confusion – a long history – and the saga continues?

by

 

VIJAY. K. KUMAR

MA, B.Ed,BL,MBA

Superintendent of Central Excise, Hyderabad

The issue regarding, credit when the inputs are used in the manufacture of dutiable as well as exempted final products, is as old as the Modvat rules itself.

As early as in April 1986, vide Board's F. No. B. 22/3/86-TRU, dated the 10th April, 1986, it has been clarified with regard to Point No. 5 that

Modvat credit is not available if the final products are exempt or are chargeable to nil rate of duty. However, where a manufacturer produces along with dutiable final products, final products which would be exempted from duty by a notification (e.g. an end-use notification) and in respect of which it is not reasonably possible to segregate the inputs, the manufacturer may be allowed to take credit of duty paid on all inputs used in the manufacture of the final products, provided that credit of duty paid on the inputs used in such exempted products is debited in the credit account before the removal of such exempted final products.

The above instructions were apparently not very clear or there was some doubt somewhere about its implementation that Board by circular No.
5/87, dated 7-1-1987 [From F. No. 211/50/86-CX.6] invited reference to the Board's instructions dated 10.4.1986 and asked the Collectors for a report,

"A detailed report on the practice being followed in your respective Collectorate, with regard to the implementation of the aforementioned instructions, may be furnished to the Board urgently."

Obviously there were many Collectorates were the Board's instructions were not followed. Seven years later in Circular No. 5/93-CX-8, dated 26-5-1993 [From F.No. 267/16/93-CX-8] Board informed that it has been noticed that

    "the aforesaidinstructions are not being followed in the field formations ….

    in a case reported by the audit, an assessee cleared certain quantities of     pharmaceutical product as "Physician samples" without payment of duty availing     exemption. However, the credit of duty availed on inputs used in such exempted     products was not reversed, resulting in irregular availment of MODVAT credit.

It is once again reiterated, that the aforesaidinstructions of the Board contained in Circular No. 5/87-CX-6, dated 7-1-1987 may please be followed scrupulously so as to avoid such lapses resulting in loss of revenue."

It took three more years for these instructions to be made more mandatory by rules. In 1996, the controversial and by now notorious rule 57CC was introduced. The rule when it first came into existence stood like this,

"57CC. Adjustment of credit if final products are exempt. - Where a manufacturer ordinarily uses the inputs on which the credit of duty has been availed in the manufacture of any product [other than those cleared either to a unit in a Free Trade Zone or to a hundred per cent Export-Oriented Unit or to a unit in an Electronic Hardware Technology Park or to a unit in Software Technology Parks or supplied to the United Nations or an international organisation for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 108/95-Central Excises, dated the 28th August, 1995] which is exempt from the whole of the duty of excise leviable thereon or is chargeable to nil rate of duty, the manufacturer shall pay an amount equivalent to twenty per cent of the value of such product at the time of clearance of the said product by adjustment in the credit account maintained under sub-rule (3) of rule 57G or sub-rule (5) of rule 57T or in the accounts maintained under rule 9 or sub-rule (1) of rule 173G or if such adjustment is not possible for any reason by cash recovery from the manufacturer availing of the credit under rule 57A.

Explanation.- For removal of doubts, it is hereby declared that the provisions of this rule shall apply notwithstanding the fact that the inputs on which credit has been taken are not actually used or contained in the products referred to in this rule.".

This rule was to come into effect from 1.8.1996. It may be of interest to note that originally it was proposed to get back 20% on the exempted final product. There was understandable uproar all over the country and a very responsive Government, by Notification No. 20/96-C.E. (N.T.), dated 31-7-1996 , that is just a day before the rule was to come into force, made it effective from 1.9.96. A two month respite. Vide Notification No. 26/96-C.E. (N.T.), dated 31-8-1996, rule 57CC was replaced by a new rule 57CC.

"57CC. Adjustment of credit if final products are exempt. - (1) Where a manufacturer is engaged in the manufacture of any final product which is chargeable to duty as well as any other final product which is exempt from the whole of the duty of excise leviable thereon or chargeable to nil rate of duty [other than those cleared either to a unit in a Free Trade Zone or to a hundred per cent Export-Oriented Unit or to a unit in an Electronic Hardware Technology Park or to a unit in Software Techno- logy Parks or supplied to the United Nations or an international organisation for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 108/95-Central Excises, dated the 28th August, 1995] and the manufacturer takes the credit of specified duty on any input (other than inputs used as fuel) which is used or ordinarily used in or in relation to the manufacture of both the aforesaid categories of final products, whether directly or indirectly and whether contained in the said final products or not, the manufacturer shall, unless the provisions of sub-rule (2) of this rule are complied with, pay an amount equal to eight per cent of the price (excluding sales tax and other taxes, if any, payable on such goods) of the second category of final products charged by the manufacturer for the sale of such goods at the time of their clearance from the factory by adjustment in the credit account maintained under sub-rule (3) of Rule 57G or in the accounts maintained under Rule 9 or sub-rule (1) of Rule 173G or if such adjustment is not possible for any reason, by cash recovery from the manufacturer availing of the credit under Rule 57A.

Provided that nothing contained in this sub-rule shall apply to final products falling under Chapters 50 to 63 of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986).

Provided further that the provisions of this sub-rule shall not apply to final products which are exported under bond in terms of the provisions of Rule 13.

Provided also that the provisions of this sub-rule shall not apply to -

(a)    articles of plastics, falling within Chapter 39;

(b)    tyres of a kind used on animal drawn vehicles or handcarts and their tubes, falling within Chapter 40; and

(c)    Black and White television sets, falling within Chapter 85 which are exempt from the whole of the duty of excise leviable thereon or chargeable to nil rate of duty.

Explanation I. - For removal of doubts, it is hereby declared that the provisions of this sub-rule shall apply notwithstanding the fact that the inputs on which credit has been taken are not actually used or contained in any particular clearance of final products referred to in this sub-rule.

Explanation II. - If any goods are not sold by the manufacturer at the factory gate but are sold from a depot or from the premises of a consignment agent or from any other premises, the price (excluding sales tax and other taxes, if any, payable) at which such goods are ordinarily sold by the manufacturer from such depot or from the premises of a consignment agent or from any other premises shall be deemed to be the price for the purpose of this sub-rule.

(2) In respect of the inputs (other than inputs used as fuel) which are used in or in relation to the manufacture of any goods, which are exempt from the whole of the duty of excise leviable thereon or chargeable to nil rate of duty, the manufacturer shall maintain separate inventory and accounts of the receipt and use of inputs for the aforesaid purpose and does not take credit of the specified duty on such inputs."

 

This was the first of the series of new rules dying before their birth. The new rule made certain clarifications and certain explanations and more importantly reduced the amount payable to a fairly reasonable 8%. And the Pandora's Box opened.

 

The entire Modvat rules were amended (along with rule 57CC of course) by Notification No. 6/97-C.E. (N.T.), dated 1-3-1997 and a corrigendum vide M.F. (D.R.) F. No. B-42/1/97-TRU, dated 10-3-1997.

 

After a lull of three years there was another change with the entire Modvat rules proposed to be revised from 1.4.2000, by Notification No. 11/2000-C.E. (N.T.), dated 1-3-2000. But this also did not materialize. These rules actually did not come in to existence and a new set of rules were brought in by Notification No. 27/2000-C.E. (N.T.), dated 31-3-2000. Our rule 57CC now became Rule 57 AD but with all the frills of 57CC in tact.

One more year of these rules and then came the Cenvat Credit Rules 2001 with effect from 1.7.2001 and now the latest Cenvat Credit Rules 2002 from 1.3.2002. Rule 6 of the new rules deals with this 8% recovery.

 

Rule 6. Obligation of manufacturer of dutiable and exempted goods.- (1) The CENVAT credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule (2).

    (2) Where a manufacturer avails of CENVAT credit in respect of any inputs, except inputs intended to be used as fuel, and manufactures such final products which are chargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs meant for use in the manufacture of exempted goods and take CENVAT credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods.

(3) The manufacturer, opting not to maintain separate accounts shall follow either of the following conditions, as applicable to him, namely:-

(a) if the exempted goods are-

1.   goods falling within heading No. 22.04 of the First Schedule to the Tariff Act;
   
2. Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used in the generation of electricity;
   
3. Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of fertilizer;
   
4. tyres of a kind used on animal drawn vehicles or handcarts and their tubes, falling within Chapter 40 of the said First Schedule;
   
5. newsprint, in rolls or sheets, falling within heading No.48.01 of the said First Schedule;
   
6. final products falling within Chapters 50 to 63 of the said First Schedule,
   

the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputs used in, or in relation to, the manufacture of such final products at the time of their clearance from the factory; or

(b) if the exempted goods are other than those described in condition (a), the manufacturer shall pay an amount equal to eight per cent. of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory.

Explanation I.- The amount mentioned in conditions (a) and (b) shall be paid by the manufacturer by debiting the CENVAT credit or otherwise.

Explanation II.- If the manufacturer fails to pay the said amount, it shall be recovered along with interest in the same manner, as provided in rule 12, for recovery of CENVAT credit wrongly taken.

(4) No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods, other than the final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made in a financial year.

(5) The provisions of sub- rule (1), sub-rule (2), sub-rule (3) and sub-rule (4) shall not be applicable in case the exempted goods are either-

1. cleared to a unit in a free trade zone; or
   
2. cleared to a unit in a special economic zone; or
   
3. cleared to a hundred per cent. export-oriented undertaking; or
   
4. cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or
   

1. supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No.108/95-Central Excise, dated the 28^th August, 1995, number G. S R. 602 (E), dated the 28^th August, 1995; or
   
   1. cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002.
      

That is the history of this controversial 8% recovery. But is the issue clear now? After all those changes! There have been several articles in ELT on the subject - obviously to point out certain defects.

Prior to the 2002 rules, Board vide Circular No. 591/28/2001-CX, dated 16-10-2001, clarified that,

It is stated that the basic principle underlying the CENVAT scheme is that credit is admissible if duty is paid on final products. Attention is drawn to sub-rule (1) of Rule 6 of the CENVAT Credit Rules, 2001, which clearly provides that CENVAT credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in circumstances specified in sub-rule (2). The provisions of sub-rule (2) and (3) of rule 6 provide as to how to deal with and account for the inputs and credit of duty in cases where the inputs are used in manufacture of both dutiable as well as exempt products. It follows from the provisions that if the manufacturer does not fulfill the requirements of either sub-rule (2) (i.e. maintaining separate accounts) or sub-rule (3) [i.e. paying 8% of total price of exempted goods, other than exceptions specified in clause (a)] then in terms of sub-rule (1) the assessee shall not be allowed credit on such quantity which is used in the manufacture of exempted goods. Consequently, where the assessee has not paid the amount, the availment of corresponding credit on inputs is incorrect. The recovery of such credit taken incorrectly is squarely covered by the provisions of Rule 12 (erstwhile Rule 571). Necessary action may be taken accordingly.

This clarification of the Board found place in the new rules and now such recovery has to be under rule 12 as per the explanation II to sub rule 3 of rule 6 of the Cenvat Credit Rules 2002.

Now the position is: - when inputs are used in the manufacture of final products which are dutiable as well as exempted, then

1. the manufacturer shall maintain separate accounts for receipt, consumption and inventory. (rule 6 sub rule 2)
   
2. the manufacturer opting not to maintain separate accounts shall follow the conditions as applicable to him (rule 6 sub rule 3)
   
   1. If the exempted goods are   goods falling within heading No. 22.04,Low Sulphur Heavy Stock, Naphtha (RN), newsprint, in rolls or sheets etc as specified in the rules, he shall pay an amount equal to the Cenvat credit attributable to the inputs
      
   2. In other cases an amount equal to eight percent has to be paid..
      
3. In case the said amount is not paid, it shall be recovered in the same     manner as provided in rule 12 for recovery of wrong credit. (explanation II)
   

 

Several questions still remain unanswered.

As per sub rule 2, he shall maintain separate accounts. There is no option. But the very next rule says, "the manufacturer opting not to maintain separate accounts". An apparent contradiction? As per rule 13 of the rules, any person who contravenes any of the provisions of these rules in respect of any inputs is liable for a penalty and the goods are liable to confiscation. So is a person who is not marinating separate accounts liable for penalty as he has contravened rule 6(2). Or should he opt for sub rule 3?

 

As per the explanation to the rule, in case the said amount is not paid, it has to be demanded under rule 12. What is the said amount? Is it eight percent or the proportionate credit? As per the Board circular,

Consequently, where the assessee has not paid the amount, the availment of corresponding credit on inputs is incorrect. The recovery of such credit taken incorrectly is squarely covered by the provisions of Rule 12 .

What according to the Board can be rightly recovered is the wrong credit, not eight percent. But the new rules say, -
If the manufacturer fails to pay the said amount, it shall be recovered. What is it? Obviously eight percent!! Another contradiction?? In any case rule 12 deals with, Where the CENVAT credit has been taken or utilized wrongly. So an amount payable under some other rule cannot be recovered under rule 12.

 

As per one rule there is no option – separate accounts shall be maintained.

But he can also opt to contravene this rule if he pays eight percent or the proportionate credit as applicable.

There is yet another option!!! He need not pay even this amount. All that will happen is there will be a demand for this amount. But rule 12 does not authorize the department to demand this amount. Only the proportionate credit can be demanded.

So finally there is one grand option. He can take all the credit and when demanded, can reverse proportionate credit.

How to calculate the attributable credit, especially in a case where the inputs are not contained in the final product?

 

 

 

 

EXCISE LAW TIMES – 01.07. 2002 – A 10