The basic principle of any VAT system is that credit of duty or tax paid on the input goods or service can be availed only for payment of duty on final products or output services. As a natural corollary, if no duty/tax is payable on final product or output services, credit of duty/tax paid on inputs or input services cannot be availed.
Rule 6 of CENVAT Credit Rules, 2004 is framed to ensure the above principle is applied while allowing the CENVAT credit of excise duty/service tax to the manufacturers/service providers.
The fundamental principles of Rule 6 are as follows:
A. No credit shall be allowed on inputs/input services used exclusively in the manufacture of goods/provision of services on which no duty/tax is being paid.
B. Full credit shall be allowed on the inputs/input services used exclusively in the manufacture of dutiable goods/taxable services.
C. Credit on common inputs/input services shall be allowed only to the extent of attributable to dutiable goods/taxable services.
However, owing to the drafting errors and complications in combining the above cited principles, practical implementation & understanding of above rule thrown many challenges/issues. And some of these issues are settled and some are unsettled.
In this budget 2016, the entire Rule 6 was redrafted with view to simplify & rationalize ensuring the above principles. In this article, an attempt was made to articulate the issues faced previously and how the redrafted rule 6 was addressed or not addressed.
Whether “non-excisable” are to be considered as “exempted goods” similarly “non-service activities” whether to be considered as ‘exempted services’:
A. Rule 6 makes a reference to the words ‘exempted goods’, now the issue which was prevailing was whether the expression ‘exempted goods’ (excisable but exemption given) shall be interpreted to include ‘non-excisable goods’? Non-excisable goods are those goods, which do not find place in the Central Excise Tariff like alcohol etc.
B. Judiciary has expressed the view in case of Commissioner v. Kesar Enterprises Ltd. — 2001 (130) E.L.T. 93 (Tribunal) where in it was held that reversal under rule 57CC (now rule 6) is not applicable. However partly differing the said view in Tribunal case of Sahni Strips & Wires Pvt. Ltd. v. Commissioner — 2012 (283) E.L.T. 418 (Tribunal) held that non-excisable goods are not covered within the definition of ‘exempted goods’ but credit attributable to these non-excisable goods are ineligible. Similar on the issue of the any activity not being a service there was a Decision of the Tribunal in case of Orion Appliances Ltd. v. Commissioner — 2010 (19) S.T.R. 205 (Tribunal) wherein it was held that the activity of trading is not a service at all therefore the same cannot be a exempted service, however it held that CENVAT attributable to trading has to be restricted.
C. However with advert of amendment w.e.f 01.03.2015 wherein an explanation was inserted to provide that exempted goods shall include ‘non-excisable goods’. Consequently credit of duties/taxed paid on inputs/input services used in manufacture of non-excisable goods are ineligible. This is not the end of story since another issue remain unsettled is what is the treatment in case of non-service activities (activity is not a service at all) and whether definition of ‘exempted service’ shall be interpreted to include said non-service activity?
D. To bring clarity to this issue present amendment vide notification 13/2016-CE(NT) 01.03.2016 dated w.e.f. 01.03.2016 inserts an explanation to provide that activity, which is not a service at all is also covered within the ambit of exempted service. Consequently credit of duties/taxed paid on inputs/input services used in an activity which is not at all service becomes ineligible.
With the above changes & developments, the principle that no credit shall be availed if output is not taxed is appears to be achieved and settled.
Whether one has to take the total credit or he has to restrict only to common credit while applying the prescribed formula to arrive the credit attributable to dutiable goods/taxable services?:
Rule 6 of the CENVAT Credit Rules, 2006 prescribes a formula to arrive the attributable credit to the dutiable goods/taxable services in cases involving use of common inputs/input services for manufacture of both dutiable and exempted goods (similarly for service provider rendering both taxable & exempted services). While applying the formula, an issue was raised as to whether total credit (including exclusively used for taxable) shall be taken or only common credit.
logical answer is common credit and same was confirmed in the interim order of tribunal in case of SIFY Technologies Ltd. v. CCE 2014-TIOL-60-CESTAT-MAD however complete contrary view was expressed in another interim order by tribunal in case of Thyssenkrupp Industries India Private Limited v. CCE 2014 (310) E.L.T 317 (Tri. Mumbai) on the ground that words “total credit taken’ was used and not the common credit. However the law has been settled in the final decision of SIFY Technologies Ltd (unreported) which provides that the Rule 6 formula needs to be applied only on common credits.
Vide the latest amendment to Rule 6 it clearly provides that formula needs to be applied only on common credit while arriving the attributable credit for dutiable goods/taxable services.
What are the options available to restrict the credit attributable to exempted goods or exempted service in case where separate books were not maintained?
Rule 6 (existing upto 31.03.2016) gives three options
I. Maintain separate books to identify the extent of common inputs/input services used for dutiable goods/taxable services
II. Reverse the credit applying the prescribed formula. Intimation to department is required to be given.
III. Pay @ 6/7% on value of exempted goods/services
If assessee is not maintaining separate books and reversed the credit adopting the prescribed formula (either voluntarily or during/after investigation) but intimation regarding exercise of this option was not given. Revenue authorities are raising demands adopting the third option (payment of 6/7% of exempted value) citing that procedure prescribed therein was not followed. As result of this, the amount payable is more than the credit attributable to exempted services/goods and in some cases credit actually availed.
On this, various appellate forums consistently held that once the credit was reversed applying the prescribed formula there can be no further demand mainly on the following grounds:
A. It is upto assessee to exercise the preferable option and revenue department cannot force to avail particular option
B. There is no provision specifying that if assessee does not opt for any of first two options, then third option is automatic
C. No time-limit provided to exercise option
D. It is only intimation and not the prior intimation
E. failure in intimation can be condoned as it is only procedural lapse
Noted judgments are Mercedes Benz India Pvt Ltd Vs CCE 2015 (40) S.T.R. 381 (Tri. - Mumbai) and Commissioner v. Himalaya Drug Company — 2011 (271) E.L.T. 350 (Kar.).
Resting this anomaly, the restructured Rule 6 provides that Central Excise Officer competent to adjudicate the case based on the amount of Cenvat credit involved, may allow the assessee to avail options of reversing credit adopting the prescribed formula and condoning the procedure lapse during the adjudication.
Loophole in newly restricted rule:
With objective to restrict the amount payable (6/7%) to maximum of credit availed, newly restricted rule provides that such amount payable shall not exceed credit available at the end of the period, which implies & referring to closing balance of credit and not the credit attributable to exempted services/goods. This leads to anomaly and does not serve the intended purpose for multiple reasons inter alia
- Closing balance may be ‘0’ then no amount is payable in guise of above restriction and leads to allowing the availment of credit attributable to exempted goods/services.
- Closing balance may be more than credit availed and requiring the assessee to pay the amount more than the credit attributable to exempted services/goods.
Therefore there is need of immediate amendment to the effect that restriction of amount payable applies to credit availed.
What if Capital Goods (CG) initially used for exempted but later for dutiable
Unlike inputs/input services, credit on capital goods (CG) is fully eligible even though same were used for both taxable & exempted services/goods (irrespective of extent of usage). However if the CG were exclusively used in exempted services/goods then no credit is eligible. Here an issue arises how to determine a particular CG were used exclusively in exempted goods/services inter alia when
I. CG are intended to use for both exempted & taxable business (simultaneously or sequentially) but initially used for exempted goods/services.
II. At the time purchase, goods/services are exempted but subsequently taxable and vice versa.
Judicial forums expressed a view that eligibility criteria for availing credit on Capital Goods is time of receipt into factory/premises and at such time if goods/services are exempted then credit cannot be availed. Noted judgments are Spenta International Ltd. v. Commissioner of Central Excise, Thane [2007 (216) E.L.T. 133 (Tri. - LB.)]. However there is contrary view also prevailed Commissioner v. Gujarat Propack — 2009 (234) E.L.T. 409 (Guj.) and CCE v. Kailash Auto Builders Ltd. 2012 (280) E.L.T. 49 (Kar.).
Resting this, now the redrafted rule 6 provides that no credit is available if the capital goods are exclusively used in exempted goods/services for a period of 2 years. With this, now the credit on CG is eligible
A. Even though CG were initially used for exempted services/goods but subsequently used for taxable services/goods within 2 years of its purchase.
B. Goods/services were exempted at the time of purchase but subsequently made taxable within 2 years of its purchase
Issues not addressed:
1. The scope of ‘non-service activities’ is wide and eat away the substantial common credit whereas actual usage of common inputs/services for such ‘non-service activities’ would be less.
2. What if assessee is both manufacturer of non-exempted goods & service provider of non-exempted service in view of the fact that manufacturing activity is included in ‘Negative list’ qua section 66D of Finance Act, 1994 thereby it falls within the ambit of ‘Exempted service’ definition. In such cases, whether rule 6 is applicable even though all the activities (including manufacturing) are duly taxed either excise duty or service tax.
3. Whether value of export of services shall be included in calculation of credit attributable to exempted goods/services?. the definition of ‘exempted service’ specifically excludes export services from within its ambit however question is whether same shall be included in taxable turnover and total turnover as well. The answer seems to be affirmative in as much redrafted rule 6 defines ‘non-exempted services’ as ‘output services excluding exempted service’ thereby included within the ambit of taxable & total turnover as well. As far as goods exports are concerned, the expression ‘Exempted goods’ does not exclude unlike ‘exempted service’ but Rule 6(6) specifically provides that reversal of credit is not applicable. In such cases, whether goods exports turnover shall be included in dutiable or total turnover while arriving the credit attributable to exempted goods is still remain unanswered?
4. Whether services which are taxed under reverse charge (full) will be treated as exempted services in the hands of service provider and compliance of rule 6, ibid is required inter alia when same service was duly taxed in the hands of service receiver & the definition of ‘output service’ excludes the same from its ambit.
5. Services which are valued under Rule 2A/2C of Service tax (determination of value) Rules, 2006 falls within the ambit of ‘exempted service’ inter alia
- Rule 2A/2C, ibid are not for exemption and it is only specifies value of service
- definition of ‘exempted service’ requires that credit on both inputs & input services shall be disallowed whereas rule 2A/2C disallows only input credit and allows ‘input service’ credit.
6. Whether the changes are prospective or needs to be applied retrospective?
While an attempt has been made to highlight the regular/common issues, many other issues may not covered in this article, authors humbly request readers to bring any of such to the notice of authors.