Budget 2011 Central Excise – Amendments in Cenvat Credit Rules, 2004

Several amendments have been carried out in the provisions of the Cenvat Credit Rules (CCR), 2004. The basic thrust of these changes is to broad base and simplify definitions to reduce disputes and to achieve a more realistic attribution when common inputs or input services are used for the manufacture of both dutiable and exempt goods. A detailed discussion on the revised provisions is contained in the d.o. letter of Joint Secretary (TRU-II) which is also being issued today. From the point of view of Central Excise, the salient features of these changes are as under:

(a) The definition of „input. contained in rule 2(k) has been revised. The requirement that goods should be used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not has been removed. Henceforth, all goods used in the factory by the manufacturer of the final product, except those specified in the negative list and goods having no relationship whatsoever with the manufacture of final product, would qualify for treatment as inputs. In addition, any goods including accessories cleared alongwith the final product and goods used for providing free warranty have also been included in the definition of inputs. Similarly, goods used for generation of electricity or steam for captive use also constitute inputs. As for exclusions, any goods used for the construction of a building or a civil structure or laying of foundation or making of structure for support of capital goods have been excluded. Another feature of the new definition is that goods used primarily for personal use or consumption of any employee including food articles etc. have been expressly excluded.

(b) The definition of „input service. has also been rationalized to impart clarity and to achieve congruence between goods and services so that the services related to any goods excluded from the definition of „inputs. are also excluded from the definition of „input services.. To give an example, goods used for construction have been excluded from inputs while construction services, works contract service, and other specified services in so far as they are used for construction have been kept out of the purview of input services.

(c) In the case of capital goods, there is no material change in the definition. Credit of duty paid on capital goods used outside the factory for generation of electricity for captive use within the factory has been permitted.

(d) The process of obtaining goods and material mainly melting scrap and re-rollable scrap of steel, by breaking up of ships, boats and other floating structures is deemed to be a process of manufacture in terms of section note 9 of Section XV of the Central Excise Tariff. In the breaking of ships, a number of used serviceable articles such as pumps, air-conditioners, furniture, kitchen equipment, wooden panels etc. are also generated. These are generally sold as second hand goods by ship breaking units but no excise duty is payable as they do not emerge from a manufacturing process. At the same time, ship breaking units are allowed to avail full credit of additional duty of customs paid on the ship when it is imported for breaking. It has been reported by the field formations that this anomaly is resulting in misuse of the Cenvat credit scheme. Rule 3 of the CCR has been amended to prescribe that Cenvat credit shall not be allowed in excess of 85% of the additional duty of customs paid on ships, boats etc. imported for breaking.

(e) Rule 5B is being amended to require a manufacturer or service provider to pay an amount equivalent to the CENVAT credit taken in respect of inputs or capital goods even where the value of such inputs or capital goods is written off partially before being put to use. Currently, this is required only when the value is written off fully.