Area based exemption

[CA AJAY KUMAR AGRAWAL]

There are lots of manufacturing units availing area based exemption & not liable to pay excise duty. I would solicit your valuable views on the aspect that 'can they accumulate service credit (being paid presently) & use it later on when the exemption is over?' Further as presently they are not required for registration under excise (hence not required to file ER1) how they will justify their case.

[KASTURI SETHI]

Sh.Ajay Agrawal Ji,
It is jugglery of words. In my view after litigation case can be won on time factor.Though the unit is not registered but invoices on which ST has been paid bear registration no. and other particulars. One year restriction can also be fought and overcome. For availment of the facility of Cenvat Credit Scheme, there are two basic requirements:-

(i) ST on must be paid and service should qualify the definition of input service.

(ii) Credit should be utilised for providing taxable output service.

Such issue is a challenge and must be accepted and fought. You can win the case after prolonged litigation and it may go up to the Apex Court. This is my view.

[Ganeshan Kalyani]

Sir, Sri Kasturi Sir, in my view, if a unit is availing excise duty exemption then the unit is not eligible to take input credit. How can a department allow to enjoy exemption as well as claim credit of input associated with the exemption to be availed after the exemption period is over.

Sir, the chain of Cenvat credit is broken when exemption is given by the Govt. Thanks.

[KASTURI SETHI]

Sh.Ganeshsan Kalyani Ji,

I agree with you entirely. Here it is time factor. It is a challenging case. There is no harm to explore the possibility.An expert advocate can achieve its destination.This is job of an expert advocate.Pl. go through Rule 3(2) &(3) of Cenvat Credit Rules, 2004. When the final goods cease to be exempted and any service ceases to be exempted _______________ (read further deeply). The analogy of these sub-rules of Rule 3 can lead to the destination of the querist who is expert with 20 years' experience. From the surface it appears that the querist cannot get benefit, but querist can get benefit at CESTAT level, High Court level or Supreme Court level. Such challenging cases should not be allowed to go out of your hands. An expert driver is he who drives its vehicle on bumpy/muddy road safely otherwise on smooth road every driver can drive safely.

[Ganeshan Kalyani]

Sir, yes I agree with you. Sir, I also agree that Cost of litigation is also substantial. As a consultant we welcome the case. Thanks.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

I am of the view that if there is a possibility of 10 % or 20 % chances of the case going in favour of the party, that case should be taken up provided that the concerned party is willing to fight. The client should not be kept in dark. After all, an advocate or consultant is not the judge, he is only to plead the case on merits. Decision depends on the facts & circumstances of the case as well as luck of the assessee.

[CA AJAY KUMAR AGRAWAL]

Dear all,

I would like all to consider the followings, to reach conclusion:-

1. The unit has exemption from Excise duty (not Service Tax) & they have to follow ST procedure.

2. Rule 3(2) of CCR 2004 talks of Cenvat on Inputs. I agree that I cant avail the same at present.

3. One year limit of availing Credit is not in picture as I am not willing to take Cenvat on Inputs, but talking regarding Service Tax paid on input services.

[JSW CEMENTLIMITED]

Sir,

By a plain reading of Rule 3(2) and 3(3) of the CCR 2004, it is very clear that the credit of Inputs lying on stocks are only available for utilization subsequent to a product or services becoming non-exempt. The intention of the legislature was to provide credit of inputs lying on stocks only which are going to be used for producing a non-exempt product or which are used for providing a non-exempt service. But, during the period of exemption, the input service availed and used or inputs purchased and used for producing exempt product or providing exempt service and as such, in my opinion, the accummulation of input service tax credit during the period of exemption cannot be used for payment of excise duty or service tax on a product or service becoming non-exempt.

[CA AJAY KUMAR AGRAWAL]

I think issue got mixed. I am clear that cenvat credit on inputs can not be taken as final product is exempt. Presently they have to follow Service Tax provisions & they dont have any exemption for payment of Service Tax. My idea is regarding cenvat credit of "Service Tax Paid" only. Presently also they have to discharge service tax liability (as applicable to them). Once it is accumulated ( on logic of present provisions) can there be any bar on them in future to use it on their final products ?

[JSW CEMENTLIMITED]

Dear Mr. Agrawal,

Kindly note that the services on which service tax paid on reverse charge has been utilized only for production of exempted product. Any service availed and utlized for manufacture and clearance of non-exempt product is only eligible for cenvat credit and utilization. You are presently availing area based exemption as such, the your final product is exempt and services which you have availed during the tenure of exemption has been used for manufacture of exempt product only. As such, service tax credit availed at present (which was for manufacture of exempt product) cannot be utilized for payment of excise duty on a product which subsequently became non-exempt. Rule 2(3) also talks about inputs only which are tangible product, which can be lying in stock on date of product becoming non-exempt and which can be utilized for manufacture of non-exempt product and thus the rule allows credit on such inputs but service is an event which once happened means happened and it cannot be utilized for production of non-exempt product. As such, service tax credit accrued during the period of exemption can not be utilized for payment of excise duty subsequent to product becoming non-exempt.

[CA AJAY KUMAR AGRAWAL]

Thank you very much. I got it.

[Ganeshan Kalyani]

Sir, I agree with the views inasmuch as the final product is exempt then how the input service credit used in relation to exempt goods manufactured would be eligible . Thanks

AI Summary

Cenvat credit on input services cannot be accumulated during excise exemption and used after the exemption ends. Whether input service tax paid during an excise area-based exemption can be accumulated and utilised after exemption cessation; Cenvat requires paid tax and qualifying input service and permits utilisation only for taxable outputs. Rules emphasise credit tied to tangible inputs lying in stock at cessation; services consumed during exemption are not treated as stockable credits and therefore cannot be used later for duties on products becoming non-exempt. The exemption breaks the credit chain, and using accumulated service tax credits later is generally not permissible, though litigation has been suggested as a risky alternative.