Rule 4 – Conditions for allowing CENVAT credit :

A. INPUTS

(1) Credit available on receipt of inputs in the factory of the manufacturer/premises of the provider of output service: Sub-rule 1 allows instant credit on inputs after receipt in the:

• factory of the manufacturer, or

• premises of the provider of output service, or

• premises of job worker, in case goods are sent directly to the job worker on the direction of the manufacturer or the provider of output service, as the case may be.

Two points to be noted here are that the manufacturer/output service provider can take the credit immediately as soon as the inputs are received in the factory/premises:

(a) without waiting till the inputs are actually utilized in the manufacture and

(b) even if the payment for the inputs to the supplier is pending.

(2) Credit available on receipt of inputs in the premises of principal manufacturer in case of jewellery manufactured on job-work basis: The first proviso to rule 4(1) lays down that where articles of jewellery or other articles of precious metals falling under heading 7113 or 7114, as the case may be, of the Central Excise Tariff are manufactured on job work basis, the CENVAT credit of duty paid on inputs may be taken immediately on receipt of such inputs in the registered premises of the principal manufacturer subject to the condition that such inputs are used in the manufacture of articles of jewellery by the job worker.

(3) Credit available to output service provider on maintenance of documentary evidence of delivery and location of the inputs: CENVAT credit in respect of inputs may be taken by the provider of output service when the inputs are delivered to such provider, subject to maintenance of documentary evidence of delivery and location of the inputs [Second proviso to sub-rule (1)]. In other words, credit can be availed by an output service provider even if the inputs are not received in the premises of the output service provider, but are delivered at some other place; if documentary evidence of delivery and location of such inputs is maintained.

(4) Credit to be availed within one year of the date of invoice: The manufacturer or the provider of output service shall not take CENVAT credit after one year of the date of issue of any of the documents specified in rule 9(1) – invoice/bill/challan etc. [Third proviso to sub-rule (1)].

B. CAPITAL GOODS

(1) 50% credit on capital goods in the year of receipt: Sub-rule 2(a) restricts the quantum of credit in respect of capital goods received in the

• factory of the manufacturer, or

• premises of the provider of output service, or

• outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory at any point of time in a given financial year, or

• premises of job worker, in case capital goods are sent directly to the job worker on the direction of the manufacturer or the provider of output service, as the case may be

as under:

a. Upto 50% in the same financial year;

b. Balance in one or more subsequent financial years provided the capital goods is still in the possession of the manufacturer or the output service provider.

Exception:

Credit in case of components, spares accessories etc.: In respect of certain capital goods like components, spares and accessories, refractories and refractory materials, moulds and dies and goods falling under heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the Central Excise Tariff, the condition regarding possession of the capital goods in the second year is not applicable. This is so because such items, being consumables, may not be available in next year or in subsequent years at all. Further, even if they are available, it would be practically impossible to locate them and prove their possession.

Availing full 50% credit not mandatory in the first year: Credit of any amount not exceeding 50% of the duty paid on the capital goods can be taken in the first year. Therefore, even 25% credit can be taken in the first year and the balance (75% in this case) can be taken in the subsequent financial years. Similarly, assessee can take full credit in the second year, if he does not take any CENVAT credit in the first year (as nil does not exceed 50%).

(2) Credit available to output service provider on maintenance of documentary evidence of delivery and location of the capital goods: CENVAT credit in respect of capital goods may be taken by the provider of output service when the capital goods are delivered to such provider, subject to maintenance of documentary evidence of delivery and location of the capital goods [Fourth proviso to sub-rule (2 (a)]. Thus, credit can be availed by an output service provider even if the capital goods are not received in the premises of the output service provider, but are delivered at some other place; if documentary evidence of delivery and location of such capital goods is maintained.

(3) Cases where 100% credit on capital goods is allowed in the year of receipt: In the following cases 100% credit of duty paid on capital goods is available:

(i) Receipt of capital goods by SSI: An assessee eligible to avail of the exemption under a notification based on the value of clearances in a financial year is allowed to take the CENVAT credit in respect of capital goods received by him for the whole amount of the duty paid on such capital goods in the same financial year [Third proviso to sub-rule (2)(a)].

Above relaxation is available to a unit who is “eligible” to claim SSI exemption regardless of whether the unit actually claims it or opts to pay duty. An “eligible” unit is one whose aggregate value of clearances of all excisable goods for home consumption did not exceed ` 400 lakh in the preceding financial year.

(ii) Capital goods cleared as such in the year of acquisition: If the capital goods are cleared as such in the same financial year, CENVAT credit in respect of such capital goods shall be allowed for the whole amount of the duty paid on such capital goods in the same financial year.

(iii) Credit of CVD leviable under section 3(5): CENVAT credit of the additional duty leviable under section 3(5) of the Customs Tariff Act in respect of capital goods shall be allowed immediately on receipt of the capital goods in the factory of a manufacturer.

(4) Capital goods acquired on lease, hire purchase: Sub-rule (3) allows CENVAT credit on capital goods even when the same are acquired on lease, hire-purchase or through loan from a financing company.

(5) Credit vis a vis depreciation on capital goods: Sub-rule (4) provides that no CENVAT credit shall be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which the manufacturer or provider of output service claims as depreciation under section 32 of the Income-tax Act, 1961.

In other words the manufacturer or provider of output service cannot enjoy the benefit of both depreciation allowance as well as CENVAT credit.

C. INPUT SERVICE

(1) Credit allowed on receipt of invoice: Sub-rule (7) provides that the CENVAT credit in respect of input service shall be allowed, on or after the day on which the invoice, bill or, as the case may be, challan referred to in rule 9 is received.

(2) Credit allowed on payment of service tax, if service tax is paid under reverse charge (both full and partial reverse charge): In respect of input service where the whole or part of the service tax is liable to be paid by the recipient of the service, credit of service tax payable by the service recipient shall be allowed after the service tax is paid [First proviso to sub-rule (7)].

(4) Credit to be reversed if value of input service and service tax payable not paid within 3 months of the date of invoice/bill/challan: In case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in rule 9, is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT credit availed on such input service, except an amount equal to the CENVAT credit of the tax that is paid by the manufacturer or the service provider as recipient of service.

In case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules [Second proviso to sub-rule (7)].

(5) Proportionate credit to be reversed in case of partial refund of payment made towards input service or receipt of credit note by the manufacturer/service provider: If any payment or part thereof, made towards an input service is refunded or a credit note is received by the manufacturer or the service provider who has taken credit on such input service, he shall pay an amount equal to the CENVAT credit availed in respect of the amount so refunded or credited [Third proviso to sub-rule (7)].

(6) Credit to be availed within one year of the date of invoice: The manufacturer or the provider of output service shall not take CENVAT credit after one year of the date of issue of any of the documents specified in rule 9(1) – invoice/bill/challan etc. [Fifth proviso to sub-rule (7)].

Points which merit consideration 1. The amount mentioned in rule 4 shall be paid by the manufacturer of goods or the provider of output service by debiting the CENVAT credit or otherwise on or before the 5th day of the following month [“following quarter” in case of SSI manufacturer and service provider who is an individual/proprietary firm/partnership firm] except for the month of March [“quarter ending with the month of March” in case of SSI manufacturer and service provider who is an individual/proprietary firm/partnership firm], when such payment shall be made on or before the 31st day of the month of March. 2. If the manufacturer of goods or the provider of output service fails to pay the amount payable under rule 4, it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT credit wrongly taken. 3. The limitation period for availing CENVAT credit would not apply when re-credit is taken of amount reversed under: (i) second proviso to rule 4(7) (ii) rule 3(5B) (iii) rule 4(5)(a) after meeting the conditions prescribed in these rules. The limitation period applies only when the credit is taken for the first time on an eligible document [Circular No. 990/14/2014 CX dated 19.11.2014].