FEBRUARY 08, 2011

Rule 6(3A)(b)(iii ) of CCRs 2004 – A minor amendment is required to clear major confusion

By Raghavendra Rao

FINANCE Act, 2010 has brought a major relief to the manufacturers of dutiable and exempted good who did not maintain separate accounts for inputs or input services. The amendment provided for paying an amount equal to the CENVAT Credit attributable to the inputs or input services used in manufacture of exempted goods right from the inception of the much debated Rule 57 CC.

With effect from 1.4.2008, Rule 6 of the CENVAT Credit Rules has been revamped to provide for an additional option of paying an amount attributable to the inputs and input services used for manufacture of exempted goods / providing exempted output service. Rule 6(3A) provides the method by which the amount to be paid has to be computed. The sum and substance of these provisions is that based on the turnover of the exempted goods/Services, the amount payable has to be arrived at for inputs or input services ( except sub-rule (i))

Essentially, though the formulas prescribed under sub-rules (ii) and (iii) should have been in relation to apportioning the CENVAT credit in relation to COMMON inputs/input services, surprisingly, there is no mention in the sub-rules of the word COMMON which gives scope to divergent interpretations of the method of quantification of the amount to be paid.

For example, Rule 6(3A)(b)(iii) reads:

(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services (provisional) = (E/F) multiplied by G, where E denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the preceding financial year, F denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the preceding financial year, and G denotes total CENVAT credit taken on input services during the month;

There is a school of though that since the expression used in the above sub-rule is total CENVAT credit , no exclusion are allowed ( other than those 17 services listed in Rule 6(5) as clarified by the CBEC vide circular No868/6/2008-CX., Dated: May 9, 2008). In other words, even if there are any input services which are exclusively used for manufacture of dutiable goods, no exclusion is permitted. However, this interpretation appears to be not correct for the following reasons:

Vide Circular No 868 dated 9th May 2008 referred above, it has been clarified that

“ For the purpose of the calculation of amount under formula given under rule 6(3A), the total CENVAT credit taken on inputs and input services does not include excise duty paid on inputs or service tax paid on input services which are used exclusively for the manufacture of exempted goods or provision of exempted services.”

Therefore, by the same analogy, the total CENVAT Credit shall not include the inputs/input services which are used exclusively in the manufacture of dutiable goods / Taxable services.

However, though the purpose of the provisions of Rule 6(3A) is to provide a methodology for computing the CENVAT Credit attributable to the COMMON inputs/ or input services, the word COMMON is nowhere seen the formulas.

Therefore to make things clear and make the rule 6(3A) in harmony with the clarification issued by the Board, sub-rules (ii) and (iii) require an amendment to the effect that the phrase “ total CENVAT Credit taken on inputs or input services ” should be substituted with “total CENVAT Credit taken on common inputs or common input services”

(The views expressed are strictly personal)