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Some Issues on Rule 6 of CENVAT Credit Rules 2004

The most happening topic under the whole of CENVAT credit rules, 2004 is Rule 6. This topic since its introduction has not been asked in the exams [CA Final [existing]].

Keeping this in view some issues are discussed in this article, which have been collected from different sources so as to help students of May 2010.

RULE 6 of CENVAT Credit Rules, 2004

Options available

Maintain Separate Accounts

Not Maintain Separate Accounts [amount to reverse/paid]

For receipt, consumption & inventory of input of input services for use in dutiable goods or taxable services

Quantity of input or input services for use in exempted goods or services


Manufacturer 5% of value of Ex goods

Service provider 6% of value of Ex services


[As discussed below]

Amount to be reversed or paid in case of OPTION II

[FIRST STEP] - Provisionally every month pay/reverse the aggregate of following

For inputs used in Mfg. of Exempted GOODS

For inputs used in provision of Exempted SERVICES

For input services used in mfg of Ex GOODS / Ex SERVICES


Where, [during preceding FY]

Where, [during concerned month]

A = Value of Ex Goods Mfg & Cleared

X = CENVAT credit on Inputs

B = Value of Dutiable Goods Mfg & cleared

Y = CENVAT credit attributable to Ex Goods

C = Value of Ex Services provided

Z = CENVAT credit on Input Services

D = Value of Taxable Services provided

[SECOND STEP] Computation of annual amount payable/ reversible under OPTION II

Follow the same procedure as stated in FIRST STEP with the following changes,

*Reference to during preceding FY

*Reference to during Concerned month

* replace with during the financial year

Some important points relevant for Rule 6(3)/3(A) relating to option of not maintaining separate accounts:

1. Even if accounts are not maintained, credit on inputs or input services which are used exclusively for manufacture of exempted goods or provision of exempt services shall not be allowed.

2. Option under rule 6 once exercised, it shall be applicable to all goods/services for that financial year and to all business activities undertaken by him.

3. Exempt services include non taxable services but does not include services which are exported without payment of service tax.

4. Value shall be computed as per Sec 4/4A, as applicable, of central excise act/ rules and as per sec 67 of Finance act.

5. The value of exempted service is the gross amount charged for providing exempted service without abatement.

Clarification on computation of provisional/actual amounts under Rule 6(3)/(3A)

CENVAT credit taken on inputs/input services during the month/financial year shall not include the following

a. Duty paid on inputs or service tax paid on input services which are used exclusively for manufacture of exempted goods or provision of exempted services and

b. The credit attributable to services mentioned in Rule 6(5)

Credit on Capital Goods [Rule 6(4)]

Credit on capital goods used exclusively for manufacture of exempted goods/provision of exempted services shall not be allowed.

Thus, credit can be availed if such capital goods are used for manufacture of dutiable and exempted goods or provision of exempted and taxable services.

Important Circulars

1. Circular No 904/24/09-CX dated 28-10-2009

After amendment of sec 2(d), the bagasse, aluminum/ zinc dross which are termed as waste are chargeable to duty. In case such products are chargeable to nil rate or exempt, then, Rule 6 shall be applicable.

2. Circular No 1/2009 dated 5-5-2009

Input services which are used in relation to capital goods, which re in turn used exclusively for manufacture of exempted goods or provision of exempted services, then Rule 6 shall be applicable and consequently no credit shall be allowed on such input services.

3. Circular No 868/6/2008-CX dated 9-5-2008

Rule 6 shall not apply to Input Service Distributor, as he does not provide any service.

Some Important judgments

CCEx v. Gujarat Narmada Fertilizers Co. ltd [2009]

CENVAT credit cannot be allowed in respect of goods used in generation of electricity which in turn is used for manufacture of exempt goods [here fertilizers] and dutiable goods, to the extent the goods used in generation of electricity used in production of fertilizers.

There was a contrary view in CCEx. V. Gujarat State Fertilizers & Chemicals Ltd [2008], which said, such credit is allowable as inputs used for generation of electricity used for any other purpose are also inputs [as per definition of inputs].

As the judgment in Gujarat Narnadas case was rendered later in time, it shall prevail.

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