REVISED MODVAT RULES

Certain Grey Areas

by

K. VIJAY KUMAR^*

 

Recently, the Government brought about a total change in the Modvat rules, but even these changed rules have not solved or simplified all problems. Here are some of the questions one would wish to get answers in the context of the revised rules.

 

Rules 57A and 57B speak of allowing credit, but it is well known that there is nothing like allowing credit. The assessee is free to take credit, though there can be disallowing of credit in some cases.

 

Under Rule 57 B, not withstanding anything contained in Rule 57A, credit is allowed on certain goods like-

 

1. Captively consumed goods
   
2. Paints
   
3. Goods used as fuel
   
4. Gods used for generation of electricity or steam, used for manufacture of final products or for any other purpose, within the factory of production;
   
5. Packing materials
   
6. Accessories of final….
   

 

Now in the notification issued under rule 57A, HSD falling under SH No.27.10 is specially excluded from the purview of Modvat. But what happens if the HSD is used as fuel or for generation of electricity or steam? Rule 57A(1) says that the provisions of this section i.e Chapter VAA is applicable to only those inputs specified in the notification, but Rule 57B says "not withstanding anything contained in Rule 57A, Credit shall be allowed…." Thus even though HSD is specifically excluded by Rule 57A, it is allowed by Rule 57B if used as fuel or for generating electricity.

 

Under (iv) above credit is allowed on goods used for generation of electricity or steam, used for manufacture of final products or for any other purposed within the factory of production.

 

When electricity or steam can be used for any other purposed, what is the need for mentioning Manufacture of final Products? Credit is allowed even if the steam or electricity is not used for manufacture of final products.

 

Under rule 57F(1) and (2), the inputs may be –

 

1. Used in or in relation to the manufacture of the final products, and
   
2. Removed for home consumption or for export under bond.
   

 

Does this mean that the inputs cannot be removed for export on payment of duty under claim for rebate? I am not joking, I have heard a senior colleague telling an audience that there is not provision to allow clearance of inputs on payment of duty for export!

 

Under rule 57G(7), a manufacturer is required to maintain –

 

1. an account in Form RG 23A, Parts I & II;
   
2. in respect of duty payable on final products, an account current with adequate balance to cover the duty of excise payable on the final products cleared at any time.
   

 

This means that every manufacturer has to compulsorily maintain a PLA even if the credit available is more than the duty payable!

 

Rule 57G(3) explanation defines first stage dealer and second stage dealer as –

 

1. first stage dealer means a dealer who .. Purchases the goods from …
   
2. Second Stage dealer means dealer who .. purchases the goods from a first stage dealer.
   

 

This means the dealers will have to purchase the goods. Suppose a first stage dealer has a branch in another city and he sends (not sells) the goods to the other city. Will the branch be a second stage dealer? As per the law, No, because he did not purchase the goods!

 

Rule 57G(6) stipulates that a manufacturer may take credit on the basis of original invoice if duplicate is lost in transit, subject to the satisfaction of the Assistant Commissioner . Now it is not clear whether credit can be taken after or before the satisfaction of the Assistant Commissioner. And if it is after the satisfaction of the Assistant Commissioner, then what about the time limit of six months within which credit has to be taken as per rule 57G(5)? Of course Board has clarified that the 6 months stipulation will not apply in such cases but the rule is silent on this.

 

Under rule 57G(10) (1) the Assistant Commissioner shall not condone the delay in filling of such declaration unless he is satisfied that the inputs were received in the factory not before a period of six months from the date filling of such declaration. As per rule 57G(5) credit shall not be taken after six months from the date of issue of duty paying document. So if the assessee wants to take credit, he invariably, has to file the declaration within 6 months. Thus rule 57 G(10) (1) seems to be redundant now.

 

Rule 57GG91) says every person who issues invoices under rule 57G or 57T shall get registered under rule 57 G or 57T. In fact both these rules speak of persons receiving invoices, not issuing invoices. This error has remained in the statue for the years now and merrily remains there!

 

In view of the changes brought out in other rules and notifications, rule 57H appears to be no more relevant. (A detailed explanation of this would make another article). But strangely rule 57H went almost untouched in the recent changes.

 

Rule 57 –I(ii), speaks of taking credit by reason of fraud ….. with intent to evade payment of duty. How can he take credit with the intent to evade payment of duty? An assessee who takes wrong, ineligible credit can always plead that he has not evaded duty, ( and has no intent to do so) though he has taken credit wrongly and has an intent to avail wrong credit. This lapse took place because the words of section 11A have been used verbatim in rule 57-I.

 

Rule 57-J is to allow credit on the inputs used in the manufacture of intermediate products received by the manufacturer for use in or in relation to the manufacture of the final products. In this rule the change made is the notification no.351/86 was rescinded and incorporated in the rule itself.

 

CAPITAL GOODS

 

Under Rule 57Q(1) and (2) credit will be allowed if the capital goods specified in the table are used in the factory (not necessarily for the purpose of manufacture of final products).

 

Rule 57Q(6) provides for allowing credit of duty paid on capital goods manufactured by him for the manufacture of final products in his factory. But under Notfn.No.67/95-Central Excise., Capital goods as defined in 57Q manufactured in a factory and used within the factory are exempted from the whole of the duty of Excise. When there is not duty payable at all, where is the question of allowing credit of duty paid?

 

Rule 57R(1) states that credit shall not be allowed if the capital goods are used in the manufacture of final products on which no duty is payable and Rule 57R(2) says that credit shall not be denied on the ground that exempted intermediate products have come into existence.

 

Now both these rules are redundant or are even contradictory to Rule 57Q(1) which allows credit if the capital goods are used in the factory for any purpose including manufacture of exempted final products or intermediate products.

 

Under Rule 57T(1), the manufacturer is required to file a declaration with the Assistant Commissioner, indication the particulars of the capital goods, description of the final products etc. This was required when it had to be decided whether a declared item was capital goods are not. Now with capital goods definition leaving nothing for imagination and end use not being a requirement, this declaration is out dated. Similar is the case with Rule 57T (2).

 

Rule 57G(2) says that a manufacturer who has filed the declaration may after obtaining the acknowledgement from the Assistant Commissioner take credit of the duty on the inputs received by him. There is no similar provision in the rules relating to Capital Goods. So strictly speaking there is no rule for allowing credit on capital goods. This is an anomaly prevailing right from the introduction of credit on capital goods.

 

Rule 57U(2) is identical to rule 57-(1)(ii) and what is said in para above applies to this also.

EXCISE LAW TIMES – 15.08.1997 – A 3