Rule 3 – CENVAT Credit

Rule 3 – CENVAT Credit :

(1) Duties/tax eligible for credit: A manufacturer and an output service provider can take credit of excise duty paid on inputs or capital goods and service tax paid on input services. Such credit of excise duty and service tax together is known as ‘CENVAT credit’. This credit can be utilized to pay excise duty on final products /service tax on output services in accordance with the conditions and restrictions prescribed in CENVAT Credit Rules, 2004.

As per sub-rule (1) of rule 3, a manufacturer or an output service provider can take CENVAT credit of-

(i) Basic excise duty;

However, CENVAT credit of basic excise duty is not allowed if excise duty @ 2% is paid under Notification No.1/2011-CE dated 01.03.2011 or excise duty @ 1% is paid on coal and fertilizers under Notification No. 12/2012 CE dated 17.03.2012.

(ii) National calamity contingent duty;

(iii) Additional duty leviable under section 3 of the Customs Tariff Act (CVD), equivalent to the duty of excise specified under (i), and (ii);

However, CENVAT credit of CVD (leviable under section 3(1) of the Customs Tariff Act) paid on ships, boats and other floating structures up [Entry 8908 00 00 of the Customs Tariff] for breaking is allowed only to the extent of 85%.

(iv) Additional duty leviable under section 3(5) of the Customs Tariff Act (Special CVD);

However, a provider of output service is not eligible to take credit of such additional duty.

(v) Service tax;

(vi) Additional duty of excise leviable on pan masala and tobacco products under the Finance Act, 2005

paid on-

(i) any input or capital goods received in the factory of manufacture of final product or by the provider of output service; and

(ii) any input service received by the manufacturer of final product or by the provider of output services.

Points to be noted:

(i) Job-worker manufacturing exempt intermediate goods eligible to avail credit: CENVAT credit is allowed in respect of the above-mentioned duties, tax or cess paid on any inputs or input service used in the manufacture of intermediate products, by a jobworker availing the benefit of exemption specified in the Notification No. 214/86 and received by the manufacturer for use in, or in relation to, the manufacture of final products.

[Notification No. 214/86 grants exemption to specified goods manufactured in a factory as a job work and used in the manufacture of final products, which are liable to excise duty.]

(ii) Amount of excise duty paid on capital goods at the de-bonding of a unit allowed as credit: The amount equal to excise duty paid on the capital goods at the time of debonding of a unit in terms of the para 8 of Notification No. 22/2003 CE dated 31.03.2003 (which exempts certain goods when brought into 100% EOU / STP complex) is allowed as CENVAT credit. [Notification No. 22/2003 CE dated 31.03.2003 exempts certain goods when brought into 100% EOU/STP complex.]

It may be noted here that in this case the credit is allowed for an amount equal to excise duty and not for excise duty.

(iii) CVD paid on Project Imports allowable as credit: The manufacturer of the final products and the provider of output service are allowed CENVAT credit of additional duty leviable under section 3 of the Customs Tariff Act on goods falling under heading 9801 (project imports) of the First Schedule to the Customs Tariff Act.

(iv) ‘Duty paid’ as per the invoice available as credit in case of subsequent reduction in price: Where a manufacturer avails credit of the amount of duty paid by supplier as reflected in the excise invoice, but subsequently the supplier allows some trade discount or reduces the price, without reducing the duty paid by him, the entire amount of duty paid by the manufacturer, as shown in the invoice would be available as credit. This is because rule 3 allows credit of duty “paid” by the inputs manufacturer and not duty “payable” by the said manufacturer. However, the supplier, who has paid duty, should not file/claim the refund on account of reduction in price.

It may, however, be noted that if the duty paid is also reduced, along with the reduction in price, the reduced excise duty would only be available as credit [Circular No. 877/15/2008-CX dated 17.11.2008].

(2) Availment of credit when exempt/non-excisable goods or exempt services become dutiable/excisable goods or taxable services:

Goods: An assessee manufacturing exempted goods or non-excisable goods cannot avail CENVAT credit of duty paid on inputs used in the manufacture of such final products. However, if such final product becomes dutiable or excisable at a later date CENVAT credit of inputs in stock as on that date can be availed by virtue of rule 3(2).

In effect sub-rule (2) provides that an assessee entering into the tax net will be able to avail CENVAT credit of excise duty paid on

• inputs lying in stock
• inputs contained in work-in-progress
• inputs contained in finished goods lying in stock

on the date on which any goods manufactured by the said manufacturer or producer cease to be exempted goods or any goods become excisable.

This provision is mainly invoked when the aggregate value of clearances of SSI units crosses ` 150 lakh and they become liable to excise duty.

Services: Sub-rule (3) lays down that in relation to a service which ceases to be an exempted service, the provider of the output service shall be allowed to take CENVAT credit of the duty paid on the inputs received and lying in stock on the date on which any service ceases to be an exempted service and used for providing such service.

(3) Utilization of credit:

(i) Eligible payments: As per Rule 3(4), CENVAT credit can be utilized for payment of:

(a) any excise duty 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

(d) an amount, when goods are cleared after repairs under sub-rule (2) of rule 16 of Central Excise Rules, 2002; or

(e) service tax on any output service.

Since, the credit can be utilized for payment of any excise duty on any final product or service tax on output service, ‘one to one’ co-relation between inputs/input services and final product/output services is not required.

(ii) Non-eligible payments: CENVAT credit cannot be utilized/used for payment of:

(a) any duty of excise on goods in respect of which the benefit of an exemption under Notification No. 1/2011 CE dated 01.03.2011 is availed.

(b) service tax in respect of services where the person liable to pay tax is the service recipient.

(iii) Credit available on the last day of the month/quarter only to be utilized: While paying excise duty or service tax, the CENVAT credit can be utilised only to the extent such credit is available on the last day of the month or quarter for payment of duty or tax relating to that month or the quarter [First proviso to rule 3(4)].

Points to be noted:

(a) Units situated in North Eastern States, Jammu and Kashmir, Sikkim and Kutch district availing exemption of duty payable in cash (i.e, duty other than the duty paid by utlilizing CENVAT credit) can avail CENVAT credit on inputs and input services, used in the manufacture of final products cleared after availing the said exemptions, only for payment of duty on final products in respect of which exemption has been availed. [Such exemption is given by way of refund i.e., duty is first paid by the manufacturer and later claimed back as refund.]

(b) Credit of the special CVD (additional duty leviable under section 3(5) of the Customs Tariff Act) cannot be utilised for payment of service tax on any output service.

(c) Credit of only National Calamity Contingent duty (NCCD) can be utilised for payment of the NCCD payable on mobile phones. In other words, in the absence of the credit of NCCD, NCCD payable on mobile phones will have to be paid in cash (even if credit of other duties/tax is available) as no other credit can be utilized to pay such duty.

(d) Credit of only additional duty of excise leviable on pan masala and tobacco products under the Finance Act, 2005 can be utilized for payment of said additional duty of excise on final products. In other words, in the absence of the credit of such additional duty, the additional duty leviable on pan masala and tobacco products will have to be paid in cash (even if credit of other duties/tax is available) as no other credit can be utilized to pay such duty.

(4) Reversal of credit on inputs/capital goods/input services: The CENVAT credit taken on inputs/capital goods/input services by the manufacturer of goods or the provider of output service need to be paid (reversed) in certain cases under rule 3. Unless specified otherwise, such amount has to be paid by debiting the CENVAT credit or otherwise on or before the 5th day of the following month and on or before the 31st day of March in case of month of March. However, if the manufacturer of goods or the provider of output service fails to pay such amount, the same would be recovered in the manner provided under rule 14. The cases where CENVAT credits need to be reversed are:

(i) Inputs/capital goods removed as such: Rule 3(5) states that if the inputs or capital goods on which CENVAT credit has been taken are removed as such from the factory or premises of the provider of output service, the manufacturer of the final products or provider of output service has to pay an amount equal to the credit availed in respect of such inputs or capital goods. Such removal shall be made under the cover of an invoice referred to in Rule 9. The buyer will be able to take credit of such amount by virtue of rule 3(6).

Exceptions: The payment referred to in rule 3(5) above is not required to be made if:

(i) inputs or capital goods are removed outside the premises of the provider of output service for providing the output service;

(ii) inputs are removed outside the factory for providing free warranty for final products. .

(ii) Capital goods removed after being used: As per clause (a) of sub-rule (5A), if the capital goods, on which CENVAT credit has been taken, are removed after being used, the manufacturer or provider of output services shall pay an amount equal to the CENVAT credit taken on the said capital goods reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking the CENVAT credit, namely:-

S.No.	Type of capital goods	Percentage points calculated by straight line method
1	Computers and computer peripherals	For each quarter in	Percentage
		Year* 1	10 %
		Year 2	8 %
		Year 3	5 %
		Year 4 & 5	1 %
2	Other capital goods	2.5% for each quarter

* Here, year is taken to be the financial year.

However, if the amount so calculated is less than the amount equal to the duty leviable on transaction value, the amount to be paid shall be equal to the duty leviable on transaction value.

In other words, if the capital goods are removed after being used, the manufacturer/provider of output services shall pay an amount equal to:-

(I) CENVAT credit taken on the said capital goods reduced by the percentage points calculated by straight line method (mentioned above) for each quarter of a year or part thereof from the date of taking the CEVAT credit; or

(II) Duty leviable on transaction value;

whichever is higher. The buyer will be able to take credit of such amount by virtue of rule 3(6).

(iii) Capital goods removed as waste or scrap: As per clause (b) of sub-rule (5A), if the capital goods are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty leviable on transaction value. The buyer will be able to take credit of such amount by virtue of rule 3(6).

(iv) Inputs/capital goods written off before use: Sub-rule (5B) provides that if the value of any

(a) input, or

(b) capital goods before being put to use,

on which CENVAT credit has been taken is written off fully or partially or where any provision to write off fully or partially has been made in the books of account, then the manufacturer or service provider is required to pay an amount equivalent to the CENVAT credit taken in respect of the said inputs or capital goods. However, if such inputs or capital goods are subsequently used in the manufacture of final products or the provision of output services, the manufacturer or output service provider can take credit of the amount paid earlier.

Credit in case of inputs contained in written off WIP/finished goods: Circular No. 907/27/2009-CX dated 07.12.2009 sets out the manner of reversal of CENVAT credit taken on the inputs, which have gone into manufacture of work in progress (WIP), semi finished goods and finished goods which have also been written off fully in the books of accounts as under-

(A) Finished goods written off:

S.No.	Case	Treatment
1	Excise duty on the finished goods not remitted	Manufacturer is liable to pay excise duty. Thus, he need not reverse the CENVAT credit taken on inputs.
2.	Excise duty on the finished goods remitted under rule 21 of the Central Excise Rules, 2002	Manufacturer is required to reverse the credit on the inputs used.

(B) Work in progress (WIP) written off:

S.No.	Stage of completion of the WIP goods	Treatment
1	WIP can be considered as manufactured goods	Same treatment as applicable to finished goods in point (i) mentioned above
2	WIP cannot be considered as manufactured goods	Goods to be considered as inputs and the treatment for reversal of credit applicable to inputs to apply in this case as well

(v) Remission of duty on final product: Sub-rule (5C) provides that where on any goods manufactured or produced by an assessee, the payment of duty is ordered to be remitted under rule 21 of the Central Excise Rules, 2002, the CENVAT credit taken on the inputs used in the manufacture or production of said goods and the CENVAT credit taken on input services used in or in relation to the manufacture or production of said goods shall be reversed.

(5) Credit in case of inputs/capital goods procured from 100% EOU/EHTP/STP: As per sub-rule (7) the amount of CENVAT credit in respect of inputs and capital goods cleared on or after the 07.09.2009 from an export-oriented undertaking (EOU) or by a unit in Electronic Hardware Technology Park (EHTP) or in a software technology park (STP), as the case may be, on which such undertaking or unit has paid excise duty leviable under section 3 of the Excise Act read with serial number 2 of the Notification No. 23/2003 CE, dated 31.03.2003 [Notification No. 23/2003 CE dated 31.03.2003 grants exemption to specified goods produced in EOU/EHTO/STP] shall be the aggregate of that portion of excise duty, as is equivalent to –

• the additional duty leviable under section 3(1) of the Customs Tariff Act (Countervailing duty), which is equal to the duty of excise under section 3(1)(a) of the Excise Act;
• the additional duty leviable under section 3(5) of the Customs Tariff Act (special countervailing duty @ 4%); and

Rule 3(7) has to be applied only for the duties levied under section 3 of the Central Excise Act. The availment of credit in respect of any other duties charged by the EOU/EHTP/STP unit would be governed by Rule 3(1).

(6) Inter-changeability of credit: (1) Clause (b) of sub-rule 7 provides that CENVAT credit in respect of –

(i) NCCD;

(ii) Additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified above; and

(iii) Additional duty of excise leviable on pan masala and tobacco products, shall be utilized towards payment of –

• NCCD, or the additional duty of excise leviable on pan masala and tobacco products, respectively, on any final products manufactured by the manufacturer, or

• for payment of such duty on inputs themselves, if such inputs are removed as such or after being partially processed or on any output service.

(7) Credit of CVD paid on marble slabs: CENVAT credit of additional duty leviable under section 3 of the Customs Tariff Act (CVD) paid on marble slabs or tiles is allowed to the extent of ` 30 per square metre.

(8) Credit vis a vis notification granting exemption on condition of non-availability of credit: It has been explained that where the provisions of any other rule or notification provide for grant of whole or part exemption on condition of non-availability of credit of duty paid on any input or capital goods, or of service tax paid on input service, the provisions of such other rule or notification shall prevail over the provisions of these rules.

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