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CENVAT credit budget amendments: Taking the bad with the good
Rohit Jain, Partner, Economic Laws Practice
Divya Jeswant, Senior Associate
The Union Budget 2016-17 has amended the CENVAT Credit Rules, 2004 (‘Credit Rules’) significantly, which has far-reaching impact for industry.
While the CENVAT scheme is one of beneficiation for manufacturers and service providers, most disputes currently arise out of the interpretation of the provisions of the Credit Rules. The Union Budget amendments have taken a step forward to provide certainty on disputed issues, which amendments involve all four segments of the credit provisions – availment, reversal, distribution and utilisation of credit.
Availment of credit
Certain noteworthy amendments have been made to the definitional and the eligibility provisions, i.e. under Rules 3 and 4 of the Credit Rules.
(a) Capital goods:
The definition of “capital goods” has been modified to enable credit of wagons and also of equipments and appliances used in an office of a manufacturer. The former was held not to be available in terms of Bulk Cements Corporation (India) Ltd. vs. CCE [2013 (294) ELT 433 (Tri-Mum)], while the latter was previously specifically excluded from the definition.
CENVAT credit has been disallowed in respect of “capital goods” where they are used exclusively for exempt manufacturing / service for two years starting from the date of installation (or from the date of commencement of commercial production / rendition of service). Previously, there were two schools of thought on this issue – (i) credit could be availed if the assessee was not involved only in exempt activity on the date of receipt of the capital goods; or (ii) credit could be availed if the assessee had no intention to carry out only exempt activity on the date of receipt of the capital goods. This amendment now subverts both these tests to some extent and overcomes the decision in Brindavan Beverages Pvt. Ltd.
...vs. CCE, Meerut [2014-TIOL-2136-CESTAT-DEL], wherein it was held that the length of usage of the capital goods for exempt activity is not the requisite criteria to avail the credit of capital goods.
(b) Inputs
The definition of “inputs” has been amended to include any “capital goods” which have a value up to Rs. 10,000. Corresponding exclusion from the definition of “capital goods” has also been made. The impact of shifting such items from the category of “capital goods” to “inputs” is fourfold: (i) the entire amount of credit can be availed in one shot in the initial financial year; (ii) at the time of removal of used inputs, there may be no requirement for reversal of credit on depreciated value (as in the case of capital goods); (iii) for availing abatements where credit of inputs is not allowed, credit of capital goods costing less than Rs. 10,000 will also have to be forgone; and (iv) such items will have to be considered for reversal of credit under Rule 6.
(c) Services
Credit in respect of assignment of “right to use” any natural resources must be availed in a staggered manner, i.e. on Straight Line Method basis for the duration of the assignment. While this amendment affirms the right to credit in respect of such assignment of right to use, at the same time, the credit is not made available in one shot. This amendment also raises the interesting issue of whether a category of “capital services” is being evolved under the CENVAT scheme.
The definition of “exempted service” has also been amended to exclude transportation of goods by a vessel from a customs station in India to a place outside India. This amendment effectuates zero-rating for outward transport for export goods, as basic ocean freight which was previously under the negative list has been brought into the tax net from this Budget.
...Alignment of reversal provisions
Rule 6 of the Credit Rules has been revamped to provide as follows:
(a) Manufacturers exclusively engaged in exempt activity will not be eligible for credit of any inputs and input services;
(b) Manufacturers engaged in both exempt and taxable activity may follow either of the following options for reversal:
(i) pay an amount equal to 6% of value of the exempted goods and 7% of value of the exempted services (subject to a cap of the total credit available with the assessee at the end of the period to which the payment relates); or
(ii) pay an amount of ineligible CENVAT credit proportionate to exempt activity.
For banking and financial institutions including a non-banking financial company, which are engaged in providing services by way of extending deposits, loans or advances, a third option is available to pay an amount equal to 50% of the CENVAT credit availed on inputs and input services in each month.
Two positives emerge from this overhaul – first, the cap on payment at the rate of 6/ 7% is a welcome step, in line with decisions such as Sirpur Paper Mills Ltd. vs. Commissioner of C. Ex., Hyderabad [2006 (205) ELT 188 (Tri.-Bang.)]; secondly, the amendment lays to rest the issue raked up by the case of Thyssenkrupp Industries Pvt. Ltd. vs. CCE [2014 (310) ELT 317 (Tri-Mum)], where the Hon’ble Tribunal expressed the prima facie view that proportionate reversal is to be carried out qua the entire credit pool and not only qua the common credit pool.
On the other hand, the scope and ambit of the term ‘exempted service’ has been thrown open to encompass any activity even if it is not a service. This has dangerous ramifications as potentially any transactions (including sale of goods, sale of immovable property, investment activity etc.)
...will now count as ‘exempted service’ going by the strict wording of the definition. Therefore, very few businesses will be left which do not have any exempted service. Assessees are accordingly required to analyse not only the receipts qua their regular business, but also those which are captured under the head ‘other receipts’, while carrying out reversals under Rule 6.
Relaxation of ISD provisions
An overall relaxation of the ISD provisions has been brought in through this Budget.
The definition of ISD has been extended to an office of an ‘outsourced manufacturing unit’, which includes both a job worker who pays duty on goods manufactured for the ISD, as well as a contract manufacturer who produces goods for an ISD under the latter’s brand name and pays duty. Rule 7 has correspondingly been amended to enable distribution of input service credit to an outsourced manufacturing unit in addition to own manufacturing units. Outsourced manufacturing units are required to maintain separate accounts of credit received from each ISD and use such credit for payment of duty on goods manufactured for the respective ISD. This provision applies only prospectively, and credit of input services available with an ISD as on March 01, 2016 cannot be distributed to an outsourced manufacturing unit.
The amendment overcomes the decision in Sunbell Alloys Co. of India Ltd. vs. CCE, Belapur [2014 (34) STR 597 (Tri.-Mumbai)], which denied CENVAT to a jobber against the ISD invoice issued by the principal manufacture.
Furthermore, it has also been made clear that Rule 6 is not to be applied by an ISD while distributing the credit; rather, the unit to whom the credit has been distributed must apply Rule 6 upon receiving the distributed credit.
Additionally, Rule 7B has been inserted to enable manufacturers with multiple manufacturing units to avail CENVAT on the basis of an Excise invoice issued by the warehouse storing inputs (raw material, packing material etc.)
...of the said manufacturer. The procedure as applicable to a first stage dealer or a second stage dealer would apply to such warehouse in this regard.
All of the aforesaid amendments effectively remove existing blockages to enable free flow of credits for both manufacturers and service providers.
Utilisation of credit
Certain restrictions have been placed on utilisation of CENVAT under the Credit Rules. In respect of the newly imposed Krishi Kalyan Cess, which will come into force from June 01, 2016, credit of the Cess paid on input services will be permitted to be utilized only for payment of the Cess on output services. Further, no provision for inter-sectoral credit of the Cess has been made for manufacturers.
A similar restriction on utilisation has been introduced for the proposed Infrastructure Cess (also to come into force from June 01, 2016) which is to be levied on certain motor vehicles.
The existing provisions in respect of the levy of National Calamity Contingent Duty (NCCD) have also been modified to provide that only NCCD can be utilised for payment of output NCCD on any products.
On the upside, the ‘deemed utilisation’ provision for purposes of calculation of interest liability has been done away with.
Concluding comments
The aforesaid alignment of the CENVAT provisions has to some extent improved fungibility in the credit chain, cleared up certain ambiguities on reversals, and enabled ease of distribution of credit. The nature of changes suggests that they are possibly geared towards a liberalisation of the credit regime, with the proposed GST in mind.
However, as can be observed, most of the amendments usher in the good along with the bad.
In so far as the provisions have brought in consequences which are possibly unintended or have resulted in ambiguity, given that the CENVAT amendments will come into effect from April 1, 2016 (unless otherwise specified), there is a window of opportunity to address these issues, either legislatively or by way of clarification, in order to minimise any confusion and adverse fallout.
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