ntroduction:- Budget of 2014 had become the talk of the town since the day Mr. Narendra Modi came into power as the Prime Minister of India. The veil on the most awaited Budget has been lifted. But there seem least changes in the indirect tax regime. However these little changes too might have a considerable impact on the assessee. This piece of articulation is about few such changes done in the Cenvat Credit Rules, 2004 which restrict the time for availing the Cenvat credit to six months.
RULE 4(1) OF CENVAT CREDIT RULES, 2004
♣ Pre Budget Scenario: The Rule 4(1) of Cenvat Credit Rules, 2004 before amendment, reads as follows:
“4. Conditions for allowing CENVAT credit.- (1) The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service:
Provided that in respect of final products, namely, articles of jewellery or other articles of precious metals falling under heading 7113 or 7114 as the case may be of the First Schedule to the Excise Tariff Act, the CENVAT credit of duty paid on inputs may be taken immediately on receipt of such inputs in the registered premises of the person who get such final products manufactured on his behalf, on job work basis, subject to the condition that the inputs are used in the manufacture of such final product by the job worker.
Provided further that the CENVAT credit in respect of inputs may be taken by the provider of output service when the inputs are delivered to such provider, subject to maintenance of documentary evidence of delivery and location of the inputs.”
The language of existing provision provides that the assessee can take the Cenvat credit “immediately” on receipt of inputs. This word “immediately” has been a cause of litigation since couple of years. Department has practice of denying the Cenvat Credit if taken after months or so of receipt of the inputs. However, there are a number of Tribunal decisions where credit was allowed even after few years of actual receipts of inputs. Some of such decisions are cited as follows:-
COROMANDEL FERTILIZERS LTD. Versus COMMR. OF C. EX. (A), VISAKHAPATNAM-IV [2009 (239) E.L.T. 99 (Tri. – Bang.)]
Cenvat/Modvat – Limitation – Denial of credit on the ground that same taken 3 to 7 years after receipt of inputs – Appellants could not take credit because of uncertainty about eligibility – Rules do say that credit should be taken immediately but no outside limit prescribed – Revenue’s contention is that it should be availed within reasonable period – Law has been settled by several decisions that there is no justification for denying credit taken after a long period – No merit in impugned order which is set aside and appeal allowed – Rule 3 of Cenvat Credit Rules, 2004. [para 6]
JOHNSON MATTHEY CHEM. INDIA PVT. LTD. Versus COMMR. OF C. EX., BELAPUR [2009 (240) E.L.T. 673 (Tri. – Mumbai)]-
Demand on the ground that credit not taken immediately on receipt of inputs – Tribunal decisions holding that upper time limit not fixed for taking credit.
Thus, the Tribunal decisions have decided the issue in favour of appellants and the credit was allowed even after couple of years of receipt of inputs as there was no upper time limit fixed for taking the credit. This budget has come up with the fixation of time limit for taking the credit.
♣ Post Budget Scenario:
Notification No. 21/2014-Central Excise (N.T.) dated 11th July, 2014 has done the following amendments in the said rule 4(1):-
“ In the said rules, in rule 4, –
(a) in sub-rule (1), after the second proviso, the following proviso shall be inserted with effect from first day of September 2014, namely :–
“Provided also that the manufacturer or the provider of output service shall not take CENVAT credit after six months of the date of issue of any of the documents specified in sub- rule (1) of rule 9.”;
Thus, w.e.f. 1.9.2014, the upper time limit has been fixed as six months from the date of duty paying document prescribed in rule 9(1) of the Cenvat Credit Rules, 2004.
♣ Effect of amendment: –
The amendment now restricts the assessee to take credit within the period starting from date when inputs are received in the factory of the manufacturer or in the premises of the provider of output service till the expiry of six months of the date of issue of any of the documents specified in rule 9(1) of Cenvat Credit Rules, 2004.
This amendment has nullified the effect of Tribunal judgments which held that the credit can be availed even after a number of years of actual receipt of the inputs. However, this amendment has an unforeseen effect also in the cases of clandestine removal. In the cases where the demand is confirmed whether on account of clandestine removal or in any other similar case, at present the facility of Cenvat Credit is allowed. In the case of S.R. SPRINGS PVT. LTD. Versus COMMISSIONER OF C. EX. & CUS., BBSR-II [2002 (150) E.L.T. 757 (Tri. – Kolkata)], hon’ble Tribunal has allowed the Cenvat Credit on inputs to the appellants while confirming the demand for clandestine removal of goods. This case was maintained by the Highest Court of India and the judgment was reported at 2003 (154) ELT A180 (Supreme Court). Thus, as of now, the consequential benefit of Cenvat credit was allowed if the demand for clandestine removal was confirmed on the assessees. But after this amendment, since there is ceiling limit for availing the Cenvat credit; the facility of Cenvat credit cannot be availed. Thus, this small amendment seem to have scrapped the verdicts of Supreme Court that the “consequential benefits should be allowed where the demand is confirmed”.
RULE 4(7) OF CENVAT CREDIT RULES, 2004
♣ Pre Budget Scenario:
The relevant extract of Rule 4(7) of Cenvat Credit Rules, 2004 before amendment, reads as follows:
“(7) The CENVAT credit in respect of input service shall be allowed, on or after the day on which the invoice, bill or, as the case may be, challan referred to in rule 9 is received:
Provided that in case of an input service where the service tax is paid on reverse charge by the recipient of the service, the CENVAT credit in respect of such input service shall be allowed on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to in rule 9:
Provided further that in case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in rule 9, is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT credit availed on such input service and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules:”
Thus, the existing rule 4(7) states that:-
Credit can be availed on the input service after the receipt of invoice/bill/challan.
In case input service is covered by Reverse Charge mechanism (RCM), the credit is allowed after the invoice is paid off and the service tax due is also paid off.
If the invoice value is not paid within three months, the credit availed has to be reversed which can be taken back on actual payment of the invoice.
The rationale behind enactment of two provisos to rule 4(7) of CCR was to prevent the service recipient from availing CENVAT Credit just on the basis of payment of service tax and where he has not paid the invoice amount to the service provider.
♣ Post Budget Scenario:
Notification No. 21/2014-Central Excise (N.T.) dated 11th July, 2014 has done the following amendment in rule 4(7) of the Cenvat Credit Rules, 2004:-
(b) in sub-rule (7),-
(i) for the first and second provisos the following provisos shall be substituted, namely:-
“Provided that in respect of input service where whole of the service tax is liable to be paid by the recipient of service, credit shall be allowed after the service tax is paid:
Provided further that in respect of an input service, where the service recipient is liable to pay a part of service tax and the service provider is liable to pay the remaining part, the CENVAT credit in respect of such input service shall be allowed on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to in rule 9:
Provided also that in case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in rule 9, except in respect of input service where the whole of the service tax is liable to be paid by the recipient of service, is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT credit availed on such input service and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules :”
(ii) after the fifth proviso, the following proviso shall be inserted with effect from first day of September, 2014, namely :–
“Provided also that the manufacturer or the provider of output service shall not take CENVAT credit after six months of the date of issue of any of the documents specified in sub-rule (1) of rule 9.”.
Thus, after amendment, the rule 4(7) states that:-
Credit can be availed on the input service after the receipt of invoice/bill/challan.
If the input service is covered under full RCM (i.e. 100% Service tax is payable by service recipient), the credit shall be allowed after the payment of service tax.
If the input service is covered by partial RCM (i.e. part of service tax is payable by service provider and remaining part of service tax is paid by service recipient), the credit shall be allowed on or after the date of payment of value of input service alongwith service tax as indicated in the invoice.
If the value of input service and service tax indicated on the invoice is not paid within three months of the date of invoice, the credit availed shall be reversed and on actual payment of invoice value alongwith service tax indicated therein; the credit can be re-availed. This provision is not applicable in case of full RCM.
According to new proviso added to this rule, the credit cannot be taken after six months from the date of issue of invoice/bill/challan.
♣ Effect of amendment:
There was lacuna in the above rule that even in case of full reverse charge where the service recipient was liable to pay the entire service tax and credit was allowed on the basis of GAR-7 challan; there was pre-condition of paying the invoice value to the service provider. Since the service tax stand paid to the government exchequer and credit was allowed only on the basis of this challan; there was no loss to government even if the invoice value was not paid to service provider. Thus, the Cenvat ought to have been allowed which was hindered by the existing provision. This provision was fit only in case the service provider was liable to pay the service tax to the government exchequer and service tax was payable on receipt basis as when the service provider will not receive the service tax amount from recipient of service, he will not pay the same to the government. Thus, government could not have allowed the Cenvat credit in such cases since the tax was not deposited to its credit. But this provision was also made applicable to the cases of full RCM which has now been rectified by the Budget, 2014.
In continuation of above, even as per point of taxation rules, the service tax is mostly payable on raising of invoice itself except in case of small service provider having turnover of less than 50 Lakhs. Hence the condition of payment of service provider should not be deleted for all cases. Even with the introduction of time limit of taking of credit within six months from date of issue of invoice will complicate the position.
Further, there are some consequences of this amendment particularly in case of input services availed on the recurring basis. There are agreements between the parties where there is condition of maintaining a running account and payment is made either half yearly or annually. In such cases, restricting the time of availment of credit will create a huge problem as the credit availed will be governed by the date of issue of invoice.
Also, there is practice of keeping the retention money in some of the service sectors where a part of billed amount is always retained for a specified period. In such cases, restricting the credit availment to the period of six months from date of invoice will result into loss of Cenvat credit out of the total service tax amount specified in the invoice. Thus, such service sectors will need to redraft their agreements on the basis of amended law.
WHILE WINDING:-
Restricting the time limit of availing the Cenvat credit to six months has been done to nullify the effects of a couple of Tribunal judgments which allowed the credit even after passage of years of receipt of inputs. The positive side of this amendment is that as the time passes, it is difficult to verify the factum of actual receipt of inputs and chances of committing the fraud increases. However, carrying out the similar amendment in respect of input services is not a welcome step in our view as the same will result into litigation due to complicacies involved in the service sector. It should be noted that the concept of input services is already prone to litigation since its inception and this provision will definitely add fuel to fire.