GUEST COLUMN
[Authored by Shri Bimal Jain, FCA, FCS, LLB, B.Com (Hons.)]
In the Union Budget, 2015 presented by the Hon’ble Finance Minister Shri Arun Jaitley on February 28, 2015, Saturday, numerous changes in the Indirect taxes, have been introduced to combat/ surpass the challenges encountered in the way of progress of continued growth and to pave way for smooth implementation of Goods and Services tax (“GST”).
We are discussing here the changes made in the Cenvat Credit Rules, 2004 (“the Credit Rules”) under the Union Budget, 2015 viz-a-viz existing/ old provisions for easy digest as under:
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Changes in the Credit Rules vide Notification No. 6/2015-Central Excise (N.T) dated March 1, 2015 |
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Changes in Rule 4 of the Credit Rules: Conditions for allowing Cenvat credit |
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W.e.f: March 1, 2015 Ø A: Rule 4(1) and Rule 4(2)(a) of the Credit Rules amended –Availability of Cenvat credit on Inputs/ Capital Goods directly despatched to job worker: Rule 4(1): Cenvat credit of Inputs can be taken immediately on receipt of Inputs in the premises of the job worker, in case where the Inputs are sent directly to the job worker’s premises on the direction of the manufacturer or the provider of output service. Hitherto, Cenvat credit was available only on receipt of Inputs in the factory of the manufacturer or in the premises of the provider of output service. Ø Rule 4(2)(a): Parallel amendment has also been incorporated in Rule 4(2)(a) of the Credit Rules dealing with conditions for availing Cenvat credit on Capital Goods. Accordingly, effective from March 1, 2015, Cenvat credit on Capital Goods can be taken immediately on receipt of the Capital Goods in the premises of the job worker, in case where the Capital Goods are sent directly to the job worker’s premises on the direction of the manufacturer or the provider of output service. Hitherto, Cenvat credit was available only on receipt of Capital Goods in the factory of the manufacturer or in the premises of the provider of output service or outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory.
Therefore, through the stated amendment, the manufacturer or the output service provider would be able to dispatch the Inputs/ Capital goods directly to the job workers’ premises and avail Cenvat credit, thereby removing the blockage in Cenvat credit when Inputs/ Capital goods are directly sent to job worker’s premises.
B: Rule 4(5)(a) of the Credit Rules substituted – Provisions pertaining to Cenvat credit in case of Inputs/ Capital Goods sent to job workers: Rule 4(5)(a)(i): Cenvat credit on Inputs sent to job worker Ø Availment of Cenvat credit would be permissible even if Inputs as such or after being partially possessed are sent to a job worker and from there subsequently sent to another job worker and likewise, for further processing, testing, repairing, re-conditioning or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose provided that the Inputs or the products produced therefrom are received back by the manufacturer or the provider of output service within 180 days of being sent. Ø Cenvat credit of Inputs can be taken immediately where the Inputs are directly sent to the job worker’s premises without their being first brought to the premises of the manufacturer or the provider of output service. Here the time limit of 180 days shall be counted from the date of receipt of the Inputs by the job worker. Rule 4(5)(a)(ii): Cenvat credit on Capital Goods sent to job worker Ø Time limit for receipt of Capital Goods from job worker: Availment of Cenvat credit would be permissible even if Capital Goods as such are sent to a job worker, for further processing, testing, repairing, re-conditioning or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose provided that the Capital Goods are received back by the manufacturer or the provider of output service within 2 years of being sent. Ø Cenvat credit of Capital Goods sent directly to job worker’s premises: Cenvat credit of Capital Goods can be taken immediately where the Capital Goods are directly sent to the job worker’s premises without their being first brought to the premises of the manufacturer or the provider of output service. Here the time limit of 2 years shall be counted from the date of receipt of the Capital Goods by the job worker. Rule 4(5)(a)(iii): Reversal of Cenvat credit Ø If the Inputs/ Capital Goods are not received back within the above stipulated time, the manufacturer or the provider of output service shall pay an amount equivalent to the Cenvat credit attributable to the Inputs/ Capital Goods, as the case may be, by debiting the Cenvat credit or otherwise. However, Cenvat credit can be taken again on receipt of such Inputs/ Capital Goods in the factory or in the premises of the provider of output service.
C: Third proviso to Rule 4(1) and Sixth Proviso to Rule 4(7) of the Credit Rules amended – Enhancement of time limit for availing Cenvat credit on Inputs/ Input Services from 6 months to 1 year Ø Till September 1, 2014, there was no time limit prescribed under the Credit Rules for availment of Cenvat credit. However, effective from September 1, 2014, the said liberty in respect of availment of Cenvat credit on Inputs/ Input Services was withdrawn vide Notification No. 21/2014-CE dated July 11, 2014 (Applicable w.e.f September 1, 2014), amending Rule 4(1) [for Inputs] and Rule 4(7) [for Input services] of the Credit Rules in order to fix a time limit of 6 months from the date of issue of any of the documents specified in Rule 9(1) thereof, for availment of the Cenvat credit. Considering the hue and cry created in the Industry, the Union Budget, 2015 has enhanced the stated time limit (effective from March 1, 2015) for availing Cenvat credit on Inputs and Input services to 1 year (as against 6 months earlier) from the date of issue of any of the documents specified in Rule 9(1) of the Credit Rules.
D: Applicability of the Explanations I and II of Rule 4(7) of the Credit Rules extended to Rule 4 thereof Ø In the Explanations I and II, for the words “sub-rule”, the word “rule” has been substituted. Thereby, the amount mentioned in Rule 4 of the Credit Rules and not just Rule 4(7) thereof, shall be paid by the manufacturer of goods or the provider of output service by debiting the Cenvat credit or otherwise, on or before the 5th day of the following month except for the month of March, when such payment shall be made on or before the 31stMarch. Further, provisions of Rule 14 of the Credit Rules will be invoked for recovery of the Cenvat credit wrongly taken in case the manufacturer of goods or the provider of output service fails to pay the amount payable under Rule 4 thereof.
W.e.f: April 1, 2015 A: Rule 4(7) amended – Conditions for availment of Cenvat credit on Input services under Partial Reverse Charge: Ø Cenvat credit in respect of Partial Reverse Charge allowed immediately after the payment of the Service tax by Service Recipient: Proviso to Rule 4(7) of the Credit Rules has been amended to provide that effective from April 1, 2015, Cenvat credit in respect of Partial Reverse Charge can be availed immediately after payment of Service tax by the Service recipient and there is no requirement of payment of the value of Input services as indicated in invoice, bill or, as the case may be, challan referred to in Rule 9 of the Credit Rules. Hitherto, in case of Partial Reverse Charge, the Cenvat credit of Input services were allowed on or after the date on which the payment of the amount of Service tax as well as value of Input services were made. Here, it would not be out of place to mention that vide Notification No. 21/2014-CE (NT), dated July 11, 2014 (Applicable w.e.f September 1, 2014) in case of Service tax paid under Full Reverse Charge, the condition of payment of invoice value to the service provider for availing Cenvat credit of Input services was withdrawn. |
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Changes in Rule 5 of the Credit Rules: Refund of Cenvat credit on Inputs/ Input Services used for Export of Goods |
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Definition of Exports goods inserted w.e.f. March 1, 2015 Ø The term “Exports goods” has been defined to include within its ambit any goods which are to be taken out of India to a place outside India. Hitherto, in terms of Rule 5 of the Credit Rules, the manufacturer who clears a final product or an intermediate product for export without payment of duty under bond or letter of undertaking, or a service provider who provides an output service which is exported without payment of Service tax, was allowed refund of Cenvat credit as determined by the formula, procedure, conditions etc. specified therein. Accordingly, intention of stated change warrants that Deemed exports benefits would not qualify for refund under Rule 5 of the Credit Rules (Elaborated in Article - Discussion Forum) |
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Changes in Rule 6 of the Credit Rules: Obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services |
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Scope of reversal of Cenvat credit under Rule 6 of the Credit Rules extended to non-excisable goods w.e.f. March 1, 2015: Ø Explanation-1 has been inserted in Rule 6(1) of the Credit Rules, which provides that, for the purpose of this Rule, exempted goods or final products as defined in Rule 2(d) and Rule 2(h) thereof shall include non-excisable goods cleared for a consideration from the factory. Therefore, requirement of Cenvat credit reversal under Rule 6 of the Credit Rules in respect of clearance of exempted goods has been extended to clearance of non-excisable goods also. Further Explanation – 2 provides that Value of such non-excisable goods shall be the invoice value and where such invoice value is not available, such value shall be determined by using reasonable means consistent with the principles of valuation contained in the Central Excise Act, 1944 (“the Excise Act”) and the Rules made thereunder. |
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Proviso to Rule 9(4) of the Credit Rules |
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Provisions of Rule 9(4) of the Credit Rules applicable to First Stage Dealer or Second Stage Dealer shall also apply mutatis mutandis to importer who issues an invoice on which Cenvat credit can be taken [W.e.f. March 1, 2015]: Ø Rule 9(4) of the Credit Rules provides as under: “(4) The CENVAT credit in respect of input or capital goods purchased from a first stage dealer or second stage dealer shall be allowed only if such first stage dealer or second stage dealer, as the case may be, has maintained records indicating the fact that the input or capital goods was supplied from the stock on which duty was paid by the producer of such input or capital goods and only an amount of such duty on pro rata basis has been indicated in the invoice issued by him” |
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Provision of Rule 12AAA of the Credit Rules Amended: Power to impose restrictions in certain types of cases |
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Provision of Rule 12AAA of the Credit Rules extended in case of registered importer: Ø In order to prevent the misuse of the provisions of the Cenvat credit, power of the Central Governmenthas been extended to impose restrictions on registered importer apart from the following existing categories: · Manufacturer; · First stage and second stage dealer; · Provider of taxable service; · Exporter The nature of restrictions may include restrictions on utilization of Cenvat credit and suspension of registration. |
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Rule 14 of the Credit Rules substituted to segregate Recovery of Cenvat credit wrongly availed but not utilized from the cases of Cenvat credit wrongly availed and utilized [W.e.f. March 1, 2015] |
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Rule 14(1)(i): Cenvat credit availed wrongly but NOT UTILIZED – recoverable under Section 11A of the Excise Act or Section 73 of the Finance Act, 1994 (“the Finance Act”) Ø Where the Cenvat credit has been availed wrongly but not utilised, the same shall be recovered from the manufacturer or the service provider, as the case may be, and the provisions of Section 11A of the Excise Act (Recovery of duties not levied or not paid or short-levied or short-paid or erroneously refunded) or Section 73 of the Finance Act (Recovery of Service tax not levied or paid or short-levied or short-paid or erroneously refunded), as the case may be, shall apply mutatis mutandis for effecting such recoveries; Rule 14(1)(ii): Cenvat credit availed AND UTILISED wrongly – recoverable along with interest under Section 11A/ 11AA of the Excise Act or Sections 73/ 75 of the Finance Act Ø Where the Cenvat credit has been availed and utilised wrongly or has been erroneously refunded, the same shall be recovered along with interest from the manufacturer or the service provider of output service in terms of the provisions of Sections 11A and Section 11AA (Interest on delayed payment of duty) of the Excise Act or Sections 73 and 75 (Interest on delayed payment of service tax) of the Finance Act, as the case may be, shall apply mutatis mutandis for effecting such recoveries. Manner of determining utilization of Cenvat credit Ø For the purposes of Rule 14(1) of the Credit Rules, all credits taken during a month shall be deemed to have been taken on the last day of the month and the utilisation thereof shall be deemed to have occurred in the following manner, namely: - i. Opening balance of the month has been utilised first; ii. Cenvat credit admissible in terms of the Credit Rules taken during the month has been utilised next; iii. Cenvat credit inadmissible in terms of the Credit Rules taken during the month has been utilised thereafter. |
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Rule 15 of the Credit Rules substituted: Confiscation and Penalty [With effect from the date on which the Finance Bill, 2015 receives the assent of the President] |
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Penalty provisions amended in terms of Section 11AC of the Excise Act or Section 78 of the Finance Act
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DISCUSSION FORUM – ARTICLES
Till September 1, 2014, there was no time limit prescribed under the Credit Rules for availment of Cenvat credit. Various Courts have held that in the absence of any time limit prescribed under the Credit Rules, Cenvat credit can be taken at any time even in some cases, Assessees have been allowed to avail Cenvat credit even after year(s).
However, effective from September 1, 2014, the said liberty in respect of availment of Cenvat credit has been withdrawn. The Central Board of Excise and Customs (“the CBEC” or “the Board”) vide Notification No. 21 (Applicable w.e.f September 1, 2014), amended Rule 4(1) [for Inputs] and Rule 4(7) [for Input services] of the Credit Rules in order to fix a time limit of 6 months from the date of issue of any of the documents specified in Rule 9(1) thereof, for availment of the Cenvat credit.
In this regard, following are the eligible documents specified under Rule 9(1) of the Credit Rules:
· Invoice issued by a manufacturer, importer, first stage dealer;
· Supplementary invoice by supplier-manufacturer or service provider, except where such payment was on account of fraud, suppression of facts etc.
· Bill of entry;
· A certificate issued by an appraiser of customs in respect of goods imported through a Foreign post office;
· A challan evidencing payment of Service tax, by the service recipient as the person liable to pay Service tax;
· An invoice, a bill or challan issued by a provider of input service on or after the September 10, 2004;
· An invoice, bill or challan issued by an Input Service Distributor under Rule 4A of the Service Tax Rules.
After the said insertion under Rule 4(1) and Rule 4(7) of the Credit Rules, the same became a debatable issue in the Trade, raising concerns about applicability of time frame of 6 months in various situations such as:
· Taking re-credit in terms of the Credit Rules;
· Invoices issued prior to September 1, 2014;
· Payment of Service tax paid by service recipient under partial reverse charge etc.
Thereafter, on November 19, 2014, the CBEC vide Circular No. 990/14/2014-CX-8 dated November 19, 2014 (“the Circular”) has clarified that the purpose of the amendment made by Notification No. 21 is to ensure that after the issuance of a document under Rule 9(1) of the Credit Rules, Cenvat credit is taken for the first time within 6 months of the issue of the document. Once this condition is met, the limitation has no further application.
Although the Circular on one hand clarifies that purpose of the amendment made by Notification No. 21 is to ensure that after the issuance of a document under Rule 9(1) of the Credit Rules, Cenvat credit is taken for the first time within six months of the issue of the document. Once this condition is met, the limitation has no further application.
However, it is pertinent to note that the Circular in later part further provides that “It is, therefore, clarified that in each of the three situations described above pertaining to Rule 4(7), Rule 3(5B) or Rule 4(5)(a) of CCR, 2004, the limitation of six months would apply when the credit is taken for the first time on an eligible document”
Thus, even though the CBEC has clarified non-applicability of six months’ time limit while availing re-credit in terms of the Credit Rules but, there are certain other issues still existing in this regard, which were left unexplained by the Board.
Now, with extension of time limit for availment of Cenvat credit from 6 months to 1 year (supra) w.e.f 1st March, 2015, the same issue may still crop up again as to whether the Assessee would be eligible avail Cenvat credit on Invoices issued prior to March 1, 2015 for which time period of 6 months expired but 1 year period is open on March 1, 2015.
Conclusion: The Board is required to clarify the matter at the earliest keeping in mind the very purpose of introduction of the Cenvat credit scheme i.e. not to collect duty on duty and avoid cascading effect.
Over the years, Rule 14 of the Credit Rules has always been the matter of concern/ litigation for both the Revenue and the Assessee. Even the Courts have taken divergent views while interpreting the provisions of Rule 14 of the Credit Rules. Before we proceed to understand the changes made in Rule 14 of the Credit Rules vide the Union Budget, 2015, it is imperative here to understand the erstwhile provisions therein which had been a tale of never ending litigations.
Rule 14 of the Credit Rules as it existed prior to April 1, 2012: Taken OR Utilized
Prior to April 1, 2012, Rule 14 of the Credit Rules provided for recovery of Cenvat credit taken or utilized wrongly or had been erroneously refunded along with interest from the manufacturer or the provider of output service. Erstwhile Rule 14 of the Credit Rules is reproduced hereunder:
“14. Recovery of CENVAT credit wrongly taken or erroneously refunded.-
Where the CENVAT credit has been taken or utilized wrongly or has been erroneously refunded, the same along with interest shall be recovered from the manufacturer or the provider of the output service and the provisions of sections 11A and 11AB of the Excise Act or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.”
As observed from above, the use of the word “OR” in erstwhile Rule 14 of the Credit Rules was constantly disputed as regards its interpretation on account of chargeability of interest in case the Assessee has taken but not utilized the Cenvat credit and if at all, the interest is leviable at the starting point to reckon the same.
The Hon’ble Supreme Court in the case of Union of India Vs. Ind-Swift Laboratories Ltd. 2011-VIL-04-SC-CE has held that the word "or" used in Rule 14 of the Credit Rules should not be interpreted as "and" and thus, interest would be payable even if the Cenvat credit is wrongly taken but the same is not utilized.
Rule 14 of the Credit Rules w.e.f April 1, 2012 till February 28, 2015: Taken AND Utilized
Above discussed lack of clarity paved way to enormous litigations, which was at last addressed by the amendment made in erstwhile Rule 14 of the Credit Rules in the year 2012 vide Notification No. 18/2012-CE(NT) dated March 17, 2012 (Effective from April 1, 2012). The relevant extract of Rule 14 of the Credit Rules since April 1, 2012 is reproduced hereunder:
“Recovery of CENVAT credit wrongly taken or erroneously refunded.
14. Where the CENVAT credit has been taken and utilized wrongly or has been erroneously refunded, the same along with interest shall be recovered from the manufacturer or the provider of the output service and the provisions of sections 11A and 11AA of the Excise Act or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.”
Inferred from above, Rule 14 since April 1, 2012 was in favour of Assessee as it explicitly conveyed that interest would not be charged in cases where Cenvat credit has been taken but not utilized. Further, interest was chargeable in case of Cenvat credit taken and utilized but, again the question of starting point to reckon the interest amount was still ambiguous.
Rule 14 of the Credit Rules post amendment vide the Union Budget, 2015:
Effective from March 1, 2015, the Union Budget, 2015 has substituted Rule 14 of the Credit Rules to provide separate treatment of recovery of Cenvat credit wrongly availed when utilized and when not utilized as under:
“14. Recovery of CENVAT credit wrongly taken or erroneously refunded. -
(1) (i) Where the CENVAT credit has been taken wrongly but not utilised, the same shall be recovered from the manufacturer or the provider of output service, as the case may be, and the provisions of sections 11A of the Excise Act or section 73 of the Finance Act, 1994 (32 of 1994), as the case may be, shall apply mutatis mutandis for effecting such recoveries;
(ii) Where the CENVAT credit has been taken and utilised wrongly or has been erroneously refunded, the same shall be recovered along with interest from the manufacturer or the provider of output service, as the case may be, and the provisions of sections 11A and 11AA of the Excise Actor sections 73 and 75 of the Finance Act, 1994, as the case may be, shall apply mutatis mutandis for effecting such recoveries.
(2) For the purposes of sub-rule (1), all credits taken during a month shall be deemed to have been taken on the last day of the month and the utilisation thereof shall be deemed to have occurred in the following manner, namely: -
(i) the opening balance of the month has been utilised first;
(ii) credit admissible in terms of these rules taken during the month has been utilised next;
(iii) credit inadmissible in terms of these rules taken during the month has been utilized thereafter.”
As observed from above, in terms of substituted Rule 14 of the Credit Rules, if the Assessee has wrongly taken Cenvat credit but has not utilized the same, then interest is not leviable but the Department can recover from the amount of tax. However, in case of Cenvat credit wrongly taken and utilized or where the Cenvat credit has been erroneously refunded to the Assessee then such tax along with interest is recoverable from the Assessee.
To the extent of afore stated provisions, substituted Rule 14 of the Credit Rules seems to remove the mist surrounding the aspect of interest. But Rule 14 of the Credit Rules does not end here. Sub-Rule (2) of substituted Rule 14 of the Credit Rules further provides that all credits taken during a month shall be deemed to have been taken on the last day of the month and a deeming procedure shall be followed for determining utilization of Cenvat credit, which is as under:
(i) The opening balance of the Cenvat credit in beginning of month has been utilized first i.e. ‘first in first out method (FIFO)’ has been followed.
(ii) Thereafter the Cenvat credit which was admissible during the month has been utilized next.
(iii) Lastly, the Cenvat credit which was inadmissible during the month has been utilized.
Apparently, with the introduction of Rule 14(2) of the Credit Rules, the recourse adopted by the Assessee for avoiding payment of interest by stating that since, balance of Cenvat credit in the books of Assessee was more than the amount of the disputed Cenvat credit, hence the disputed amount of Cenvat credit availed has not been utilized, has now come to an end.
Albeit, substituted Rule 14 of the Credit Rules appears to have redressed the ambiguities and apprehensions surrounding erstwhile Rule 14 thereof, yet such an the endeavor is futile to the extent it will crop certain another issues in future warranting clarification. Some of them are:
· Different interpretations of the procedure for determining utilization of Cenvat credit provided under newly inserted Rule 14(2) of the Credit Rules
One way to read the provisions of the Rule 14(2) of the Credit Rules is that in case the amount of inadmissible Cenvat credit is not utilized in a particular month, then such inadmissible Cenvat will become a part of the opening balance of Cenvat credit of the Next month. In Next month, since the opening balance of Cenvat credit is deemed to be utilized first, the inadmissible amount of Cenvat credit which forms part of the opening balance can be said to have utilized first before utilization of the admissible Cenvat credit which was availed during the subsequent month. Consequently, even if such amount of the inadmissible Cenvat credit is less than the closing balance in the subsequent month, the same will become part of opening balance and therefore will result in interest liability in the subsequent month when the said opening balance is so utilized.
On the other hand, another view which can be adopted to interpret Rule 14(2) of the Credit Rules is that the opening balance of Cenvat credit should only include the admissible amount of Cenvat credit and the inadmissible amount of Cenvat credit should be recorded separately. In such a scenario, while computing the amount of Cenvat credit utilized in a particular month, the total admissible amount of Cenvat credit available with the Assessee will have to be taken into account first and the inadmissible amount of Cenvat credit will be said to be utilized only after the admissible Cenvat credit is exhausted. In such a case, an Assessee will become liable to pay interest only in those cases where the balance of admissible Cenvat credit available with the Assessee is less than the Cenvat credit utilized in a month.
· Time limit of 1 year for availing Cenvat credit – another stumbling block
In terms of amended Rule 4(7) of the Credit Rules with effect from March 1, 2015, the time limit for availment of Cenvat credit on Inputs and Input services has been increased from 6 months to 1 year. Therefore, even where the eligibility of Cenvat credit on Inputs and Input services is under dispute, Cenvat credit has to be availed within a period of 1 year from the date of the relevant document under Rule 9 thereof. Now substituted Rule 14 of the credit Rules read with Rule 4(7) thereof will emerge as stumbling block. If Cenvat credit amount is taken within 1 year then in terms of Rule 14(2) of the Credit Rules, the disputable amount of Cenvat credit availed by the Assessee will become a part of the opening balance of the Cenvat credit in the next month and may be said to be utilized by it in the month subsequent to the month of availment of Cenvat credit, resulting in payment of tax along with interest.
· Congruence required under Rule 15 of the Credit Rules - Still uses the words taken OR utilized
Though this year Budget has segregated treatment for recovery of Cenvat credit wrongly availed when utilized and when not utilized, penalty provisions under Rule 15 of the Credit Rules needs to be amended in congruence with substituted Rule 14 thereof. Rule 15 of the Credit Rules still uses the phrase “taken or utilized” which means that penalty is still imposable in the case where the Cenvat credit is wrongly taken but not utilized.
Conclusion: As observed from above, the substituted Rule 14 of the Credit Rules demands clarification from the Board for its successful implementation.
Vide Notification No. 6/2015-CE(NT) dated March 1, 2015, Explanation-I to Rule 6(1) of the Credit Rules have been inserted to state that w.e.f March 1, 2015, for the purpose of this Rule, exempted goods and final products shall include non-excisable goods cleared for a consideration from the factory:
“Explanation 1. - For the purposes of this rule, exempted goods or final products as defined in clauses (d) and (h) of rule 2 shall include non-excisable goods cleared for a consideration from the factory.
Further, by virtue of the Explanation-2 inserted in Rule 6(1) of the Credit Rules, the value of non-excisable goods shall be the invoice value and where such invoice value is not available, the value of non-excisable goods shall be determined by using reasonable means consistent with the principles of valuation contained in the Excise Act and the Rules made thereunder:
“Explanation 2. - Value of non-excisable goods for the purposes of this rule, shall be the invoice value and where such invoice value is not available, such value shall be determined by using reasonable means consistent with the principles of valuation contained in the Excise Act and the rules made thereunder."
It is clear from the above Explanations that exempted goods and final products now include non-excisable goods also for the purpose of Rule 6 of the Credit Rules, which provides the mechanism for availment of Cenvat credit by a manufacturer of dutiable and exempted goods and providers of taxable and exempted services. In such cases, the manufacturer/ service provider has following four options, effective from April 1, 2011:
Option I: Maintain separate inventory and accounts of Inputs and Input services – Rule 6(2)
Option II: Pay prescribed ‘amount’ on value of exempted goods or exempted services if separate inventory and records not maintained – Rule 6(3)(i)
Option III: Proportionate reversal of Cenvat credit – Rule 6(3)(ii)
Option IV: Maintain Separate inventory and accounts of Inputs but common records of Input services – Rule 6(3)(iii)
The first point to be noted here is that the Explanation is applicable only for the purpose of Rule 6 and there is no amendment in the definition of 'exempted goods' or in the definition of 'final product' under the Credit Rules. Therefore, Rule 6 is now applicable for the manufacturer of dutiable goods and non-excisable goods also. Moreover, it is apposite to highlight that the achievement of the objective of insertion of the aforesaid Explanation, which was applicable for the provision relating to reversal for Cenvat credit in Rule 6 of the Credit Rules to non-excisable goods apart from existing applicability to exempted goods and services is at stake in the plight on certain issues, for which clarification is much needed:
· Whether reversal of Cenvat credit also requited for by-products and wastes: By-products and wastes arising in the manufacture due to the technological necessity are not treated as finished goods for the purpose of erstwhile Rule 57CC of erstwhile Central Excise Rules, 1944/ Rule 6 of the Credit Rules as held by the Hon’ble Supreme Court in case of Union of India Vs. Hindustan Zinc Ltd. 2014-VIL-11-SC-CE. Therefore, prior to March 1, 2015, Rule 6 of the Credit Rules was not applicable in case of by-products and wastes. But, now in view of Explanation-I inserted in Rule 6(1) of the Credit Rules, question may arise in this regard as to whether such by-products and waste arising out of the technological necessity shall be treated as non-excisable goods for the purpose of Rule 6 of Credit Rules.
· Fate of goods mentioned in CETA but without any rate of duty: It is imperative to state here that the term ‘non-excisable goods’ is not defined under the Excise Act. However, the definition of ‘excisable goods’ has been provided under Section 2(d) of the Excise Act to mean goods specified in first and second schedule to the Central Excise Tariff Act, 1985 ("CETA") as being subject to a duty of Excise and includes salt.
Therefore goods which do not have any rate specified in the CETA are treated as non-excisable goods. E.g., electricity which is mentioned in the CETA but without any rate of duty, the same is considered to be non-excisable. Now, the question may arise on the fate of treatment of such goods.
· Whether reversal would be required in case of removal of used goods as scrap: It is a common practice of removing worn out goods, used furniture etc., as scrap from the factory along with dutiable goods. Now, again the issue may crop up as to whether such removal of scrap will also trigger reversal provisions under Rule 6 of the Credit Rules.
· Whether the Explanations also applicable for past period: Though the Insertion of Explanations should be applicable w.e.f March 1, 2015 but still calls for clarification regarding applicability of Rule 6 of the Credit Rules to non-excisable goods manufactured for the past periods also.
· Meaning of the term ‘Consideration’: Firstly, Explanation-I inserted in Rule 6(1) of the Credit Rules specifically includes “non-excisable goods cleared for a consideration”, implying that, if the non-excisable goods are cleared without any consideration, or not cleared from the factory, the same will result in redundancy of application of the Explanation so inserted.
Further, the word ‘Consideration' has not been defined under the Credit Rules or in the Excise Act. In such a scenario, the same has been left open to multiple views and interpretations. Further, it is not made clear that whether the consideration will cover in its ambit only monetary consideration or both monetary and non-monetary consideration.
· Valuation related issues: Value of non-excisable goods shall be the invoice value in terms of Explanation-2 inserted to Rule 6(1) of the Credit Rules. But, there are chances that the Department may litigate the same on the grounds of invoice value being influenced by related party, lower than market value charged etc.
· Non-excisable goods equated with exempted goods, but only for the purpose of Rule 6 of the Credit Rules: The present Explanations inserted in Rule 6 of the Credit Rules very clearly states to be “for the purpose of this Rule”. In such a case, one may confront as to whether Rule 7 thereof is also to follow same provisions or an Input Service Distributor may ignore such provisions while distribution of Cenvat credit.
· Whether Total Turnover under Rule 5 of the Credit Rules would also include non-excisable goods: Again, with insertion of Explanations specifically for the purpose of Rule 6 of the Credit Rules, poses a question of its applicability while determining Total turnover under Rule 5 of the Credit Rules.
Conclusion: The clear clarification of the terms used and corresponding valuation in the stated Explanations to Rule 6(1) of the Credit Rules is very much required from the Board so as not to create another area of future litigation.
The Hon’ble Prime Minister, in order to encourage Companies to manufacture their products in India has launched initiative named ‘Make in India’ on September 25, 2014. This had not only helped Indian manufacturers to enhance their capital base as there are proposed relaxations in the policy of Foreign Direct Investment but also produce their products in India by benchmarking the International Standards.
The Government issued a Notification No. 114 (RE-2013)/2009-2014 dated March 12, 2015 which is one more step forward in improving 'Ease of Doing Business' by reducing the compulsory documents required for import and export of goods. Further as per CBEC Circular No. 1/2015 – Customs dated January 12, 2015, the Customs have also merged the 'Commercial Invoice' with the 'Packing List' and provided acceptance to 'Commercial Invoice cum Packing List' that combines the required details of both the documents.
On the other hand, in the Union Budget, 2015 vide Notification No. 06/2015-C.E. (N.T.) dated March 1, 2015 (Effective from March 1, 2015), Export goods have been defined by inserting a Clause (1A) in Explanation 1 to Rule 5 of the Credit Rules, which is reproduced as under:
"(1A) "export goods" means any goods which are to be taken out of India to a place outside India".
Similarly Notification No.8/2015–C.E.(N.T.) dated March 1, 2015 has substituted the existing explanation to Rule 18 of the Central Excise Rules, 2002 (“the Excise Rules”) to narrow down the meaning of the term ‘Export’ in the following manner:
“Explanation. – For the purposes of this rule, “export”, with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India and includes shipment of goods as provision or stores for use on board a ship proceeding to a foreign port or supplied to a foreign going aircraft.”.
Hitherto, in terms of Rule 5 of the Credit Rules, the manufacturer who clears a final product or an intermediate product for export without payment of duty under bond or letter of undertaking, or a service provider who provides an output service which is exported without payment of Service tax, was allowed refund of Cenvat credit as determined by the formula, procedure, conditions etc. specified therein.
Furthermore, in terms of Rule 18 of the Excise Rules, in case of export, the Central Government may grant rebate of duty paid on such excisable goods or duty paid on materials used in the manufacturing or processing of such goods subject to certain conditions or limitations, if any, and fulfilment of certain procedure, as may be specified.
Hence, with the insertion of the words “taking goods out of India to a place outside India”, the Government has made it clear that the actual export will only be given benefit under the Excise Rules & the Credit Rules and not the “Deemed export”, which is defined under Para 8.1 of Chapter 8 of the Foreign Trade Policy 2009-14 (“the FTP”) as under:
“Deemed Exports refer to those transactions in which goods supplied do not leave country, and payment for such supplies is received either in Indian rupees or in free foreign exchange”
Accordingly, with the stated amendment, the issue that arise for consideration is that how the Assessee who supplies goods to Export Oriented Units (“EOUs”)/ Special Economic Zones (“SEZs”), will get refund of the duties suffered by him.
Our Comments: It is worth observing that recently, the Hon’ble High Court of Gujarat in the case of E I Dupont India Pvt. Ltd. Vs. Union of India 2013-VIL-10-GUJ-CE has confirmed the fact that even Deemed exports are eligible for refund under Rule 5 of the Credit Rules. In pursuant to the above decision, the Board also issued an Instruction F. No. 201/01/2014-CX.6 dated June 26, 2014 wherein it has been strictly instructed to follow the judicial discipline by the adjudicating authorities when the issue is covered by decisions of High Courts or Supreme Court. This instruction also clearly states that if there exists any precedent judgement which has been decided against the revenue then the officers shall be bound by it. Moreover, even if the appeal has been filed against the precedent judgment by the revenue department, still the same is required to be followed for deciding the issue in case of other assessees in view of the decision given by the Hon’ble Supreme Court in the case of Union of India Vs. Kamalakshi Corporation Ltd. 1991-VIL-01-SC-CE
However, with the stated amendments in Rule 5 of the Credit Rules read with Rule 18 of the Excise Rules, fate of refunds in case of Deemed exports has raised concerns among the Trade. If Deemed exports are excluded from the purview of Rule 5 of the Credit Rules and Rule 18 of the Excise Rules, then in such a scenario, taxes and duties paid on Inputs though available as credit would add to the cost of products supplied to EOUs/ SEZs as they will remain unutilised in case substantial part of the clearances are to EOUs/ SEZs. This will ultimately result in export of taxes and duties which has never been the intention of the Government. Thus, in turn it will hamper the Government’s broad vision of making all manufactures self-reliant and create India’s Product image in the global market. Hence, achievement of mission ‘Make in India’ is at stake.
[The Author is Chairman of Indirect Tax Committee of PHD Chamber of Commerce, Member of
Indirect Tax Committee of ASSOCHAM and FICCI & Member of GST Committee of ICAI/ ICSI]
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