Exempted goods/output services

Rule 6 of Cenvat Credit Rules

No Cenvat credit if final product/service exempt

1 Cenvat credit is not available if inputs or input services are used for manufacture of exempted goods or provision of exempted output services.

As per basic principle of VAT, credit of duty or tax can be availed only for payment of duty on final product or output services. As a natural corollary, if no duty is payable on final product or output services, credit of duty/tax paid on inputs or input services cannot be availed.

In CCE v. Modi Rubber 2001 AIR SCW 4363 (SC 3 member bench), it was held that no credit of duty paid on inputs is available if final product is exempt from duty. [Decision in respect of proforma credit, but principle applicable to Cenvat credit also].

As per Rule 6(1) of Cenvat Credit Rules, Cenvat credit is not admissible on such quantity of input or input service which is used in manufacture of exempted goods or provision of exempted services [The words ‘provision of’ are inserted w.e.f. 1-4-2008, but this is only clarificatory amendment).

Thus, if inputs and input services are partly used in exempted final product/output service, Cenvat credit of that portion of input/input service will not be available.

Partial manufacture/provision of exempted products/services – Cenvat credit of inputs and input services is not available if final product/output service is exempt from excise duty/service tax. In case of manufacturer manufacturing both exempt and dutiable goods (or service provider providing taxable as well as exempt services), it may happen that same inputs/input services are used partly for manufacture of dutiable goods/taxable services and partly for exempted goods/services.

In such cases, the manufacturer/service provider has following three options (w.e.f. 1-4-2008) –

(a)    Maintain separate inventory and accounts of receipt and use of inputs and input services used for exempted goods/exempted output services – Rule 6(2) of Cenvat Credit Rules.

(b)    Pay amount equal to 10% of value of exempted goods (if he is ‘manufacturer) and/or 8% of value of exempted services (if he is service provider) if he does not maintain separate inventory and records  – Rule 6(3)(i) w.e.f. 1-4-2008.

(c)    Pay an ‘amount’ equal to proportionate Cenvat credit attributable to  exempted final product/ exempted output services – Rule 6(3)(ii) w.e.f. 1-4-2008.

Cenvat credit on capital goods – If capital goods are partly used for exempted goods and party for dutiable final products, entire Cenvat credit of duty paid on capital goods is available. Cenvat credit of duty on capital goods is not allowable only when it is exclusively used for manufacture of final products [rule 6(4)]

No reversal or payment of amount in certain cases – If excisable goods are removed to SEZ, EOU, EHTP, STP, UN agencies or for exports or removal of gold or silver arising in manufacture of copper or zinc by smelting, payment of 10% ‘amount’ is not required [rule 6(6)].

Cenvat credit of service tax in case of supplies made by DTA to EOU - Supplies from DTA to EOU are entitled to Cenvat credit of service tax paid – para 6.11(v) of FTP.

1-1 Options available to manufacturer manufacturing both dutiable and exempt goods and service provider providing taxable as well as exempt services  

The manufacturer/service provider has three options –

Maintain separate inventory and accounts - Maintain separate inventory and accounts of receipt and use of inputs and input services used for exempted goods/exempted output services. In such cases, he should not avail Cenvat credit of the inputs and input services which are used in exempted final services at all – Rule 6(2) of Cenvat Credit Rules.

Pay 10% ‘amount’ on value of exempted goods or 8% ‘amount’ on value of exempted services if separate inventory and records not maintained - If the manufacturer/service provider opts not to maintain such separate accounts, he has to pay an amount equal to 10% of the ‘value’ of such exempted goods or 8% of the value of ‘exempted services’ [Rule 6(3)(i) w.e.f. 1-4-2008 ( Such payment can be made by debit to Cenvat credit account or PLA [ explanation II to rule 6(3A)].

He cannot utilise Cenvat credit of inputs/input services utilised exclusively for manufacture or exempted final product or exempted output services, as is clarified in Explanation II to rule 6(3) inserted w.e.f. 1-4-2008 - reiterated in para 1 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.

Thus, he cannot utilise Cenvat credit in respect of inputs/input services utilised exclusively for manufacture of exempted final products or exempted taxable services. In addition, he has to pay 10%/8% amount, if he uses some common inputs/input services! This is double whammy.

It can be argued that rule 6(3) states that ‘notwithstanding anything contained is rule 6(1) and 6(2), the manufacturer of goods or provider of output service, opting not to maintain separate accounts, shall follow either of the following options as applicable to him’.

Thus, when assessee opts not to maintain separate accounts, calculation of Cenvat credit of inputs/input services used exclusively for exempted final products/output services cannot arise. A rule cannot be interpreted to mean that even if assessee opts not to maintain separate accounts, still you are required to maintain separate accounts for inputs/input services used for exempted final products!.

In Life Long Appliances Ltd. v. CCE 2006 (196) ELT 1110 (CEGAT), it has been held that payment of 10% ‘amount’ means Cenvat credit has not been taken – view upheld by SC – 196 ELT A144.

However harassment, tensions and disputes are possible, if explanation II to rule 6(3) is literally interpreted, Thus, the option of payment of 10%/8% amount is not likely to be very attractive in most of the cases.

Such option has to be exercised in respect of all exempted goods manufactured and all exempted output services provided. The option once exercised shall not be changed in remaining part of financial year – Explanation I to Rule 6(3) inserted w.e.f. 1-4-2008 - reiterated in para 2 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.

 Education cess and SAH education cess is payable only on ‘duties of excise’.  ‘Amount’ is not ‘duty’. Hence, education cess or SAH education cess is not payable on such ‘amount’.

The ‘amount’ should be paid in accounting code applicable to service tax i.e. 0044 - para 4 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.

Pay proportionate amount attributable to Cenvat credit utilised for exempted final product/ exempted output services – The manufacturer/service provider can opt to pay an ’amount’ which is proportional to Cenvat credit availed on exempted final product/exempted output services [rule 6(3)(ii) w.e.f. 1-4-2008]

He cannot utilise Cenvat credit of inputs/input services utilised exclusively for manufacture or exempted final product or exempted output services, as is clarified in Explanation II to rule 6(3) inserted w.e.f. 1-4-2008- reiterated in para 1 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.

Thus, he cannot utilise Cenvat credit in respect of inputs/input services utilised exclusively for manufacture of exempted final products or exempted taxable services. In addition, he has to pay proportionate amount relating to exempted final products/exempted output services!.

As explained later, the reasonable interpretation is that he should also exclude Cenvat credit relating to inputs/input services used exclusively for taxable goods [as provided in rule 6(2)] and then apply formula for proportionate reversal to common inputs/input services.

If interpreted this way, this option seems to be much better than payment of 8%/10% where quantum is substantial. Otherwise, this option is almost equally unfair.

For small service providers and small manufacturers, it may be difficult to maintain elaborate records and make calculations.

If manufacturer/service provider wants to exercise this option, he has to inform details as prescribed in rule 6(3A) of Cenvat Credit Rules to Superintendent of Central Excise.

Such option has to be exercised in respect of all exempted goods manufactured and all exempted output services provided. The option once exercised shall not be changed in remaining part of financial year – Explanation I to Rule 6(3) inserted w.e.f. 1-4-2008 - reiterated in para 2 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008. .

Education cess and SAH education cess is payable only on ‘duties of excise’.  ‘Amount’ is not ‘duty’. Hence, education cess or SAH education cess is not payable on such ‘amount’.

1-2 Option is to person availing Cenvat credit

Rule 6(3) uses the words ‘if manufacturer or provider of output service opts not to maintain separate accounts’. Thus, whether to maintain separate accounts or not is at the option of person availing Cenvat credit.  He cannot be compelled to maintain or not maintain separate accounts.

The option is with assessee and he cannot be forced to maintain separate inventory under rule 6(2) – Tahir Ali Industries v. CCE (2006) 195 ELT 225 (CESTAT).

1-3 Meaning of exempted goods

As per Rule 2(d) of Cenvat Credit Rules, 'exempted goods' means goods which are exempt from whole of duty of excise leviable thereon and includes goods which are chargeable to 'Nil' rate of duty. Thus, 'exempted goods' for purpose of Cenvat cover (a) Goods chargeable to 'Nil' duty as per Tariff and (b) Goods which are exempt by a notification issued under section 5A.

Exempted goods do not mean non-excisable goods - Goods which are not mentioned in Tariff are not ‘exempted goods’ as they are neither ‘goods chargeable to 'Nil' duty as per Tariff’ nor ‘goods which are exempt by a notification issued under section 5A’. 

'Exempted goods' do not cover goods which are not excisable at all, i.e. which are not included in Central Excise Tariff at all. Such goods are not 'exempted goods'.  Similarly, goods not specified in tariff at all are not goods 'chargeable to 'Nil' rate of duty'.  Thus, rule 6(2) applies only if all the final products are 'excisable goods'. The rule does not apply if one of the products is not 'excisable goods' at all. Goods which are not 'excisable goods' cannot be said to be exempt from duty or chargeable to Nil rate of duty. – view confirmed in CCE v. Kesar Enterprises Ltd. 2001(130) ELT 93 (CEGAT).

1-4 Meaning of ‘exempted services’

As per rule 2(e) of Cenvat Credit Rules, “exempted services” means 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 Finance Act.

Services on which no tax is payable are also ‘exempt services’ - - For purpose of the definition of ‘exempted services’, services on which no service tax is leviable are also ‘exempted services’. Thus, if a particular service is not taxable under present provisions of Finance Act, 1994, it will be ‘exempted service’ for purpose of rule 6.

It has been clarified that export of service will not be treated as exempted service - para 6 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.

Services utilised for own use, not connected with manufacture or provision of services is not ‘exempted service’ – An assessee may utilise part of the input services for his own use, which may be unconnected with his manufacturing activities or activities pertaining to provision of output services. For example, he may be engaged in exports or trading of goods. In such case, what is to be done in respect of input services which might be partially utilised for own use?

These cannot be termed as ‘exempted services’, as ‘service’ can be given only to another person. One cannot give service to oneself. This is ‘captive consumption’ of input services and not provision of services to another person.

2 Exceptions to provisions of payment of amount

Following are the exceptions to provision of proportionate removal of Cenvat credit or payment of 10%/8% ‘amount’.

2-1 Dis-allowance of Cenvat of capital goods only if used exclusively for exempted final product/services

Capital goods used exclusively for manufacture of exempted goods or providing exempt service are not eligible [rule 6(4)]. If capital goods are partly used for taxable services or dutiable final products, Cenvat credit will be available.

Some manufacturers are entitled to exemption based on turnover or quantity (e.g. SSI units). They will be entitled to Cenvat on capital goods. They can take Cenvat on capital goods and utilise it for payment of duty when their exemption limit is crossed.

Inputs used in manufacture of capital goods used within the factory – Notification No. 67/95-CE exempts capital goods manufactured within the factory and used within the factory. In such case, a view is possible that ‘amount’ is payable on such capital goods. However, since the goods are not sold, there is no question of any ‘price’ and hence no ‘amount’ should be payable.

2-2 Some services eligible even if partly used for manufacture of exempted goods/output services

Rule 6(5) of Cenvat Credit Rules provides that in case of specified services, full Cenvat credit of input service is available even if these services are partly used in manufacture of exempted final product/output services.

The services are –

·         Consulting Engineer [section 65(105)(g)]

·         Architect [section 65(105)(p)]

·         Interior decorator [section 65(105)(q)]

·         Management consultant [section 65(105)(r)]

·         Real Estate Agent [section 65(105)(v)]

·         Security Agency Services [section 65(105)(w)]

·         Scientific or technical consultancy [section 65(105)(za)]

·         Banking and Financial Services [section 65(105)(zm)]

·         Insurance Auxiliary Services concerning life insurance business  [section 65(105)(zy)]

·         Erection, commissioning and Installation [section 65(105)(zzd)]

·         Maintenance or repair [section 65(105)(zzg)]

·         Technical testing and analysis [section 65(105)(zzh)]

·         Technical inspection and certification [section 65(105)(zzi)]

·         Foreign Exchange Broker [section 65(105)(zzk)]

·         Construction Service [section 65(105)(zzq)]

·         Intellectual property services [section 65(105)(zzr)]  

In case of these services, reversal of Cenvat or payment of ‘amount’ is not required, if these services are even partly used for providing output service or manufacture of dutiable final product. Cenvat credit will be dis-allowed only when these services are used exclusively in manufacture of exempted final product or exempted output service. Rule 6(5) has been given overriding effect over rule 6(1), 6(2) and 6(3).

This rule has not been amended even if rule 6(3) of Cenvat Credit Rules has been recast w.e.f. 1-4-2008. Hence, the effect is that in respect of these specified services, proportionate reversal is not required - view confirmed in para 8 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.

2.3 Supply to EOU/SEZ, export of goods, deemed exports or gold manufacture

Rule 6(6) of Cenvat Credit Rule states that provisions of rules 6(1), 6(2), 6(3) and 6(4) are not applicable , if excisable final product is despatched without payment of duty, in following cases –

(a)     Final product is despatched to SEZ, EOU, EHTP or STP (Actually, supply to SEZ is ‘export’ and not ‘deemed export’).

(b)     Final product is supplied to United Nations or an international organisation for their official use or supplied to projects funded by them, which are exempt from duty.

(c)     When final product is exported under bond without payment of duty

(d)     Gold or silver arising in course of manufacture of copper or zinc by smelting.

(e)     Goods supplied against International Competitive Bidding in terms of Notification No. 6/2006-CE dated 1-3-2006 or earlier Notification No. 6/2002-CE dated 1-3-2002, if such goods are exempt from customs duty when imported in India

In such case, assessee need not reverse Cenvat credit or pay any ‘amount’. 

If final product is exported, Cenvat credit cannot be denied – CCE v. VVF Ltd. (2006) 195 ELT 57 (CESTAT).

This provision does not apply to service providers. See discussions in a subsequent paragraph.

This provision will create difficulties if assessee intends to opt for proportionate reversal of Cenvat credit, as discussed later.

International competitive bidding - The last clause has been added w.e.f. 28-1-2005, with intention to exempt goods supplied against International Competitive Bidding as specified in Notification No. 6/2006-CE dated 1-3-2006 (Earlier Notification No. 6/2002-CE dated 1-3-2002).

3 Payment of ‘amount’ on exempted final product/exempt services

Assessee can opt to  pay ‘amount’ of 10% of ‘value of exempted final product or 8% of ‘value of exempted services [rule 6(3)(i) w.e.f. 1-4-2008].

Option of payment of 10% ‘amount’ on exempted goods was also available, but in case of service tax, the provision upto 31-3-2008 was that tax Cenvat credit was restricted to 20% of service tax payable on taxable output services.

The ‘amount’ should be paid in accounting code applicable to service tax i.e. 0044 - para 4 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.

Education cess not payable - Education cess and SAH education cess is payable only on ‘duties of excise’.  ‘Amount’ is not ‘duty’. Hence, education cess and SAH education cess is not payable on such ‘amount’.

Nature of the payment of ‘amount’ - The payment of ‘amount’ is really in nature of reversal of Cenvat credit availed on inputs/input services which have been used for manufacture of exempted goods or provision of output services.

3-1 Job worker doing job work under Cenvat may be liable to pay 8% ‘amount’ after 1-4-2008

Job work done under Cenvat provisions is exempt from service tax. If the job worker is not availing any Cenvat credit of any common input or input services, question does not arise. However, if the job worker is availing Cenvat credit on inputs or input services, he will be liable to pay 8% ‘amount’ on  job charges under rule 6(3) of Cenvat Credit Rules, or he may have to go in for proportionate reversal of Cenvat Credit as per rule 6(3A) of Cenvat Credit Rules effective from 1-4-2008.

If the job worker thinks that the rule 6(3A) is cumbersome, it may be advisable to pay service tax @ 12.36% on job charges, since the customer will be in a position to avail Cenvat credit.

If job worker charges 8% ‘amount’, buyer cannot avail Cenvat credit, but if job worker charges regular service tax, the customer will be eligible to avail Cenvat credit.

3-2 No Cenvat credit of such ‘amount’ paid

The ‘amount’ paid on the exempted final product is not in the nature of excise duty. Hence, department has clarified that buyer of such exempted goods will not be allowed to avail Cenvat credit of ‘amount’ paid by the manufacturer/service provider. - MF(DR) circular No B-42/1/96-TRU dated 27.9.1996.

The view has been confirmed in Malviya Chem v. CCE 2001(127) ELT 274 (CEGAT), where it has been held that ‘Nil duty’ and ‘exemption’ cannot co-exist with duty payment.

It has been clarified that the invoice prepared should indicate duty paid as 'Nil'. However, the amount @ 8% (now 10%) debited should be indicated separately as 'amount debited under rule 6(3)(b)'. There should be separate column in the invoice. - Indore Commissionerate TN 66/96 dated 29-10-1996.

3-3 When to pay the ‘amount’

Para 30(a) of D. O. F. No. 334/1/2007-TRU dated 28-2-2007, issued by Shri Gautam Ray, Joint Secretary, TRU, Ministry of Finance states as follows - An explanation has been inserted in rule 8 to provide that for the purposes of this rule, the expressions 'duty' or 'duty of excise' shall also include the 'amount' payable in terms of the CENVAT Credit Rules, 2004. Therefore, all amount payable like payment under rule 6 (3) of the CENVAT Credit Rules, 2004 etc., can be paid along with duty payable by 5^th or 15^th of the next month.

4 Reversal of credit or payment of ‘amount’ means Cenvat credit not availed

Sometimes, assessee may take Cenvat credit by mistake or because he cannot identify the material to be used for exempted final products. This does not mean that he cannot rectify and must pay 10% ‘amount’. He can rectify by reversing Cenvat credit.

In CCE v. Bombay Dyeing Ltd. (2007) 10 STT 286 = 215 ELT 3 (SC), it was held that even when Cenvat credit is taken, if it is reversed before utilization, it would mean that Cenvat credit has not been taken. In view of the decision, CBE&C vide its circular No. 858/16/2007-CX dated 8-11-2007, has clarified that if Cenvat credit is reversed before utilization, it would amount to credit not having been taken..

In Chandrapur Magnet Wire v. CCE 1996(2) SCC 159 = 1996(81) ELT 3 (SC), it was held that if Cenvat credit taken is reversed, it means no Cenvat credit has been taken. This judgment was on the basis of a specific Board circular, but principle can still apply. 

In Punjab Tractors Ltd. v. CCE 2005 (181) ELT 380 (SC 3 member bench), assessee paid duty on exempted parts, availed Cenvat and reversed it when utilising it for exempted final product (junior tractors of less than 25 HP). It was held that the procedure followed was revenue neutral and hence duty is not payable. However, penalty was held valid for violation of rules.

4-1 Payment of ‘amount’ means Cenvat has not been taken

In Life Long Appliances Ltd. v. CCE 2006 (196) ELT 1110 (CEGAT), it has been held that payment of 10% ‘amount’ means Cenvat credit has not been taken – view upheld by SC – 196 ELT A144 (In this case, assessee’s produce was exempt if Cenvat was no taken. It was held that if ‘amount’ is paid, it means that Cenvat has not been taken).

5 Proportionate reversal of Cenvat Credit w.e.f. 1-4-2008

If assessee intends to pay amount on proportionate basis as provided in rule 6(3)(ii) (w.e.f. 1-4-2008), the ‘amount’ is to be calculated as provided in rule 6(3A) of Cenvat Credit Rules. He has to pay ‘amount’ provisionally on monthly basis. At the yearend, he has to calculate exact amount and pay difference if any or adjust excess amount paid.

5-1 Inform option to Superintendent 

The assessee should inform following details to Superintendent, while exercising the option of proportionate reversal [Rule 6(3A)(a) inserted w.e.f. 1-4-2008] -

(i)                  name, address and registration No. of the manufacturer of goods or provider of output service.

(ii)                date from which the option under this clause is exercised or proposed to be exercised.

(iii)               description of dutiable goods or taxable services.

(iv)              description of exempted goods or exempted services.

(v)                CENVAT credit of inputs and input services lying in balance as on the date of exercising the option under this condition.

Such option has to be exercised in respect of all exempted goods manufactured and all exempted output services provided. The option once exercised shall not be changed in remaining part of financial year – Explanation I to Rule 6(3) inserted w.e.f. 1-4-2008.

If assessee intends to pay 10%/8% ‘amount’ on exempted final products/exempted final services, such intimation is not required.

5-2 Mode of calculations of proportionate reversal

The mode of calculation is as follows –

Assessee should first take entire Cenvat credit of inputs and input services used in exempted as well as taxable final products and exempted as well as taxable services.

Calculation of amount to be reversed -  At the end of month, assessee should calculate Cenvat credit attributable to exempted final products and exempted services on provisional basis, as follows –

Calculations at the end of the year - At end of the year, assessee should calculate the ratios on actual basis and make fresh calculations and pay difference, if any, before 30th June.  If it is found that he had paid excess amount based on provisional ratio, he can adjust the difference himself by taking credit.

Reversal in first year of production or service only at the end of year - In the first year of production or provision of services, ratios of previous year will not be available. In that case, the calculations need not be made for the whole year. However, calculations should be made after the year is over and amount attributable to Cenvat credit on exempted final products and exempted services should be calculated and paid.

The basic idea behind the mode of calculations is sound and correct as per Vat principles. However, calculations are not easy and are prone to litigation.

There is no provision to calculate input services used exclusively for exempted services. This has to be done on ratio basis only.

5-3 Calculation of ‘amount’ on provisional basis every month

The manufacturer of goods or the provider of output service shall determine and pay, provisionally, for every month –

Inputs used for exempted final products - The amount equivalent to CENVAT credit attributable to inputs used in or in elation to manufacture of exempted goods during the month, denoted as A.

This has to be done on basis of input-output ratio or on basis of formula similar to the one applicable in case of inputs for exempted services on provisional basis.

Inputs used for exempted services -  The amount of CENVAT credit attributable to inputs used for provision of exempted services (provisional) is to be calculated as follows -

Input services used in or in relation to manufacture of exempted goods or provision of exempted services - The amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services (provisional) is calculated as follows -

5-4 Calculation of ‘final amount’ after year end 

The manufacturer of goods or the provider of output service, shall determine finally the amount of CENVAT credit attributable to exempted goods and exempted services for the whole financial year in the following manner [Rule 6(3A)(c) inserted w.e.f. 1-4-2008] -

Inputs used for exempted final products - The amount of CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods, on the basis of total quantity of inputs used in or in relation to manufacture of said exempted goods during the financial year, denoted as H [Rule 6(3A)(c)(i)].

This has to be done on basis of input-output ratio and/or on basis of formula similar to the one applicable in case of inputs for exempted services on actual basis.

Inputs used for exempted services -  The amount of CENVAT credit attributable to inputs used for provision of exempted services is to be calculated finally on actual basis as follows -

Input services used in or in relation to manufacture of exempted goods or provision of exempted services - The amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services is to be calculated on actual basis as follows -

Amount of Cenvat credit to be reversed for whole year - Amount of Cenvat credit attributable to exempted goods and exempted services is to be determined at the end of financial year. The amount  is to be calculated as follows

5-5 Payment of difference if short payment was made 

At the year end, the manufacturer of goods or the provider of output service, shall pay an amount equal to the difference between the aggregate amount determined as per rule 6(3A)(c)  and the aggregate amount determined and paid as per Rule 6(3A)(b), on or before the 30th June of the succeeding financial year, if the amount provisionally paid was lower than the amount finally determined at the year end [Rule 6(3A)(d) inserted w.e.f. 1-4-2008].

Interest payable if amount was short paid - In addition to the amount short-paid, the assessee will be liable to pay interest at the rate of twenty-four per cent per annum from the due date, i.e., 30th June till the date of payment, where the amount short-paid is not paid within the said due date.

Thus, no interest is payable if difference is paid by 30th June of the following year [Rule 6(3A)(e) inserted w.e.f. 1-4-2008].

5-6 Intimation of details to Range Superintendent

The manufacturer of goods or the provider of output service shall intimate to the jurisdictional Superintendent of Central Excise, within a period of fifteen days from the date of payment or adjustment, the following particulars -

(i) details of CENVAT credit attributable to exempted goods and exempted services, monthwise, for the whole financial year, determined provisionally

(ii) CENVAT credit attributable to exempted goods and exempted service for the whole financial year, finally determined

(iii) amount short paid determined alongwith the date of payment of the amount short-paid

(iv) interest payable and paid, if any, on the amount short-paid [Rule 6(3A)(g) inserted w.e.f. 1-4-2008].

5-7 Self adjustment of excess amount was paid

If at the year end, it is found that the amount provisionally paid was more than the amount finally determined, the manufacturer of goods or the provider of output service may adjust the excess amount on his own, by taking credit of such amount [Rule 6(3A)(f) inserted w.e.f. 1-4-2008].

Intimation of details to Range Superintendent  - The manufacturer of goods or the provider of output service shall intimate to the jurisdictional Superintendent of Central Excise, within a period of fifteen days from the date of payment or adjustment, the following particulars -

(i) details of CENVAT credit attributable to exempted goods and exempted services, monthwise, for the whole financial year, determined provisionally

(ii) CENVAT credit attributable to exempted goods and exempted service for the whole financial year, finally determined

(iii) amount excess paid

(iv) credit taken on account of excess payment, if any  [Rule 6(3A)(g) inserted w.e.f. 1-4-2008].

5-8 If assessee does not manufacture dutiable goods or does not render taxable services

If assessee does not manufacture dutiable final products or taxable output service, he can take credit but is not required to pay proportionate amount on provisional basis as provided in rule 6(3A)(b). However, at year end, he should pay amount on proportionate before 30th June [Rule 6(3A)(h) inserted w.e.f. 1-4-2008].

The provision applies in case of production in first year when ratios of the previous year are not available to calculate Cenvat attributable to exempted products and exempted services.

If the amount is not paid by 30^th June, interest is payable @ 24% after 1st July [Rule 6(3A)(i) inserted w.e.f. 1-4-2008].

5-9 Calculation of ‘Value’ of exempt goods or exempt services

“Value” for the purpose of rules 6(3) and 6(3A)  shall have the same meaning assigned to it under section 67 of the Finance Act, 1994 read with rules made thereunder or, as the case may be, the value determined under section 4 or 4A of the Central Excise Act, 1944 read with rules made thereunder [Explanation I to rule 6(3A)]

Thus, value is to be calculated as per provisions of Central Excise Act (in case of manufactured products) and Finance Act, 1994 (in case of service tax).

In case of goods chargeable to specific rate of duty, value shall be determined under section 4. In case of (partially)exempted services, value shall be gross amount charged for providing exempted services, without abatement - para 3 CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.

5-10 Cenvat credit in case of export of services

If the services are exported, the Cenvat credit is not required to be reversed. Assessee can utilise credit for payment of duty on other products or service tax on other services. If this is not possible, he can get refund [see rule 5 of Cenvat Credit Rules].

Meaning of export of services – As per explanation to rule 5, ‘output services which are exported’ means any output service exported in accordance with the Export of Services Rules, 2005.

5-11 Recovery of the ‘amount’

If assessee does not pay the ‘amount’ as provided in rule 6(3) or rule 6(3A), it can be recovered along with interest under rule 14 of Cenvat Credit Rules, as if it is a credit wrongly taken – Explanation III to rule 6(3A) inserted w.e.f. 1-4-2008.

6 Issues  involved in applying the formulae

Various issues are going to arise while calculating the credit to be reversed proportionately.

6-1 Rule 6(2) and 6(3) should be taken as complimentary and not mutually exclusive

The words used in rule 6(3) are ‘nothwithstanding anything contained is rule 6(1) and 6(2), the manufacturer of goods or provider of output service, opting not to maintain separate accounts, shall follow either of the following options as applicable to him’.

At first glance, it appears that rule 6(2) and 6(3) are mutually exclusive. However, this rule can be interpreted to mean that rule 6(3) is applicable in respect of inputs and input services for which assesses opts not to maintain separate accounts.

In my view, fair interpretation is that rule 6(3) should apply in cases of common inputs and common input services where assessee is not in a position to maintain separate accounts.

In costing, there is concept of ‘allocation’ and ‘apportionment’. The costs which can be allocated directly to a particular product should be so allocated, while costs which cannot be directly allocated to any particular product/service, should be apportioned on a reasonable basis.

This principle can be applied here. The input goods/services which can be directly allocated to taxable goods/services and exempt goods/services should be allocated under rule 6(2). Full credit should be allowed of Cenvat credit allocable to taxable goods/services and no credit should be allowed for Cenvat credit allocable to exempt goods/services.

The remaining input credit/input services should be apportioned between taxable goods/services and exempt goods/services on the basis of formulae given in rule 6(3A). This should give best possible and most fair results.

6-2 Treatment  of traded goods

A manufacturer and/or service provider may also be trading in goods. The trading may be in respect of goods manufactured under his own brand name or other goods. The sale may be within India or outside.

For example, authorised service station of automobiles is  also selling spare parts. A brand name owner manufactures some goods and also gets similar goods manufactured from ancillary units.

Obviously, there will be many common input services. Now, traded goods are not ‘exempt goods’. It is also not ‘service’, since you are not providing services to anyone else. Further, you cannot provide service to yourself.

Including the entire value of turnover of traded goods into numerator (above line) will be highly unfair to assessee since the services attributable to such traded goods will certainly not be proportional to value of  the traded goods, in cases where assessee is both manufacturer/service provider as well as trader.

As the formulae stand today, turnover of traded goods can neither be included in denominator (below the line) nor the numerator (above the line). This would give higher Cenvat credit to assessee.

Para 5 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008 clarifies that an Input Service Distributor (ISD) does not provide any service, and is like a trader’. Thus, this circular indirectly confirms that trader is not a service provider.

  In my view, it would be fair to first allocate expenses which can be directly allocated to traded goods (e.g. commission) and no credit should be taken.

In case of common input services, value added in traded goods (i.e. difference between sales realisation and purchase price) should be deemed to be value of ‘exempt service’ to be added in numerator.

If no such provision is made in rules, there is strong case to argue that it is not includible in numerator as well as denominator at all, since the traded goods are neither exempted goods nor exempted service (rather it is not ‘service’ at all).

6-3 Cenvat credit in case of export of manufactured goods

As per rule 5 of Cenvat Credit Rules, if the final products are exported, the Cenvat credit is not required to be reversed. Assessee can utilise credit for payment of duty on other products. If this is not possible, he can get refund. The issue is where the value of exported goods will appear while making calculations as per rule 6(3A)?

Goods are cleared for export ‘without payment of duty’. They are not ‘exempt’ goods. Ministry of Law Advice dated 29.10.1974 - confirmed and circulated vide CBE&C circular No 278/112/96-CX dated 11.12.1996, states as follows, ‘Under Central Excise, 'exemption' means exemption by notification under section 5A of CEA [earlier rule 8]. Thus, goods exported under bond are not 'exempt' from duty. These goods also cannot be termed as 'chargeable to Nil rate of duty', as in fact, the goods are dutiable’ - same view in Reliance Industries Ltd. v. CCE 1999(112) ELT 653 (CEGAT) * India Poly Fibres Ltd. v. CCE 1999(111) ELT 48 (CEGAT) * Orissa Synthetics v. CCE 1999(111) ELT 111 (CEGAT) * Frigarifico Allana v. CCE 2001(130) ELT 901 (CEGAT) * Shriram Rayons v. CCE 1999(107) ELT 26 (CEGAT) * Miltan Polyplast v. CCE 2004 (166) ELT 122 (CESTAT) * CCE v. Omkar Textile Mills 2000(122) ELT 115 (CEGAT) * SH Kelkar v. CCE 1998(102) ELT 418 (CEGAT).

Thus, exported goods are not ‘exempt goods’. Hence, in my view, value of export of goods should be taken in denominator i.e. below the line to give correct and fair results. If these are ignored or taken in numerator (above the line), it will amount to reversal of Cenvat credit attributable to these goods, which certainly is illogical.

Supplies to SEZ are ‘exports’ - Supplies to SEZ are ‘exports’ as per section 2(m)(ii) of SEZ Act. Section 51 of SEZ Act provides that provisions of SEZ Act have overriding effect. Hence, irrespective of provisions of rule 6(6) of Cenvat Credit Rules, supplies to SEZ unit or developer are to be treated as ‘exports’.

6-4 Cenvat credit in case of export of services

As per rule 5 of Cenvat Credit Rules, if the output services are exported, the Cenvat credit is not required to be reversed. Assessee can utilise credit for payment of duty on other products or service tax on other services. If this is not possible, he can get refund. As per explanation to rule 5, ‘output services which are exported’ means any output service exported in accordance with the Export of Services Rules, 2005.

The issue is where the value of exported services will appear while making calculations as per rule 6(3A)?

As per rule 2(e) of Cenvat Credit Rules, service on which no tax is payable is also ‘exempt service’. Thus, exported service is also exempt service. However, as per rule 5, Cenvat credit on exported service is not required to be reversed.

Hence, applying principle of harmonious construction, export of services should be taken in denominator i.e. below the line to give correct and fair results. If these are taken in numerator (above the line), it will amount to reversal of Cenvat credit attributable to the exported services, which certainly is illogical.

Luckily, CBE&C vide para 6 of Circular No. 868/6/2008-CX dated 9-5-2008, has confirmed that export of service without payment of service tax are not to be treated as exempted services.

6-5 Calculation of value of common inputs in case of exempted final products

The formulae as given in rule 6(3A) are only in respect of Cenvat credit attributable to (a) inputs used for provision of exempted services and (b) input services used in or in relation to manufacture of exempted goods or provision of exempted services.

There is no formula to calculate Cenvat credit attributable to value of inputs used in manufacture of exempted final product, when inputs are common. In any case, consumables, fuel, dies, toolings etc. will be ‘common inputs’ in most of the cases.

In absence of any formula, the only option with assessee is to calculate the same either on basis of input-output ratio, or on the basis of formula similar to the one applicable for calculation of inputs used for provision of exempted services.

In my view, the principle of allocation and apportionment as applied in costing should apply i.e. credit of inputs directly allocable to exempt final products should be excluded fully and credit of inputs allocable directly to taxable goods should be allocated fully.

In case of balance common inputs, the Cenvat credit to be reversed may be calculated on basis of formulae given in rule 6(3A).

Certificate of Cost/Chartered Accountant - As per para 7 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008, calculation of Cenvat credit attributable to inputs used in relation to manufacture of exempted final products shall be made on basis of stores/production records maintained by the manufacturer. A certificate from Cost/Chartered Accountant giving details of quantity of inputs used in the manufacture of exempted goods, value thereof and Cenvat credit taken on these inputs may be submitted at the end of the year.

6-6 Supplies to EOU, SEZ etc.