Amendment to Rule 7 of the Cenvat Credit Rules 2004
Rule 7 of the Cenvat Credit Rules 2004, providing for manner of distribution of credit by input service distributor has been amended vide Notification No. 05/2014- CE (N.T.) dated 24 February 2014. The amendment, which comes into force from 1st day of April 2014, is discussed in the following paragraphs.
Rule 7 of the CCR 2014 at present reads as
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 following conditions, namely:
(a) The credit distributed against a document referred to in Rule 9 shall not exceed the amount of service tax paid thereon.
(b) Credit of service tax attributable to service used in a unit exclusively engaged in the manufacture of exempted goods or providing of exempted service shall not be distributed.
(c) Credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit, and
(d) Credit of service tax attributable to service used in more than one unit shall be distributed pro rata on the basis of turnover during the relevant period of the concerned unit to the sum total of all units to which the service relates during the same period.
Vide above Notification, conditions (b), (c) and (d) has been amended in the following manner:
(i) In clause (b) for words “used in a unit”, the words “used by one or more units" are substituted.
The effect of this amendment is that the scope of restriction on distribution of service tax is expanded. Prior to amendment restriction was applicable in respect of service tax paid on services used in any unit exclusively engaged in the manufacturer of exempted goods or providing of exempted service. After the amendment, restriction is applicable to service tax paid on all services used by such unit whether in the unit or outside the unit. By using the words ‘one or more units’ even service tax paid on input services used by such exempted unit cannot be distributed.
(ii) In clause (c) for the words “used wholly in a unit”, the words “used wholly by a unit” are substituted.
The effect of this amendment is that w.e.f. 1-4-2014 input service distributor can distribute the service tax paid on services used wholly or exclusively by a unit to that unit. Prior to amendment service tax paid on services used wholly in the unit only was allowed to be distributed. Thus now even if service is provided outside the unit but is used wholly by that unit, service tax paid on such service can be distributed to that unit only.
(iii) Clause (d) has been substituted for a new clause (d) which reads as follows –
Credit of service tax attributable to service used by more than one unit shall be distributed on a pro rata on the basis of the turnover of such units during the relevant period to the total turnover of all its units, which are operational in the current year, during the said relevant period.
The effect of the amendment is that while calculating service tax paid on input services used by more than one unit which is to be distributed on pro rata basis the turnover of all such units is to be divided by turnover of all units which are operational during the relevant period. Prior to amendment, turnover of only unit to which service tax was to be divided by turnover of only such units to which the service was related. Now the turnover of units to which service is related is to be divided by turnover of all the units which are operational units.
(iv) Explanation 3 to Rule 7 at present reads as follows:
(a) The relevant period shall be the month previous to the month during which the Cenvat credit is distributed.
(b) In case if any of its unit pays tax on quarterly basis as provided in Rule 6 of the Service Tax Rules, 1994, or Rule 8 of Central Excise Rules, 2002, then the relevant period shall be the quarter previous to the quarter during which the Cenvat credit is distributed.
(c) In case of an assessee who does not have any total turnover in the said period, the input service distributor shall distribute any credit only after the end of such relevant period wherein the total turnover of its unit is available.
The above Explanation 3 is substituted by new Explanation 3 as follows –
Explanation 3 – For the purpose of this Rule, the ‘relevant period’ shall be-
(a) If the assessee has turnover in the "financial year" preceding to the year during which credit is to be distributed for month or quarter as the case may be, the said financial year; or
(b) If the assessee does not have turnover for some or all units in the preceding financial year, the last quarter for which details of turnover of all the units are available, previous to the month or quarter for which credit is to be distributed.
The effect of the amendment is that now instead of calculating the turnover of previous month or previous quarter for pro rata calculation, the turnover of previous financial year is to be considered and pro rata calculation is to be done on the same basis throughout the current financial year.
However if new units are added or any unit is closed during the current year then turnover of last month or quarter as the case may be, for which turnover of all the current units is available, is to be considered for pro rata calculation.
Amendment for registration requirement
The Central Government has amended the Central Excise Rules, 2002 in the following manner. These amendments would become operational with effect from 1-3-2014.
Rule 9(1) at present reads –
(1) Every person who, produces, manufactures, carries on trade, holds private store-room or warehouse or otherwise uses excisable goods, shall get registered;
The proposed amendment would result in the following –
(1) Every person who produces, manufactures, carries on trade, holds private store-room or warehouse or otherwise uses excisable goods or an importer who issues an invoice on which Cenvat Credit can be taken, shall get registered;
As per Rule 9(a)(ii) of the Cenvat Credit Rules, 2004 an invoice issued by an importer is a valid document for taking credit but there was no specific provision requiring an importer to get registered under the Central Excise Act, The diverse practices were followed in different Excise Commissionerates. Now a specific provision is inserted in Rule 9(1) of the Central Excise Rules, 2002 requiring an importer who issues Cenvatable invoice to get compulsorily registered.
Amendment in definition of, "First Stage Dealer"
Rule 2, clause IJ of Cenvat Credit Rules, 2004 is amended in the following manner
The ‘First Stage Dealer’ is now defined as –
i. A dealer who purchases the goods directly from the manufacturer under the cover of an invoice issued in terms of the provisions of Central Excise Rules, 2002 or from the depot of the said manufacturer , or from premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer or, under the cover of an invoice; or
ii. An importer who sells goods imported by him under the cover of an invoice on which Cenvat credit may be taken and such invoice shall include an invoice issued from his depot or premises of his consignment agent.
The effect of the amendment is that an importer issuing the Cenvatable invoice will now be considered as First Stage Dealer in addition to a dealer purchasing goods directly from the manufacturer.
In terms of Rule 2(s) of the Cenvat Credit Rules, 2004, “Second stage dealer”, means a dealer who purchases goods from the first stage dealer;
It therefore follows that a dealer purchasing goods from importer will now be considered as second stage dealer.
Amendment in prescribed documents for availing Cenvat Credit
In view of the fact that an invoice issued by an importer will be an invoice issued by a first stage dealer, as a consequential amendment , clauses (ii) and (iii) of Rule 9 of the CCR, 2004, prescribing an invoice issued by an importer or from importer’s registered depot are omitted as no longer required.
An importer issuing Cenvatable invoice has to obtain Registration under Central Excise before 1-3-2004, unless he is already registered.
An importer will be considered as First stage dealer therefore an invoice issued by an importer will be considered as invoice issued by First stage dealer.
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