cenvat credit on service tax for installation of machinery in manufacturing of excisable as well as exempted product

[Mehul Pandya]

Sir,

We are manufacturing excisable as well exempted product. We have received one service invoice for the errection, commssioning and installation of capital goods including value of that capital goods. Hence my query is that can we avail cenvat credit for the same .?? Is there any notification or else in supporting of the same because cenvat volume is too high. Pl. advice me.

Thank you

[YAGAY and SUN]

Dear Mehul,

You will get the CENVAT credit on installation of Capital Goods as such goods are not exclusively used for manufacturing of exempted goods. Please check CENVAT credit Rules, 2004 meticulously.

Regards

YAGAY and SUN

(Management, Business and Indirect Tax Consultants)

[Rajagopalan Ranganathan]

Sir,

As per sub-rule (3) of Rule 6 of CENVAT Credit Rules, 2004 states that-

"Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow any one of the following options, as applicable to him, namely:-

(i) pay an amount equal to six per cent of value of the exempted goods and exempted services; or

(ii) pay an amount as determined under sub-rule (3A); or

(iii) maintain separate accounts for the receipt, consumption and inventory of inputs as provided for in clause (a) of sub-rule (2), take CENVAT credit only on inputs under sub-clauses (ii) and (iv) of said clause (a) and pay an amount as determined under sub-rule (3A) in respect of input services. The provisions of sub-clauses (i) and (ii) of clause (b) and sub-clauses (i) and (ii) of clause (c) of sub-rule (3A) shall not apply for such payment:

Provided that if any duty of excise is paid on the exempted goods, the same shall be reduced from the amount payable under clause (i):

Provided further that if any part of the value of a taxable service has been exempted on the condition that no CENVAT credit of inputs and input services, used for providing such taxable service, shall be taken then the amount specified in clause (i) shall be six per cent of the value so exempted.”;

Provided that in case of transportation of goods or passengers by rail the amount required to be paid under clause (i) shall be an amount equal to 2 per cent. of value of the exempted services.

Explanation I.- If the manufacturer of goods or the provider of output service, avails any of the option under this sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year.

Explanation II.- For removal of doubt, it is hereby clarified that the credit shall not be allowed on inputs used exclusively in or in relation to the manufacture of exempted goods or for provision of exempted services and on input services used exclusively in or in relation to the manufacture of exempted goods and their clearance upto the place of removal or for provision of exempted services.

Explanation III. - No CENVAT credit shall be taken on the duty or tax paid on any goods and services that are not inputs or input services.

Therefore you can follow any one of the clauses which is most beneficial to you.

[YAGAY and SUN]

Dear Mehul,

According to the Indian Accounting Standards, any expenses for installation of Capital goods must be capitalized to arrive the accurate value of the capital goods and not treated as Revenue expenditures as it is treated as capital expenditure. Therefore, in our opinion the provisions of Rule 6 of the CENVAT credit would not be applicable as erection, commissioning and installation expenses would be capitalized and would be treated as capital expenditure. Please also discuss this aspect with your seniors to understand the accounting treatment and accounting standards in this regard.

Regards,

YAGAY and SUN

(Management, Business and Indirect Tax Consultants)

AI Summary

Cenvat credit on capital goods installation: creditability subject to capitalization or proportionate reversal under prescribed options.
CENVAT credit on erection, commissioning and installation services for capital goods is governed by whether those costs are capitalized and by the CENVAT reversal/options framework: capitalized installation costs are treated as part of the capital asset and generally creditable unless used exclusively for exempted goods, while inputs/input services used for both taxable and exempted activities require either separate accounts or adherence to prescribed proportionate payment options, with the chosen option applying for the remainder of the financial year.