CA Ashish Gupta

THUMB RULE to avail CENVAT Credit is that it can be availed on those eligible Inputs, Capital goods or Input Services which have been utilized for providing taxable services or manufacturing dutiable goods except the cases where it is restricted under any notification. Therefore, a person engaged in rendering exempted services or manufacturing exempted goods shall not be allowed to avail any amount of CENVAT Credit. However, CENVAT Credit shall not be denied on:

  • Capital goods to SSI units availing exemptions based on the value of clearance.
  • Inputs used in the manufacture of goods cleared without payment of duty to a job worker referred to in rule 12AA of the Central Excise Rules, 2002.

In case a person is engaged in providing Taxable & Exempted service or Manufacturing Dutiable or Exempted goods together then CENVAT Credit on inputs or input services used shall be availed the manner given in Rule 6 of CCR, 2004.

Before moving towards the answer of this question, we need to understand the meaning of Exempted Goods & Exempted Services as provided in Cenvat Credit Rules, 2004.

Rule 2(d): “Exempted Goods” means excisable goods:

Following three types of Goods are covered in the aforesaid definition:

  1. Excisable goods which are exempt from whole of the duty under any exemption notification, which would otherwise be dutiable. But it does not include those goods which are not excisable at all i.e. not listed in Central Excise Tariff Act, 1958
  1. Excisable goods on which duty is charged at the NIL rate i.e. No Excise Duty is payable on such goods though mentioned in CETA.
  1. Excisable goods on which duty is reduced to 1% with a condition that CENVAT Credit on inputs or input services was not availed under N. No. 1/2011-C.E., dated 1st March, 2011 or under entries at serial numbers 67 and 128 of Notification No. 12/2012-C.E., dated 17th March, 2012.

Rule 2(e): “Exempted Service” means a –

  • Taxable service which is exempt from the whole of the service tax leviable thereon; or
  • Service, on which no service tax is leviable under section 66B of the Finance Act; and
  • Taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken;

but shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994.

Following three types of Services are covered in the aforesaid definition:

  1. Any taxable service which is exempt from whole of the service tax by way of exemption notification which would otherwise be taxable. But if any activity is not a “Service” as per section 65(44) of the Act then it can not be termed as Exempted Service like a transaction in money only.
  1. Services which are listed in section 66D of the Act as Negative List of services on which no service tax is levied under section 66B of the Act shall be treated as exempted service.
  1. Services where part of it has been exempted by way of abatement with a condition that no CENVAT Credit shall be availed on input and input services used in providing such services. However, it will not cover those services where abatement benefit is available without any condition or a condition which restrict availment of CENVAT credit of either inputs or input services. For example, service tax is being levied on 30% of the Total Value of service of construction of commercial complex where money was received from customers before receipt of completion certificate from competent authority. Under this category, abatement benefit is available with a condition that no CENVAT Credit shall be available on inputs used in providing output services. Here, CENVAT Credit on input services can be availed and thus this service can not be categorised as exempted services.

Further, it has specifically been mentioned in this definition that it shall not include the services which are exported. Most of the time it is misunderstood that export will also be considered as exempted service for the purpose of this Rule but it has been clarified now within the definition itself.

If a person is engaged in manufacturing dutiable & exempted goods or rendering taxable & exempted services together then he has to determine and avail CENVAT Credit only on those inputs or input services which are used for providing taxable services or manufacturing dutiable goods.

In such cases there can be two following situations:

  1. Inputs or Input Services exclusively used for exempted goods or services then no CENVAT Credit shall be allowed on such items.
  1. Common input or input services have been used for both taxable and exempted output then it would be difficult for the assessee to identify the amount of CENVAT Credit that has been used for taxable output only. For such cases, law provides three rules to determine correct amount of CENVAT Credit eligible for utilization.

Three Rules CENVAT Credit

If any person is engaged in manufacturing exempted goods or rendering exempted services along with the taxable service or goods then assessee has to determine the amount of CENVAT Credit utilized for taxable goods or services. There are three options available under the following rules to do so:

A) Rule 6(2) of CCR, 2004

The manufacturer or provider of output service for availing CENVAT Credit shall maintain separate accounts for the receipt, consumption and inventory of inputs & use of input services used:

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(i) in or in relation to the manufacture of exempted goods;

(ii) in or in relation to manufacture of dutiable final products excluding exempted goods;

(iii) for the provision of exempted services;

(iv) for the provision of output services excluding exempted services.

and shall take CENVAT credit only on inputs & input services under clauses (ii) and (iv).

B) Rule 6(3)(i) of CCR, 2004

The manufacturer of goods or the provider of output service shall pay an amount equal to six per cent of value of the exempted goods and exempted services. In case of services by way of transportation of goods or passengers by rail, the service provider shall pay only two per cent on the value of service so exempted.

The amount paid under this rule shall be deemed to be CENVAT credit not taken for the purpose of exemption notification where part of the value of a taxable service has been exempted on the condition that no CENVAT credit of inputs or input services shall be taken. In such cases, 6% shall be paid on the value so exempted under the notification.

C) Rule 6(3A) of CCR, 2004

Under this rule, an assessee shall reverse or pay the proportional amount of CENVAT credit availed, every month on provisional basis, which will be considered as utilized for the provision or manufacture of exempted service or goods respectively. Such reversal or payment shall be made by 5th of the following month or quarter as the case may be. Following formula has been prescribed for computing such amount under this rule:

Cenvat Credit* taken in a month X Value of Exempted Service or Goods manufactured or    removed during the preceding financial year
Total Value of Taxable & Exempted Services and Dutiable Goods manufactured & removed during the preceding financial year

The amount computed would be the provisional amount of CENVAT Credit which shall be paid in cash or through CENVAT Credit account for all the 12 months. At the end of the financial year, the assessee shall re-compute the amount of CENVAT Credit required to be reversed or paid under this Rule for the current financial year based on the current year’s values of goods & services. Given below is the formula:

Cenvat Credit* taken in the year X Value of Exempted Service or Goods manufactured or removed for the current year
Total Value of Taxable & Exempted Services and Dutiable Goods manufactured & removed during the current year

 * Cenvat Credit amount shall be excluded of the value of inputs used in or in relation of manufacture of exempted goods.

This amount is the actual amount of CENVAT Credit which was supposed to be reversed or paid on account of credit availed for providing exempted services or manufacturing exempted goods.

The assessee shall compute the difference between the provisional and the actual amount of CENVAT as computed of CENVAT reversal. In case, the amount reversed by the assessee during the Financial Year falls short of the actual amount of CENVAT Credit then he shall have to pay the balance amount by 30th June of next Financial Year. Interest @24% p.a. will be levied if payment is delayed. In case excess CENVAT Credit was reversed during the year then he will be allowed to take it back by way of debiting its CENVAT Credit balance.

# In case there were no output services rendered or no goods were manufactured by the assessee during the preceding year then there is no need to compute the amount on provisional basis. The assessee will directly compute the amount to pay or reverse at the end of the financial year and will pay it by 30th June of succeeding financial year accordingly.

Exception to Rule 6(3A):

In case of a banking company and a financial institution including a non-banking financial company, engaged in providing services by way of extending deposits, loans or advances, the amount of CENVAT credit required to be reversed or paid shall be equivalent to fifty per cent of the CENVAT Credit availed on inputs and input services in a particular month.

Compliance under Rule 6(3A):

In order to avail this option, assessee is required to submit following details to the jurisdictional Superintendent of Central Excise:

  • Intimation of choosing this option along with the details of its taxable & exempted service, date of exercising such option and the balance lying in the account of CENVAT Credit on that day.
  • At the end of the financial year, the assessee shall submit the amount of CENVAT Credit computed on provisional basis and on the actual basis and the treatment of difference between the two along with the proof of payment, if any, within 15 days from the date of payment or adjustment of CENVAT Credit account.

Miscellaneous:

  • Once an option is opted by an assessee, it shall be exercised on all the exempted goods manufactured or services provided and shall not be withdrawn during the remaining part of the financial year.
  • In terms of Rule 6(3)(ii), with respect to inputs, an assessee can maintain separate accounts for inputs used for manufacturing taxable & exempted goods and take CENVAT credit on inputs used for taxable goods. While with respect to input services, assessee can pay or reverse CENVAT Credit as provided under Rule 6(3A) ibid.

Exceptions to Rule 6 of CCR, 2004:

In certain cases, assessee can avail 100% of CENVAT Credit on inputs or input services or capital goods even if the assessee is engaged in providing exempted services or manufacturing exempted goods along with taxable services or goods. The provisions of Rule 6 shall not apply in the following cases:

  • In case the excisable goods, where goods are removed without payment of duty to:
    • Cleared to a unit in SEZ or developer of SEZ, software technology park;
    • Cleared for exports under bond;
    • Cleared to 100% EOU;
    • Cleared for Solar power generation project;
    • Gold or Silver falling under the Chapter 71 of the First Schedule arising in the course of manufacture of copper or zinc;
    • Supplied to UN or an international organization or foreign diplomatic missions or consular missions for their official use
  • In case of taxable services, where services are rendered without payment of service tax to a unit in SEZ or developer of SEZ or when services are exported.
  • These rules shall not apply to persons who are liable to pay service tax as service receiver under reverse charge mechanism. For example: A person is manufacturing dutiable goods and has used services by way of transportation of goods by road on which he has to pay service tax, on 25% of the total value of the service, as a service recipient. Then, he shall not be required to reverse or pay CENVAT Credit utilized for manufacturing taxable goods even though he had paid service tax on the abated value of the service.

Further, CENVAT Credit on Capital Goods is not restricted where a person is providing taxable & exempted services or manufacturing dutiable or exempted goods together. But no credit shall be allowed where assessee deals in exempted services or goods only.

Disclaimer:  This article has been prepared from the provisions of the Act, Notifications & Circulars and is solely for your better understanding of the rules & regulations and neither I suggest nor recommend any action based on the information provided above.

Your Feedback & Comments are welcome at info@ashishca.com

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22 responses to “Decoding Rule 6 of Cenvat Credit Rules, 2004”

  1. Anil Bharaskar says:

    Dear Sir,

    Thank you very much for your valuable article.

    My query w.r.t. the same rule is, if we cleared a goods under notification no 12/2012 CE and as per rule 6 (3) if we reversed a Cenvat Credit @ 6% of the value of the exempted goods.
    if so cleared goods rejected by the customer with in 3 months form its dispatch. then can we take the credit of so reversed amount.

    what will be the treatment if we sold those goods to some other party under the same notification.

    requesting your valuable guidance for the same.

  2. Suresh Disale (mobile no.9867036698) says:

    Respected Sir,

    We are engaged in the manufacture of Tower Structure & parts thereof falling under CETH 7308.20.11 of the Central Excise Tariff Act, 1985

    We seek your legal opinion on the following subjects

    1. We(jobworker) have received an order for job work for galvanizing the material(Column)
    2. Goods are sent by principal manufacturer under Rule 4(5)(a) of Cenvat Credit Rules, 2004 vide Annexure-II challan
    3. Tariff heading declared by Principal Manufacturer is 8541.40.19. Description of the goods is Solar Power Structure which is sent for galvanizing purpose.
    4. we are doing the job work(i.e Galvanizing) & sent back the material without payment of duty thru 4(5)a challan to Principal manufacturer.
    5. we are issuing invoice by debiting a Cenvat Credit on the zinc material which is used for galvanizing. Such invoice showing the cenvat duty attributable to quantity of zinc used in job work.
    6. Principal Manufacturer clear the goods without payment of duty to Solar Power Generation Projects
    7. The product of principal manufacturer is exempted from payment of duty if supplied to solar power generation projects as per notification no. 15/2010- CE dtd.27.02.2010 as amended by notification 26/2012-CE dtd.08.05.2012.

    Thus, in view of the above we would like to seek your legal opinion, whether Jobworker is liable to pay excise duty on the products which are processed on receipt of the goods under 4(5) a challan from principal supplier.

  3. Bala says:

    In case of NVOCC, Ocean freight is exempted u/s 66D. Are they required to reverse CENVAT Credit even though they have collect and pay Ocean freight. If in case reversal is applicable, can they avail Rule 6(3)(i) and reverse 2%. What if option has not been exercised already?

  4. Ashish Gupta says:

    Company supply goods shall charge full rate of duty on their clearance…how a user is going to use your goods shall not be the criteria to determine your tax liability…even if the buyer is manufacturing exempted goods and your raw material is taxable then you have to charge duty on your bills..

  5. kalyani jadhav says:

    hi i had one doubt one indian company enganged in business of information technology services in past year company deal in foreign customers but in this year company also provide services to the india company not maintain seperate books of accounts in this cases can company apply the input credit for common services such as security services and building rent

    • Ashish Gupta says:

      they can avail cenvat of all input services since they are rendering export services which is not covered under the definition of Exempted Service…you can also claim refund of service tax paid on services used for exports

  6. Jitin says:

    hi i had a doubt can we avail cenvat credit on invoices in which ecc no is not mentioned .

  7. Kishore Kannan says:

    Dear Sir,

    Suppose a 100 EOU, having 100 lakhs monthly turnover, out of that 40 lakhs is DTA services. rest is export. It has around 10 lakhs of Input Service Tax Credit for that month. How much inpout credit can be set off against the Service Tax Liability on DTA Services? Is there any proportion or full ta credit can be takan?

    • ajay says:

      As per Rule 6(7) of the Cenvat Credit Rules, 2004, the provisions including the so called proportionate credit in terms of Rule 6(3) do not apply in case of export of services. Therefore, in the given situation entire amount of service tax credit is admissible and the same can un-disputably be set off against the service tax liability on DTA services.

    • Ashish Gupta says:

      No reversal of cenvat credit will be required since EOU is exporting its services..which is not an exempted service..pls read the article it is already mentioned that in case of export of service no reversal is required..thanks

  8. Shantanu Sanghi says:

    Dear Sirs,

    In reference to Rule6 Exemptions:
    Can we avail cenvat credit on inputs used to manufacture goods, which are cleared at NIL EXCISE duty against MNRE certificate for SOLAR PV projects?

    • Ashish Gupta says:

      Any input goods used for manufacturing output goods which are exempted or NIL rated by way of notification, shall not be eligible for cenvat credit…however, goods cleared for solar power project are covered under exception, therefore, no reversal shall be required

      • Riddhika Ganatra says:

        Sir, if the manufacturer manufactures goods only for the purpose of solar power generation, he cannot charge excise from the holder of EDEC. So he is not required to pay any duty. In this case, how will the credit availed be utilised? Can the amount be refunded?

  9. Jonita says:

    One of our client has provided us with a Status Holder Incentive Scrip License i.e under excise notification 33/2012. we did not charge excise duty on the Excise invoice.
    my question is that can we claim Cenvat on the raw materials used to make the finished product under this License..

  10. Mukund says:

    Dear Sir,

    Pls comfirm, whether we have to reverse 6 % in cenvat for excisable goods cleared to Mega Power Projects, Goods Supplied to Mega Power Projects is in Exception List, Pls reply, Excise department demanding for reversal of 6% in Cenvat.

  11. Rohan says:

    What is the process for company who supplies raw material to company who produces exempt goods and pay 6% excise duty?

    What rate of duty should they charge in the invoice?

    are they allowed to remove goods without payment of duty?

  12. C.P. BAREJA says:

    supplies made under excise notification 214/86 ( Job work material ) from manufacture unit if consumables & packing material used for manufacturing than we require maintain the separate record for consumables & packing material used & reverse the 6% duty. Please confirm.

  13. Hemant Thombre says:

    In this Situation Rule 6 is applicable, As these are separate action that assessee is doing, 1st gear assembly fitted in tractor which is cleared at nil rate of duty but if 2nd situation if he sell the gear assemble as such to others then situation arise as the exempted goods clearence & dutiable goods clearence.

  14. Bipin says:

    Sir, We would appreciate if the implications of Rule 6 are elaborated in view of the set up having both manufacturing of Dutiable items & also trading of dutiable & non- dutiable items.Wish to clarify the position w.r.t the Input Goods credit (No CENVAT credits availed in trading) but Service tax credits taken on Common services.

  15. kapil kuntala says:

    how to calculate as per 6% duty reversal under rule 6(3)(i)of cenvat credit rule 2004 against excise duty exemption.

  16. JAGANNATHAN says:

    Please give the treatment of Rule 6 in the following case

    A manufacture manufactures both dutiable and exempted final products and availing Cenvat Credit viz Tractors which is fully exempted and gear assembly which is dutiable. This gear assembly is fitted in Tractor and cleared at NIL rate of duty. If they clear Gear assembly separately, it is on payment of duty. It is of the opinion that if the assessee clears a particular product under dutiable and exempted, then only he is eligible to avail rule 6 of CCR i.e Tractor should be cleared at NIL rate and on payment of duty. In the instant case there is no chance of clearance of Tractors on payment of duty since it is totally exempted. Another example is if a manufacture manufactured Gear assembly and kept ready for clearance, he does not know whether this goes to exempted clearance or dutiable clearance ie either he can send it on payment of duty or clear it under exemption notification to ISRO project etc. In these circumstances only Rule 6 operative as per some consultants opinion. Please clarify whether two different products -one is fully exempted and other is dutiable in the case of using common inputs, whether Rule is 6 is operative or not

  17. jay says:

    Sir,
    The article is very useful, detailed and explained in easy language.
    good compilation.
    Only one ommission – In the last para relating to Exceptions to Rule 6 of CCR, 2004: – Mega power projects under ICB is not mentioned. This is to be included in the exception list.
    regards
    jayashree

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