CENVAT CREDIT - CBEC Manual (OLD) - Central Excise

CHAPTER 5 CENVAT CREDIT 1. Introduction 1.1 CENVAT Credit Rules, 2004 (hereinafter referred to the 'CENVAT Credit Rules') have been notified vide Notification No. 23/2004-CE (N.T.) dated 10th September, 2004 as separate set of rules. 1.2 A beginning has been made to introduce the concept of allowing credit of duty paid on inputs and capital goods and service tax paid on input services used for the manufacture of final products and providing out put services. 1.3 These rules have introduced simplified CENVAT provisions and procedures for allowing credit of duty paid on specified inputs, capital goods and input services used in or in relation to the manufacture of specified final products, whether directly or indirectly and whether contained in the final product or not (inputs) and used (capital goods) in the factory of the manufacture of the final product. Similarly, the credit of duty paid on specified inputs, capital goods and input services used for providing output services have been allowed. The credit of duty so allowed can be utilized for payment of duty leviable on the final product subject to the conditions laid down in the rules. 2. Definitions 2.1.1 Certain definitions have been incorporated in rule 2 of the Credit Rules itself. The definition of 'capital goods' is comprehensive. It includes components, spares and accessories as also other capital goods like moulds and dies, refractories and refractory materials, etc. It has been clarified that the components, spares and accessories may fall under any Chapter but they should be components, spares or accessories of capital goods. Storage tanks were added to the list of capital goods w.e.f 1.3.2001. 2.1.2 Credit of duty paid on motor vehicles has been allowed for the services like Tour operators where it is a part of the process of providing output services. 2.2.1 Input Rule 2 (k) of Credit Rules defines "input" as under: "input" means all goods, except [ diesel oil]*, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not, and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used for manufacture of final products or for any other purpose, within the factory of production. * applicable w.e.f. 1.3.2003 Similarly, inputs for input services have been defined as all goods except light diesel oil, high speed diesel oil and motor spirit and motor vehicles used for providing any output services. Light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever. Further, inputs include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer. 2.2.2 Input Service Rule 2(1) defines 'input service' as any service (i) used by a provider of taxable service for providing an output service; or (ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal, and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal. 2.2.3 Capital goods Rule 2 (a) of CENVAT Credit Rules defines capital goods as under: "Capital Goods" means:- (A) the following goods, namely (i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule to the Excise Tariff Act; (ii) Pollution control equipment; (iii) Components, spares and accessories of the goods specified at (i) and (ii); (iv) Moulds and dies, jigs and fixtures; (v) Refractories and refractory materials; (vi) tubes and pipes and fittings thereof; and (vii) storage tank, Used - (1) In the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or (2) For providing output service; (B) motor vehicle registered in the name of provider of output service for providing taxable service as specified in sub-clauses (f), (n), (o), (z r), (z z p), (z z t) and (z z w) of clause (105) of section 65 of the Finance Act; 2.2.4 Exempted goods and Exempted Services Rule 2 (d) of CENVAT Credit Rules defines 'exempted goods' as under:- "exempted goods" means goods which are exempt from the whole of the Duty of excise leviablé thereon, and includes goods which are chargeable to "Nil" rate of duty. Similarly, 'exempted services' have been defined as Per rule 2(e) of CENVAT Credit rules as, "exempted services" means taxable services which are exempt from the Whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act. 2.2.5 Final Products Rule 2 (h) of CENVAT Credit Rules defines final products as under:- "final products means excisable goods manufactured or produced from input, or using input service.* * Matches have been brought under CENVAT scheme w.e.f. 9.7.2004. 2.2.6 . Input Service Distributor As per rule 2(m), Input service distributor has been defined as, - "Input service distributor" means an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be. 2.3 Types of duty of which credit can be taken Rule 3 of the CENVAT Credit Rules specifies the type of duties in respect of which credit can be taken. These duties are — (i) the duty of excise specified in the First Schedule to the Excise Tariff Act, leviable under the Excise Act; (ii) the duty of excise specified in the Second Schedule to the Excise Tariff Act, leviable under the Excise Act; (iii) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978 ( 40 of 1978); (iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957); (v) the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001); (vi) the Education Cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004 (23 of 2004); (vii) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv), (v) and (vi); (viia) the additional duty leviable under section 3(5) of Customs Tariff Act, 1975{ Refer clause 72 of Finance Bill, 2005} (viii) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003); (ix) the service tax leviable under section 66 of the Finance Act; and (x) the Education Cess on taxable services leviable under section 91 read With section 95 of the Finance (No.2) Act, 2004 (23 of 2004), (xi) the additional duty of excise leviable under clause 85 of Finance Bill, 2005. Further, the Explanation in rule 3(1) specifically clarifies that credit of additional duty paid under section 3 of the Customs Tariff Act, 1975 on goods falling under Customs Tariff heading No.98.01 (Project Imports) would be available. This rule also provides for the manner of utilization of credit in different situations. Sub- rule (5) provides that when inputs or capital goods on which the CENVAT credit has been taken are removed as such from the factory or premises of provider of output service, an amount equal to the credit availed is to be paid. However, such amount on inputs and capital goods is not required to be paid when the inputs and capital goods are removed outside the premises of the provider of output service for providing output service and capital goods are received back in the premises within 180 days or within such period as extended by jurisdictional DC/AC. 2.4 Utilisation of credit 2.4.1 The CENVAT credit may be utilized for payment of:- (a) any duty of excise on any final products; or (b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or (c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or (d) an amount under sub-rule (2) of rule 16 of Central Excise Rules, 2002; or (e) service tax on any output service. 2.4.2 Restrictions on utilization of Credit There are certain restrictions on utilization of Cenvat credit of different duties. The credit of AED (TTA), NCCD, Additional Duty of Excise on Tea, Education Cess and additional duty of excise levied under clause 85 of Finance Bill, 2005 can only be utilized only for the payment of such duties. Vide section 88 of Finance (No. 2) Act, 2004, it has been provided that the credit of AED (GSI) paid on or after 1.4.2000 shall be allowed to be utilized for the payment of any other duty. However, prior to this, the duty credit of AED(GSI) if taken can be utilized only for the payment of AED(GSI) as per relevant provisions applicable at that time. Finance Bill, 2005 has made certain changes in clause 88 of Finance (No. 2) Act, 2004 to provide for recovery of AED(GSI) paid before 1st April, 2000 and wrongly availed for payment of Cenvat duty and interest thereon. The scheme also provides for payment of aforesaid amount in 36 equated monthly instalments. {for further details, clause 124 of Finance Bill, 2005 may be referred to.} It has however, been provided that the credit of the Education Cess on excisable goods and the Education Cess on taxable services can be utilized either for payment of the Education Cess on excisable goods or for the payment of the Education Cess on taxable services. The credit of additional duty leviable under sub-section (5) of section 3 of Customs tariff Act, 1975 cannot be utilized for payment of service tax on any output service. Further, the credit of any other duty cannot be utilized for the payment of duty levied under clause 85 of Finance Bill, 2005. {refer Notification No. 13/2005-CE(NT) dated 1 .3.2005} There is no restriction on utilization of credit of duties other than mentioned above. Conditions for allowing CENVAT CREDIT 2.5 Rule 4 of the CENVAT Credit Rules provides for different conditions for allowing CENVAT credit in different situations for inputs and capital goods. The conditions for allowing CENVAT credit are: (1) The CENVAT credit in respect of inputs can be taken immediately on receipt of the inputs in the factory of the manufacturer/premises of provider of output service. The CENVAT credit can also be taken by the job worker referred to in rule 12AA of Central Excise Rules, 2002 for jewellery manufacturers. (2) The CENVAT credit in respect of capital goods received in a factory or premises of provider of output service at any point of time in a given financial year can be taken only for an amount not exceeding fifty per cent. of the duty paid on such capital goods in the same financial year. However, if the capital goods are cleared as such in the same financial year, then the CENVAT credit can be taken in full. Further, the credit of duty leviable under sub-section (5) of section 3 of Customs Tariff Act, 1985 read with clause 72 of Finance Bill, 2005 is also allowed to be taken in full immediately on receipt of capital goods. (3) The CENVAT credit in respect of the capital goods is allowed to a manufacturer or provider of output service even if the capital goods are acquired by him on lease, hire purchase or loan agreement, from a financing company. (4) The CENVAT credit in respect of capital goods is not be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which the manufacturer or output service provider claims as depreciation under section 32 of the Income-tax Act, 1961( 43 of 1961). (5) The CENVAT credit is allowed in respect of jigs, fixtures, moulds and dies sent by a manufacturer of final products to a job worker for the production of goods on his behalf and according to his specifications. The condition of return within 180 days as per clause (a) of sub-rule (5) is not applicable to such jigs and fixtures, moulds and dies when sent to a job worker for production of goods on behalf of principal manufacturer. (6) The CENVAT credit in respect of input service shall be allowed, on or after the day which payment is made of the value of input service and the service tax paid or payable as is indicated in invoice, bill or, as the case may be, challan referred to in rule 9. Other Provisions of CENVAT Credit Rules 2.6 Rule 5 of the CENVAT Credit Rules is regarding refund of CENVAT Credit in specified situations. The refund is allowed only if the credit has been accumulated due to export of final products under Bond or due to providing output service which is exported and if such credit cannot be utilized for payment of duty on domestic clearances or on export clearances under claim of rebate or for payment of service tax. No -refund of credit is allowed if the manufacturer avails of draw back allowed under Customs Central Excise Duties Draw Back Rules, 1995, or claims a rebate of duty under the Central Excise Rules, 2002 in respect of such duties. 2.7 Rule 6 of the .CENVAT Credit Rules explains the obligations of manufacturer of dutiable and exempted goods and provider of taxable and exempted services. These are briefly as under - (i) No credit can be taken on such quantity of inputs! input services which is used for manufacture of exempted goods or for providing exempted services. (ii) Where inputs are used f or exempted as well as dutiable final products/ taxable services, separate accounts for such inputs! Input services are required to be maintained. (iii) If the manufacturer! does not want to maintain separate accounts, he shall pay an amount equal to 10% of the total price of the exempted final products except in the case of certain specified final products mentioned therein. Similarly, in this situation, the provider of output service shall utilize credit only to extent of an amount not exceeding twenty per cent. of the amount of service tax payable on taxable output service. (iv) No credit can be taken on capital goods which are exclusively used in the manufacture of exempted goods or in exempted services except where these are exempted under a notification based on the value or quantity of clearances in a financial year. 2.8 Rule 7 provides the manner of distribution of credit by input service distributor. The input service distributor may distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, subject to the conditions that the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon and credit of service tax attributable to service used in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed. 2.9 Rule 8 of the CENVAT Credit Rules is regarding storage of inputs outside the factory of the manufacturer. The Assistant Commissioner or Deputy Commissioner of Central Excise having jurisdiction over the factory of a manufacturer of final products in exceptional circumstances having regard to the nature of the goods and shortage of space at the premises of such manufacturer may permit to store inputs in respect of which CENVAT credit has been taken, outside such factory, subject to such limitations and conditions as he may specify. In case, such inputs are not used in the manner prescribed in these rules for any reason whatsoever, the manufacturer of the final products shall pay an amount equal to the credit available in respect of such inputs. 2.10 Documents 2.10.1 Rule 9 of the CENVAT Credit Rules specifies the documents on which CENVAT credit can be taken. The documents are - (i) Invoice issued by a manufacturer from his factory or depot or from the premises of the consignment agents or any other premises from where such goods are sold, (ii) Invoice issued by an importer or by an importer from his depot or from the premises of the consignment agents or any other premises from where such goods are sold, 6 (iii) Invoice issued by a first stage dealer or a second stage dealer, (iv) A supplementary invoice issued by a manufacturer or importer (This includes challan or any other similar document evidencing payment of additional amount of additional duty leviable under section 3 of the Customs Tariff Act.) (v) Bill of Entry, (vi) Certificate issued by an Appraiser of Customs in respect of goods imported through Foreign Post Office, (vii) a challan evidencing payment of service tax by the person liable to pay service tax under sub-clauses (iii) and (iv) of clause (d) of sub- rule (1) of rule (2) of the Service Tax Rules, 1994, (viii) An invoice, a bill or challan issued by a provider of input service on or after the 10th day of September, 2004, (ix) an invoice, bill or challan issued by an input service distributor under rule 4A of the Service Tax Rules, 1994, The credit is allowed in cases where the invoice is issued from premises other than the factory, only if such depots, premises of consignment agents or any other premises are registered in terms of Central Excise Rules, 2002. 2.10.2 It also provides for maintenance of accounts by first and second stage dealer. The CENVAT credit in respect of inputs or capital goods purchased from a first stage or second stage dealer shall be allowed only if such dealer has maintained records indicating the fact that the inputs or capital goods were supplied from the stock on which duty was paid by the manufacturer of such inputs or capital goods and only an amount of such duty on pro rata basis has been indicated in the invoice issued by him. 2.10.3 The manufacturer of final products or provider of output service is required to maintain proper records for the receipt, disposal, consumption and inventory of the inputs and capital goods in which the relevant information regarding the value, duty paid, the person from whom the inputs or capital goods have been procured is recorded and the burden of proof regarding admissibility of CENVAT credit shall lie upon manufacturer! provider of output service taking such credit. 2.10.4 Similarly, the manufacturer of final products or the provider of output service is required to maintain separately proper records for the receipt and consumption of the input services in which the relevant information regarding the value, tax paid, CENVAT credit taken and utilized, the person from whom the input service has been procured is recorded and the burden of proof regarding the admissibility of the CENVAT credit shall lie upon the manufacturer or provider of output service taking such credit. For the sake of removal of doubts, it is clarified that separate records should be maintained for availment of credit on inputs and input services. 2.11 Information relating to Principal inputs 2.11.1 Rule 9A has been inserted w.e.f. 25.11.2004 requiring a manufacturer to furnish declaration in respect of each of the excisable goods manufactured by him about principal inputs and quantity of principal inputs required for use in the manufacture of unit quantity of such final product. The term 'Principal Input' has been defined as any input which is used in the manufacture of final products where the cost of such input constitutes not less than 10% of the total cost of the raw materials. 2.11.2 The manufacturer is also required to file a monthly return regarding the receipt and consumption of each principal input with reference to the quantity of final products manufactured. 2.11.3 Manufacturers engaged in the manufacture of goods other than falling under Ch- 22, 28, 29,30, 32, 33, 34, 38, 39, 40, 48, 72, 73, 74, 76, 84, 85, 87 and Headings No. 54.02, 54.03, 55.01, 55.02, 55.03 and 55.04 and who have paid duty less than Rs 100 lakhs from account current during previous year have been exempted form filing of declaration and monthly return under this rule. 2.11.4 The formats of the declaration and the monthly return under this rule have been notified separately. 2.12.1 Returns 2.12.1 The manufacturer of final products is required to submit a monthly return in specified proforma within 10 days from the close of each month to the Superintendent of Central Excise. In respect of manufacturers availing exemption under a notification based on value or quantity of clearances in a Financial year, he shall file a quarterly return in the form specified by notification by the Board within 20 days after the close of the quarter to which the return relates. 2.12.2 A first stage or a second stage dealer shall submit within 15 days from the close of each quarter of a year to the Superintendent of Central Excise a return in the form specified. 2.12.3 Board vide Notification No.73/2003-C.E (N.T.) dated 15th September, 2003 has specified the form for the quarterly return for the registered dealer for the purpose of this rule. Board vide Notification No.25/2004- CE (NT) dated 27th September, 2004 has specified the form ER-i, ER-3 in which monthly/quarterly return for production and removal of goods and other relevant particulars and CENVAT credit under rule 12 of Central Excise Rules, 2002 and rule 9(7) of CENVAT Credit Rules, 2004 is required to be furnished. 2.12.4 The provider of output service availing CENVAT credit shall submit a half-yearly return in form specified, by notification, by the Board to the Superintendent of Central Excise, by the end of the month following the particular quarter or half year. 2.12.5 The input service distributor shall submit a half yearly Statement, giving the details of credit received and distributed during the said half year to the Superintendent of Central Excise, by the end of the month following the half year. 2.13 Transfer of credit Under rule 10 of the Credit Rules, it has been provided that the manufacturers or provider of output service shall be allowed to transfer CENVAT credit lying unutilized in their accounts to such transferred, sold, merged, leased or amalgamated factory! business on account of shifting his factory! business to another site or factory! business transferred due to change in ownership on sale, merger, amalgamation, lease or transfer of a factory! business to joint venture with specific provision for transfer of liabilities of such factory. This shall be allowed only if stock of inputs as such or in process or capital goods is also transferred to new site and the same is duly accounted for to the satisfaction of the Commissioner. [Transfer of credit by Exempted Textile Manufacturer 2.14. Rule 8A of erstwhile CENVAT Credit Rules, 2002 provides for transfer of the credit of duty paid on the inputs, , falling under Chapter No. 51, 52,54,55, 58 or 60 of the First Schedule of the Central Excise Act, 1985 used in the manufacture of the fabrics to the buyers of the said fabrics]*. * Rule 8A has been omitted w.e.f. 9.7.2004 2.15 Transitional Provisions are specified in rule 11 of the CENVAT Credit Rules. Any amount of credit earned by manufacturer/ provider of output service under CENVAT Credit Rules, 2002 and remaining unutilized on 10th September, 2004 is allowed as CENVAT credit under these rules and allowed to be utilized. However, certain restrictions are imposed in this rule. 2.16 Transitional provisions for textile and textile articles were provided in rule 9A of erstwhile Cenvat Credit Rules, 2002 which has now been omitted. . 2.17. Special dispensation 2.16.1 Goods manufactured in factories located in specified areas in the notified areas of North-East, J K, Sikkim and Kutch (Gujrat) are exempted from excise duty by Notification Nos. 32/99-CE 33/99-CE both dated 8.7.1999 as amended, 56/2002-CE 57/2002-CE both dated 14.11.2002 as amended, 56/2003-Central Excise dated 25th June, 2003 , 71/2003-Central Excise the dated 9th September, 2003 and 39/2001-CE dated 31.7.2001 as amended. Any inputs and capital goods produced by these factories are not required to pay any excise duty from account current. However, a special provision has been made in rule 12 that the amount of excise duty payable on any inputs or capital goods produced in such factories, but for the exemption, would be available as CENVAT credit. 2.17.2 On the issue of diversion of credit taken on inputs for exempted products under the North-East notifications for payment of Central Excise duty on other products, it has been provided that the CENVAT credit of the duty paid on the inputs used in the manufacture of final products cleared after availing of the exemption under the notification numbers 32/99-CE and 33/99-CE, both dated the 8.7.199, 39/2001-Central Excise, dated the 31st July, 2001, 56/2002- Central Excise, dated the 14th November, 2002, 57/2002-Central Excise, dated 14th November, 2002, 56/2003-Central Excise, dated the 25th June, 2003 and 71/2003-Central Excise, dated the 9th September, 2003, shall be utilized only for payment of duty on final products cleared after availing of the exemption under the said notifications. 2.18 Power of Central Government to notify goods for availment of deemed credits are contained in rule 13 of the CENVAT Credit Rules. Accordingly, certain inputs were notified on which the duties of Excise or additional duties paid shall be deemed to have been paid at the prescribed rate and allow credit of such amount subject to certain conditions. (Notification Nos. 52/2001-CE (NT), 53/2001-CE (NT), 54/2001-CE (NT), 55/2001-CE (NT) all dated 29.6.2001). These provisions cease to exist w.e.f. 1.4.2003. 2.18. Recoveries of credit wrongly taken or utilized or erroneously refunded are governed by rule 14 of the CENVAT Credit Rules. Where CENVAT credit has been taken or utilized wrongly or has been erroneously refunded, the same along with interest shall be recovered from manufacturer and the provision of Section 11-A of the Central Excise Act, 1944 shall apply mutatis mutandis for effecting recoveries. 2.20 Provisions for confiscation and penalty, for contravention of the CENVAT Credit Rules are contained in rule 15. Where CENVAT Credit has been taken wrongly in respect of inputs or capital goods, all such goods shall be liable to confiscation and such person shall be liable to a penalty not exceeding the duty in the excisable goods in respect of which any contravention has been committed or ten thousand rupees, whichever is greater. In case CENVAT Credit has been taken or utilised wrongly on account of fraud etc., the person availing credit shall also be liable to pay penalty in terms of the provision of Section 1IAC of the Central Excise Act. Similar penal provisions have been provided for wrong availment of Cenvat credit on input services. 2.21 Supplementary provisions are specified in rule 16 of the Credit Rules, 2002, which is reproduced below: "Rule 16. Supplementary provision . - Any notification, circular, instruction, standing order, trade notice or other order issued under the CENVAT Credit Rules, 2002 or the Service Tax Credit Rules, 2002, by the Central Government, the Central Board of Excise and Customs, the Chief Commissioner of Central Excise or the Commissioner of Central Excise, and in force at the commencement of these rules, shall, to the extent it is relevant and consistent with these rules, be deemed to be valid and issued under the corresponding provisions of these rules. 3. Important clarifications 3.1 Once the SSI exemption limit is crossed and the manufacturer starts paying duty, he is eligible to take CENVAT credit in respect of inputs lying in stock, on the inputs contained in finished goods lying in stock and on the inputs in process. For this purpose, it is obligatory on the assessee to quantify the amount of admissible credit based on documentary evidence and records maintained for this purpose. 3.2 The CENVAT credit can be utilised for payment of duty on waste and scrap as waste and scrap are 'final products' within the definition given in the Credit Rules. 3.3 The CENVAT credit is admissible on raw material used for making packing material CENVAT Credit is permissible on the 'raw material' so used. r This is for the reason that the packing material being an input, the raw material used for making packing material is also to be construed as inputs used in or in relation to the manufacture of finished products. 3.4 There is no bar for a manufacturer to remove the inputs or capital goods as such for export under bond. 3.5 CENVAT credit may be taken immediately on receipt of inputs in the factory. This, however, does not mean, nor it is even intended that if the manufacturer does not take credit as soon as the inputs are received in the factory, he would be denied the benefit thereof. 3.6 Air-conditioners and refrigerating equipment and computers are eligible to CENVAT credit as capital goods. The only condition is that the manufacturers should use them in the manufacture of final product. For example, an air-conditioner used in the office premises or a computer used in the office premises of the factory shall not be eligible to CENVAT credit. 3.7 CENVAT credit is also admissible in respect of the amount of inputs contained in any of the waste, refuse or bye product. Similarly, CENVAT is not to be denied if the inputs are used in any intermediate of the final product even if such intermediate is exempt from payment of duty. The basic idea is that CENVAT credit is admissible so long as the inputs are used in or in relation to the manufacture of final products, and whether directly or indirectly. 3.8 If the inputs or capital goods are cleared to a job worker, they should be received back within 180 days. If these are not received, the manufacturer or provider of output service is required to debit the CENVAT credit attributable to such inputs or capital goods. However, the manufacturer or provider of output service shall be entitled to take CENVAT credit as and when the goods sent to the job worker are received back. If part of the goods is received back within 180 days and the rest of the goods are received back after 180 days, the obligation for debiting the credit shall arise only in respect of CENVAT credit attributable to that part which is not received within 180 days. 3.9 Provision has been made for permitting the CENVAT credit when the inputs or capital goods are purchased from the first stage dealer or from the second stage dealer. These dealers should be registered under rule 9 of the Central Excise Rules, 2002. The other procedural requirements in respect of first stage dealer and second stage dealer will continue as in the case of Modvat rules. 3.10 The documents on which CENVAT credit can be taken have been prescribed to enable verification, where needed, by the department. The admissibility of the amount of CENVAT credit should be discernible from the records of the manufacturer! provider of output service, including the payment made to the sellers of inputs and capital goods and providers of input services. The basic responsibility is upon manufacturer! provider of output service to prove that inputs or capital goods were purchased and were used by him for the intended purpose. 3.11 Notification No. 70/2003-CE. (N.T.), dated 15.9.2003 vide which inter alia, clause (b) of sub-rule (2) of rule 4 of CENVAT Credit Rules, 2002 was amended to substitute the words 'refractories and refractory materials, moulds and dies' in place of / refractories and refractory materials'. This means that credit is allowed in respect of the balance 50% of the duty on Moulds and Dies in a subsequent financial year even if the conditions of these goods being in the possession and use of the manufacturer of final products in such subsequent years is not fulfilled. In other words, the balance 50% credit may be taken by the manufacturer of final products for Moulds and Dies in a subsequent financial year when these goods have been used for the manufacture of final products but no longer available in such subsequent financial year. Application to exempted goods/ exempted services 3.12 No credit can be taken on inputs! Input services which are used exclusively in or in relation to the manufacture of exempted final products! exempted services. The basic principle underlying the CENVAT scheme is that credit is admissible if duty is paid on final products/ output service. Attention is drawn to sub-rule (1) of rule 6 of the CENVAT Credit Rules, which clearly provides that CENVAT credit shall not be allowed on such quantity of inputs or input services which is used in the manufacture of exempted goods/ exempted services, except in circumstances specified in sub-rule (2). The provisions of sub- rule (2) and sub-rule (3) of rule 6 provide as to how to deal with and account for the inputs and credit of duty in cases where the inputs are used in manufacture of both dutiable as well as exempted products! Services. In other words, in terms of Rule 6, the assessee who has not maintained separate inventory and has taken credit on common inputs! input services to manufacture dutiable and exempted products [ in the cases mentioned in i- provisions contained in sub-Rule (3) (a)] has no option but to reverse 10 % of price of the exempted goods as per provisions of sub-rule (3)(b) of the said rule. The recovery of such amount is covered by Explanation II provided in the rule itself. Molasses 3.13 The utilisation of accumulated Modvat/Cenvat Credit on molasses or payment of duty on sugar may vary depending on the situation. Molasses is generated as a by-product in the sugar manufacturing units and attracts specific rate of duty. The molasses generated can be captively consumed for further Manufacture of ethyl alcohol either in the same unit or in a distinct distillery unit. However, ethyl alcohol which is manufactured using the molasses may be dutiable or exempted or non-excisable. All such possible situations are discussed ol1ows. (a) A composite unit may manufacture sugar, molasses and Ethyl Alcohol dutiable, exempted and non-excisable. In case, Ethyl Alcohol non-excisable or exempted is manufactured, the duty becomes payable on molasses and no credit of duty paid on 'in-house' manufactured molasses shall be available. In case, the ethyl alcohol is cleared on payment of duty, no duty is required to be paid on molasses and hence, no question of availing credit arises. (b) A composite unit may manufacture sugar, molasses and ethyl alcohol and also procure duty paid molasses from outside. In such an event, the credit of duty paid on molasses used as input in the manufacture of dutiable ethyl alcohol shall be available which can be utilised for the payment of duty on any finished product manufactured in the same factory. In case, exempted/non-excisable ethyl alcohol is produced, no credit of duty paid on molasses procured from outside shall be available. (c) Where sugar unit and distillery unit are two distinct entities, molasses is produced in sugar unit and cleared on payment of duty. No question of availing credit of duty paid on molasses arises in such case. However, if molasses so produced is used as input in distillery unit which is altogether a separate entity, credit of duty paid on such molasses can be utilised by the later entity. 3.14 Cenvat Credit is admissible only when the inputs or Capital goods are used by the manufacturer within the factory premises [except when inputs or capital goods are used/sent for job work outside factory]. This position remains unchanged in the present Cenvat Credit Rules, 2004. 3.15 The admissibility of Modvat/Cenvat Credit on the inputs/capital goods written off including partial write off is as follows (i) In cases, where unused inputs are fully written off, Board's instructions dated 22.2.95 shall apply i.e. the credit availed must be paid back. (ii) In cases where the value of the inputs is partially written off ! reduced in the accounts of the company, but the inputs are still capable of and available for use in the manufacture of finished goods, there would be no question of payment of CENVAT credit availed. (iii) In respect of capital goods viz, components, spare parts etc; which are written off before use and hence are not proposed to be used, the CENVAT credit availed will have to be paid back on the same lines as applicable to "inputs" as mentioned in (i) above. 3.16 Modvat/Cenvat credit of duty paid on the inputs contained in finished products on which duty remission has been granted shall not be admissible and reversal thereof should be ensured before granting remission of duty. Further, before granting remission of duty on any finished products destroyed or damaged in fire, accident etc., it should also be ensured that the insurance amount claimed by the assessee does not include the duty element for which remission is being claimed. 3.17 Cenvat credit is also available on the capital goods used in manufacturing of intermediate goods exempt from payment of duty so long as these intermediate goods are consumed within the factory of production and are further used in the manufacturing of the final products which are cleared form payment of duty. e.g. capital goods used in the preparatory stages of Cotton in a textile mill which are exempt from duty but are produced in the course of manufacturing of finished products chargeable to duty. 3.18 In case the manufacturer wishes to clear the goods directly from the premises of the job worker, as per rule 4(6), the Commissioner having jurisdiction over the factory of manufacturer of final products can allow such clearance subject to conditions including the manner of payment of duty, imposed by him in this regard. Such permission shall be valid for a financial year. It may however, be noted that the duty in such case is required to be paid by the principal manufacturer only and the job worker shall have no option to pay duty.