Restoration of issue of “Written off” goods”

Introduction

Writing off the Inputs and Capital Goods for the stock account purpose in the books of accounts and reversal of CENVAT Credit has always been a matter of dispute between the assessees and the departmental authorities. This issue was clarified with the introduction of the Circular No. 645/36/2002-CX.,dated 16-7-2002 which has been explained in detail in this article. This issue was there, as it is. unresolved in its entirety and a new issue arose relating to the CENVAT burden in case of “Writing Off” of WIP and Finished goods in books of accounts. We in this article have made an endeavor to elucidate the issues relating to such “writing off” of value of goods and the CENVAT burden thereon.

Issue in case of Inputs and Capital Goods

The CENVAT burden in case of Writing off of the Inputs and Capital Goods, as being obsolete or unfit for use, in the books of accounts was clarified by introduction of Circular No. 645/36/2002-CX.,dated 16-7-2002. Under this Circular the Government clarified the CENVAT Credit issues and the procedure to be adopted in different situations in case of writing off.

The Circular classified the different situations into 3 categories and their respective treatments, as follows: -

Situation 1: -

In this situation Government specified that in the cases where unused inputs are fully written off in the books of accounts and where they are not capable of and are not available for use in the manufacture of finished goods then the assessee is required to pay back the credit availed on such Inputs.

Eg: – ABC ltd. is dealing in product X for which an input named “R” is required whose credit is availed in the records amounting to Rs.100. According to the aforesaid situation if the Input “R” is written off in the books of accounts of ABC ltd. then in such a case ABC ltd. will have to pay back the amount of Rs.100 by reversing the Credit taken in the RG 23 A PART II register or by paying the amount in cash to the Department.

Situation 2: -

In this second situation Government clarified the treatment of CENVAT in cases where the value of the inputs is partially written off or reduced in the accounts of the assessee, but they are still capable of and available for use in the manufacture of finished goods. In such cases it clarified that no payment of CENVAT credit availed is to be done and there will be no liability on the assessee till the goods are removed or used in the circumstances other than those specified above.

Eg: – Taking the same example as above if the input “R” is written off partially or its value is reduced in the books of account of ABC ltd. but they are still capable of and available for use in the manufacture of finished goods then in such a case there will be no liability on ABC ltd. to pay back. Hence, the Credit on the same will be allowed.

Situation 3: -

In this last situation the Government illuminated the situation in case of writing off of capital goods viz. components, spare parts etc. It stated that in case where the Capital goods are written off before use and as thus are not proposed to be used in the manufacture of final products, then in such situation the CENVAT credit availed will have to be paid back.

Various Judicial Pronouncements on this issue: -

Various Hon’ble Courts and Judicial authorities have given their judgments on the said matter minimizing the litigations on the admissibility of CENVAT Credit or not. Various cases of vital importance in this matter are produced as under: -

    * Hindustan Zinc Ltd V/s COMMR. OF C. EX., VISAKHAPATNAM [2005 (191) E.L.T. 724 (Tri. - Bang.)]

In this case appellant had written off the 75% of the value of the inputs/spare in accounts and seeking the same fact the respondents contended to reverse the MODVAT as per rule 57-I of the Central Excise Rules read with Rule 57AH (1) & (2). The Bangalore Tribunal relying on the Board Circular No. 645/36/2002-CX., dated 16-7-2002 held that the MODVAT shall be validly admissible to the appellants.

    * Oswal Agro Mills Ltd V/s Collector Central Excise [1992 (60) E.L.T. 479 (Tribunal)]

In this case the respondent argued that the appellant has showed quantity issued in RG 23 A Part-1 but the same was still unused and laying in stores. The respondent further contended that the intention of the appellant was to use the said input for any other purpose instead of manufacturing and hence, appellant has to reverse the duty on the same.

On the contention of respondent the appellant replied that the issued quantity has not actually consumed upto the date, therefore the excessive stock shown in the store. The Tribunal relying on the appellant’s contention allowed the appeal.

    * Ashok Leyland Versus Commissioner of Central Excise, Chennai [2005 (191) E.L.T. 277 (Tri. - Chennai)]

The appellant was denied the Credit on the ground that certain inputs have been written off in the balance sheet. The appellant in reply to the contention of the Departmental arguments stated that the inputs in question were still in stock and denial of credit of demand of duty cannot arise in such a case and mere writing off in the balance sheet is no ground for reversal of credit. The Chennai Tribunal allowed the appeal seeking to the merits of the case and evidences as produced by the appellant.

    * Commissioner of Central Excise, Indore Versus Kinetic Motors Co. Ltd. [2005 (183) E.L.T. 300 (Tri. - Del.)]

In this case the Respondent had written off the Value of inputs in the books of accounts after termination of the collaboration contract but inputs were still lying in their factory premises and as per Rule 57F there was no time limit specified for the utilization of the inputs by the respondent. The Hon’ble Tribunal held that the credit cannot be denied to the respondents for having failed to utilize the inputs for a long time, when those had not been removed by them from the factory as such.

However the appellant contended that since the collaboration of the respondents with M/s. Honda Motors stood terminated, the use of the inputs lying in the factory of the respondents had become impracticable and impossible and as such, they are liable to reverse the Modvat credit of the amount in question, on those inputs even if the same were lying in their factory.

CESTAT held that the credit could be denied under the rule only on two grounds, firstly for having not used the inputs in the manufacture of goods; and secondly for having removed the inputs as such and thus, merely writing off value of the inputs in their books, they could not be denied the credits, when inputs were still lying in their factory premises.

Rule 3(5b) of CENVAT Credit Rule, 2004

In the case of “AMBUJA CEMENTS LTD. Versus UNION OF INDIA”, Punjab and Haryana High court has held that the clarifications issued by CBEC are binding only on revenue authorities and not on the assessees. This led to emergence of various judicial pronouncements which nullified the said circular, hence, in order to make the clarification under the circular binding on the assessees the Government introduced sub-rule (5B) in Rule 3 of CENVAT Credit Rule, 2004 which is reproduced as under: -

“If the value of any,

(i) input, or

(ii) capital goods before being put to use,

on which CENVAT credit has been taken is written off fully or where any provision to write off fully has been made in the books of account, then the manufacturer or service provider, as the case may be, shall pay an amount equivalent to the CENVAT credit taken in respect of the said input or capital goods:

Provided that if the said input or capital goods is subsequently used in the manufacture of final products or the provision of taxable services, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules.”

Thus, covering the scope of all the situations the Government clarified all the related aspects as are related to capital goods and inputs, but so far as the cases related to writing off of Finished goods and Work in progress is concerned the issue remained unresolved. To clarify this situation Government introduced the new Circular no. 907/27/2009-CX, Dated: 07/12/2009 read with Rule 21 of Central Excise Rules, 2002.

Issue in case of WIP and Finished Goods

By issuing this Circular Board wants to clarify that liability to pay excise duty is on the manufacture of the goods but for the sake of convenience, the liability is postponed till the removal of goods i.e. duty is collected at the time of removal instead of manufacturing. Whereas if the goods are destroyed due to natural calamities like earth quake, fire, flood etc, then Rule 21 of Central Excise Rules, 2002 relating to remission of duty can be availed by the assessee. The said rule as follows:

“21. Remission of duty.-

Where it is shown to the satisfaction of the Commissioner that goods have been lost or destroyed by natural causes or by unavoidable accident or are claimed by the manufacturer as unfit for consumption or for marketing, at any time before removal, he may remit the duty payable on such goods, subject to such conditions as may be imposed by him by order in writing:

Provided that where such duty does not exceed ten thousand rupees, the provisions of this rule shall have effect as if for the expression “Commissioner”, the expression “Superintendent of Central Excise” has been substituted:


Provided further that where such duty exceeds one thousand rupees but does not exceed one lakh rupees, the provisions of this rule shall have effect as if for the expression “Commissioner” , the expression “ Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be,” has been substituted:


Provided also that where such duty exceeds two thousand five hundred rupees but does not exceed five lakh rupees, the provisions of this rule shall have effect as if for the expression “Commissioner”, the expression “ Joint Commissioner of Central Excise or Additional Commissioner of Central Excise, as the case may be, ” has been substituted.”

The above rules clarifies if the finished goods is written off in the books, then the manufacturer is liable to pay the excise duty on the same and if he remitted the duty on the finished goods in virtue of Rule 21, then he requires to reverse the input credit on the same.

However the Circular No. 907/27/2009-CX, Dated: 07/12/2009 clarified the situation as regard to reversal of credit taken on inputs which have gone into manufacture of work in progress (WIP), semi finished goods and finished goods which have also been written off fully in the books of accounts. The Circular clarified as under: -

Situation 1: -

It provides that if the value of finished goods is written off, the manufacturer will be liable to pay excise duty or he will be required to reverse the credit on the inputs used, if duty has been remitted on finished goods.

Eg: – We assume that XYZ ltd. is manufacturing a product named “A”. Now, According to the Situation if the product “A” is written off in the books of account then the assessee has two options, firstly either he can pay the duty else he can avail the benefit of remission under Rule 21 and will subsequently have to reverse the credit on the inputs used therein.

Situation 2: -

In case of writing off work in progress (WIP), it clarified that if the WIP has reached the stage, when it can be considered as manufactured goods, then in that case, the same treatment as applicable to finished goods, discussed above in situation 1 will apply.

Eg: – We assume that XYZ ltd. is manufacturing a product named “A” which passes through a number of processes to become a Final Product. Now, According to the Situation the product “A” has reached that stage of processing where it can be called as good as manufactured goods. Hence if it is written off on the books of account then it will be treated as Finished goods and the treatment applicable to written off finished goods will be applicable to the same.

Situation 3: -

However, if the activity carried out on the WIP goods cannot be considered as amounting to manufacture, then in that case, such goods shall be considered as input and the treatment for reversal of credit applicable to input will apply.

Eg: – Taking the same example as above, according to the Situation the product “A” is processed to a stage where it cannot be called as manufactured goods and if it is written off in the books of account then it will be treated as Inputs and the respective treatment will be applicable to the same.

Conclusion

Before wrapping up we would like to submit that Government issued Circular no. 645/36/2002-CX., dated 16-7-2002 but the judicial authorities pronounced their judgments against the said Circular and as a result of this all the Board came up with the amendment in Rule 3 of CENVAT Credit Rules, 2004 to make it a legal binding on all the assesses.

The same story is being repeated by the Board with the issuance of Circular no. 907/27/2009-CX, Dated: 07/12/2009 wherein it has clarified the treatment of CENVAT Credit in case of written off of WIP or Finished goods. But there is no clearance from factory in this case also. As such, legally duty or reversal can not be demanded. Consequently, as the Board Circulars are not binding on assesses, the round of litigation will once again start and hence, the History will repeated itself. Now, the issues will be again be decided against the said circular and the Board will later on come up with Notification in this matter. And moreover it can be retrospective also. The Question which arises now is why not “Notification” itself is issued in the initial step only; so that unnecessary time and money which will be wasted can be avoided?