Cenvat credit on Proportionate basis

[sunil mehta]

1)A proprietory firm is carrying on trading activities in yarn.They are yarn dealers for many yarn manufacturers. 2)They also get commission on sale of their yarn products every month. 3)o other actvity is carried on except yarn trading & commission income. 4)Proprietory firm has incurred foll: common expenditure in carrying out above two activities from same premises: ---i)telephone /mobile exp ---ii)audit fees/c.a.consulting fees ---iii)constructon of office premises(major renovation rs.4 lacs)---eligible for 100% credit ---iv)office insurance ---eligible for 100% credit query:1)since firm is carrying out only one taxable service (other being trading of yarn)whether cen.credit on above expenditure can be claimed proportionately in ratio of yarn trading & yarn commission ? 2)since there is only one taxable services whether whole amt. of cenvat credit can be claimed commission output services? 3)If no, then in what manner?

[sudhir V S]

Dear Mr. Sunil, Rule 6 of CCR 2004 gives 3 options. I – Maintain Separate accounts for taxable and non- taxable and avail CENVAT on taxable portion only. Option II - Take 100% credit and utilize only 20% of tax payable on taxable output service. Option III – pay (i.e reversal) CENVAT attributable to exempted service (based on previous year turnover proportion) by 5th of the next month and adjust based on the actual (current year proportion) by 30th June of next year. However 16 services 100% credit available. Therefore 1 proportion credit is possible based on option III (intimation etc required). 2. Full credit cannot be utilized at a time but possible over a period of time under option II. 3. Option II or III should be examined based on the facts.

[sunil mehta]

In above case assessee is a trader in yarn and not a manufacturer.He carries out only one taxable service viz.commission income .Rule 6(1) speaks of ...."manufacturer of exempted goods or exempted services"...In above case assessee is not involved in 'manufacturing'. Rule 6(2) states that..."and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts...." So, there is no taxable & non-taxable services.Only one taxable service is provided. Pl. give your opinionin ,in light of above clarification,whether (i) he will have to apportion cenvat credit available on input services as per trading turnover-commission ratio or(ii) he can avail 100% input service credit? or(iii)he can avail cenvat credit to the extent of 20% of output tax payable?

[sudhir V S]

Dear Mr. Sunil the option III is available only for insurace Compnay and hence the same may not to applicable to all categories hence either option I or II has to be opted for.

[Surender Gupta]

Before getting solution to this query, it should be understood that no input service which is not used for providing taxable output service is allowed. However, there are various options available to manage the situation. Our legislatures have also recognized the difficulties that may arise due to common input services. Therefore certain provisions have been made under rule 6. Therefore, in my view you may either opt for 20% credit formula or actual (proportionate) credit based on certain acceptable calculations. I do not see any difficulty in availing cenvat credit based on trading : commission ratio as an alternative option.

AI Summary

Cenvat credit apportionment: input service credit must be allocated between taxable commissions and trading under available rule options. Entitlement to Cenvat credit on common input services used for both trading and commission-based taxable services must be determined under Rule 6 options: maintain separate accounts and claim credit for the taxable portion only; take full credit but follow utilization restrictions against output service tax; or perform proportionate reversal/adjustment based on turnover proportions subject to specified conditions. The proportionate apportionment between trading and commission income is a viable method, while certain annual adjustment procedures may be limited to specific categories.