provides that service provider who takes Cenvat credit on capital goods cannot claim depreciation under section 32 of the Income-tax Act, 1961 on that portion which represents the Cenvat credit amount. It must be noted that the restriction of depreciation is in respect of only the Cenvat amount and not the entire cost of the capital goods.
As far as credit pertaining to input services are concerned, Rule 4(7) provides that it is available only on payment of value of such service and service tax thereon as is indicated in invoice, bill or, as the case may be challan. Therefore it becomes a separate exercise for the service provider who avails credit on the input services to keep track of the payment of the value of services and service tax thereon pertaining to which they wish to avail credit. There may be a case wherein the entire value of taxable service is not paid at once but paid in installment; the question would be whether proportionate credit would be available on such installment payment. In view of the paper writer and also with the practice being followed under Central Excise law (proportionate credit for portion of the material received out of the total invoice) proportionate credit is available on such payment.
Job Work Provisions
Rule 4(5) deals with availability of credit in cases where the goods are sent for job work. As per the said provision, after availing the credit on inputs or capital goods, the goods may be sent to the job worker for further processing, testing, repair or any other purpose. There is no special procedure for inputs and capital goods. There is a time limit of 180 days placed on the length of the period before which the goods must be ordinarily returned. However, the sub-rule further states that the credit is to be reversed on that quantity not returned within 180 days, which can be taken as credit once the goods come back.
Sub-rule 5(b) extends the CENVAT credit in respect of mould, dies, jigs and fixtures sent by a manufacturer of final products to a job worker without any time limit for its return. It is important to note that if the said goods are sent to job workers alone this provision would be applicable. On the other hand if the same are not sent to the job worker, then the provisions of Rule 3(5) (on payment of duty) as discussed in the foregoing headings would be applicable.
Refund of CENVAT credit
Rule 5 provides a benefit for any inputs or input service used in manufacture of final products or intermediate products for final products, which are cleared for export under bond or letter of undertaking or providing output service, which is exported.
The output service which is exported is defined as any output services i.e. taxable services which is exported in terms of “Export of Service Rules, 2005”. However it does not covers non-taxable services though the same might have been exported or amount is received in foreign exchange.
The benefit provided is the CENVAT credit in respect of the inputs or input services so used would be allowed to be utilized towards payment of Excise duty on goods on final products cleared in India or payment of excise duty on exports or payment of service tax on taxable services provided in India.
Where for any reason such adjustment is not possible, the service provider is allowed refund subject to such safeguards, conditions and limitations, as is set out in the Notification issued for this purpose.
Obligation of manufacturer of dutiable and exempted goods
Rule 6(1) provides that no credit can be taken on the inputs or input services, which are used in providing, exempted services (which includes non-taxable services also).
However if the inputs or input services are used in both taxable and also exempted service, the following options are available in terms of Rule 6(2), 6(3) & 6(5).
(a)   Option 1: Separate Record: Maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in providing exempted and non-exempted service and take Cenvat credit only on that quantity of input or input service which is intended for use in providing non-exempted service on which service tax is payable. It maybe possible to use the principles of costing to bifurcate between the usage, which however may not be questioned by the Revenue.
(b)   Option 2: Payment of credit: The provider of output service shall pay an amount equal to eight per cent. of value of the exempted services.
(c)   Option 3: Proportion credit availment: The provider of output service to avail the entire credit. Every month/quarter to reverse the credit in proportion to the exempted service provisionally based on the previous year turnover. By 31st of May of the year after completion to adjust the credit based on actual turnover.
(d)   Option 4: No effect: In case of some of the services being common input services, though used in exempted services, the same would be considered as used only in taxable service. That is to say the receiver of such service need not maintain separate records where he avails the credit on the specified service and further that there would be no cap of 20% utilization. The 16 specified services are:
1.      Architectural service 
2.      Banking & Financial Services
3.      Certain Insurance Service
4.      Commissioning Erection and Installation Agency
5.      Construction Service
6.      Consulting Engineer Service
7.      Forex Brokering
8.      Inspection and Certification
9.      Intellectual Property Rights Service
10. Interior Decorator
11. Management Consultant
12. Real Estate Services
13. Repairs & Maintenance
14. Scientific and Technical consultancy
15. Security Agencies
16. Technical Testing
Rule 6(4) provides that the credit on the capital goods, which are used exclusively in providing, exempted services is not available. However even if the said capital goods are used partially in the providing of taxable services, the entire credit over a period of 2 years would be allowed.
Manner of distribution of credit by input service distributor
The Input Service Distributor as discussed earlier is not an independent person like dealer in Central Excise who passes on the duty. Input Service Distributor is an office in which name the bills are received though the services are rendered at the factory, branches, depots, or any other premises. As per this provision, the input service distributor may distribute the CENVAT credit in respect of the service tax paid on the input service to its units providing output service, subject to the following conditions:
a.      The credit can be distributed by way of document referred in Rule 9 of Rules. ( I.e. by way of invoice, bill, challan)
b.      The credit distributed should not exceed the amount of service tax paid thereon; or
c.      Credit of service tax attributable to service used in a unit exclusively engaged in providing of exempted services shall not be distributed. Though this is not explicit, harmonious leads to this view.
It is expected that this would be used as a tool for tax planning in multi locational and multi registration service providers.
It is important to note that the Service Tax Registration provisions covers input service distributor within its ambit. They would also have to file the return required under the Rule 9(10).
Documents on which credit is admissible
As per the provisions of Rule 9(1), Credit is allowed on the following documents

Nature of document
1. Invoice issued by manufacturer from his factory, his depot, premises of the his consignment agent, any other premises from where the goods are sold by or on his behalf under Central Excise Rules 2003. (Including for the goods removed as such under rule 3)
2. Invoice issued by an importer
3.  Invoices issued by an importer from his depot, premises of his consignment agent if they are registered under rule 9 of Central Excise Rules 2003.
4. Invoice issued by a first stage dealer or second stage dealer
5. Bill of entry
6. Supplementary invoice issued by manufacturer or importer on payment of additional duty unless such short levy etc is with an intention of evasion of payment of duty. It is specifically given that the supplementary invoice includes challan or any other similar document which will evidence such payment of additional duty.
7.    Certificate issued by appraiser of customs for postal imports
8.   Challan evidencing payment of service tax by specified persons carrying on insurance business for services of agent, receiver of services provided from outside India and received in India in terms of the rules set out, Receiver of GTA services and receiver of sponsorship service.
9.   Invoice, Bill or Challan issued by service provider
10. Invoice, Bill or Challan issued by an input service distributor.

        The documents listed above should be in terms of the provisions under which it is issued. However if any of the particulars is not there except for details of payment of duty or service tax, description of goods or taxable service, assessable value, name and address of the factory or warehouse or provider of input service, then the credit on the same would be allowed on satisfaction of the jurisdictional Assistant Commissioner / Deputy Commissioner that the duty or service tax has actually been paid and such input or input services has actually been used in providing output service on recording the reason for allowing such credit.
Responsibility of Service Provider availing credit
Rule 9(3) places responsibility on the service receiver to ensure that he takes adequate care/ steps to ensure that duty/tax has been paid on the inputs, input services and capital goods on which credit is availed. Such adequate steps can be taken in any of the following ways:
a.      From his personal knowledge of the person
b.      On the basis of a certificate given by a person with whose handwriting or signature is familiar; or
c.      On the basis of a certificate issued to the manufacturer or the supplier or, as the case may be, the provider of input service by the Superintendent of Central Excise within whose jurisdiction such manufacturer has his factory or such supplier or provider of output service has his place of business or where the provider of input service has paid the service tax;
and where the identity and address of the manufacturer or the supplier or the provider of input service is satisfied on the basis of a certificate, the manufacturer or producer or provider of output service taking the CENVAT credit or input service distributor distributing CENVAT credit  shall retain such certificate for production before the Central Excise Officer on demand
Records to be maintained
As per the provisions of Rule 9(5) & 9(6) the service provider is required to maintain proper records for receipt, disposal, consumption and inventory of the inputs, input services and capital goods. Further there is a requirement to maintain information on the value, duty/tax paid, CENVAT credit taken and utilised. For input services also the information regarding the input service provider is to be maintained. Therefore the need to have a proper system of capturing the service tax payable and the service tax credit available is to be ensured. Most of the assessees who are now on the mercantile basis would require making additional accounting entries if the same is to be brought into the mainstream of accounting.
The assessees who have computerised system of accounting would be required to add on the new modules to take care of this added statutory compliance. It is the experience of the authors that the use of an excel sheet may not be appropriate other than for very small assessees as it creates one more island of technology which does not speak to the others.
There would be a need to have a reconciliation of the various service tax credit charged to the service provider as well as the service tax credit availed to ensure that either credits are not missed or that double credit is not availed.
It is the responsibility of the service provider to establish the admissibility of the CENVAT credit.
As per the provision of Rule 9(9) service provider has to file before the end of the month following half year ending a return in specified form. Similarly Rule 9(10) requires the input service distributor to file a statement providing the details of credit received and distributed during the said half year to Superintendent.
Transfer of credit
Rule 10 provides for transfer of credit from credit lying in his accounts in case of shifting or transfer on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the business to a joint venture with the specific provision for transfer of liabilities of such business.
The said credit transfer would be allowed only on the condition that the stock of inputs as such or in process, or the capital goods are also transferred along with the ownership and the inputs, or capital goods, on which credit has been availed of are duly accounted for to the satisfaction of the Assistant Commissioner. 
Transitional provisions
There is a transitional provision in Rule 11, which allows credit earned under earlier Service Tax Credit Rules, 2002 remaining unutilized as on 10.9.2004 for utilizing under new CENVAT Credit Rules, 2004.
Deemed Cenvat Credit
Rule 13 seeks to empower the Central Government to issue notifications for deeming duty paid nature of inputs as well as the rate thereof. The credit of the same also would be admissible to the Service providers.
Recovery of Cenvat credit wrongly taken.
As per the provisions of Rule 14, if any Cenvat credit is taken wrongly or utilised wrongly, the same is entitled for recovery along with interest as provided for in Sec.11A and 11AB of Central Excise Act, 1944 or Section 73 and 75 of Finance Act, 1994.
Confiscation and penalty
Rule 15 provides for penalty in case where the person, takes Cenvat credit in respect of inputs, input services or capital goods, wrongly or without taking reasonable steps to ensure that appropriate duty on the said inputs or capital goods has been paid the details of which would be indicated in the document accompanying the inputs or capital goods specified in rule 9.
Further if there is any contravention of any of the provisions of these rules in respect of any inputs, input services or capital goods, then all such goods shall be liable to confiscation.
The quantum of minimum penalty would be Rs. 10,000/- however if the duty on the excisable goods in respect of which any contravention has been committed is more than ten thousand rupees, then such duty amount. 
In addition to the above, if there is intent to evade the payment of duty, they would be liable for penalty under Section 78 of Finance Act, 1994
However no such action can be taken without following the principles of natural justice of a fair hearing.
Supplementary Provision:
Rule 16 provides that if any notification, circular, instruction standing order, trade notice or other order issued under Cenvat Credit Rules, 2002 and the Service Tax Rules, 2002 and in force at the commencement of these rules, to the extent it is relevant and consistent with these rules, would be considered as been issued under the current provisions of the Rules.
Further any reference made in any Act or rules as to Cenvat Credit Rules, 2002 or Service Tax Credit Rules, 2002 would have a effect of the same being referred to new Cenvat Credit Rules, 2004.
Other Aspects
Demand of Service Tax and Credit
Generally there may be cases where the demand is raised subsequent to the point of time for which the service provider is liable to pay service tax on one or more output services. In such cases if the demand is raised, in view of the paper writer and following the decision of Supreme court in case of Formica India Division v. Collector - 1995 (77) E.L.T. 511, the credit though would have been availed during the said period can be claimed and deducted and only the balance if any may required to be paid. In the said decision it was held that the assessee is liable to pay duty after he has contested the same, his claim for availing the benefit of the notification cannot be denied on the technical ground of non-compliance with procedures, which but for such contesting, would have been ordinarily complied with. Similar view have been taken in the decisions of Indian Oxygen v. CCE - 1995 (80) E.L.T. 573 and JBA Printing Inks Ltd. v. CCE - 2000 (115) E.L.T. 24 (S.C.).
Service Tax Credit against Exemption
It is well settled position of law that exemptions are options and not obligations. Therefore sometimes due to the fact that the service receiver is in a position to avail credit of the service tax paid by the service provider, the service provider may examine the option of paying the tax and instead of availing the exemption. By this option, the service provider can reduce the cost of his services since the duty or tax paid on inputs, capital goods and input services can be availed as credit and paid as tax on the service provided for which the amount would be paid over and above the amount for services.
The cross sectional credit introduced is indeed the most important reform action in the past few budgets. However the common usage for taxable and non taxable activities appear to be a little difficult to resolve considering that the revenue safeguards have also to be in place. The availing of the credit would go to reduce the service tax cost for both the service provider as well as the manufacturer.

Published by

Madhukar N Hiregange
(Chartered Accountant)
Category Service Tax   Report

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