Proportionate reversal of credit

[Dalia Felix]

Dear Sirs,

My doubt is regarding the proportionate reversal of cenvat credit as per sub-rule 3(A) of Rule 6, CENVAT Credit Rules, 2004. 

How can we calculate the amount to be reversed corresponding to the inputs used in the manufacture of exempted goods in the following case? Say, two products X and Y are simultaneously produced from inputs A and B ( X is the more valuable good). Suppose 1000 Tons each of A & B are used for producing 20 Tons of X, an exempted good and 50 Tons of Y, a dutiable product.How can we calculate the proportionate credit to be reversed by the manufacturer?  

Whether the manufacturer has to consider the quantity or value of X and Y produced? Is he free to choose either basis (whichever is more advantageous)?

[YAGAY andSUN]

Dear Dalia,

Please go as per the formula prescribed in the relevant Rules of CENVAT credit Rules, 2004.

Regards

Team YAGAY & SUN

(Management & Indirect Tax Consultants)

[Dalia Felix]

Sir,

Thanks for your quick response. But frankly, I don't get the answer-whether based on quantity or value of the products? 

[YAGAY andSUN]

On Quantity, which has not been used in manufacturing of dutiable finished goods.

[Dalia Felix]

Sir,

Did you mean,

Credit to be reversed on A=Total credit available on A * (20/70)

Correct?

[Greeshma VP]

In case of inputs, the Rule 6 does not prescribe a specific formula for the amount to be reversed, It simply states that the amount equivalent to Cenvat credit attributable to inputs used in manufacture of exempted goods is to be reversed. However, in case of input services, a clear formula is given which is based on "value of exempted and dutiable goods" 

It may be better to consider turnover of X and Y for the purpose of reversal. Reversal to be made = Total Cenvat credit availed on inputs * turnover of X / total turnover

[Dalia Felix]

Dear Greeshma,

Thanks for the reply. I suggested quantity based reversal because at the end of the financial year, we have to determine the 'actual amount reversible on inputs' based on quantity (Clause (c)  of Sub-rule 3 (A), Rule 6). Please give your comments.

[Greeshma VP]

I was under an impression that assessee is free to chose the method to determine the cenvat required to be reversed, The quantity based working seems to be fair. However, won't that be a more cumbersome procedure in cases where there are numerous inputs on which credit is availed. 

[Rajagopalan Ranganathan]

Sir,

       The formula prescribed under rule 6 (3A) (b) and (c) are based on value of the final products manufactured and cleared and/or output service provided and  inputs and input services utilized for such manufacture and/or provision of output service.  You cannot adopt quantity since it is advantageous to you. 

AI Summary

Proportionate reversal of credit: follow value based allocation under the Rule rather than a taxpayer's quantity choice. Proportionate reversal of cenvat credit under sub rule 3A of Rule 6 requires determining the credit attributable to inputs used for exempt goods. The debate is whether to apportion reversal by quantity of products or by value/turnover; input services contain a clear value based formula, and where the Rule bases calculations on value of final products and inputs, a taxpayer should not adopt a quantity basis solely because it is advantageous.