Background –Various amendments have been made in Cenvat Credit Rules, 2004 vide Union Budget 2011. Definitions of the terms like ‘inputs’, ‘input services’, ‘exempt services’, etc. have been amended. Also, amendments have been made in the methodology prescribed for credit reversal in case an assessee is engaged in both taxable and non taxable activities. Many of these amendments appear to be in respect of issues which have been a subject matter of judicial scrutiny in the last few years. Thus, it seems that through these amendments, Government intends to settle the long standing disputes and move ahead.

However, given the manner in which some of the clauses have been worded, the same has given rise to various interpretational ambiguities. Accordingly, during the past few weeks, the trade and industry has been making representations to the Government seeking clarifications on number of interpretational issues with respect to these amendments.

In order to clarify some of these issues, the Government has recently come up with a Circular No. 943/04/20 1 1-CX dated 29 April 2011 (the Circular).

The purpose of this document is to summarize some of the key clarifications issued vide the Circular (please refer Annexure for full extract of the Circular) and possible action points on the part of the companies pursuant to these clarifications.

Clarification – Negative list

The list of goods and services for which credit has been disallowed (such as catering, club services, etc.) is only illustrative and not exhaustive. The principle is that Cenvat credit is not allowed when any goods and services are used primarily for personal use or consumption of employees.

Key Action Points

  • Expense list needs to be analysed not only to carve out those expenses which are specifically excluded in the definition but also those expenses, which though not specifically covered, satisfy the principle mentioned in the preceding para.
  • It needs to be analysed whether expenses incurred by employees during business/ official visits would get covered under the negative list.
  • Credit of ineligible expenses should be denied upfront to avoid any interest exposure.

Clarification – Scope of the term ‘inputs’

In respect of ‘inputs’, it has been clarified that goods such as furniture and stationary used in an office within the factory would be construed to be goods used in the factory. Thus, the same would be deemed to be used in relation to the manufacturing business and hence credit of the same shall be allowed.

Key Action Points

  • Re-evaluate expenses incurred in the factory from credit eligibility perspective with special emphasis on expenses with respect to which credit has been forgone till now.
  • Ensure that goods in respect of which credit is intended to be taken in terms of the amended provisions (e.g. furniture, stationary items, etc.) are purchased against Excise invoice.

Clarification – Treatment of credit of common inputs and input services used in trading before 1 April 2011

It has been clarified that the same could be availed subject to prescribed restrictions as were applicable during the relevant period. This clarification seems to suggest that trading was all along an ‘exempt service’ (i.e. the recent amendment clarifying that trading is an exempt service will have retrospective effect).

Key Action Points

  • Analyse whether this would necessitate reversal/re-instatement of credit pertaining to the past period (depending upon the position taken earlier with respect to credit reversal pertaining to trading activities)
  • Formulate the strategy accordingly and consequently, revise the tax returns.

Clarification – Availability of credit on services received before 1 April 2011 on which credit is not allowed now – e.g. rent-a-cab service

It has been clarified that the credit on such services shall be available if their provision had been completed before 1 April 2011.

Key Action Points

  • Review the status of credit with respect to services that have been completed before 1 April 2011.
  • Avail credit even if the booking/ payment/ billing in respect of these services have been done on or after 1 April 2011.
  • Analyse whether credit of Service tax incurred on advance payments made before 1 April 2011 would be available.

Clarification – Manner of determining ‘value’ of trading activities It has been clarified that  for calculating the value of trading:

  • As regards application of specific principle of LIFO, FIFO, etc. – the method normally followed by the concern for its accounting purposes as per generally accepted accounting principles should be used.
  • With respect to the taxes and year end discounts – generally accepted accounting principles need to be followed in this regard. All taxes for which set off or credit is available or are refundable/ refunded may not be included. Discounts are to be included.

Key Action Points

  • Ascertain the accounting policy adopted by the Company and
    compute ‘sale price’ and ‘cost of goods sold’ accordingly.

Conclusion

The Circular should be seen as a timely step on the part of the authorities to clarify various issues arising out of the amendments. Further, most of these clarifications should be welcomed by the industry.

However, there are still number of issues that have not been addressed, such as:

  • Whether credit of general business expenses, like rent, telecommunication, equipment maintenance, etc. would be allowed.
  • Whether the credit reversal formula prescribed for trading activities can be applied retrospectively.
  • Whether expenses incurred by employees during their official trips would be construed as being personally used/consumed by these employees.
  • Accordingly, one would hope that the Government comes up with another set of clarifications to address the unresolved issues to obviate alternate interpretations/disputes.

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