Capital Goods - Cenvat Credit Rules, 2004 - Cenvat Credit - Ready Reckoner [OLD] - Cenvat Credit

Capital Goods - Cenvat Credit Rules, 2004 Reference: Rule - 02 - Definitions Rule - 03 - Cenvat Credit Rule - 04 - Conditions for allowing CENVAT credit FAQ www.taxmanagementindia.com Reply What is meaning and scope of the term Capital Goods under Cenvat Credit Rules, 2004 ? Please refer Rule 2(a) of the CCR, 2004 . Whether all goods are eligible for Cenvat Credit as Capital? No. The goods which satisfy the conditions of Rule 2(a) are eligible for credit on Capital Goods. What are the conditions for availing Cenvat Credit on Capital Goods? Cenvat Credit in respect of Capital goods can be taken in two instalments (i) First up to 50% in the first year (ii) second remaining in the subsequent FY. In case of capital goods, proportionate credit system is not applicable. Means if capital goods are used for exempted goods / services and taxable goods/ output services in both, full credit will be allowed. Capital goods used exclusively for exempted final products and output services not eligible. CVD levied u/s 3(5) of Customs Tariff Act [SAD] 100% credit is allowed in the first year itself. 100% credit is allowed in the first year itself where a unit is availing or eligible of SSI exemption [Clearance up to ₹ 4 crores]. 100% credit is allowed in the first year itself where the capital goods are removed as such in the first year itself. On removal of these capital goods, an amount equal to full Cenvat Credit will have to be paid. In case of service provider, actual receipt of capital goods within the registered premises is not necessary. Installation or commissioning of capital goods is not required for taking CENVAT credit. Ownership of capital goods is not essential to avail CENVAT credit. Capital goods obtained on hire purchase/lease/loan eligible. Credit even if hire or lease and license is from non finance company. Credit eligible even if capiatal goods hypothecated to banks. Capital goods can be sent out temporarily. Capital goods should be used in the factory,purpose immaterial. Capital goods eligible even if used for short duration. Partial use of capital goods outside the factory permitted. Credit on capital goods is not available if it is used in another factory even if it is subsidiary. Actual use of capital goods is not required. Capital goods used outside factory premises but integrally connected with factory may be eligible. Capital goods extended from factory like ropeway, conveyor belt and pipeline used for drawing water etc. are eligible. Whether accounting treatment of capital goods is different? Yes, sometimes an item is considered as capital goods for the purpose of Cenvat Credit Rules, 2004 whereas the same items if charged as revenue expenditure in profit and loss account e.g. (i) accessories (ii) parts and components required for repair and maintenance etc. Important points emerge out from definition of Capital Goods Definition Only those items specified in the definition will be capital goods. Any capital goods not covered in definition of capital goods, may be an input to manufacturer, if used within the factory and has some relation with manufacturing activity. Hence Cenvat credit will be allowed. Cenvat credit on capital goods (covered in definition) is available even if ultimately they become immovable property. Like storage tank in factory. Capital goods used for generation of electricity outside factory for captive use within the factory will be also allowed. Captive use is interpreted by the supreme court in case of Madras Cements Ltd. 2010 (7) TMI 179 - SUPREME COURT , supply should be restricted to respective factory only. In this case it was held that Mines if captive mines so as to constitute one integrated unit with concerned cement factory, Cenvat credit will be available. Rule 2(a)(A)(1) of Cenvat Credit Rules provided that equipment or appliances used in an office will not be eligible as capital goods . This clause has been omitted w.e.f. 1/4/2016. It is clarified that air conditioners, refrigerating equipment and computers will be eligible for cenvat credit of capital goods if they are used in the manufacture of final product. Air conditioner used in office premises or a computer used in the office premises of a factory shall not be eligible to cenvat credit. Eligibility of certain motor vehicles and components, spares and accessories as capital goods for following purposes only. Motor vehicles other than tractors, passenger transport vehicles, motor cars and motorcycles. Motor vehicles for transportation of goods used for renting, transportation or courier Motor vehicle designed to carry passengers used for renting or transport or training. Components, spares and accessories of motor vehicles eligible for cenvat credit and when abatement is not availed. Service providers can take credit only if original duty paying document or dealer s invoice is available. Capital goods do not cover equipment or appliance used in office for manufacturer Definition clears that equipment or appliances used in an office will not be eligible as capital goods. This restriction is only for manufacturer and not for service provider. Thus if an assessee is both manufacturer as well as service provider, he should be able to avail Cenvat on equipment or appliance used in an office, if they are used for providing output service. Classification cannot be change at the user s end Classification of goods as done by supplier cannot be changed by excise officer having jurisdiction over factory of user who is availing Cenvat credit. Assessee can take full credit in second year, if he does not take any Cenvat credit in first year in relation to capital goods Assessee can choose to take credit in any subsequent year even if he takes nil credit in the first year. It is not necessary that any credit must be taken in the first year of purchase of capital goods. Capital goods used in EPC project How service receiver can avail cenvat credit of capital goods used by the service provider in the works contract(EPC)? The invoice of machinery supplier will be in name of service provider(contractor).if the service receiver intends to avail cenvat credit of capital goods used in works contract, the invoice should show name of service receiver as consignee, so that he can avail cenvat credit. Even endorsed invoice is sufficient for availing Cenvat credit. In Rajarambhau Patil SSK Ltd.v.CCE2007 (208) ELT 372(CESTAT),components and equipments required for sugar plants were purchased/manufactured by contractor and brought to the factory.Name of assessee was shown in the invoices. The sugar plant was erected at site and commissioned.it was held that cenvat credit is available to assessee. Rule 6(4) of Cenvat Credit Rules, as amended w.e.f. 1.4.2016 Capital goods used exclusively for manufacture of exempted goods or providing exempt service for two years from date of commercial production or provision of service not eligible. Thus,if after two years,the assesse uses such capital goods for taxable goods or services, he cannot avail cenvat credit. [This limit of two years is not applicable to SSIunits who claim SSI exemption.they can avail Cenvat Credit on capital goods even if they start paying excise duty after two years.] If the assesse receives such capital goods after commencement of production or provision of service,the two year period shall be computed from the date of installation of such capital goods. [ proviso to rule 6(4) of Cenvat Credit Rules, as amended w.e.f. 1.4.2016 ] If capital goods were initialy used for exempted goods but later used for excisable goods, Cenvat Credit is available when assessee starts manufacturing excisable goods. Rule 6(4) applies only to excise duty on capital goods and not in respect of input services used in relation to capital goods. Capital goods used in manufacture of exempt intermediate product eligible if final product dutiable. Goods manufactured as job work under cenvat provisions are not exempted goods ,job worker can avail cenvat credit of duty on capital goods. Goods imported under project imports Goods mainly machinery imported under project imports is classified under chapter heading 9801 for customs purposes. Actually the machinery/goods may be classifiable under different chapter heading as per Central Excise Tariff. It has been clarified that even if imported goods are classifiable under chapter heading 9801 for customs purposes,it will be eligible for Cenvat Credit. It has been clarified that in case of inputs included in project import, full credit of CVD will be available immediately.in case of capital goods, upto 50% is available in current year and balance in subsequent year/years. Provision if capital goods are cleared as such in the first year itself If the assesse clears capital goods as such in the first year itself, full 100% Cenvat Credit will be available and then while clearing the capital goods, an amount equal to full Cenvat will have to be paid. Rule 3 CENVAT CREDIT If capital goods are removed as such : The capital goods on which cenvat credit is claimed, if removed, as such, from the factory/premises of service provider, then the manufacturer/ service provider, shall pay an amount equal to cenvat credit availed on such capital goods. Such removal shall be made under the cover of an invoice. Such payment not required, if capital goods are removed outside the premises of service provider for providing output service. If capital goods are removed after being used : the capital goods on which cenvat credit taken, if removed after being used, from the factory/premises of service provider, then the manufacturer/service provider shall pay an amount equal to cenvat credit availed as reduced, by the percentage points as mentioned below. Calculations to be made by straight line method for each quarter of a year or part thereof. Calculations to be made from the date of taking the cenvat credit. For computers and computer peripherals: for each quarter in the first year @ 10% for each quarter in the second year @ 8% for each quarter in the third year @ 5% for each quarter in the fourth and fifth year @ 1% For other capital goods : 2.5% for each quarter. Higher of the amount so calculated, or the amount equal to the duty leviable on transaction value shall be paid. If capital goods are cleared as waste and scrap : the capital goods on which cenvat credit taken, if cleared as waste and scrap, the manufacturer shall pay an amount equal to duty leviable on transaction value. If capital goods written off fully/partially or provision made to write off fully/partially : if the capital goods on which cenvat credit taken, is written off fully, or provision made in the books of account to write off fully or partially, then the manufacturer/service provider shall pay an amount equal cenvat credit taken on such capital goods. If the said goods are used subsequently, the manufacturer/service provider shall take the cenvat credit equal to the amount paid earlier. Where an amount is required to be paid (for reversal of credit), it shall be paid by the manufacturer/service provider, on or before the 5 th day of the following month for the months from april to February, and for the month of march it shall be paid on or before 31 st day of march. If the manufacturer/ service provider, who is required to pay an amount (for reversal of credit), fails to pay the amount, it shall be recovered in the manner as provided in rule 14. Capital goods produced/manufactured by a 100% EOU, a unit in EHTP, STP: Cenvat credit on capital goods produced/ manufactured by a 100% EOU,EHTP, STP, and used in the manufacture of final products/provision of service in any place other than India and the unit pays excise duty under section 3 of the Excise Act read with serial number 2 of the notification No. 23/2003-Central Excise, dated the 31st March, 2003, [G.S.R. 266(E), dated the 31st March, 2003], then the cenvat credit allowed shall be calculated as follows : Fifty per cent. of [X multiplied by {(1+BCD/100) multiplied by (CVD/100)}], where BCD and CVD denote ad valorem rates, in per cent., of basic customs duty and additional duty of customs leviable on the inputs or the capital goods respectively and X denotes the assessable value. The CENVAT credit in respect of capital goods cleared on or after the 7 th September, 2009 from an export-oriented undertaking or by a unit in Electronic Hardware Technology Park or in a Software Technology Park, as the case may be, on which such undertaking or unit has paid - excise duty leviable under section 3 of the Excise Act the Education Cess and the Secondary and Higher Education cess then the cenvat credit available shall be equal to excise duty equal to additional duty under section 3(1) and under section 3(5) of the customs tariff act and the education cess and higher secondary cess. Rule 4 CONDITIONS FOR ALLOWING CENVAT CREDIT on CAPITAL GOODS The cenvat credit on capital goods in any case shall be taken only for an amount not exceeding 50% of the duty paid on such capital goods in the same financial year. Balance of cenvat credit of 50% may be taken in any financial year subsequent to the financial yearin which the capital goods were received in the factory of manufacturer/premises of service provider,if such capital goods are in the possession of the manufacturer/service provider in such subsequent years. The requirement of possession of capital goods dispensed with if such capital goods are components, spares and accessories, refractories and refractory materials, moulds and dies and goods falling under heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to the Excise Tariff Act, When capital goods sent to job worker: The cenvat credit on capital goods allowed if capital goods are sent to a job worker and from there sent to another job worker and is received back by the manufacturer/service provider within 2 years of their being sent to any job worker. Cenvat credit also allowed if capital goods is sent directly to job worker without their being first brought to factory of manufacturer/ service provider.in this case period of 2 years shall be counted from the date of receipt of such input in the premises of job worker. If capital goods not received back in the premises of manufacturer/ service provider within 2 years, then the manufacturer/ service provider shall be required to pay an amount equal to cenvat credit taken. But the manufacturer/ service provider shall again take the cenvat credit when the capital goods are received in his premises. Cases where 100% credit allowed in the same financial year. The cenvat credit in respect of capital goods, cleared as such in the same financial year, shall be allowed 100% of the duty paid in the same financial year. The cenvat credit on capital goods of additional duty under section 3(5) of the customs tariff act shall be allowed immediately on receipt of the capital goods in the factory of the manufacturer. The cenvat credit in respect of an assesse, where the assesse eligible to avail of the exemption under a notification based on value of clearances in a financial year, shall be allowed for the whole amount of duty paid on such capital goods in the same financial year. The CENVAT credit in respect of capital goods may be taken by the service provider when the capital goods are delivered to such provider, subject to maintenance of documentary evidence of delivery and location of the capital goods. The cenvat credit in respect of capital goods shall be allowed to anufacturer/service provider, if the capital goods are acquired by him on lease, hire purchase or loan agreement from a financing company. Cenvat credit on capital goods shall not be claimed, where the depreciation is availed.