CENVAT CREDIT ON CAPITAL GOODS ,MOTOR CARS RELATED ISSUES

Concept of Capital Goods 

                                                                                                           “Capital goods” as per Rule 2(a) of CENVAT Credit Rules 2004, means: 

“A. The following goods –

1. All goods falling under chapters 82, 84, 85, 90, heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to Central Excise Tariff Act 
2. Pollution control equipment
3. Components, spares and accessories of the goods specified at clauses (1) and (2) above
4. Moulds and dies, jigs and fixtures
5. Refractories and refractory materials
6. Tubes and pipes and fittings thereof; and
7. Storage tank and 
8. Motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711 and their chassis), but including dumpers and tippers, used-
1. in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or 
2. (1A) Outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory; or 
3. (2) for providing output service,

B. Motor Vehicles designed for transportation of goods including their chassis, registered July, 2012, if used for: 

• Providing an output service of renting of such motor vehicle or
• Transportation of inputs and capital goods used for providing an output service or
• Providing an output service of courier agency 

C. Motor Vehicles designed to carry passengers including their chassis, registered in the name of the service provider , is considered as capital goods w.e.f. 1st July, 2012 if used for providing an output service of transportation of passengers, renting of such motor vehicle, imparting motor driving skills 

D. Definition of “capital goods” has been amended whereby credit of duty paid on components, spares & accessories of motor vehicles which are capital goods for the assessee is available as CENVAT Credit. Hitherto, the CENVAT Credit of duty paid on those goods was available only to specified service providers.” 

The aforesaid items should be used for providing output service. Presently credit on all motor vehicles is not available except to a few specified service providers.

The definition of capital goods has been expanded to cover motor vehicles other than the following by inserting a new item no. (viii) under Rule 2(a)(A): 

• Motor vehicles for the transport of ten or more persons including the driver as specified under tariff heading 8702; 
• Motor cars and other motor vehicles principally designed for the transport of persons(other than those of tariff item 8702) including station wagons and racing cars other than those as specified under tariff heading 8703; 
• Motor vehicles for the transport of goods as specified under tariff heading 8704. It includes three-wheeled motor vehicle, dumper, lorry, truck etc. 
• Motorcycles (including mopeds) and cycles fitted with an auxiliary motor with or without side cars as specified under tariff heading 8711; 

The credit of service tax paid on their hiring would be allowed only in relation to motor vehicle which is capital good. The credit for service tax paid on general insurance and repair would be allowed to a manufacturer of motor vehicle in respect of motor vehicle manufactured by such person or an insurance company in respect of motor vehicle insured or reinsured. 

Restriction in Case of Capital Goods 

Only 50 % cenvat credit can be claimed in first year : As per Rule 4(2)(a) of CCR 2004, the CENVAT credit in respect of capital goods received in the premises of the service provider who provides taxable services, shall be taken for an amount not exceeding 50% of the duty paid on such capital goods in the same financial year and the balance in the subsequent financial year if the capital goods are in possession of such service provider. 

The criterion as to possession would not apply to components, spares,accessories, refractories and refractory materials, moulds, dies and goods falling under heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of First Schedule of Central Excise Tariff Act. Moreover, in case the capital goods are cleared as such in the same financial year of its purchase), then balance credit can be claimed, and subsequently entire credit needs to be reversed.

Presently credit on goods can be taken only after they are brought to the premises of the service provider. Sub-rules 4(1) and 4(2) have been amended to allow credit without bringing them into premises subject to due documentation regarding their delivery and location. This is subject to maintenance of documentary evidence of delivery and location of the inputs.

Rule 4(2) is amended to state that the CENVAT credit would be allowed even on capital goods which are received outside the factory by a service provider and also available to the manufacturer provided they are used for generation of electricity for captive use in factory. 

When inputs/ capital goods are removed outside the premises 

As per Rule 3(5), when inputs or capital goods on which CENVAT credit has been taken, are removed as such from the premises of the service provider, the CENVAT credit availed would have to be reversed unless the removal was for providing taxable service.  

In case of capital goods removed after use, where the credits are to be reversed, the reversal would be reduced on SLM basis with respect to computers and computer peripherals at prescribed percentage as referred in notification 06/2010 and for capital goods other than computer and computer peripherals at 2.5% per quarter or the duty on transaction value, whichever is higher. 

Rule 3(5) has also been amended to further include that the reversal of credit/ payment of duty would not be required on inputs when they are removed under free warranty. 

For this purpose, free warranty means ‘warranty’ provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer. 

When inputs/ capital goods are written off fully 

When inputs or capital goods are written off fully or a provision for such write off is made in the  books of accounts then the manufacturer or service provider shall pay an amount equivalent to the CENVAT credit taken on such input or capital good. Subsequently where such input or  capital good is put to use for manufacture or providing taxable service, the manufacturer or service provider would be entitled to take credit of the amount paid earlier subject to the other provisions in the Rules. 

Can the inputs or capital goods on which CENVAT credit is claimed, be sent out to a sub contractor for processing? 

The input or capital goods on which credit has been claimed, can be sent out under Rule 4(5)(a) of CENVAT Credit Rules 2004 to a job worker for processing, testing, reconditioning  etc. The goods after processing, testing etc are to be received back within the premises of the manufacturer within 180 days from the date of sending the same. Where it is not so received,the CENVAT credits availed earlier in respect of the inputs or capital goods needs to be reversed which can again be claimed back once the goods are received any time after the expiry of the said period of 180 days. There is no restriction to the service provider as to receipt within 180 days in case of capital goods.