MODVAT ON CAPITAL GOODS & INPUTS – CERTAIN PROBLEMS

By

K.Vijay Kumar, M.A.,B.Ed., B.L.,

SUPERINTENDENT OF CENTRAL EXCISE

 

 

    While introducing Modvat on Capital Goods, the Government did not include or add

Capital Goods to the list of inputs, but brought in a new Chapter V-AAAA and added new Rules 57Q to 57U to the Central Excise Rules, 1944. This would or should have made it very clear to all there are separate sets of rules for credit on inputs and credit on capital goods, which means that what applied to inputs need not necessarily apply to Capital Goods. Let us compare and contrast the input rules and the Capital Goods rules.

 

        Rule 57A INPUTS                Rule 57Q CAPITAL GOODS

         Applicability                        Applicability

 

1. Credit on inputs used in or in relation to     Credit on Capital Good used by the
   

   the manufacture of the final products.     Manufacturer in his factory.
   

 

1. Credit to be used for payment of         Credit to be used for Excise Duty on the
   

   Excise duty on the final products         final products or on the Capital Goods
   

                            permitted to be cleared under rule 57S
   

 

1. Credit can be taken immediately after Credit to be taken only after Capital
   

   after obtaining the dated acknowledge-     Goods are installed.
   

   ment of the declaration under Rule.57G.
   

 

 

Here it would be of interest to note that Rule 57A does not provide for the credit to be used for payment of duty on the inputs if the inputs are removed on payment of duty, but there is a provision for this under Rule 57F(4)(iii) which reads;

 

    "Credit… may be utilised towards payment of duty of Excise….

 

1. ………..
   
2. ……….
   
3. On the inputs themselves if such inputs have been PERMITTED to be cleared under sub rule (i) [i.e., 57F(i)]."
   

 

Both these provisions speak about inputs permitted to be cleared under Rules 57F(1) and 57S, but there is no permission required under Rule 57F or 57S to remove inputs or Capital Goods …. Only an intimation will do.

 

Definition : For inputs it is an a specific definition "Capital Goods inclusive definition, but in that means ……" has been given. Among other things capital goods have been specifically excluded.

 

 

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• The author is an employee of the Central Excise Department, but this articles written in personal capacity.
  

 

 

 

This has undergone a major change in the 1996 Budget. The new definition of capital goods mostly included only goods falling under Chapter 84,85 and 90 and components of these goods. So most of the litigation about what are Capital Goods, is perhaps now avoidable. All one has to see is whether the goods fall within the specified chapter headings. But fresh problems do crop up.

 

1. Explanation 1(g) to Rule 57Q reads Capital Goods means : (g) "tubes and pipes of iron or steel or copper or, aluminum used for conveying inputs, on which credit of duty is taken, intermediate goods or final products in the factory.
   

 

So these pipes should be for conveying inputs on WHICH CREDIT IS TAKEN. Thus if there is a pipe used for conveying water or crude oil in a refinery that pipe is not covered under capital goods.

 

Will lancing tubes used for conveying oxygen into a furnace be capital goods (The tubes get melted and mixed along with the metal in the furnace).

 

Rule 57B : Higher Notional Credit                No provision

(not available at present)

 

Rule 57C : No credit if final products        57R(1) No credit is used exclusively for

are exempted                    final products which are exempt from duty

(except exempted based on value or quantity like Notification No.1/93)

 

This creates another problem in respect of Capital Goods. As per Rule 57R(1) no credit will be allowed if the Capital Goods are exclusively used for final products which are wholly exempted (except based on value or quantity). So if the Capital Goods are used for manufacture of exempted as well as dutiable goods, credit is allowed. Now as per Notification No.1/93 (as it stood before the budget) the exemption up to Rs.30 lakhs clearance is :

 

1. 10% of the value for a manufacturer who avails of the credit under Rule.57A or 57Q or both
   
2. Whole of the duty for others i.e., those who don't avail 57A, 57Q or both.
   

 

This means that if he avails credit on Capital Goods, he cannot avail full duty exemption upto Rs.30 lakhs but Board has clarified in F.No.333/33/93-TRU, dated.17.3.1994, that Credit should not be denied if he avails nil duty clearance up to 30 lakhs. And when to take credit if Capital Goods are received during exemption period. This issue is yet to be resolved.

 

The 1996 Budget vide Notification No.14/95 amended Notification No.1/93 deleting the words "or on Capital Goods or both" and or "57Q or under the both rules".

 

So now the position is clear that even SSI units with 30 lakhs can avail Capital Goods Credit. But this rule does not have retrospective effect. Does it mean that credits allowed prior to 23.7.1996 are without the sanction of law ? and what is the significance of 57R(1) now, when credit can be given if capital goods are used in the factory? (for any purpose). This rule is now redundant or even contradictory to Rule 57Q.

 

A new Rule 57CC has been included in the new budget making it mandatory to pay20% (now reduced to 8%) duty on exempted goods if credit on inputs has been used.

 

Rule 57D credit not to be varied or denied        57R(2) Similar

57E Adjustment of credit                    57R(1)(i) Similar

57F(1) (i) inputs to be used in the manufacture        57S(1)(i) Similar

        of final products.                (ii) ……….

1. shall be removed for
   

   (a) home consumption                (a) home consumption
   

   (b) export under bond                (b) export on payment of duty
   

                               (c) export under bond.
   

 

    From this it appears that inputs cannot be cleared for export on payment of duty. What can be exported without payment of duty under bond can certainly be exported on payment of duty, but strangely 57F(1)(i) does not allow this.

 

 

    The duty payable is credit.            Credit with a rebate of 2.5% for each

                            Quarter of use.

    

    57F(2) Removal of inputs for which         Not applicable

    restricted credit was availed.

 

    57F(3) Job work; inputs for further        57S(5)Capital Goods for processing & return

    processing.

 

    An interesting feature here is that while Rule 57F(3) does not stipulate any procedure for sending goods for job work, 57S(5) stipulates that the assessee shall follow the procedure as prescribed by the Central Board of Excise & Customs or the Commissioner of Central Excise. But strangely the Board and almost all Commissioners have prescribed the procedure for 57F(3) (where no procedure stipulating power is given), but the Board and many of the Commissioners have not prescribed any procedure for 57S(5).

 

    A new Rule 57F(3A) has been added in this budget which reads :- "(3A) where a manufacturer intends to remove the inputs as such, or after the inputs have been partially processed during the course of manufacture of final products to a place outside the factory for the purposes specified in sub-rule (3), the manufacturer shall do so after debiting an amount equivalent to the amount of credit of duty attributable to such inputs or the inputs contained in such partially processed inputs…. "(now quantified as equivalent to 10% of value of the inputs removed for job work).

 

    Now inputs can be removed for processing etc., only on payment of duty. Then what about inputs sent directly to the job worker and received in piecemeal from him? Should credit be taken without receipt of inputs and the whole credit paid back as duty? The proviso to this rule states that credit of an equivalent amount can be taken on the cover of a document on wlich the inputs were removed. Now this is not a document prescribed under Rule 57G(2), which states that "no credit shall be taken unless the inputs are received under the cover of documents specified in (a) to (f).

 

 

Rule 57F(4) Credit to be used' for payment of duty.

 

(i)    On the final products            (i)     on final products

(ii)    on the waste                (ii)    on waste

(iii)    on the inputs PERMITTED TO BE    (iii)    on Capital Goods if removed under

    CLEARED UNDER THE SUB-RULE(1)        sub-rule (1).

 

    Please observe (iii) in both the cases. For inputs, it is if PERMITTED and no such restriction for Capital Goods. (As noted earlier no permission is required).

 

57F(5)    Regarding waste            Not applicable

57F(6) Reiteration of use of credit,        57S(3) Same

57F(7) Transfer of Credit            57S(4) Almost same

57F(8) Credit of SED                Not applicable

Rule 57G : Procedure                Rule 57T procedure

 

    1) Declaration                1) Declaration within one month or 3 months if

allowed by Asst. Commissioner

1. Can be filed within six months    2) Intimation to be filed.
   

   (Rule 57G(5))
   

     No intimation required        3) Document prescribed under Rule 57G.

    Inputs to be accompanied by     

    Invoice etc., or document prescribed.

 

    Rule 57G(2) has been amended in the budget to prescribe 10 types of documents. While Board has prescribed a procedure for endorsement of invoices by jurisdictional superintendent in case of diverted goods, these endorsed invoices are not prescribed as documents under Rule 57G(2).

 

Proviso :

 

    Taking reasonable steps to see that inputs are duty paid. No such proviso.

This means that while a manufacturer who takes input credit is required to take reasonable steps, one who takes credit on Capital Goods is not (by law) required to do so. But interestingly Rule 173Q(bb) makes it an offence in both the cases.

 

(2)    Credit may be taken after filing declaration.            No such provision.

 

    Strangely in the entire "Capital Goods" Rules, there is no provision for taking credit similar to Rule 57G(2). There are a couple of rules stating "No credit can be taken", but there is no rule to state "Credit may be taken….. after obtaining acknowledgement, etc. In fact, there was a provision under Rule 57T earlier, but while amending the position relating to verification by the Superintendent, this part dealing with taking of credit was also deleted by Notification No.23/94, dated 20.5.1994.

 

2A Credit on original invoice if duplicate is lost.    Similar (by 1996 Budget) Rule 3A.

 

    The rule states "Credit may be taken subject to Assistant Commissioner's satisfaction". Is the credit to be taken before or after the Assistant Commissioner's satisfaction? The facility of allowing credit on original invoice for Capital Goods was given only in this budget. Does it mean it has effect only from 23.7.1996 ?

 

G(3) (a) RG23A Part I and II            S(5) RG23C Part I and II

 

(b) in respect of duty payable on the final        No such provision.

Products an account current with

adequate balance.

 

    This clause is not needed, because an account current is prescribed under Rule 173G(1). Does it mean that a person who takes Capital Goods credit need not maintain Account Current ?

 

    And why is it mandatory to maintain an account current ? In case of an SSI unit in the 30-50 lakhs slab, there may be no need to maintain PLA at all.

 

57G(4) Returns                     57S(6) Returns. Same

57G(5) delayed declaration                Covered under Rule 57T(1)

 

Rule 57GG and H'(not relevant now)'            Rule 57U(1) show cause notice for irregular

Rule 57-I(1) :                        credit.

(i) Show cause notice for irregular credit        (2) Same.

(ii) Proper officer to determine

 

(2) If credit taken inputs not accounted for,     (3) Same.

duty to be paid within 10 days of demand

by Asst.Commissioner.

 

(3) Interest.                        (4) Interest.

 

(4) Penalty equal to the credit in certain cases    (5) Same.

(5) Interest from succeeding month in case of

fraud, etc.

 

    Here both under Rule 57-I and 57U show cause notices are to be given by the proper officer and adjudication also to be done by proper officer. Who is the proper officer and what are the powers of adjudication ? While under Section 11A any officer can issue a notice, in some Commissionerates Superintendent is the proper officer, while in some it is Asst. Commissioner.

 

    Under Rule 57-I(2) and 57U(3) there is no time limit and no need to issue show cause notice. Not having time limit is reasonable as the department will not know when the goods are not accounted for, but why no show cause notice ? Now it is a well accepted principle of law that any demand without notice is against the principle of Natural justice.

 

    Thus it is seen that though there are a lot of similarities between the rules pertaining to credit on inputs and credit on capital goods; it can also be seen that there are certain differences, purposely put in the statute though there are certain omissions and inclusions inadvertently.

EXCISE LAW TIMES – 15.10. 1996 – A 75