Thursday, August 05, 2010

MODVAT ON CAPITAL GOODS – WHEN TO TAKE CREDIT


 

by

K. VIJAY KUMAR*


 

Under Rule 57G(2) a manufacturer can take credit of duty paid on the inputs after filing a declaration with the Assistant Commissioner and obtaining dated acknowledgement, i.e, immediately on receipt of inputs into his factory. But there is no similar provision under Rule 57T for taking credit on the duty paid on capital goods. There was a provision earler under Rule 57T(3) under which a manufacturer could take credit after filing declaration, obtaining acknowledgement and verification by the Supdt. But this has been changed by Notification No.23/94 dated 25.4.94. Rule 57Q speaks about allowing credit on capital goods "USED" by the manufacturer. This has created confusion as to when credit of duty on capital goods can be taken. Is it immediately after receipt of the goods (Of course after filing declaration, intimation etc.) or is it after installation and use?


 

2. There was a strong opinion that credit can be taken only after use of the capital goods. Mr. Gunasekharan, in his Modvat Manual 1995-96 V Edition, Page 275 says that credit on capital goods can be used only when the capital goods are actually put into use and not just on receipt of the same. Many in the department also shared this view. Commissioner of Customs & Central Excise , Pune, in his Trade Notice No.75/95, dated 18.7.95-1995 (79) ELT T61 emphatically clarified that the credit of duties paid on capital goods received in the factory should be taken only when such capital goods enter into production process and not soon after their mere receipt into the factory. Any taking of the credit before installation and use for production purposes and its utilization will be considered to be violative of the relevant Modvat Rules. This controversy is not solved by Government of India in Notification No. 1/96-Central Excise (NT) dated 1.1.96. The very first notification of 1996 sets at rest the controversy as to when to take credit. By the new Rule 57Q(2) (ii) no credit on the capital goods received into the factory on or after 1st January, 1996 shall be taken on a date prior to the date on which the capital goods are installed or as the case may be used by the manufacturer of the excisable goods, as certified by such manufacturer or an officer designated by him for this purpose. So this makes it very clear that credit can be taken only after the capital goods have been put to use. This may be alright for capital goods which are whole machines but what will be the case of spares or parts of machinery which generally bought in bulk and used over a period of time? For instance, blades for cutting machine. The manufacturer may need say 20 blades each month for his machine. Suppose he gets 300 blades and issues 20 blades each month, should he take credit for 20 blades each month or wait till all the blades are used? This notification takes care of this kind of situation also. The restriction of taking credit after using the goods is not applicable to components, spare parts etc., and refractories which fall under explanation 1(b), 1(d) (ix) and 1(d)(x) to Rule 57Q.


 

It is not always necessary that the capital goods have to be used within the factory. Sometimes they may also be removed for home consumption under Rule 57S(2). In such cases if credit cannot be taken till the use of the goods how can duty be paid at the time of removal of such capital goods for home consumption? The proviso to this notification has taken care of such situation also. In cases where the capital goods are removed from his factory on payment of duty.

Thus this notification makes it clear (1) that credit on capital goods can be taken only after their use except in the case of components, spares etc., and refractories (2) that the credit on capital goods cleared as such can be allowed on the date of removal of capital goods on payment of duty.

EXCISE LAW TIMES –15.03.1996- A 109

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