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Amended Cenvat Credit Rules: Integrating service tax and excise laws

The Cenvat Credit Rules (CCR), 2004, have seen substantial changes over 12 years and now come across as a comprehensive and coherent law.

The Cenvat Credit Rules (CCR), 2004, have seen substantial changes over 12 years and now come across as a comprehensive and coherent law. Certain issues which required attention of the government have been effectively addressed in Budget 2016.

Cenvat reversal

Amendments to Rule 6(3A) of CCR set right the anomaly that existed all this while. Earlier, the taxpayer had to fully reverse cenvat credit directly pertaining to exempted activity and balance credit in the ratio of exempted to total turnover. Post-amendment, the proportionate reversal requirement will apply only to credit common to both taxable and exempt activity.

Rule 6(3)(i) has been amended to provide that the amount payable towards proportionate credit relatable to exempt turnover, i.e. as 6%/7% of value of exempted activities, shall be restricted to opening balance of cenvat credit and credit availed during such period. This is partly in line with the Bangalore Tribunal judgment in Sirpur Paper Mills, where it was held that such reversal should be limited to the amount of credit availed. But the requirement to consider opening credit for each periodic reversal appears imprudent, as it would have already gone through a reversal in the previous period(s). Ideally, this cap should have been only on the common credit accrued during the relevant period.

The definition of “exempted services” under Rule 6 for reversal of cenvat credit pertaining to exempt activities has been expanded to include activities that have been specifically excluded from the definition of “service”. An extreme view could be that all revenue items in the profit and loss statement, other than those entailing excise duty and service tax, would be considered as exempt services calling for cenvat reversal. Such expansive definition would mean that every taxpayer with incomes such as interest, dividend, etc, or revenue from transfer of immovable property will need to proportionately reverse cenvat credit. Such complications that have hitherto not been imposed on taxpayers are avoidable at this juncture when the nation is sitting on the tenterhooks of moving onto GST. It is logical that cenvat credit reversal should be required only if the taxpayer actively engages resources to earn revenue which qualifies as “exempt service”. Any income earned from passive utilisation of funds or capital transactions should not be treated as “exempt service” for the purpose of reversal of credit. Clarifications need to be issued on valuation of “non-service” portion of works contract, restaurant service, etc, i.e. whether the entire abated portion should be treated as “exempt service” or can the taxpayer resort to margin of sales method (as available in case of trading in goods) for arriving at the value of “non-service” portion?

Cenvat availment

Cenvat credit of input services availed by the principal manufacturer/brand-owner (input service distributor), to the extent relatable, will be allowed to be distributed to job worker/contract manufacturer (outsourced manufacturing units). This is a welcome change with significant monetary impact especially for FMCG, pharma and such other manufacturing sectors which have large-scale dependence on job work or contract manufacturing. But there seems no cogent reason for exclusion of goods on which duty is payable under Section 4 of the Act, i.e. on transaction value. The benefit should have been logically extended to such entities as well. Another positive change is that Rule 6 shall apply to the units manufacturing goods or providers of output service and shall not apply to the input service distributor.

A new Rule 7B has been inserted, vide which a manufacturer having multiple factories shall be able to avail credit on inputs received under the cover of an invoice issued by a warehouse of such manufacturer who receives inputs under cover of excise invoices. This will have a positive impact on working capital requirements of a manufacturer with multiple factories procuring same inputs, especially in case of slow-moving high-value inputs.

In case of import of goods where credit of additional duty is allowed on the basis of Bill of Entry (BoE), say if the BoE was filed by one factory immediately after the import of goods and another factory needed the same input more urgently, the manufacturer could not easily redirect the goods to the second factory without either (1) amending BoE, (2) the credit being lost/litigated or (3) receiving the goods in the factory where BoE was filed first and then removing it under the cover of an invoice resulting in large logistic costs and time loss. With this amendment, the manufacturer can file BoE in the name of warehouse, store it in such location, say, near the port of import, and transfer the goods under the warehouse invoice to any factory that needs the same at such time. This would ease the expensive and time-consuming transfer of goods from one place to another or loss of credit.

While this is welcome, the distribution of credit by warehouse to factory is limited to “inputs” and, thus, similar issues faced in the case of “capital goods” (especially those required to be replaced periodically by a manufacturer) would continue to plague the manufacturers.

In the erstwhile provision, cenvat credit on capital goods was not available if it was used exclusively in the manufacture of exempted goods or in providing exempted services. However, the Delhi Tribunal had, in the case of Brindavan Beverages Pvt Ltd, held that simultaneous manufacture of dutiable and exempted goods is not necessary. Cenvat credit would be admissible even if capital goods are used for manufacture of dutiable goods and exempted goods at different points of time. Post the amendment, capital goods can be used exclusively for manufacture of exempted goods or in providing exempted services up to a period of 2 years. It removes the requirement of use of capital goods for some taxable activity right from day 1. However, it also puts a cap on the time for which it can be used exclusively for exempt activity, thereby partially limiting Delhi Tribunal’s judgment.

Interest on cenvat credit wrongly taken

The debate whether interest would be applicable on cenvat credit wrongly availed but not utilised has been a long-standing one. The issue was attempted to be resolved through amendment notification 6/2015 dated March 1, 2015, where it was clearly spelt out that interest would be recovered only if cenvat was wrongly availed and utilised/refunded, and not if it had been availed but not utilised. But that amendment opened another issue by adding that cenvat would been deemed to be utilised on first in first out (FIFO) basis. In other words, any credit availed could not remain unutilised beyond a certain point in time. With CCR restricting availment of credit beyond 6 months (now 1 year), the assessee lost right of availing any credit disputed by the revenue beyond a point, without paying interest. The provision deeming the cenvat being utilised on FIFO basis has now been omitted, thereby bringing sanity to the provision.

Cenvat credit treatment in case of spectrum of natural resources

Cenvat credit of a service tax on one-time charges paid/payable either as full payment upfront or in instalments for the service provided by way of assignment by the government/any other eligible person, of the right to use any natural resource, shall be spread evenly over 3 years. In case such a person further transfers the right to use for a consideration, the amount of balance cenvat credit, not exceeding the amount of service tax payable on the consideration received by him, shall be allowed in the same financial year. However, the amendment is not clear as to whether the credit will be availed completely in the first year and utilised over 3 years, or will it be treated as availed and utilised each year in ratio as determined above? Clarification in this regard may simplify the provision and reduce litigation prospect that may arise in the near future.

The very purpose of introduction of CCR was integration of service tax and central excise legislations and, hence, creating a common pool of credit base. Notwithstanding the same, the amendments eschew flamboyance and aim to rationalise and streamline the existing legal regime so as to prepare for the introduction of GST. Efforts should be made to ensure that we walk hand in hand as regards expansion of tax and credit base, and not do the opposite.

(With inputs from Poonam Harjani and Dhiraj Agarwal)

The author is leader, Indirect Tax, BMR & Associates LLP

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First published on: 25-04-2016 at 06:16 IST
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