I had earlier promised to come out with some academic input.

Subsequently, there was

substantial and valuable contribution from others. Contributors   I therefore thought that I
would concentrate more on the observations as there is ample text and enough text books.
Because it is too late in the day to get confused any further. These observations are the result
of my 20 plus years’ experience in the field.  I am against preaching of all kind per se. if you
don’t find the useful , kindly ignore them . But kindly don’t use four letters expletives as many
of my younger friends have done. Removal of such remarks is an additional burden for  the
administrators, who have provided us with such a wonderful platform to interact. .

Please avoid the traps like improve your handwriting. What cannot be done surely cannot be
done at this stage. JUST TRY TO BE LEGIBLE.

Be precise. SOME TIMES IT IS INEVITABLE TO WRITE NONSENSE IN EXAMS BUT WRITE

NONSENSE SENSIBLY.

SEE SOME EXAMPLES:

1.       There was a specific question (not for finals) what happens to a company where the ALL
two directors and shareholders perish in a car crash. I am particularly taking this case as
it was asked differently way back in Nov. 1976 when I was appearing in CA inter.  
The problem was a direct illustration from Prof David Gower’s company Law (British)
and he jovially observed that NOT EVEN A HYDROGEN BOMB WOULD KILL A COMPANY
because of its separate entity and perpetual succession independent of the members.
In fact only these 14 words are enough to get FULL marks I repeat full marks. Now the
gentleman while replying have travelled from Solomon’s case to what not and came to
the same conclusion. In my humble opinion, such answer is not expected to put it
mildly. On the other hand, if you forget Solomon’s name in the exam hall, it will spoil
your joyride and make you tense.
2.       Take second illustration, in forums, someone asked about the status of interest income
from funds deposited in a bank under the order of a court of law for the benefit of a
minor girl in the custody of her estranged mother. The answer lies in simple
comprehension of the fact that first there should be income. If Income is diverted at the
soured itself under a court order, Where is the question of clubbing provision. Now if
one writes a long answer on clubbing provisions, what will be the use?  The problem is
camouflaged as minor’s income but this in fact is a problem on income accruing or
arising and diversion of income by overriding title.
3.       Just I extend this problem to a NRI income where there is a mandatory foreign levy,
now the problem will appear to be NRI problem and many will faint. The question is
simply grasping the root cause and the principle,if one has to remain cool.
4.       In my original article I had taken a riddle of a company agreeing to half of the assessed
income but disputing the remaining half but having no money. The underlying principle
was :
         There could be no appeal , if undisputed tax not paid ( it would be dismissed in
limini or at the threshold without being admitted
          Since quantum is in dispute , there can be no rectification S. 154 – Rectification can
be only WHEN NO LONG DRAWN REASONING PROCESS IS REQUITRED  : Re: Volkart
Bros – in four years
         Then only remedy is Revision U/s 264 within one year and the fact that revision
petition is at the instance of the assessee, it cannot be against him.264 / and 246
Appeal ARE MUTUALLY EXLUSIVE. One has to make a choice between the two.
         Supposing the CIT want to go against the assessee, even then he cannot do so in
264, he will have to go for 263 for an order prejudicial to the interest of the revenue
or direct the A.O. to commence reopening proceedings u/s 147. But if the A.O. has
taken a considered decision, 263 will fail. Merely taking a view that benefits the
assessee   is not necessarily prejudicial to revenue.263 is appealable directly to ITAT.
264 is not appealable only a writ will lie before the High court
         Again, Reopening cannot be for change of opinion or failure of appraising the
record already produced.  Nor a retrospective amendment not existing on the date
of order amounts to ESCAPING THE INCOME.
         However, a retrospective amendment is only calrificatory or explanatory   nature, it
would be a mistake apparent from the record and if it is to do away with some
interpretation mischief, it would not be a mistake apparent from record.
         Company in extreme cases can approach the High court directly but it would be
hard pressed to plead that the circumstances warrant that the HC must exercise its
wit jurisdiction to make the ends of justice meet.
         The above 300 words take care of entire procedure of rectification /appeal and
revision / assessment and return is simple. Supplement it by suitable case laws.
5.       Take yet another case, an assessee file a return of ` 150Cr. AO assesses it for  ` 200Cr.
Both the CIT and the assesses are unhappy. What should be done. Please apply the
principles in point 5 above.
6.       Gift by an employer is salary . Gift by a client is Business income and other gifts are for
other sources. To remember the list remember line up and down and brothers/ sisters
of all kind {so father, son, grandson uncles- maternal and paternal – Just see the list / It
will be comprehensive without learning by heart. Consider particularly the gift of
property – where inadequate CONSIDERATION will not BE A GIFT.
7.       A common mistake in excise likewise is a product with ZERO duty is still EXCISABLE.
Only a product not in CETA alone is NOT Excisable. I once again repeat that VS Date in
his Website datevs.com has given entire Excise, Customs and service tax , so brief yet so
comprehensive. I consider Date be  Guru Drona although I do not consider myself
worthy of being an Eklavya.
8.       I am separately posting a PPT Law and languages, which deals a controversy of one
house for S 54/54F . There are hardly 10 slides. Will be helpful in understanding the
conceptual interpretation of law.
9.       Transfer Pricing, the OECD countries have changed the whole lot of guidelines. Of
course they are not in course but surely they provide additional focus to the topic.
10.   Don’t forget to refer to WIRC references at WIRC-ICAI.org.
11.   Feel free to direct your queries to me. If personal in nature use PM from my profile.
Send me a friendship request for this purpose .

LLP-Excellent hybrid of partnership &

company
 
LLP at a glance

Good hybrid of partnership and company form of organisation

Removes defects of unlimited liability under partnership and rigidity of provisions as prevalent
under Company Law.
LLP has limited liability and perpetual succession.
LLP is a ‘body corporate’ having legal entity different from its partners. It can hold property in
its own name
Maximum flexibility in respect of internal management, remuneration to partners, specific
powers like management power or veto powers to some partners.
LLP can be formed for carrying out any lawful business with a view to profit. Thus ideal for
medium businesses, professionals, joint ventures but not available for charitable organisations.
A partner can bind LLP but not other partners. LLP Agreement can curtails powers, duties and
liabilities of some partners.
A company, LLP, foreign LLP and foreign company can be partner of LLP.
Minimum two partners. No limit on maximum number of partners.
No restriction on number of LLPs of which a person can become a partner
Minimum two partners should be nominated as ‘designated partners’ to fulfil statutory
obligations under LLP Act. Other partners will not be normally held liable, except in case of
fraud.
Procedure for incorporation of LLP is similar to incorporation of Company.
Incorporation document (parallel to memorandum) and LLP agreement (parallel to Articles of
Association) is required to be filed electronically
No formalities of board meetings, general meetings, registration of charges, restrictions on
managerial remuneration,  issue and transfer of shares, election of directors,  restrictions on
powers of Board etc.
Accounts are to be maintained but Small LLP exempt from audit provisions.
 Electronic Filing of annual return, statement of accounts and solvency is required.
Change in partners is required to be reported within 30 days.
Concept of ‘holding out’ by partner incorporated.
Very heavy penalty (of Rs 100 per day) for late filing of returns.
Provisions of reconstruction, amalgamation and compromise, winding up, inspection and 
investigation are similar to those under Companies Act.
Existing partnership firms, private companies and unlisted companies can convert themselves
into LLP.
LLP will be taxed the same way as a partnership. The exception is that a partner of partnership
firm is liable personally for income tax liability of firm. In case of LLP, all partners are jointly
and severally liable for income tax liability, but a partner can escape the liability if he proves
that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of any duty
on his part.
Visit www.llp.gov.in for registration, filing of documents, instruction kit, write up on LLP etc.

Overview of LLP Act

Presently, two forms of business organisation are popular - partnership under Indian Partnership
Act and company under Companies Act.

Partnership form of organisation provides flexibility of operations. However, its basic

disadvantage is unlimited liability and the fact that partners are agents of partnership firm as well
as other partners, since act of partner binds partnership firm which in turn binds other partners also.

Companies Act does remove defect of unlimited liability but over the years, lot of rigidity has
entered the Companies Act. There are many restrictions on managerial remuneration, loans,
investments, guarantees, selling agents, contracts where directors are related etc. Many procedural
formalities like registration of charge, periodic meetings and filing of numerous documents with
ROC is required. Many statutory registers and records are to be maintained.

This rigidity is acceptable and indeed  required when public money is involved i.e. in case of listed
companies. However, in case of private companies and small public companies, these restrictions
reduce flexibility in operations and increase administration costs.

Solution - The solution is provided in form of LLP, major portion of which has become effective
from 1-4-2009.

LLP is ideal blend of partnership and company - You mix Companies Act and Indian Partnership
Act, remove all defects of traditional partnership firm, remove all procedural hassles and rigidity in
Companies Act, keep good points of both Indian Partnership Act and Companies Act and what you
have is Limited Liability Partnership! This, in brief, is the description of Limited Liability
Partnership Act, 2008.

LLP is excellent hybrid of Partnership Act and Companies Act. LLP is a very good substitute to
formation of a private limited company.

LLP may not be a good substitute for small family owned partnerships, but will be excellent tool
for professional partnerships.

Even in case of small partnerships, in certain situations, LLP may be a good option. If the proposed
activity is of manufacture, service providers, import/export etc.; there can be a sudden huge tax
liability. if some unexpected tax demand comes. In such cases, LLP gives protection.

LLP is also a good alternative for partnerships where some of the partners are willing to provide
finance but do not want to be saddled with unlimited liability which can accrue in case of
traditional partnership firm.

Higher cost compared to normal partnership – Costs of running LLP are high compared to
traditional partnership under Indian Partnership Act. Various documents are to be filed periodically
with Registrar of Companies (ROC) and accounts and records have to be maintained.

Much fewer procedures - Procedures are much fewer compared to Companies Act. However,
there is scope for further reduction in procedures.

All portions of LLP Act have become effective

Major portion of LLP Act was made effective from 1-4-2009 vide notification No. SO 891(E)
dated 31-3-2009. Following provisions of LLP Act were not made effective on 1-4-2009 but have
been made effective w.e.f. 31-5-2009 –

Conversion of firm, private company and unlisted public company to LLP [sections 55 to 58 of
LLP Act and second to fourth schedule to LLP Act]
Winding up of LLP [sections 63 to 65 of LLP Act]
Tribunal [NCLT] and Appellate Tribunal [NCLAT] [sections 2(c), 2(u), 72, 73 and relevant
portions of section 31 and 81].
Thus now all provisions of LLP Act are in full force.

Registration of LLP has commenced - Registration of LLP has commenced from 1-4-2009 and
some LLPs have already been registered.

LLP Rules - ‘Limited Liability Partnership Rules, 2009’ are notified effective from 1-4-2009.
These rules also contain provisions relating to conversion of firm or company to LLP [rules 32, 33,
38, 39 and 40]. These rules have also been made effective from 31-5-2009. The rules do not
contain provisions relating to winding up and the provisions of winding up have not been made
effective so far.
Basic features of LLP
Basic features of LLP are as follows -

Limited liability and perpetual succession - LLP is a body corporate having perpetual succession
[Section 3(1) of LLP Act, 2008]. It is a legal entity separate from its partners [Section 3(2) of LLP
Act, 2008].

Any change in the partners of a limited liability partnership shall not affect the existence, rights or
liabilities of the limited liability partnership [Section 3(3) of LLP Act, 2008].

No partner is personally liable to liabilities of LLP except in case of fraud [Sections 27 and 28 of
LLP Act, 2008]. Liability of LLP is not liability of individual partners.

Partner is agent of LLP but not of other partners - Every partner of LLP is agent of LLP but not
of other partners. Thus, he can bind LLP by his acts but not other partners.

Flexibility in operations of LLP - The LLP Act provides great flexibility in management and
operations of LLP. In many of the cases, provision as contained in LLP Agreement prevails.

Accounts and annual returns - Each LLP will have to maintain accounts. It will have to prepare
Statement of Account and Solvency. This statement and Annual Return is required to be filed with
Registrar of Companies. LLP having turnover/contribution beyond prescribed limits will have to
get their accounts audited by Chartered Accountant.

Ministry of Corporate Affairs is administrating ministry - Ministry of Corporate Affairs,

Government of India is the administrating ministry. Registrar of Companies (ROC) of respective
State is the administrative authority where all documents are to be filed.

All thinking and concepts of company law have come in LLP since administrative ministry is
same. Procedures regarding incorporation of LLP, e-filing of returns, inspection and investigation,
reconstruction and amalgamation, compromise, winding up etc. are identical or similar to
Companies Act.

Provisions of Companies Act can be made applicable - Central Government can make applicable
any provision of Companies Act to LLP with suitable modifications by issuing a notification
[Section 67 of LLP Act, 2008]. This provision is risky since rigidity under Companies Act can be
brought in LLP Act through back door.

Indian Partnership Act does not apply - Provisions of Indian Partnership Act will not apply to
LLP [Section 4 of LLP Act, 2008].

LLP can be constituted for profession as well as trade/manufacture - It was thought

that LLP Act is necessary to form partnership among professionals only. However, LLP
Act does not contain any such restriction. LLP can be constituted for any ‘business’
having profit motive.
Procedure for Incorporation of LLP at a glance

Two partners to be designated as ‘designated partners’ should apply and get DPIN (Designate
Partner Identification Number) from Central Government by applying electronically in form
No. 7 and subsequently sending physical forms
The designated partners should obtain Digital Signature Certificate (DSC) Class II or above
from a Certification Agency (CA).
User registration - Register DPIN and DSC with LLP by visiting www.llp.gov.in.
Check name availability which is available on the aforesaid website
Apply for reservation of name in e-form 1.
After obtaining reservation of name, fill up e-from 2 ‘Incorporation Document and Statement’.
It has to be digitally signed by designated partner and a professional (advocate/practising
CA/CS/ICWA). Upload the form and pay fees electronically.
LLP will be incorporated by ROC and registration certificate will be granted by Registrar of
Companies (ROC) in form No. 16
File form 3 (Information with regard to LLP Agreement) and form 4 (Notice of appointment of
partner/designated partner) electronically with fees. The form can be submitted either with form
2 itself or within 30 days of date of incorporation.
Send original copy of LLP Agreement which is duly stamped.
LLP is now ready for commencing business.

LLP Agreement
‘Limited liability partnership agreement’ means any written agreement between the partners of the
limited liability partnership or between the limited liability partnership and its partners which determines the
mutual rights and duties of the partners and their rights and duties in relation to that limited liability partnership
[Section 2(1)(o) of LLP Act].

After incorporation, LLP may have Limited Liability Partnership Agreement. This agreement will
govern mutual rights and duties of partners of LLP and mutual rights and duties of LLP and its
partners. The agreement can be changed and details should be filed with ROC [Section 23 of LLP
Act, 2008].

The LLP Agreement is similar to Articles of Association of company. Such LLP Agreement is
theoretically optional. If such agreement is not there, mutual rights and duties will be as specified
in first schedule to LLP Act.

Many of the standard clauses in first schedule to LLP Act will not be acceptable in majority of the
cases. Further, fees payable for filing a document depend on ‘contribution’ of partners. Hence,
practically, each LLP will be required to have LLP Agreement.

The provision of rules are such that the agreement can be signed and executed either before
incorporation or after incorporation of LLP. LLP Agreement is very vital for operation of LLP.
The details are discussed in a later chapter.

Stamp duty payable on LLP agreement - Since LLP Agreement is a new instrument,
obviously, it will not find place in any schedule of State Stamp Act. If the entry in schedule
simply reads ‘Partnership Deed/Agreement’, then LLP Agreement can fall under that
entry. However, if entry reads ‘Partnership deed/agreement under Indian Partnership Act’,
then obviously LLP Agreement will not fall in that heading. In that case, it should fall under
residual entry i.e. Any other agreement’ ,  ands stamp duty will be payable accordingly.

General comments on LLP Agreement - Just as a shirt cannot fit all persons, there
cannot be a standard LLP agreement which will fit requirements of all types of LLPs.

LLP can be of different sizes and for different purposes. Some LLPs may have few partners while
some may have huge number of partners. Some LLPs may be in form of family partnerships while
some may be in form of Joint Ventures.

These aspects have to be kept in mind while drafting LLP agreement. The agreement should not be
rigid and should provide as much flexibility as possible. More the rigidity, more the problems of
operations.

Interests of all parties should be kept in mind. Chances of oppression and mismanagement by some
partners cannot be ruled out. There can be oppression of majority. These factors should be
considered and proper care should be taken.

Types of partners - As per section 18 of India Partnership Act, a partner is agent of firm.
Section 19 of Indian Partnership Act states that act of partner in usual course of business
binds the firm. Thus, any partner can bind the firm. Since firm is responsible for acts of a
partner, acts of one partner binds all other partners. Thus, they are ‘mutual agents’.

However, under LLP, authority of a partner can be restricted by way of LLP agreement. Such
restriction may not be required in caser of small family managed LLP but should be provided in
large firms.

LLP Agreement can provide for different categories of partners. Some may be termed as
Senior/Managing/Executive Partners, some may be termed as ‘Partner’ and some may be even
‘Junior Partner’.

Veto powers to one or more partners - If one or more partner/s intend to control LLP, the
agreement can provide them veto power i.e. LLP agreement can provide that in any meeting of
Partners or Senior/Managing/Executive Partners, there will be no quorum if they are not present
and no resolution can be passed without their affirmative note.

Executive/Managing Committee in case of large LLP - In case of LLP with large

number of partners, it is unworkable to give executive or operational powers to all
partners. Hence, it may be advisable to form a committee of senior partners which may
be termed as Executive/Managing Committee. In my opinion, the number should not
exceed five or seven to make it manageable.

Main clauses of LLP agreement in form 3 - Columns 7 to 20 of Form 3 are in respect of

information with regard to LLP agreement. It is highly advisable to draft LLP Agreement in same
sequence as far as possible, so that filling form 3 and its checking by ROC will be easy.

Income tax of LLP

LLP incorporated in India will be assessed as if it is a partnership firm. Section 10(23) of Income
Tax Act states that ‘firm’ shall include LLP, ‘partner’ shall include partner of LLP and
‘partnership’ shall include LLP.

LLPs incorporated outside India (foreign LLPs) shall be taxed as ‘company’.

Share of profit of LLP at the hands of partners will be exempt [section 10(2A) of Income Tax
Act]..

Remuneration to partners – Remuneration paid to partners is deductible at the hands of LLP

within limits prescribed under section 40(b) of Income Tax Act, if requirements of section 184 are
satisfied. As per section 185 of Income Tax Act, if the requirements of section 184 are not
satisfied, firm will be assessed as firm but shall not be eligible for deduction of remuneration or
interest to partner.

As per section 40(b) of Income Tax Act, maximum amount deductible in respect of remuneration
to partner of LLP is as follows – (a) If book profit is negative or les than Rs 1,66,667– Rs 1,50,000
(b) If book profit is Rs 1,66,667 or more – On first 3 lakhs 90% and on balance 60%.

The amount deductible from income of LLP will be the amount given above or amount actually
debited to profit and loss account of LLP, whichever is lower.

Remuneration paid/credited to partner will be allowable as deduction to LLP and it will be taxed at
the hands of partner of LLP.

Conditions for allowing deduction of remuneration – The conditions for allowing deduction of
remuneration are as follows – (a) Remuneration should be paid only to working partner (b)
Remuneration must be authorised by the partnership deed and should be in accordance with terms
of partnership deed (c) Remuneration should not pertain to period prior to partnership deed and (d)
Remuneration should not exceed the permissible limit.

Book profit means the net profit as shown in the profit and loss account for the relevant previous
year, computed in accordance with chapter IV-D of Income Tax Act, as increased by the aggregate
amount remuneration paid or payable to all partners of the firm, if such amount has been deducted
while computing net profit of LLP [Explanation 3 to section 40(b) of Income Tax Act]
‘Working partner’ means an individual who is actively engaged in conducting the affairs of the
business or profession of the firm of which he is a partner [Explanation 4 to section 40(b) of
Income Tax Act].

It should be noted that there is no requirement that he should provide full time for business of LLP.
Thus, if a partner is engaged in establishing business policies of LLP, remuneration paid to him
would be eligible even if does not participate in its implementation and other routine jobs.

Requirements of  LLP agreement for allowing deduction - Remuneration must be authorised by
the LLP Agreement and should be in accordance with terms of LLP agreement. As per CBDT
circular No. 739 dated 25-3-1996, the LLP agreement should specify either the amount of
remuneration payable to each individual working partner or lays down the manner of quantifying
such remuneration. A general clause that remuneration should be as per section 40(b)(v) of Income
Tax Act or that remuneration will be as mutually agreed upon partners at the end of year will not
be sufficient to allow deduction of remuneration of working partner of LLP.

Remuneration paid above limits of section 40(b) will be exempt at hands of partner of LLP –
Remuneration paid to partner over and above limits of section 40(b) will be taxed at hands of LLP
but will be exempt at hands of partner. For example, if remuneration paid was Rs 3 lakhs, but
actual allowable as per section 40(b) was Rs 2 lakhs, the excess Rs one lakh will be taxed at hands
of LLP. However, this amount will be treated as share of profit at hand of partner and will be
exempt.

Interest to partners – Interest paid to partners is deductible at the hands of LLP within limits
prescribed under section 40(b) of Income Tax Act if requirements of section 184 are satisfied. As
per section 185 of Income Tax Act, if the requirements of section 184 are not satisfied, firm will be
assessed as firm but shall not be eligible for deduction of remuneration or interest to partner.

Interest paid/credited to partner will be allowable as deduction to LLP and it will be taxed at the
hands of partner of LLP.

The conditions for allowing deduction of interest are as follows – (a) Payment of interest  should
be authorised by the partnership deed and should be in accordance with terms of partnership deed
(b) Interest should not pertain to period prior to partnership agreement and (c) Interest should not
exceed 12%.

Disallowance of interest and interest u/s 40A(2) – As per section 40A(2) of Income Tax
Act, any expenditure incurred by an assessee in respect of which payment has been
made to specified persons (relative, director of company, partner of firm, person having
substantial interest in business of assessee etc.), is liable to be disallowed in computing
business profit to the extent such expenditure is considered to be excessive or
unreasonable, having regard to the fair market value of goods or services or facilities etc.
Thus, even if payment of remuneration or interest is allowable as per section 40(b) of
Income Tax Act, it can be disallowed under section  40A(2) of Income Tax Act.

Signing of IT return – Income Tax return shall be signed by designated partner of LLP. If
for an unavoidable reasons, the designated partner is unable to sign and verify the return,
or where there is no designated partner, any partner of LLP can sign and verify income
tax return [section 140(cd) of Income Tax Act].

Income tax rate for LLP – For the Assessment Year 2010-11 (Financial Year 2009-10), income of
LLP will be taxable @ 30% plus 3% education cess (total 30.9%). There is no Dividend
Distribution Tax (DDT).

Wealth tax on LLP - Indian LLP will not be liable to wealth tax. Foreign LLP will be liable to
wealth tax.

NO MAT or DDT – Since LLP is not treated as company for income tax purposes, there
will be no Dividend Distribution Tax [DDT] or Minimum Alternate tax [MAT}.

No presumptive taxation scheme – LLP cannot avail presumptive taxation scheme

under sections 44AC or 44AD of Income Tax Act.

Liability of partner towards liability of income tax of LLP - All partners of LLP are jointly and
severally liable for income tax liability, but a partner can escape the liability if he proves that non-
recovery cannot be attributed to any gross neglect, misfeasance or breach of any duty on his part
[section 167C of Income Tax Act].

Conversion of partnership firm into LLP – Conversion of partnership firm to LLP will not have
any tax implications if the rights and obligations of the partners remains the same and there is no
transfer of any asset or liability after conversion. [Explanatory memorandum to Finance (No. 2)
Bill, 2009. However, there is no specific amendment or provision to that effect in the main Income
Tax Act. In any case, there should be no capital gains tax in view of decision of Bombay High
Court in case of Texspin as discussed below]. If there is any violation of this provision, provisions
of section 45 of Income Tax Act will apply.

Conversion of private or unlisted company to LLP – The LLP Act makes provision for
conversion of private company or unlisted public company into LLP. There is no specific
provision in Income Tax Act for treatment of income tax in such cases.

In CIT v. Texspin Engg (2003) 129 Taxman 1 = 44 SCL 239 = 180 CTR 497 = 263 ITR 345 (Bom
HC DB), it was held that when a firm is converted into a limited company, it is not transfer by way
of distribution u/s 45(4) of Income Tax Act. There is no transfer of asset as contemplated u/s 45(1)
of Income Tax Act. Hence, question of capital gains tax does not arise. It was also held that
depreciation for the year is allowable to the firm for the year. Section 34 of Income Tax Act does
not apply as the assets are not ‘sold, discarded, demolished or destroyed’.
Thus, there should be no capital gains tax if the rights and obligations of the partners remains the
same and there is no transfer of any asset or liability after conversion.

Liability of stamp duty – In case of amalgamation of companies, in Madhu Indra Ltd. v. ROC
(2005) 58 SCL 160  = 130 Comp Cas 510 (Cal HC DB), it was held that transfer of assets and
liabilities of transferor company take place by virtue of section 394(2) of Companies Act, without
any further act or deed. Hence, no stamp duty would be payable on the Court order approving
amalgamation – followed in Tata Tea Ltd. In re (2008) 88 SCL 170 (Cal HC).

Based on aforesaid decision and also decision of Bombay High Court in case of Texspin
Engineering, it can be argued that there should be no liability of stamp duty in case of transfer of
firm/company to LLP.

Returns and records required by LLP 

LLP should maintain proper books of account.
Minute book should be maintained to record minutes of meetings of partners and
managing/executive  committee of partners.
Any change in partner and designated partner (admission, resignation, cessation, death,
expulsion) should be filed electronically in form 4 within 30 days of change with fees.
Such admission and cessation will alter mutual rights and duties of partner shall change. Hence,
supplementary LLP agreement will be required which is also required to be filed in e-form 3
within 30 days of change with fees
Statement of Account and Solvency (SAS) is to be filed annually in e-form 8 with required
fees. It is to be filed within 30 days from expiry of 6 months from end of each financial year i.e.
by 30th October.
Annual Return should be filed with ROC in e-form 11 with filing fees, within 60 days from
close of financial year i.e. by 30th May.
Incorporation document (form 2), Annual Return (form 11), Statement of Account and
Solvency (SAS) (form 8) and Name of partners and changes, if any, made therein (form 4) are
available for public inspection on payment of fees [Interestingly, LLP agreement is not
available for public inspection].

 Forms under LLP Rules/

 

Form No. Description Relevant Relevant

section of Rule of
LLP Act LLP
Rules,
 2009
1 Application for reservation or change 16(1) 18(5)
of name
2 Incorporation document and 11(1) and 11
Statement 11(2)
3 Information with regard to LLP 23(2), 21
agreement and changes, if any in 23(3)
LLP agreement
4 Appointment of partners/designated 25(2)(a), 8, 10(8),
partners and changes among them, 25(2)(b), 22(2)
intimation of DPIN by LLP to ROC 25(3), and
and consent of partner to become 7(4) 22(3)
partner/designated partner
5 Notice of change of name of LLP 19 20(2)
6 Intimation of particulars/change in 25(1) 22(1)
particulars of name or address to
LLP by the partner (not to be filed
with ROC)
7 Application for allotment of DPIN 7(6) 10
(Designated Partner Identification
Number)
8 Statement of Account and Solvency 34(3) 24
9 Consent to act as designated partner 7(3) 7 and
10(8)
10 Intimation of changes in particulars 7(3) 10(9)
of Designated Partners
11 Annual return of LLP 35(1) 25(1)
12 Intimating address for service of 13(2) 16(3)
documents (other than registered
office)
13 Notice of cessation by ceasing 24(1) Nil
 partner to other partners (not to be
filed with ROC)
14 Intimation to Registrar of 58(1) 33,
Firms/ROC for conversion of 38(3),
firm/company into LLP 39(3),
40(3)
15 Change of place of registered office 13(3) 17
16 Certificate of Incorporation of LLP 12(1)(b) Nil
by ROC
17 Application by firm for conversion 55, 58(1) 38(1)
into LLP and
second
schedule
18 Application by private 55, 58(1) 39(1)
company/unlisted company for and third and
conversion into LLP and 40(1)
fourth
schedule
19 Certificate of registration on 55, 58(1) 32(1)
conversion of firm/company
20 Affidavit in support of summons 60(1) 35(1)
21 Summons for directions to convene 60(1) 35(2)
meeting for scheme of
compromise/arrangement (when LLP
is not the applicant)
22 Notice of intimation of order of 60(3) 35(11),
Court/Tribunal to Registrar (in case 35(17)
of compromise, arrangement or and
reconstruction) 41(4)
23 Application for direction to LLP to 18 19(1)
change name
24 Application to Registrar for striking 24 37(1)(b)
off name
25 Application for reservation/renewal 59 18(3)
of name by foreign LLP or foreign
company
26 Form of proxy (at meeting convened 60(2) 35(4)
for compromise, arrangement or
reconstruction)
27 Form for Registration of particulars 59 34(11)
by foreign LLP
28 Alteration in incorporation 59 34(3)
documents or registered office of
partner of foreign LLP
29 Alteration in certificate of 59 34(4)
incorporation or name and address of and
persons authorized to accept service 34(8)
or alteration of place of business of
foreign LLP in India or cessation of
business in India
30 Certificate for establishment of place 59 34(10)
of business in India (to be issued by
ROC)
31 Application for compounding of an 39 41(1)
offence
Annexur Fees for registration, filing, 60(1) Various
eA application, inspection etc. rules
Annexur Documents to be permanently 40 27(1)
eB preserved by ROC
Annexur Documents to be preserved for five 40 27(3)
eC years by ROC
Annexur Register by ROC of Particulars of 40 27(5)
 eD documents relating to LLP destroyed

Software Supply versus Software Service

Conclusion

Considering constitutional limitations and SC judgments, it can be

said that service tax can be imposed only on ‘service’.

Thus, in my view, ‘development of information technology software’

itself is not  a taxable service .  ‘Service in relation to development of
information technology software’ is a taxable service. Similarly,
‘acquiring the right to use information technology software supplied
electronically’ itself is not a taxable service, but ‘service in relation to
acquiring the right to use information technology software supplied
electronically’ is a taxable service.

This interpretation can be adopted by applying principle of ‘reading

down’ to make a provision constitutional.

In short, service tax is on ‘software service’ and not ‘software

supply’.

If interpreted this way, then there remains no conflict between

Constitutional provisions and the service tax on information
technology software. Thus, mere sale or purchase of Information
Technology Software cannot be subjected to service tax since the
transaction is covered under Vat/sales tax. Only services in relation
thereto can be subjected to service tax.
 For example, if ‘A’ is undertaking activity of development of
information technology software, he will not be liable to service tax.
However, if ‘B’ provides some service to ‘A’ in relation to
development of such software, ‘B’ will be liable to pay service tax.

Test of what is ‘service’ is already discussed above, i.e. it should be

intangible, instantly perishable  and should not be storable or
transferable.

Even assuming service tax is payable, deduction of material cost can

be claimed under Notification No. 12/2003-ST and hence 'value' for
purpose of service tax will be Nil.

Of course, there is no chance that this view will be accepted by

department. The department’s view is clear from CBE&C circular
dated 29-2-2008, which reads as follows –

para 4.1.5 ‘Software and upgrades of software are also supplied

electronically, known as digital delivery. Taxation is to be neutral and
should not depend on forms of delivery. Such supply of IT software
electronically shall be covered within the scope of the proposed
service’.

I am sure there will be numerous show cause notices and demands

at lower levels, followed by contrary views of Tribunal (as is happing
today in case of interpretation of ‘input service’). There is no doubt
that the issue will reach Supreme Court sooner or later.

Really, it is not the tax that is killing, but what is hurting more is
uncertainty and possible huge demands. If the choice is between
higher but certain taxes and lower taxes with higher uncertainty, I
think industry will prefer higher taxes to higher uncertainty.

Decisions in Coca Cola and ABB clears mist over definition

of ‘input service’
Apart from the fact that definition of ‘input service’ is very wide and it includes
any service in relation to business of assessee, following factors need
consideration.

Purpose is to move towards GST - The purpose of wide definition of ‘input

service’ has been stated by Finance Minister in para 148 of his budget speech on
8-7-2004 as follows, ‘I propose to take a major step towards integrating the tax on
goods and services. Accordingly, I propose to extend credit of service tax and
excise duty across goods and services’.

The integration of Cenvat credit of excise duty and service tax is a pre-cursor to
GST (Goods and Service Tax), where intention is to eliminate distinction between
goods and services. The whole scheme of credit of ‘input service’ is designed
from this point of view.

Avoiding cascading effect of taxes - One basic purpose of Cenvat credit is to

avoid cascading effect. These purposes cannot be ignored while interpreting the
definition of ‘input service’.

Conclusion - In my view, decision of large bench of Tribunal in ABB Ltd. and

Bombay High court in Coca cola correctly interprets the definition of ‘Input
service’ [Unless the definition is changed in next budget]. Thus, any service in
relation to business of assessee is ‘input service’ and eligible for Cenvat credit..

Exempted goods/output services & Cenvat credit

1 No Cenvat credit if final product/service exempt

Cenvat credit is not available if inputs or input services are used for manufacture of exempted goods or
provision of exempted output services.

As per basic principle of VAT, credit of duty or tax can be availed only for payment of duty on final product
or output services. As a natural corollary, if no duty is payable on final product or output services, credit of
duty/tax paid on inputs or input services cannot be availed.
In CCE v. Modi Rubber 2001 AIR SCW 4363 (SC 3 member bench), it was held that no credit of duty paid
on inputs is available if final product is exempt from duty. [Decision in respect of proforma credit, but
principle applicable to Cenvat credit also].

As per Rule 6(1) of Cenvat Credit Rules, Cenvat credit is not admissible on such quantity of input or input
service which is used in manufacture of exempted goods or provision of exempted services [The words
‘provision of’ are inserted w.e.f. 1-4-2008, but this is only clarificatory amendment).

Thus, if inputs and input services are partly used in exempted final product/output service, Cenvat credit
of that portion of input/input service will not be available.

Partial manufacture/provision of exempted products/services – Cenvat credit of inputs and input

services is not available if final product/output service is exempt from excise duty/service tax. In case of
manufacturer manufacturing both exempt and dutiable goods (or service provider providing taxable as
well as exempt services), it may happen that same inputs/input services are used partly for manufacture
of dutiable goods/taxable services and partly for exempted goods/services.

In such cases, the manufacturer/service provider has following three options (w.e.f. 1-4-2008) –

1. Maintain separate inventory and accounts of receipt and use of inputs and input services used for
exempted goods/exempted output services – Rule 6(2) of Cenvat Credit Rules.
2. Pay amount equal to 5% of value of exempted goods (if he is ‘manufacturer) and/or 6% of value
of exempted services (if he is service provider) if he does not maintain separate inventory and
records – Rule 6(3)(i) w.e.f. 1-4-2008.
3. Pay an ‘amount’ equal to proportionate Cenvat credit attributable to exempted final product/
exempted output services – Rule 6(3)(ii) w.e.f. 1-4-2008.

Cenvat credit on capital goods – If capital goods are partly used for exempted goods and party for
dutiable final products, entire Cenvat credit of duty paid on capital goods is available. Cenvat credit of
duty on capital goods is not allowable only when it is exclusively used for manufacture of final products
[rule 6(4)]

No reversal or payment of amount in certain cases – If excisable goods are removed to SEZ, EOU,
EHTP, STP, UN agencies or for exports or removal of gold or silver arising in manufacture of copper or
zinc by smelting, payment of 10% ‘amount’ is not required [rule 6(6)].

Cenvat credit of service tax in case of supplies made by DTA to EOU - Supplies from DTA to EOU
are entitled to Cenvat credit of service tax paid – para 6.11(v) of FTP.

1-1 Options available to manufacturer manufacturing both dutiable and exempt goods and service
provider providing taxable as well as exempt services

The manufacturer/service provider has three options –

Maintain separate inventory and accounts - Maintain separate inventory and accounts of receipt and
use of inputs and input services used for exempted goods/exempted output services. In such cases, he
should not avail Cenvat credit of the inputs and input services which are used in exempted final services
at all – Rule 6(2) of Cenvat Credit Rules.

Pay 5% ‘amount’ on value of exempted goods or 6% ‘amount’ on value of exempted services if

separate inventory and records not maintained - If the manufacturer/service provider opts not to
maintain such separate accounts, he has to pay an amount equal to 10% of the ‘value’ of such exempted
goods or 8% of the value of ‘exempted services’ [Rule 6(3)(i) w.e.f. 1-4-2008 ( Such payment can be
made by debit to Cenvat credit account or PLA [ explanation II to rule 6(3A)].

He cannot utilise Cenvat credit of inputs/input services utilised exclusively for manufacture or exempted
final product or exempted output services, as is clarified in Explanation II to rule 6(3) inserted w.e.f. 1-4-
2008 - reiterated in para 1 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.

Thus, he cannot utilise Cenvat credit in respect of inputs/input services utilised exclusively for
manufacture of exempted final products or exempted taxable services. In addition, he has to pay 10%/8%
amount, if he uses some common inputs/input services! This is double whammy.

It can be argued that rule 6(3) states that ‘notwithstanding anything contained is rule 6(1) and 6(2), the
manufacturer of goods or provider of output service, opting not to maintain separate accounts, shall follow
either of the following options as applicable to him’.

Thus, when assessee opts not to maintain separate accounts, calculation of Cenvat credit of inputs/input
services used exclusively for exempted final products/output services cannot arise. A rule cannot be
interpreted to mean that even if assessee opts not to maintain separate accounts, still you are required to
maintain separate accounts for inputs/input services used for exempted final products!.

In Life Long Appliances Ltd. v. CCE 2006 (196) ELT 1110 (CEGAT), it has been held that payment of
10% ‘amount’ means Cenvat credit has not been taken – view upheld by SC – 196 ELT A144.

However harassment, tensions and disputes are possible, if explanation II to rule 6(3) is literally
interpreted, Thus, the option of payment of 10%/8% amount is not likely to be very attractive in most of
the cases.

Such option has to be exercised in respect of all exempted goods manufactured and all exempted output
services provided. The option once exercised shall not be changed in remaining part of financial year –
Explanation I to Rule 6(3) inserted w.e.f. 1-4-2008 - reiterated in para 2 of CBE&C Circular No.
868/6/2008-CX dated 9-5-2008.

Education cess and SAH education cess is payable only on ‘duties of excise’. ‘Amount’ is not ‘duty’.
Hence, education cess or SAH education cess is not payable on such ‘amount’.

The ‘amount’ should be paid in accounting code applicable to service tax i.e. 0044 - para 4 of CBE&C
Circular No. 868/6/2008-CX dated 9-5-2008.
Pay proportionate amount attributable to Cenvat credit utilised for exempted final product/
exempted output services – The manufacturer/service provider can opt to pay an ’amount’ which is
proportional to Cenvat credit availed on exempted final product/exempted output services [rule 6(3)(ii)
w.e.f. 1-4-2008]

He cannot utilise Cenvat credit of inputs/input services utilised exclusively for manufacture or exempted
final product or exempted output services, as is clarified in Explanation II to rule 6(3) inserted w.e.f. 1-4-
2008- reiterated in para 1 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.

Thus, he cannot utilise Cenvat credit in respect of inputs/input services utilised exclusively for
manufacture of exempted final products or exempted taxable services. In addition, he has to pay
proportionate amount relating to exempted final products/exempted output services!.

As explained later, the reasonable interpretation is that he should also exclude Cenvat credit relating to
inputs/input services used exclusively for taxable goods [as provided in rule 6(2)] and then apply formula
for proportionate reversal to common inputs/input services.

If interpreted this way, this option seems to be much better than payment of 8%/10% where quantum is
substantial. Otherwise, this option is almost equally unfair.

For small service providers and small manufacturers, it may be difficult to maintain elaborate records and
make calculations.

If manufacturer/service provider wants to exercise this option, he has to inform details as prescribed in
rule 6(3A) of Cenvat Credit Rules to Superintendent of Central Excise.

Such option has to be exercised in respect of all exempted goods manufactured and all exempted output
services provided. The option once exercised shall not be changed in remaining part of financial year –
Explanation I to Rule 6(3) inserted w.e.f. 1-4-2008 - reiterated in para 2 of CBE&C Circular No.
868/6/2008-CX dated 9-5-2008. .

Education cess and SAH education cess is payable only on ‘duties of excise’. ‘Amount’ is not ‘duty’.
Hence, education cess or SAH education cess is not payable on such ‘amount’.

1-2 Option is to person availing Cenvat credit

Rule 6(3) uses the words ‘if manufacturer or provider of output service opts not to maintain separate
accounts’. Thus, whether to maintain separate accounts or not is at the option of person availing Cenvat
credit. He cannot be compelled to maintain or not maintain separate accounts.

The option is with assessee and he cannot be forced to maintain separate inventory under rule 6(2) –
Tahir Ali Industries v. CCE (2006) 195 ELT 225 (CESTAT).

1-3 Meaning of exempted goods

As per Rule 2(d) of Cenvat Credit Rules, 'exempted goods' means goods which are exempt from whole of
duty of excise leviable thereon and includes goods which are chargeable to 'Nil' rate of duty. Thus,
'exempted goods' for purpose of Cenvat cover (a) Goods chargeable to 'Nil' duty as per Tariff and (b)
Goods which are exempt by a notification issued under section 5A.

Exempted goods do not mean non-excisable goods - Goods which are not mentioned in Tariff are not
‘exempted goods’ as they are neither ‘goods chargeable to 'Nil' duty as per Tariff’ nor ‘goods which are
exempt by a notification issued under section 5A’.

'Exempted goods' do not cover goods which are not excisable at all, i.e. which are not included in Central
Excise Tariff at all. Such goods are not 'exempted goods'. Similarly, goods not specified in tariff at all are
not goods 'chargeable to 'Nil' rate of duty'. Thus, rule 6(2) applies only if all the final products are
'excisable goods'. The rule does not apply if one of the products is not 'excisable goods' at all. Goods
which are not 'excisable goods' cannot be said to be exempt from duty or chargeable to Nil rate of duty. –
view confirmed in CCE v. Kesar Enterprises Ltd. 2001(130) ELT 93 (CEGAT).

1-4 Meaning of ‘exempted services’

As per rule 2(e) of Cenvat Credit Rules, “exempted services” means taxable services which are exempt
from the whole of the service tax leviable thereon, and includes services on which no service tax is
leviable under section 66 of Finance Act.

Services on which no tax is payable are also ‘exempt services’ - - For purpose of the definition of
‘exempted services’, services on which no service tax is leviable are also ‘exempted services’. Thus, if a
particular service is not taxable under present provisions of Finance Act, 1994, it will be ‘exempted
service’ for purpose of rule 6.

It has been clarified that export of service will not be treated as exempted service - para 6 of CBE&C
Circular No. 868/6/2008-CX dated 9-5-2008.

Services utilised for own use, not connected with manufacture or provision of services is not
‘exempted service’ – An assessee may utilise part of the input services for his own use, which may be
unconnected with his manufacturing activities or activities pertaining to provision of output services. For
example, he may be engaged in exports or trading of goods. In such case, what is to be done in respect
of input services which might be partially utilised for own use?

These cannot be termed as ‘exempted services’, as ‘service’ can be given only to another person. One
cannot give service to oneself. This is ‘captive consumption’ of input services and not provision of
services to another person.

2 Exceptions to provisions of payment of amount

Following are the exceptions to provision of proportionate removal of Cenvat credit or payment of
10%/8% ‘amount’.

2-1 Dis-allowance of Cenvat of capital goods only if used exclusively for exempted final
product/services
Capital goods used exclusively for manufacture of exempted goods or providing exempt service are not
eligible [rule 6(4)]. If capital goods are partly used for taxable services or dutiable final products, Cenvat
credit will be available.

Some manufacturers are entitled to exemption based on turnover or quantity (e.g. SSI units). They will be
entitled to Cenvat on capital goods. They can take Cenvat on capital goods and utilise it for payment of
duty when their exemption limit is crossed.

Inputs used in manufacture of capital goods used within the factory – Notification No. 67/95-CE
exempts capital goods manufactured within the factory and used within the factory. In such case, a view
is possible that ‘amount’ is payable on such capital goods. However, since the goods are not sold, there is
no question of any ‘price’ and hence no ‘amount’ should be payable.

2-2 Some services eligible even if partly used for manufacture of exempted goods/output services

Rule 6(5) of Cenvat Credit Rules provides that in case of specified services, full Cenvat credit of input
service is available even if these services are partly used in manufacture of exempted final product/output
services.

The services are –

Consulting Engineer [section 65(105)(g)]

Architect [section 65(105)(p)]

Interior decorator [section 65(105)(q)]

Management consultant [section 65(105)(r)]

Real Estate Agent [section 65(105)(v)]

Security Agency Services [section 65(105)(w)]

Scientific or technical consultancy [section 65(105)(za)]

Banking and Financial Services [section 65(105)(zm)]

Insurance Auxiliary Services concerning life insurance business [section 65(105)(zy)]

Erection, commissioning and Installation [section 65(105)(zzd)]

Maintenance or repair [section 65(105)(zzg)]

Technical testing and analysis [section 65(105)(zzh)]

Technical inspection and certification [section 65(105)(zzi)]

Foreign Exchange Broker [section 65(105)(zzk)]

Construction Service [section 65(105)(zzq)]

 Intellectual property services [section 65(105)(zzr)]

In case of these services, reversal of Cenvat or payment of ‘amount’ is not required, if these services are
even partly used for providing output service or manufacture of dutiable final product. Cenvat credit will be
dis-allowed only when these services are used exclusively in manufacture of exempted final product or
exempted output service. Rule 6(5) has been given overriding effect over rule 6(1), 6(2) and 6(3).

This rule has not been amended even if rule 6(3) of Cenvat Credit Rules has been recast w.e.f. 1-4-2008.
Hence, the effect is that in respect of these specified services, proportionate reversal is not required -
view confirmed in para 8 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.

2.3 Supply to EOU/SEZ, export of goods, deemed exports or gold manufacture

Rule 6(6) of Cenvat Credit Rule states that provisions of rules 6(1), 6(2), 6(3) and 6(4) are not applicable ,
if excisable final product is despatched without payment of duty, in following cases –

Final product is despatched to SEZ, EOU, EHTP or STP (Actually, supply to SEZ is ‘export’ and not
‘deemed export’).
Final product is supplied to United Nations or an international organisation for their official use or
supplied to projects funded by them, which are exempt from duty.
When final product is exported under bond without payment of duty

Gold or silver arising in course of manufacture of copper or zinc by smelting.

Goods supplied against International Competitive Bidding in terms of Notification No. 6/2006-CE dated
1-3-2006 or earlier Notification No. 6/2002-CE dated 1-3-2002, if such goods are exempt from customs
duty when imported in India
In such case, assessee need not reverse Cenvat credit or pay any ‘amount’.

If final product is exported, Cenvat credit cannot be denied – CCE v. VVF Ltd. (2006) 195 ELT 57
(CESTAT).

This provision does not apply to service providers. See discussions in a subsequent paragraph.

This provision will create difficulties if assessee intends to opt for proportionate reversal of Cenvat credit,
as discussed later.

International competitive bidding - The last clause has been added w.e.f. 28-1-2005, with intention to
exempt goods supplied against International Competitive Bidding as specified in Notification No. 6/2006-
CE dated 1-3-2006 (Earlier Notification No. 6/2002-CE dated 1-3-2002).

3 Payment of ‘amount’ on exempted final product/exempt services

Assessee can opt to pay ‘amount’ of 10% of ‘value of exempted final product or 8% of ‘value of exempted
services [rule 6(3)(i) w.e.f. 1-4-2008].
Option of payment of 10% ‘amount’ on exempted goods was also available, but in case of service tax, the
provision upto 31-3-2008 was that tax Cenvat credit was restricted to 20% of service tax payable on
taxable output services.

The ‘amount’ should be paid in accounting code applicable to service tax i.e. 0044 - para 4 of CBE&C
Circular No. 868/6/2008-CX dated 9-5-2008.

Education cess not payable - Education cess and SAH education cess is payable only on ‘duties of
excise’. ‘Amount’ is not ‘duty’. Hence, education cess and SAH education cess is not payable on such
‘amount’.

Nature of the payment of ‘amount’ - The payment of ‘amount’ is really in nature of reversal of Cenvat
credit availed on inputs/input services which have been used for manufacture of exempted goods or
provision of output services.

3-1 Job worker doing job work under Cenvat may be liable to pay 8% ‘amount’ after 1-4-2008

Job work done under Cenvat provisions is exempt from service tax. If the job worker is not availing any Cenvat
credit of any common input or input services, question does not arise. However, if the job worker is availing Cenvat
credit on inputs or input services, he will be liable to pay 8% ‘amount’ on job charges under rule 6(3) of Cenvat
Credit Rules, or he may have to go in for proportionate reversal of Cenvat Credit as per rule 6(3A) of Cenvat Credit
Rules effective from 1-4-2008.

If the job worker thinks that the rule 6(3A) is cumbersome, it may be advisable to pay service tax @ 12.36% on job
charges, since the customer will be in a position to avail Cenvat credit.

If job worker charges 8% ‘amount’, buyer cannot avail Cenvat credit, but if job worker charges regular service tax,
the customer will be eligible to avail Cenvat credit.

3-2 No Cenvat credit of such ‘amount’ paid

The ‘amount’ paid on the exempted final product is not in the nature of excise duty. Hence, department
has clarified that buyer of such exempted goods will not be allowed to avail Cenvat credit of ‘amount’ paid
by the manufacturer/service provider. - MF(DR) circular No B-42/1/96-TRU dated 27.9.1996.

The view has been confirmed in Malviya Chem v. CCE 2001(127) ELT 274 (CEGAT), where it has been
held that ‘Nil duty’ and ‘exemption’ cannot co-exist with duty payment.

It has been clarified that the invoice prepared should indicate duty paid as 'Nil'. However, the amount @
8% (now 10%) debited should be indicated separately as 'amount debited under rule 6(3)(b)'. There
should be separate column in the invoice. - Indore Commissionerate TN 66/96 dated 29-10-1996.

3-3 When to pay the ‘amount’

Para 30(a) of D. O. F. No. 334/1/2007-TRU dated 28-2-2007, issued by Shri Gautam Ray, Joint Secretary,
TRU, Ministry of Finance states as follows - An explanation has been inserted in rule 8 to provide that
for the purposes of this rule, the expressions 'duty' or 'duty of excise' shall also include the
'amount' payable in terms of the CENVAT Credit Rules, 2004. Therefore, all amount payable like
payment under rule 6 (3) of the CENVAT Credit Rules, 2004 etc., can be paid along with duty
payable by 5th or 15th of the next month.

4 Reversal of credit or payment of ‘amount’ means Cenvat credit not availed

Sometimes, assessee may take Cenvat credit by mistake or because he cannot identify the material to be
used for exempted final products. This does not mean that he cannot rectify and must pay 10% ‘amount’.
He can rectify by reversing Cenvat credit.

In CCE v. Bombay Dyeing Ltd. (2007) 10 STT 286 = 215 ELT 3 (SC), it was held that even when Cenvat
credit is taken, if it is reversed before utilization, it would mean that Cenvat credit has not been taken. In
view of the decision, CBE&C vide its circular No. 858/16/2007-CX dated 8-11-2007, has clarified that if
Cenvat credit is reversed before utilization, it would amount to credit not having been taken..

In Chandrapur Magnet Wire v. CCE 1996(2) SCC 159 = 1996(81) ELT 3 (SC), it was held that if Cenvat
credit taken is reversed, it means no Cenvat credit has been taken. This judgment was on the basis of a
specific Board circular, but principle can still apply.

In Punjab Tractors Ltd. v. CCE 2005 (181) ELT 380 (SC 3 member bench), assessee paid duty on
exempted parts, availed Cenvat and reversed it when utilising it for exempted final product (junior tractors
of less than 25 HP). It was held that the procedure followed was revenue neutral and hence duty is not
payable. However, penalty was held valid for violation of rules.

4-1 Payment of ‘amount’ means Cenvat has not been taken

In Life Long Appliances Ltd. v. CCE 2006 (196) ELT 1110 (CEGAT), it has been held that payment of
10% ‘amount’ means Cenvat credit has not been taken – view upheld by SC – 196 ELT A144 (In this
case, assessee’s produce was exempt if Cenvat was no taken. It was held that if ‘amount’ is paid, it
means that Cenvat has not been taken).

5 Proportionate reversal of Cenvat Credit w.e.f. 1-4-2008

If assessee intends to pay amount on proportionate basis as provided in rule 6(3)(ii) (w.e.f. 1-4-2008), the
‘amount’ is to be calculated as provided in rule 6(3A) of Cenvat Credit Rules. He has to pay ‘amount’
provisionally on monthly basis. At the yearend, he has to calculate exact amount and pay difference if any
or adjust excess amount paid.

5-1 Inform option to Superintendent 

The assessee should inform following details to Superintendent, while exercising the option of
proportionate reversal [Rule 6(3A)(a) inserted w.e.f. 1-4-2008] -

name, address and registration No. of the manufacturer of goods or provider of output service.

date from which the option under this clause is exercised or proposed to be exercised.
 description of dutiable goods or taxable services.

description of exempted goods or exempted services.

CENVAT credit of inputs and input services lying in balance as on the date of exercising the option under this
condition.
Such option has to be exercised in respect of all exempted goods manufactured and all exempted output
services provided. The option once exercised shall not be changed in remaining part of financial year –
Explanation I to Rule 6(3) inserted w.e.f. 1-4-2008.

If assessee intends to pay 10%/8% ‘amount’ on exempted final products/exempted final services, such
intimation is not required.

5-2 Mode of calculations of proportionate reversal

The mode of calculation is as follows –

Assessee should first take entire Cenvat credit of inputs and input services used in exempted as well as
taxable final products and exempted as well as taxable services.

Calculation of amount to be reversed - At the end of month, assessee should calculate Cenvat credit
attributable to exempted final products and exempted services on provisional basis, as follows –

Amount to be reversed at end of month

(1) Rule 6(3A)(b)(i) Inputs used for exempted final products
(2) Rule 6(3A)(b)(ii) Inputs used for exempted services (On proportionate basis, based on
ratio of previous year)
(3) Rule 6(3A)(b)(iii) Input services used for exempted final products and exempted
services (On proportionate basis based on ratio of previous year).
  Total 1+2+3 = amount to be reversed every month on provisional basis
 

Calculations at the end of the year - At end of the year, assessee should calculate the ratios on actual
basis and make fresh calculations and pay difference, if any, before 30th June. If it is found that he had
paid excess amount based on provisional ratio, he can adjust the difference himself by taking credit.

Reversal in first year of production or service only at the end of year - In the first year of production
or provision of services, ratios of previous year will not be available. In that case, the calculations need
not be made for the whole year. However, calculations should be made after the year is over and amount
attributable to Cenvat credit on exempted final products and exempted services should be calculated and
paid.

The basic idea behind the mode of calculations is sound and correct as per Vat principles. However, calculations
are not easy and are prone to litigation.
There is no provision to calculate input services used exclusively for exempted services. This has to be done on
ratio basis only.

5-3 Calculation of ‘amount’ on provisional basis every month

The manufacturer of goods or the provider of output service shall determine and pay, provisionally, for every
month –

Inputs used for exempted final products - The amount equivalent to CENVAT credit attributable to inputs used in
or in elation to manufacture of exempted goods during the month, denoted as A.

This has to be done on basis of input-output ratio or on basis of formula similar to the one applicable in case of
inputs for exempted services on provisional basis.

Inputs used for exempted services - The amount of CENVAT credit attributable to inputs used for provision of
exempted services (provisional) is to be calculated as follows -

   
B Total value of exempted services provided during the preceding financial year
C Total value of dutiable goods manufactured and removed plus the total value of
taxable services provided plus the total value of exempted services provided,
during the preceding financial year
D Total CENVAT credit taken on inputs during the month minus A (i.e. credit taken
on inputs for manufactured final products)
(B/C) Amount to be reversed every month on provisional basis as per rule 6(3A)(b)(ii)
xD
 

Input services used in or in relation to manufacture of exempted goods or provision of exempted services - The
amount attributable to input services used in or in relation to manufacture of exempted goods or provision of
exempted services (provisional) is calculated as follows -

E Total value of exempted services provided plus the total value of exempted goods
manufactured and removed during the preceding financial year
F Total value of taxable and exempted services provided, and total value of dutiable
and exempted goods manufactured and removed, during the preceding financial
year
G CENVAT credit taken on input services during the month
 (E/F) Amount to be reversed every month on provisional basis as per rule 6(3A)(b)(iii)
x G
 

5-4 Calculation of ‘final amount’ after year end

The manufacturer of goods or the provider of output service, shall determine finally the amount of CENVAT credit
attributable to exempted goods and exempted services for the whole financial year in the following manner [Rule
6(3A)(c) inserted w.e.f. 1-4-2008] -

Inputs used for exempted final products - The amount of CENVAT credit attributable to inputs used in or in
relation to manufacture of exempted goods, on the basis of total quantity of inputs used in or in relation to
manufacture of said exempted goods during the financial year, denoted as H [Rule 6(3A)(c)(i)].

This has to be done on basis of input-output ratio and/or on basis of formula similar to the one applicable in case
of inputs for exempted services on actual basis.

Inputs used for exempted services - The amount of CENVAT credit attributable to inputs used for provision of
exempted services is to be calculated finally on actual basis as follows -

   
J Total value of exempted services provided during the financial year
K Total value of dutiable goods manufactured and removed plus the total value of
taxable services provided plus the total value of exempted services provided, during
the financial year
L Total CENVAT credit taken on inputs during the financial year minus H (i.e. credit taken
on inputs for manufactured final products)
(J/K) x Amount to be reversed finally as per rule 6(3A)(c)(ii)
L
 

Input services used in or in relation to manufacture of exempted goods or provision of exempted services - The
amount attributable to input services used in or in relation to manufacture of exempted goods or provision of
exempted services is to be calculated on actual basis as follows -

M Total value of exempted services provided plus the total value of exempted goods
manufactured and removed during the financial year
N Total value of taxable and exempted services provided, and total value of dutiable and
exempted goods manufactured and removed, during the financial year
P CENVAT credit taken on input services during the financial year
 (M/N) Amount to be reversed finally at end of year as per rule 6(3A)(c)(iii)
x P
 

Amount of Cenvat credit to be reversed for whole year - Amount of Cenvat credit attributable to exempted goods
and exempted services is to be determined at the end of financial year. The amount is to be calculated as follows

Total amount of Cenvat credit attributable to exempted goods and exempted

services for the financial year . . . . . .
(1) Rule 6(3A) Cenvat on Inputs used for exempted final products
(c)(i)
(2) Rule 6(3A) Cenvat Credit on Inputs used for exempted services (On
(c)(ii) proportionate basis, based on actual ratio of financial year)
(3) Rule 6(3A) Cenvat Credit on input services used for exempted final products
(b)(iii) and exempted services (On proportionate basis based on actual
ratio of financial year).
(4) Rule 6(5) Cenvat credit on services specified in rule 6(5), which are exclusively
used for exempted goods or exempted services
  Total 1+2+3+4 = Total amount attributable to exempted final products and
exempted services
 

5-5 Payment of difference if short payment was made

At the year end, the manufacturer of goods or the provider of output service, shall pay an amount equal to the
difference between the aggregate amount determined as per rule 6(3A)(c) and the aggregate amount determined
and paid as per Rule 6(3A)(b), on or before the 30th June of the succeeding financial year, if the amount
provisionally paid was lower than the amount finally determined at the year end [Rule 6(3A)(d) inserted w.e.f. 1-4-
2008].

Interest payable if amount was short paid - In addition to the amount short-paid, the assessee will be liable to pay
interest at the rate of twenty-four per cent per annum from the due date, i.e., 30th June till the date of payment,
where the amount short-paid is not paid within the said due date.

Thus, no interest is payable if difference is paid by 30th June of the following year [Rule 6(3A)(e) inserted w.e.f. 1-
4-2008].

5-6 Intimation of details to Range Superintendent

The manufacturer of goods or the provider of output service shall intimate to the jurisdictional Superintendent of
Central Excise, within a period of fifteen days from the date of payment or adjustment, the following particulars -
 details of CENVAT credit attributable to exempted goods and exempted services, monthwise, for the whole
financial year, determined provisionally
CENVAT credit attributable to exempted goods and exempted service for the whole financial year, finally
determined
amount short paid determined alongwith the date of payment of the amount short-paid

interest payable and paid, if any, on the amount short-paid [Rule 6(3A)(g) inserted w.e.f. 1-4-2008].

5-7 Self adjustment of excess amount was paid

If at the year end, it is found that the amount provisionally paid was more than the amount finally determined, the
manufacturer of goods or the provider of output service may adjust the excess amount on his own, by taking credit
of such amount [Rule 6(3A)(f) inserted w.e.f. 1-4-2008].

Intimation of details to Range Superintendent - The manufacturer of goods or the provider of output service shall
intimate to the jurisdictional Superintendent of Central Excise, within a period of fifteen days from the date of
payment or adjustment, the following particulars -

1. details of CENVAT credit attributable to exempted goods and exempted services, monthwise, for the
whole financial year, determined provisionally

2. CENVAT credit attributable to exempted goods and exempted service for the whole financial year, finally
determined

3. amount excess paid

4. credit taken on account of excess payment, if any [Rule 6(3A)(g) inserted w.e.f. 1-4-2008].

5-8 If assessee does not manufacture dutiable goods or does not render taxable services

If assessee does not manufacture dutiable final products or taxable output service, he can take credit but is not
required to pay proportionate amount on provisional basis as provided in rule 6(3A)(b). However, at year end, he
should pay amount on proportionate before 30th June [Rule 6(3A)(h) inserted w.e.f. 1-4-2008].

The provision applies in case of production in first year when ratios of the previous year are not available to
calculate Cenvat attributable to exempted products and exempted services.

If the amount is not paid by 30th June, interest is payable @ 24% after 1st July [Rule 6(3A)(i) inserted w.e.f. 1-4-
2008].

5-9 Calculation of ‘Value’ of exempt goods or exempt services

“Value” for the purpose of rules 6(3) and 6(3A) shall have the same meaning assigned to it under section 67 of the
Finance Act, 1994 read with rules made thereunder or, as the case may be, the value determined under section 4
or 4A of the Central Excise Act, 1944 read with rules made thereunder [Explanation I to rule 6(3A)]
Thus, value is to be calculated as per provisions of Central Excise Act (in case of manufactured products) and
Finance Act, 1994 (in case of service tax).

In case of goods chargeable to specific rate of duty, value shall be determined under section 4. In case of
(partially)exempted services, value shall be gross amount charged for providing exempted services, without
abatement - para 3 CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.

5-10 Cenvat credit in case of export of services

If the services are exported, the Cenvat credit is not required to be reversed. Assessee can utilise credit for
payment of duty on other products or service tax on other services. If this is not possible, he can get refund [see
rule 5 of Cenvat Credit Rules].

Meaning of export of services – As per explanation to rule 5, ‘output services which are exported’ means any
output service exported in accordance with the Export of Services Rules, 2005.

5-11 Recovery of the ‘amount’

If assessee does not pay the ‘amount’ as provided in rule 6(3) or rule 6(3A), it can be recovered along
with interest under rule 14 of Cenvat Credit Rules, as if it is a credit wrongly taken – Explanation III to rule
6(3A) inserted w.e.f. 1-4-2008.

6 Issues involved in applying the formulae

Various issues are going to arise while calculating the credit to be reversed proportionately.

6-1 Rule 6(2) and 6(3) should be taken as complimentary and not mutually exclusive

The words used in rule 6(3) are ‘nothwithstanding anything contained is rule 6(1) and 6(2), the manufacturer of
goods or provider of output service, opting not to maintain separate accounts, shall follow either of the following
options as applicable to him’.

At first glance, it appears that rule 6(2) and 6(3) are mutually exclusive. However, this rule can be interpreted to
mean that rule 6(3) is applicable in respect of inputs and input services for which assesses opts not to maintain
separate accounts.

In my view, fair interpretation is that rule 6(3) should apply in cases of common inputs and common input services
where assessee is not in a position to maintain separate accounts.

In costing, there is concept of ‘allocation’ and ‘apportionment’. The costs which can be allocated directly to a
particular product should be so allocated, while costs which cannot be directly allocated to any particular
product/service, should be apportioned on a reasonable basis.

This principle can be applied here. The input goods/services which can be directly allocated to taxable
goods/services and exempt goods/services should be allocated under rule 6(2). Full credit should be allowed of
Cenvat credit allocable to taxable goods/services and no credit should be allowed for Cenvat credit allocable to
exempt goods/services.

The remaining input credit/input services should be apportioned between taxable goods/services and exempt
goods/services on the basis of formulae given in rule 6(3A). This should give best possible and most fair results.

6-2 Treatment of traded goods

A manufacturer and/or service provider may also be trading in goods. The trading may be in respect of
goods manufactured under his own brand name or other goods. The sale may be within India or outside.

For example, authorised service station of automobiles is also selling spare parts. A brand name owner
manufactures some goods and also gets similar goods manufactured from ancillary units.

Obviously, there will be many common input services. Now, traded goods are not ‘exempt goods’. It is
also not ‘service’, since you are not providing services to anyone else. Further, you cannot provide
service to yourself.

Including the entire value of turnover of traded goods into numerator (above line) will be highly unfair to
assessee since the services attributable to such traded goods will certainly not be proportional to value of
the traded goods, in cases where assessee is both manufacturer/service provider as well as trader.

As the formulae stand today, turnover of traded goods can neither be included in denominator (below the
line) nor the numerator (above the line). This would give higher Cenvat credit to assessee.

Para 5 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008 clarifies that an Input Service Distributor
(ISD) does not provide any service, and is like a trader’. Thus, this circular indirectly confirms that trader is
not a service provider.

  In my view, it would be fair to first allocate expenses which can be directly allocated to traded goods
(e.g. commission) and no credit should be taken.

In case of common input services, value added in traded goods (i.e. difference between sales realisation
and purchase price) should be deemed to be value of ‘exempt service’ to be added in numerator.

If no such provision is made in rules, there is strong case to argue that it is not includible in numerator as
well as denominator at all, since the traded goods are neither exempted goods nor exempted service
(rather it is not ‘service’ at all).

6-3 Cenvat credit in case of export of manufactured goods

As per rule 5 of Cenvat Credit Rules, if the final products are exported, the Cenvat credit is not required to be
reversed. Assessee can utilise credit for payment of duty on other products. If this is not possible, he can get
refund. The issue is where the value of exported goods will appear while making calculations as per rule 6(3A)?

Goods are cleared for export ‘without payment of duty’. They are not ‘exempt’ goods. Ministry of Law
Advice dated 29.10.1974 - confirmed and circulated vide CBE&C circular No 278/112/96-CX dated
11.12.1996, states as follows, ‘Under Central Excise, 'exemption' means exemption by notification under
section 5A of CEA [earlier rule 8]. Thus, goods exported under bond are not 'exempt' from duty. These
goods also cannot be termed as 'chargeable to Nil rate of duty', as in fact, the goods are dutiable’ - same
view in Reliance Industries Ltd. v. CCE 1999(112) ELT 653 (CEGAT) * India Poly Fibres Ltd. v. CCE
1999(111) ELT 48 (CEGAT) * Orissa Synthetics v. CCE 1999(111) ELT 111 (CEGAT) * Frigarifico Allana
v. CCE 2001(130) ELT 901 (CEGAT) * Shriram Rayons v. CCE 1999(107) ELT 26 (CEGAT) * Miltan
Polyplast v. CCE 2004 (166) ELT 122 (CESTAT) * CCE v. Omkar Textile Mills 2000(122) ELT 115
(CEGAT) * SH Kelkar v. CCE 1998(102) ELT 418 (CEGAT).

Thus, exported goods are not ‘exempt goods’. Hence, in my view, value of export of goods should be taken in
denominator i.e. below the line to give correct and fair results. If these are ignored or taken in numerator (above
the line), it will amount to reversal of Cenvat credit attributable to these goods, which certainly is illogical.

Supplies to SEZ are ‘exports’ - Supplies to SEZ are ‘exports’ as per section 2(m)(ii) of SEZ Act. Section
51 of SEZ Act provides that provisions of SEZ Act have overriding effect. Hence, irrespective of
provisions of rule 6(6) of Cenvat Credit Rules, supplies to SEZ unit or developer are to be treated as
‘exports’.

6-4 Cenvat credit in case of export of services

As per rule 5 of Cenvat Credit Rules, if the output services are exported, the Cenvat credit is not required to be
reversed. Assessee can utilise credit for payment of duty on other products or service tax on other services. If this
is not possible, he can get refund. As per explanation to rule 5, ‘output services which are exported’ means any
output service exported in accordance with the Export of Services Rules, 2005.

The issue is where the value of exported services will appear while making calculations as per rule 6(3A)?

As per rule 2(e) of Cenvat Credit Rules, service on which no tax is payable is also ‘exempt service’. Thus, exported
service is also exempt service. However, as per rule 5, Cenvat credit on exported service is not required to be
reversed.

Hence, applying principle of harmonious construction, export of services should be taken in denominator
i.e. below the line to give correct and fair results. If these are taken in numerator (above the line), it will
amount to reversal of Cenvat credit attributable to the exported services, which certainly is illogical.

Luckily, CBE&C vide para 6 of Circular No. 868/6/2008-CX dated 9-5-2008, has confirmed that export of
service without payment of service tax are not to be treated as exempted services.

6-5 Calculation of value of common inputs in case of exempted final products

The formulae as given in rule 6(3A) are only in respect of Cenvat credit attributable to (a) inputs used for
provision of exempted services and (b) input services used in or in relation to manufacture of exempted
goods or provision of exempted services.
There is no formula to calculate Cenvat credit attributable to value of inputs used in manufacture of
exempted final product, when inputs are common. In any case, consumables, fuel, dies, toolings etc. will
be ‘common inputs’ in most of the cases.

In absence of any formula, the only option with assessee is to calculate the same either on basis of input-
output ratio, or on the basis of formula similar to the one applicable for calculation of inputs used for
provision of exempted services.

In my view, the principle of allocation and apportionment as applied in costing should apply i.e. credit of
inputs directly allocable to exempt final products should be excluded fully and credit of inputs allocable
directly to taxable goods should be allocated fully.

In case of balance common inputs, the Cenvat credit to be reversed may be calculated on basis of
formulae given in rule 6(3A).

Certificate of Cost/Chartered Accountant - As per para 7 of CBE&C Circular No. 868/6/2008-CX dated
9-5-2008, calculation of Cenvat credit attributable to inputs used in relation to manufacture of exempted
final products shall be made on basis of stores/production records maintained by the manufacturer. A
certificate from Cost/Chartered Accountant giving details of quantity of inputs used in the manufacture of
exempted goods, value thereof and Cenvat credit taken on these inputs may be submitted at the end of
the year.

6-6 Supplies to EOU, SEZ etc.

Supplies from DTA to EOU are entitled to Cenvat credit of service tax paid – para 6.11(v) of FTP.

Rule 6(6) of Cenvat Credit Rules states that provisions of rules 6(1) to 6(4) shall not apply in case of
excisable goods removed to SEZ, EOU, EHTP, STP, UN agencies or for exports or removal of gold or
silver arising in manufacture of copper or zinc by smelting.

According to strict interpretation, this turnover shall not come either in denominator or in numerator. This
would be unfair. It will give absurd results, particularly when sales to SEZ, EOU etc. are large, as amount
to be reversed will be very heavy.

Further, supplies to SEZ are ‘exports’ as per section 2(m)(ii) of SEZ Act. Section 51 of SEZ Act provides
that provisions of SEZ Act have overriding effect. Hence, irrespective of provisions of rule 6(6) of Cenvat
Credit Rules, supplies to SEZ are to be treated as ‘exports’.

In my view, sales to SEZ, EOU etc. should appear in denominator (below the line), as per correct Vat
principles to give fair results.

6-7 Services specified in rule 6(5)

As per rule 6(5) of Cenvat Credit Rules, in case of specified 16 services, full Cenvat credit of input service
is available even if these services are partly used in manufacture of exempted final product/output
services. This rule has not been amended even if rule 6(3) of Cenvat Credit Rules has been recast w.e.f.
1-4-2008.

Cenvat credit in relation to these services shall not be taken into account for determination of amount
under rule 6(3A) - para 8 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.

Thus, the credit will be outside the calculations made as per rule 6(3A) and entire credit will be available,
without any reversal.

6-8 Service tax paid under reverse charge method

In cases where service tax is paid under reverse charge method (e.g. GTA services and sponsorship
services), what would be the treatment? As per amended rules, at least in case of GTA service, this
amount should be paid by GAR-7 challan and not by cash w.e.f. 1-3-2008. However, this is not ‘output
service’ as per amended rule 2(p).

In my view, this amount is ‘input service’ and will be ‘service tax paid’. It will neither appear in numerator
nor in denominator. It will be ‘Cenvat credit taken on input service’ and proportional reversal will be made.

The same principle should apply to other services also where tax is paid under ‘reverse charge’ method.
The reason is that all these are actually ‘input services’ of service receiver, even if he is liable to pay
service tax. (By the way, except in case of GTA service, legally there is no bar in making payment of
service tax on other services through Cenvat credit).

6-9 Abatement subject to condition that Cenvat should not be availed

In some cases, abatement from service tax is available subject to condition that Cenvat credit of input
services is not availed (e.g. construction services, mandap keeper services etc.). In case of some
manufactured products, full/partial exemption is available subject to condition that Cenvat credit is not
availed.

In such case, the fair interpretation is that these should be treated as ‘exempt services’ or ‘exempt goods’
in the formulae to arrive at fair results.

Value when abatement is available - Where abatement is available, ‘value’ will be gross amount
charged for providing exempted services, without abatement - para 3 CBE&C Circular No. 868/6/2008-CX
dated 9-5-2008.

6-10 Interest on loans - is it exempt service?

Service tax on interest on loan is not exempt, but ‘value’ is Nil as per rule 6(2)(iv) of Service Tax Valuation Rules.
Hence, in my view, ‘interest on loan’ is not ‘exempt service’ but taxable service with ‘Nil’ value.

6-11 Treatment of opening balance

Assessee always tries to utilise Cenvat credit first and then pay through PLA/GAR-7. However, despite
his efforts, some opening balance is possible particularly in initial stages of production/provision of
services.
It is well settled that Cenvat credit is indefeasible. Credit once validly taken cannot be denied in absence
of specific statutory provision (Even such statutory provision cannot be confiscators in nature).

Thus, assessee is entitled to credit of opening balance. Strictly legally, that credit has been earned and
hence provision of proportionate credit should not apply.

However, in case of service providers who were availing Cenvat credit under 20% restriction, the opening
balance pertains to the balance of credit after availing 20% credit. This credit pertains to credit on
exempted services.. Hence, it will not be correct to allow carry forward in such cases.

In my view, in case of service providers, if assessee opts to pay 8% ‘amount’ on exempt services, he
should be allowed to carry forward the balance, since this is really continuation of ‘20% scheme’ in
different format. Those who opt to go under proportionate reversal scheme, it will be unfair to revenue, if
the balance is allowed to be carried forward.

However, as the law stands today, such carry forward cannot be denied.

6-12 Distribution of Credit by Input Service Distributors

Rule 7 of Cenvat Credit Rule provides that ‘Input Service Distributor’ may distribute Cenvat Credit in
respect of service tax, among its manufacturing units or providing output service. The credit distributed
should not be more than the service tax paid. If an input service is attributable to service used in a unit
exclusively engaged in manufacture of exempted goods or providing exempted services, the credit of
such credit of service tax shall not be distributed.

These are the only restrictions on distribution of Cenvat credit by Input Service Distributor. No
proportional or pro-rata distribution of Cenvat credit is required. New rule 6 does not affect this provision.

Para 5 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008 clarifies that an Input Service Distributor
(ISD) does not provide any service, and is like a trader, the question of availing of option (i) or (ii) would
not arise.

Once this credit is distributed to any particular factory/service providing unit, that credit may be
apportioned between exempt goods/service and taxable goods/service on basis of formulae prescribed in
rule 6(3A).

6-12 Value when abatement is available for payment of service tax

In case of some services, partial abatement is available (e.g. 67% in case of construction services under
Notification No. 1/2006-ST). In such case, the ‘value’ continues to be the gross value. The ‘value’ is not
reduced due to the partial abatement. Hence, full value should be considered for calculations in the
formulae.

6-13 Assessee having multi-locations of factories and service stations

The problems will multiply exponentially in case of manufacturer having multiple factories and/or service provider
providing service from multiple locations.
In my view, the principles discussed above should mutadis mutandis apply here also.

6-14 Conclusion

The aforesaid problems are just a tip of iceberg. I am sure that once one actually sits to make the
calculations, many more doubts will come up. In many cases, a reasonable conclusion can be arrived at
on the basis of Vat principles and principles of accounting and costing principles. However, unless there
is specific provision in Rules to apply those principles, there will always be disputes.

Principally, rule 6(3) is correct, but would need lot of refinements to ensure its proper implementation