In order to remove the cascading effect of excise duty and service tax, the Excise Duty paid on the inputs, capital goods and input services, which are used in or in relation to the manufacture of final product or for providing output services is permissible to be set-off against the excise duty liability on the final products or paying service tax under the CENVAT Credit Rules, 2004. These rules have been notified to regulate the availment and utilization of the CENVAT credit. The salient features are as follows:

1. "Input" means —

1. all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating, oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production.

2. all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service;

Explanation 1.— The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.

Explanation 2.— Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer;

2. The use of input must be as follows:—

1. For Manufacturer

1. Input used in relation to manufacture of final goods.

2. Specified items are specifically treated as INPUTS.

2. For Output Service Provider input must be used for providing output service. For example, Paper used by CA, Photographic chemicals & paper used by photographer for providing services is treated as INPUTS.

1. Definition of Input Service

1. "input service" means any service, —

2. used by a provider of taxable service for providing an output service; or

3. used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal, and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation up to the place of removal.

2. The definition can be bifurcated into following three broad category

1. The input service used for providing output service

2. The input Service used in or in relation to manufacture or clearance of goods up to place of removal.

3. The input services specifically described are eligible for CENVAT credit to the manufacturer or Output Service provider, irrespective of conditions mentioned at (i) or (ii) above.

3. Conditions for availing the Cenvat Credit on Input Service

1. The input Service provided on or after 10-9-2004 is only eligible for CENVAT credit.

2. The Cenvat credit is allowed only on or after the day on which payment is made for the value of input service and service tax paid/payable as per the invoice to the input service provider.

1. Meaning of Input Service Distributor

1. "input service distributor" means an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be;

2. Manner of Distribution of the Credit

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 condition, namely:—

1. Distributing office must comply with registration formalities and compliances prescribed for first/Second stage dealers under the Central Excise Rules, 2002.

2. The credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon; or

3. Credit of service tax attributable to service used in a unit exclusively engaged in manufacture of exempted goods or provision of exempted services shall not be distributed.

3. Mandatory details in Input Service Invoice

1. Invoice Sl. No., date of document,

2. Input service providers service tax Registration No., Name and Address,

3. Description of taxable service,

4. Classification of the taxable service,

5. Assessable value of input service.

6. Amount of service tax (bifurcated into service tax and Education Cess on Service Tax separately.)

7. Be duly signed by the input service provider or his authorised person.

1. As and when inputs or capital goods are removed as such from registered premises, the assessee must prepare excise invoice and pay an amount equal to CENVAT availed in respect of same.

2. Rule 3(5) Amended w.e.f. 1-4-2008 — Removal of input goods and capital goods for providing output services without reversing/paying the credit earlier availed on them is possible.

3. The excise duty on scrap of capital goods is required to paid on the price at which such scrap has been sold.

Where any input or input service is used in the final products which is cleared for export or used in the intermediate products cleared for export, or used in providing, output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilized by the manufacturer or provider of output service towards payment of,

1. Duty of excise on any final products cleared for home consumption or for export on payment of duty; or

2. Service tax on output service.

And where for any reason such adjustment is not possible, the manufacturer or output service provider shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification.

Provided that no refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback allowed under the Customs and Central Excise Duties Drawback Rules, 1995, or claims a rebate of duty under the Central Excise Rules, 2002, in respect of such duty. The Export of services shall be determined in terms of provisions contained in Export of Service Rule, 2005.

W.e.f. 1-3-2008 Goods Transport Agency are not considered "output service provider" and cannot utilise CENVAT credit for the service tax paid on their other inputs and hence have to pay service tax on value of services after abatement of 75%.

Where the manufacturer or output service provider avails of CENVAT credit in respect of inputs or input service and manufactures such final products or provide output service which are chargeable to duty as well as exempted goods or services, then the manufacturer or output service provider can except in cases of some specified items follow any of the two options given below:

1. He shall maintain separate accounts for receipts, consumption and inventory of inputs or input services meant for use in the manufacture of dutiable final product or for providing dutiable output service and the quantity of inputs or input services meant for use in the manufacture of exempted goods or services and shall take credit only on that quantity, which is intended for use in the manufacture of dutiable goods or dutiable output services.

2. In case the assessee does not maintain separate records as mentioned (a) above, the assessee has two options —

1. (i) if he is the manufacturer, pay 10% of value of exempted goods;
   (ii) if he is the provider of service, pay 8% of the value of exempted service.

2. Alternatively, he can reverse cenvat credit attributable to input and input services used in the manufacture of exempted goods or provision of exempted services.
   However as per rule 6(5) there are 16 specified categories for which input tax credit will be fully allowed though separate accounts are not maintained unless the used exclusively for providing exempted services.

The CENVAT credit of excise duty or service tax paid would be available on the following documents viz:

1. An invoice issued by —

1. A manufacturer for clearance of —

1. Inputs or capital goods from his factory or depot or from the 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.

2. Inputs or capital goods as such;

2. An importer;

3. An importer from his depot or from the premises of the consignment agent of the said importer if the said depot or the premises, as the case may be, is registered in terms of the provisions of Central Excise Rules, 2002.

4. A first stage dealer or a second stage dealer, as the case may be, in terms of the provisions of Central Excise Rules, 2002; or

2. A supplementary invoice, issued by a manufacturer or importer of inputs or capital goods in case additional amount of excise duties has been paid, except where the additional amount of duty became recoverable from the manufacturer or importer of inputs or capital goods on account of any non levy or short-levy by reason of fraud, collusion or any wilful misstatement or suppression of facts with intent to evade payment of duty.

Explanation:

For removal of doubts, it is clarified that supplementary invoice shall also include challans or any other similar document evidencing payment of additional amount of additional duty leviable under section 3 of the Customs Tariff Act; or

3. A bill of entry; or

4. A certificate issued by an appraiser of customs in respect of goods imported through a Foreign Post Office; or

5. A challan evidencing payment of service tax by the person liable to pay service tax under sub-clauses (iii) and (v) of clause (d) of sub-rule (1) of rule (2) of the Service Tax Rules, 1944 or

6. An invoice, a bill or challan issued by a provider of input service on or after the 10th day of September 2004; or

7. An invoice, bill or challans issued by an input service distributor under rule 4A of the Service Tax Rules, 1994.

The manufacturer of final products shall submit within ten days from the close of each month to the Superintendent of Central Excise, a monthly return in the form ER-1.

A SSI manufacturing unit shall file a quarterly return in the Form ER-1 within twenty days after the close of the quarter to which the return relates.

The provider of output service availing CENVAT credit, shall submit a half yearly return in form specified, to the Superintendent of Central Excise, by the end of the month following the particular half year.

The input service distributor, shall submit a half yearly Statement, giving the details of credit received and distributed during the said half year to the Superintendent of Central Excise, by the end of the month following the half year.