Sanjay Dwivedi, Advocate

Note on Rule 6(3A) of Cenvat Credit Rules, 2004

(as applicable till 31.03.2011)

1.

The basic principle incorporated in rule 6 (1) is that one cannot avail Cenvat Credit on input side if he is not to pay tax/ duty on the output side. The rule provides a few exceptions like supply to SEZ, exports, etc. [see sub-rule (6)].

2.

Therefore, a manufacturer should not avail credit in respect of inputs/ input services that are used for exempted goods or exempted output services.

3.

Problem arises when some inputs/ input services are common to the dutiable and exempted goods (or taxable and exempted output services). Rule 6(3A) provides one of the three alternative methods to solve this problem.

4.

The procedure is that the assessee would first avail credit of all the common inputs/ input services and would subsequently calculate and reverse the credit attributable to the quantum of inputs/ input services used for exempted goods & services. [Please note that no credit allowed on Inputs and input services used exclusively for the manufacture of exempted goods or provision of exempted service].

5.

Till 31.03.2011 full credit was available in respect of the following 16 services even if they were partly used for exempted goods/ output services.

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Therefore, there was no requirement of reversing any credit on these services. i. ii. g. Consulting engineer p. Architect

iii. q. Interior decorator iv. v. vi. r. Management consultant v. Real estate agent w. Security agency

vii. za. Scientific or technical consultancy viii. zm. Banking and other financial services (service by a banking company or a financial institution including a NBFC or any body corporate or commercial concern) ix. x. xi. zy. Insurance auxiliary services concerning life insurance business (zzd) commissioning or installation, (zzg) maintenance or repair,

xii. (zzh) technical testing and analysis, xiii. (zzi) technical inspection and certification, xiv. (zzk) foreign exchange broker, xv. (zzq) Commercial or Industrial construction service and xvi. (zzr) Intellectual Property Services

6.

Therefore, Cenvat Credit records will have to be segregated in the following manner: i. Inputs common to dutiable & exempted outputs (goods/ services): Here we have a liability to calculate and reverse the credits attributable to exempted goods/ services. ii. Inputs used only for dutiable outputs (goods/ services): There is no liability to reverse credits on account of use in exempted goods (because they are not so used).

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iii.

Services on which full credit is available under rule 6(6) [para 5 above]: No liability of reversal.

iv.

Services other than those covered by rule 6(6): Here credit attributable to exempted goods/ services will have to be calculated and reversed.

7.

Three steps are to be taken:

a.

File a letter with the range office to exercise the option (certain specific information is to be furnished). Please see the attached draft for a sample.

b.

At the end of every month, determine the amount of credit to be reversed on provisional basis.

c.

At the end of the year determine finally determine the amount of credit that was required to be reversed.

Method of computation of the amount of credit to be reversed provisionally:

1. Inputs used for manufacture of exempted goods: The rule does not prescribe any formula to calculate credit on such inputs. But it requires the manufacturer to reverse the credit. The credit amount has to be calculated on the basis of input output ratio. The credit amount so arrived is denoted as A in the formula below.

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2. Inputs used for provision of exempted services: The amount of credit to be reversed is = (B/C)*D. Please see the details below. D i.e. Total Cenvat Credit A (i.e. Credit relating to C during current month)

X B (Value of Exempted Service in Preceding year) C (Value of Dutiable Goods + Taxable Service + Exempted Service in Preceding Financial Year)

3. Input services used for manufacture of exempted goods or for provision of exempted services: The amount of credit to be reversed is = (E/F)*G. Please see the details below.

E i.e. total value of G i.e. Total Cenvat Credit taken (exempted services provided X on input services during current + exempted goods removed month; in preceding financial year) F i.e. Total Value of (taxable Services + Exempted Services + dutiable Goods + exempted goods during the preceding financial year) Method of computation of the amount of credit to be reversed finally: At the end of the year, the amount of credit is to be finally determined. If the amount paid provisionally was less than that finally determined, we have to pay the difference. On the other hand if the amount paid provisionally was more, we are entitled to take credit.

(i)

Inputs used for manufacture of exempted goods: The credit amount has to be calculated on the basis of total quantity of inputs used in the manufacture of exempted goods. This is denoted as H in the formula below.

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(ii) Inputs used for provision of exempted services: The amount of credit to be reversed is = (J/K)*L. Please see the details below. L i.e. Total Cenvat Credit H X J (Value of Exempted during the year Service in the year) K (Value of Dutiable Goods + Taxable Service + Exempted Service in the Financial Year)

(iii) Input services used for manufacture of exempted goods or for provision of exempted services: The amount of credit to be reversed is = (M/N)*P. Please see the details below.

M i.e. total value of (exempted services + P i.e. Total Cenvat Credit taken X exempted goods in the on input services during the year financial year) N i.e. Total Value of (taxable Services + Exempted Services + dutiable Goods + exempted goods during the financial year) NOTE: If the assessee exercises option under rule 6(3A), he has to opt it for all the goods and all the services. He cannot use other methods for certain goods and this method for certain other goods. Further, the option once exercised, cannot be withdrawn during the financial year.

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