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Present article is designed for discussion of eligibility or ineligibility of Cenvat Credit on input, input services and capital goods to manufacturers and service providers. Discussed provisions are general in nature for the help of readers and may not have universal applicability. Final conclusion as to availability or non availability needs to be examined in the light of nature of business, nature of activities involved and other facts which may be present at relevant time.

Cenvat Credit on Capital Goods

Definition:-

Capital Goods means-

Goods namely:-

i. All goods falling under chapter 82, chapter 84, chapter 85, chapter 90, heading No. 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to Excise Tariff Act 

ii. Pollution control equipment;

iii. components, spares and accessories of the goods specified at (i) and (ii) above;

iv. Moulds and dies, jigs and fixtures

v. Refractories and refractory material

vi. Tubes, pipes and fittings thereof and

vii. 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. outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory; or

3. for providing output service;

Motor Vehicles are not generally regarded as capital goods. However, for certain specific service providers, it has been considered as capital goods. These service providers are Courier, Tour Operator, Rent-a-cab scheme operator, Cargo Handling Agency, Goods Transport Agency, Outdoor caterer and Pandal or Shamiana contractor services.

Dumpers or tippers falling under chapter 87 of the First Schedule to the Central Excise Tariff Act 1985 (5 of 1986), registered in the name of provider of output service provider for providing following taxable services:

i. Site formation and clearance, excavation and earthmoving

ii. Demolition and Mining of mineral, oil or gas services.

For other service providers and manufacturer, dumpers and trippers are not regarded as capital goods.

Components, spares and accessories of motor vehicles, dumpers and tippers, as the case may be, used to provide taxable services as specified above in point (B) and (C) above.

Analysis of eligibility of Cenvat Credit on Capital goods:-

Eligibility

a. Capital goods used in the factory of the manufacturer of the final products are eligible for cenvat credit. It is not necessary that capital goods should be directly used in the manufacture of final product.

b. Similarly, any capital goods which are used in providing taxable output services are eligible for cenvat credit.

c. Capital goods obtained on hire purchase/lease/loan agreement are eligible to avail the credit.

d. Capital goods obtained on hire from a non finance company are eligible for credit.

e. Capital goods hypothecated to bank are eligible for credit.

f. Capital goods used for short duration are eligible for CENVAT credit.

g. Capital goods are eligible on receipt in factory or in the premise of output service provider even though actual use thereof has not started.

h. Capital goods used outside factory are eligible if these are integrally connected with factory or extended from factory.

i. Capital goods used in manufacture of exempted intermediate product are eligible if the final product is dutiable.

j. Full credit admissible on Capital goods though they have used in manufacture of both dutiable and non – dutiable final products.

 Non-eligibility:-

a. Capital goods used exclusively for exempted final products and output services are not eligible for availing the credit.

b. Capital goods such as equipments or appliances used in the office for manufacturer are not eligible for credit.

c. Capital goods used outside the factory of manufacturer are not eligible for credit except the capital goods which are used for generation of electricity for captive use.

d. Cenvat Credit is not available on that portion of the value of capital goods on which depreciation is claimed u/s 32 of Income Tax Act.

Credit Availability:-                                                                                                                

Cenvat Credit on Capital Goods is availed in the following manner:

a. 50% of duty paid on purchase of capital goods is available in the financial year in which capital goods is received in the factory.

b. Balance 50% may be taken in any of the subsequent financial years.

c. Credit can be availed in the subsequent years only when capital goods are in possession.

d. The exception is that in case of consumables like spare parts, components, moulds and dies, refractories, refractory materials, abrasive powder or grain, and grinding wheels, the balance credit can be availed in subsequent year, even if they are not in possession.

In following cases, full credit is available in the year of receipt of capital goods in the factory:

1. In case of the units which are eligible for SSI exemption (it is not necessary that unit must avail SSI benefit to avail entire 100% credit in first year) entire CENVAT credit can be availed in first year.

2. In case of Additional Customs Duty paid u/s 3(5), full 100% CENVAT Credit will be available in first year.

Important Note:- For better accounting & to ensure not loosing out the Cenvat benefit, the assessee can create two ledger one naming “Cenvat availed on capital goods” and another is “Cenvat receivable account” so balance 50% eligible credit can be transferred to “Cenvat receivable account” to avail in succeeding year.

Removal of capital Goods

Removal as such (Without being use)

Full 100% Cenvat credit will be available if Capital goods ‘as such’ cleared in the first year. On removal of such capital goods ‘as such’ for sale or disposal, an amount equal to full Cenvat credit taken, have to be paid/reversed.

Removal of capital goods after use

Removal of capital goods as second hand goods:- Manufacturer or output service provider shall pay an amount equal to Cenvat credit taken on the said capital good, reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking Cenvat credit, namely:-

For computers and other peripherals:

for each quarter in the first year

  1.  

for each quarter in the second year

  1.  

for each quarter in the third year

  1.  

for each quarter in the fourth and fifth year

  1.  

For capital goods, other than computers and computer peripherals @ 2.5% for each quarter.

Removal of capital goods as waste and scrap:- On removal of capital goods as scrap or waste, the manufacturer or output service provider shall pay an amount equal to duty payable on transaction value (the value of the scrap so calculated).

Other General Points:-

a. Ownership of capital goods is not essential to avail CENVAT on capital goods.

b. First 50% CENVAT credit can be availed without installation of the capital goods but these should be installed for availing the balance credit.

c. If final product subsequently exempt than CENVAT credit availed on capital goods need to be reversed.

d. CENVAT credit can be availed in the initial stages of business but the utilization of the credit can be possible only when the manufacture of goods starts.

Cenvat Credit on Inputs

Definition:-

The definition of Input contained in Rule2 (k) has been revised w.e.f.01/04/2011.

Goods used in or in relation to the manufacture of the final product. For better understanding Inclusions and Exclusions are given in the table below.

Inclusions

Exclusions

All goods used in the factory by the manufacturer of the final product.

Light Diesel oil, high speed diesel oil, Motor spirit commonly known as Petrol.

All goods including accessories cleared along with the final product and goods used for giving free warranty.

Any goods used for construction of building or a civil structure or laying of foundation or making of structure for support of capital goods.

Similarly, goods used for generation of electricity or steam for captive use are also constitutes inputs.

Motor Vehicles (In case of specific service providers, motor vehicle is regarded as capital goods.)

All goods used for providing Output Service.

Goods having no relationship with whatsoever with the manufacture of final product.

Any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee

Conditions for Availing CENVAT Credit on Inputs:-

Rule 4 of CENVAT Credit Rules 2004 provides certain conditions to be fulfilled for availing CENVAT Credit.

a. CENVAT credit can be availed immediately on the receipt of the goods in the registered premises of the person who gets the final products manufactured.

b. Physical receipt of input is prerequisite for the availment of credit.

c. It is not necessary that input should be directly used in the manufacture of final product as the word used in the definition is “all goods used in the factory…” not “all goods used in the manufacture of final product….”

d. In case of removal of input as such, credit availed earlier needs to be reversed in full.

e. In case value of any input is written off fully or partially or provision has been made in the books of account fully or partially before such input is being put to use, equivalent credit is required to be written off. In case such input is subsequently used in the manufacture of final product, credit earlier reversed may be taken back.

f. Cenvat credit on input, input services and capital goods is not available when the final product manufactured by the manufacturer is chargeable to duty @ 1% under Notification 1/2011-CE.

g. In case of import of inputs and capital goods, cenvat credit of the Basic Customs Duty is not available.

h. Input credit is not required to be reversed where final products are exported or deemed to be exported.

Cenvat Credit on Input Service

Definition:

Any service used by the provider of taxable service for providing output service or used by a manufacturer whether directly or indirectly  in relation to manufacture of final product and clearance of final product upto the place of removal.

Includes:

Services used in relation to modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sale promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal.

Eligibility/Ineligibility of cenvat credit on certain services

Eligible Services

Service

Comments

Accounting Expenses

Eligible as specially included in definition.

Advertisement (may be for recruitment, tenders, sales etc. as no restriction).

Eligible as specially included in definition.

Auditing Services

Eligible as specially included in definition.

Banking and Other Financial Services

Eligible under ‘Financing’

Business Exhibition

Eligible as specially included in definition.

Business Support Service

Eligible if in relation to manufacture or provision of taxable goods/services, modernization or repairs of factory or office, storage, recruitment and quality control, procurement of inputs, accounts, audit, financing, sales promotion, legal services, computer networking

Clearing & Forwarding Agent

Eligible for inputs and for final products upto place of removal (port is place of removal for export)

Commission Agent

Eligible as relating to ‘sales promotion’ or ‘procurements of inputs’

Consignment Agent’s Expenses

Eligible as consignment agent’s place is ‘place of removal’ when sale is from depot.

Consulting - Engineering Management

Eligible.

Courier

Eligible

Credit Rating

Eligible as specifically included in definition

Custom House Agent

Eligible for procurement of inputs and also for exports as port is place of removal for export

Depot expenses

Eligible as depot is ‘place of removal’ when sale is from depot. In other cases, it may be eligible as ‘sale promotion’

Erection, commissioning or installation

Eligible since in relation to manufacture or provision of taxable goods/services

Financing (Bank charges, Lease, Hire purchase)

Eligible as specially included in definition

Gardening

Eligible

General Insurance for machinery, building and transportation of inputs, capital goods and final products.

Eligible

Health Insurance

Not eligible

Hire Purchase

Eligible Under Financing

Intellectual Property service

Eligible

Job Work

Eligible

Labour Contractor

Eligible

Leasing

Covered under ‘Financing’. Hence eligible

Legal consultancy

Specially included in ‘legal services’

Maintenance and repairs

Eligible if in relation to manufacture or provision of taxable goods/services, modernization or repairs of factory or office, storage, quality control, except of motor vehicles

Manpower Recruitment and Supply

Eligible.

Market Research

Eligible as specifically included in definition

Mobile phones (even if in name of employees, if invoice endorsed in favour of employer and reimbursed by employer)

Eligible.

Outward transportation

Outward transportation upto the place of removal is eligible.

(Further it is to be noted that, after imposing restriction in availing Cenvat credit for a time  period of 6 months from this budget, it is advisable to avail the credit and show in your books of accounts. Because there is a view possible that, if Sellers responsibility is carrying upto buyers place then the same is eligible for availing credit.

Procurement Expenses

Eligible.

Outdoor Catering

Not Eligible

Quality Control

Eligible as specifically included in definition

Recruitment

Eligible as specifically included in definition

Renovation of factory and office building

Renovation of factory, premises of provider of output service or an office relating to such factory or premises is eligible

Renting of immovable property

Eligible.

Repair of factory or office building

Repairs of a factory, premises of provider of output service or an office relating to such factory or premises are eligible

Sales promotion expenses

Eligible as specifically included in definition

Security at factory, offices,  godown, residential colonies

Eligible.

Showroom Expenses

Eligible as sales promotion

Storage of inputs and final products

Eligible as specifically included in the definition as ‘storage upto place of removal’

Training

Eligible as specifically included in definition

Travel by air, road for business purpose

Eligible.

Air Travel of Employees for business purpose

Eligible

Club Membership

  • Club Membership fee is eligible for a director
  • Corporate membership of a club should be eligible
  • Not Eligible for employees
  • Not eligible if membership is in name of any particular employee

Commercial Coaching and Training

Eligible as specifically included in definition

Computer Networking

Eligible as specifically included in definition

Information technology Software

Eligible.

Inward Transport

Specifically included under ‘Inward transportation of inputs or capital goods’

Share Registry

Eligible as specifically included in definition

Software

Eligible.

Supply of tangible goods for use service

Eligible. (projects taken on hire basis to conduct meeting etc:- )

Not Eligible Services

Service

Comment

Canteen Expenses for Employees

Not eligible as specifically excluded

Foundation or support of capital goods

Not eligible except for specified services1.

Personal Insurance of Employees

Not Eligible

Real Estate Agent Service

Not Eligible.

Residential Colony/quarters Expenses

Not eligible.

Residential Complex

Not eligible.

Transport Charges for Transport of Employees

Not eligible.

Services related to Construction Industries.

Service

Comment

Architect Services

  • Eligible

Port Services

  • Eligible

Commercial or Industrial Construction

  • Eligible if used for finishing services, repair, alteration or restoration etc.
  • Eligible when used for provision of specified services
  • Not eligible when used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for the support of capital goods.

Construction of complex

  • Eligible if used for finishing services, repair, alteration or restoration etc.
  • Eligible when used for provision of specified services1.
  • Not eligible when used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for the support of capital goods.

Work contract Service

  • Eligible if used for finishing services, repair, alteration or restoration etc.
  • Eligible when used for provision of specified services1.
  • Not eligible when used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for the support of capital goods.
  • Generally Not eligible when used for set up work for any kind of service provider. (Though may be available for set up work for specified service provider)

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Category Service Tax, Other Articles by - Venkatanarayana GM 



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