Rule 6 of CENVAT credit Rules

[dipsang vadhel]

CENVAT Credit of eligible Taxes on inputs, capital goods and input services that goes into or in relation to manufacture of dutiable goods or taxable services is admissible. Similarly, CENVAT Credit of eligible Taxes on inputs, capital goods and input services that goes into or in relation to manufacture of exempted goods or for provision of exempted service. Though this position is very clear and seems to be easy in understanding but is equally difficult in application in practice particularly when one is manufacturing both dutiable and exempted goods and/or providing taxable and exempted services.

Further, in most cases of complex continuous process plants are designed wherein one or other intermediate or a product of one plant is being used by another plant or there may be sharing of utilities by plants manufacturing both taxable and exempted products.

Under the circumstances, compliance Rule 6 of CCR, which deals with the situation in case where one is manufacturing both dutiable and exempted goods and/or providing taxable and exempted services, has proven to be headache for assesse. In additions to complexity in calculations involved in the matter, some of the interpretation issues in opinion of the author are as under:

Sr.no.	Conditions	CENVAT Admissibility	Issues
1	whether maintaining separate account for receipt or consumption of input service and input goods (refer to Rule 6(2) of CENVET credit Rule, 2004)	CENVAT Credit of eligible Taxes on inputs, capital goods and input services that goes into or in relation to manufacture of dutiable goods or taxable services is admissible. Similarly, CENVAT Credit of eligible Taxes on inputs, capital goods and input services that goes into or in relation to manufacture of exempted goods or for provision of exempted service	The assesse should work out as what is separate account for receipt or consumption of input service and input goods. Further, this assumes that it is always possible to bifurcate and more particular document inputs and input services used for taxable and exempted activities. In practice, this will not be the case, more particularly in case of input services.
2	When separate account for receipt or consumption of input service and input goods is not maintained.
2.1	Whether paying an amount equal to 6% of the value of exempted goods/services (refer Rule 6 (3) (i) of CCR,2004)	Avail full credit of eligible Taxes on inputs, capital goods and input services and make payment of to 6% of the value of exempted goods/services (refer Rule 6 (3) (i) of CCR,2004)	Since amount paid is not tax, CENVAT is not admissible to buyer. Therefore, always goes in cost causing issues in competitiveness of prices. It is not clarified anywhere as to what is the value of exempted goods and service. This can lead to litigation when one of exempted products are subsidized like fertilizer, LPG (assuming such products to be exempted).
2.2	Whether paying an amount equal to CENVAT credit attributable to inputs and input services used in or in relation manufacture of exempted goods/services (refer Rule 6 (3) (ii) of CCR,2004)	Avail full credit at first Cenvat and pay back amount calculated using following formula:   Credit taken * Value of Exempted Service or Goods manufactured or removed during the preceding financial year	Formula uses the word 'total Cenvat Credit taken and not 'common credit', therefore the option cannot be taken in case where it is possible to maintain separate accounts as envisaged under Rule 6(2) of CENVET credit Rule, 2004 in respect of most no of inputs and input services. Accordingly, some of the otherwise legitimate common credit has to be forgone in such cases. Here also it is not clarified anywhere as to what is the value of exempted goods and service. This can lead to litigation when one of exempted products are subsidized like fertilizer, LPG (assuming such products to be exempted).
2.3	whether maintaining separate account for receipt or consumption of inputs and paying an amount equal to CENVAT credit attributable to input services used in or in relation manufacture of exempted goods/services		The assesse should work out as what is separate account for receipt or consumption of input service and inputs. Further, this assumes that it is always possible to bifurcate and more particular document inputs used for taxable and exempted activities. Here also it is not clarified anywhere as to what is the value of exempted goods and service. This can lead to litigation when one of exempted products are subsidized like fertilizer, LPG (assuming such products to be exempted).

 

Conclusion:

Rule 6 of CCR has been introduced to give benefit of legitimate CENVAT credit for inputs and input services that goes into taxable activities in case where one is manufacturing both dutiable and exempted goods and/or providing taxable and exempted services. However, ambiguity in drafting of CCR has led to lot of litigation around rule 6 of CCR thereby depriving manufacturers and service providers from intended benefit. To ensure that rule 6 of CCR meets the objective, it is desired that

1. CENVAT Credit of eligible Taxes on inputs, capital goods and input services that goes into or in relation to manufacture of dutiable goods or taxable services is allowed to the extent it is possible to maintain separate account for receipt or consumption of input service and input goods (refer to Rule 6(2) of CENVAT credit Rule, 2004)
2. Credit in respect of common inputs be allowed as per any of the option adopted as per Rule 6(3) of CCR.
3. separate account for receipt or consumption of input service and input goods is properly defined.
4. Methodology to bifurcate inputs and input services used for taxable and exempted activities may be clarified.
5. Method to value of exempted goods and service may be clarified.

This will put to logical end on unwarranted litigation under rule 6.

Discussions to this article

[Ashok Aggarwal]

I agree with Mr Vidhel that Rule 6 is very complicated and it is very difficult for the common man to understand the same. Even the departmental officers are unable to fully understand as how it has to be applied and assessee is at the receiving end. If the declaration is given for opting procedure meant for those who cannot maintain separate record for taxable and exempted services or goods, the assessee is in a mess and is unable to understand whether he should take credit for goods exclusively used for taxable services or not. If he does not submit the declaration, the department straight away issues demand for payment of tax @ 8% of the total value of exempted goods. This situation becomes more alarming for traders who also provide some services essentially required for carrying out their trading activity like providing BAS in the form of transportation or storage of goods or commissions etc. The demand so raised is many times more than the total amount of credit taken by the assessee in the entire year or in last five years because trading activity has been declared as an exempted service. In one such case the total credit taken is ₹ 5 crores in last five years and demand has been raised for ₹ 42 Crores despite a series of judgments against such demand from High Courts and Tribunal. Isn't it ridiculous ? It must be addressed without further delay.