A REQUEST TO THE HON’BLE FINANCE MINISTER ON BEHALF OF THE TRADE AND INDUSTRIES ON THE ISSUE “REVERSAL OF CENVAT CREDIT ON USED / OLD CAPITAL GOODS REMOVED DURING THE PERIOD IN RESPECT OF THE PERIOD FROM 1.3.2003 TO 12.11.2007”.
THE DETAILED SUBMISSION :
1) The Government had introduced the Modvat scheme with a view to avoid the cascading effect on the cost of the final product manufactured and also to avoid ‘duty on duty’. Though the scheme was introduced for ‘inputs’ in 1986, the same was extended to ‘capital goods’ also in 1994 as the cost of the capital goods has a direct impact on the cost of production of the excisable goods.
2)The Cenvat Credit Rules also deal with ‘reversal of credit when the capital goods (whether new without use OR used capital goods) on which credit has been taken are removed. The relevant provisions of the Central Excise / Modvat / Cenvat Credit Rules relating to removal of capital goods from 1994 to till date are tabled below for easy reference.
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Year / Notification
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Rule
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Content of the rule
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1994
Notn 23/94 CE NT dated 20.5.1994
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57S(6)
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Proviso (2) says ” Provided further that where the capital goods are removed after being used in or in relation to manufacture of final products from the factory for home consumption on payment of duty of excise or for export under rebate on payment of duty of excise, such duty of excise shall be calculated by allowing deduction of 2.5 per cent of credit taken for each quarter of a year of use or fraction thereof, from the date of availing credit, except where such capital goods are sold as waste and scrap, the duty leviable shall be at the rate applicable on such waste and scrap”;
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2001
6/2001 CE NT dated 1.3.2001
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57AB (1)(c)
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When inputs or capital goods, on which credit has been taken, are removed as such from the factory, the manufacturer of the final products shall pay an amount equal to the duty of excise which is leviable on such goods at the rate applicable to such goods on the date of such removal and on the value determined for such goods under section 4 of the said Central Excise Act, and such removal shall be made under the cover of an invoice referred to in rule 52A.
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2001
31/2001 CE NT dated 23.6.01
(eff 1.7.2001)
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Rule 3(4) of Cenvat Credit Rules, 2001
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When inputs or capital goods, on which CENVAT credit has been taken, are (4) removed as such from the factory, the manufacturer of the final products shall pay an amount equal to the duty of excise which is leviable on such goods at the rate applicable to such goods on the date of such removal and on the value determined for such goods under section 4 or section 4A of the Act, as the case may be, and such removal shall be made under the cover of an invoice referred to in rule 7.
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2002
5/2002 CE NT dated 1.3.02
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Rule 3(4) of Cenvat Credit Rules, 2002
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-do-
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2003
13/2003 CE NT
Dated 1.3.03
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Rule 3(4) of Cenvat Credit Rules, 2002
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When inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, the manufacturer of the final products shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in rule 7
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2004
23/2004 CE NT dated 10.9.2004
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Rule 3(5) of Cenvat Credit Rules, 2004
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When inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, or premises of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in rule 9 :
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2007
39/2007 CE NT dated 13.11.2007
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-do-
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“Provided also that if the capital goods, on which CENVAT Credit has been taken, are removed after being used, the manufacturer or provider of output service shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by 2.5 per cent for each quarter of a year or part thereof from the date of taking the Cenvat Credit;”.
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3) It can be seen from the above table read with the relevant sub rule of Cenvat Credit Rules that
(a) During the period from 1994 to 28.2.2003 and subsequently from 13.11.2007 to till date, separate treatment has been given to capital goods when removed as such (without use) and when removed after use.
(b) During the period from 1.3.2003 to 12.11.2007 the procedure has been set out only for ‘ removal of capital goods as such’ and the existing procedure in respect of used capital goods was deleted.
(c ) Subsequently, effective from 13.11.2007 the procedure has been brought back for removal of used capital goods.
4) There is no issue on reversal of the entire credit when the capital goods are removed without putting into use right from beginning. However, During the period starting from 1.3.2003 to 12.11.2007, when used / old capital goods are removed, the following questions arise:
(a) whether the entire credit originally taken has to be reversed OR
(b) whether the quantum of credit involved on the depreciated value OR
(c) whether amount payable at the rate of duty on the transaction value / sale value of such used capital goods at the time of removal.
5) The Assesses have no dispute on the reversal of credit when the used capital goods are removed. The dispute is only on the quantification of the amount to be reversed when the old / used capital goods are removed during the intervening period from 1.3.2003 to 12.11.2007.
6) During the said period (i.e. 1.3.2003 to 12.11.2007), most of the assesses had paid the duty on the Transaction value of such old / used capital goods (i.e. the sale value) at the time of removal. The assesses were under the bonafide view that the amount paid by them would fulfill the obligation of “reversal of credit” based on the clarification given in Board Circular dated 1.7.2002, particularly when Rule 3(5) is silent on the aspect of quantification of proportionate credit for the removal of old / used capital goods during the said period”
7) On the other hand, for the old / used capital goods cleared during the period 1.3.2003 to 12.11.2007, the Field Officers have issued Show Cause Notices demanding reversal of full credit originally taken at the time of purchase of such goods .
8) Recently, the Larger Bench of the Hon’ble CESTAT, West Zonal Bench, Mumbai in the case of ‘Modernova Plastyles P Ltd Vs CCE Raigad (reported in 2008-232-ELT 29 ‘ has held that “reversal or credit availed on capital goods is required when capital goods are removed, whether used or not”
9) Based on the above decision, the Adjudicating as well as Appellate Authorities have issued Orders on all assesses confirming the reversal of full credit originally taken.
10) The assesses contested the issue as below:
a) Some of the assesses have contested that “No reversal is required when used capital goods are removed since the rule specifically says ‘goods removed as such’ and the word as such means ‘goods removed without use’ and the word as such is not applicable to used capital goods”
b) On the other hand some assesses have paid the duty on the transaction value (i.e. sale price) of the used / old capital goods considering the amount paid by them is sufficient .
11) The purpose of this submission is to request the Hon’ble Finance Minister to do justice as below to the manufacturers across the Country
a) During the period 1.3.2003 to 13.11.2007, the Government may allow the assesses to reverse the credit by calculating the amount taking into account the deduction of 2.5% of the credit for every quarter year from the date of taking credit till the date of clearance.
b) The assesses are to be allowed to pay the amount after adjusting the amount already paid by them on the basis of transaction value
12) The above request is made on the following grounds:-
a) It is well established legal position laid down by the Hon'ble Apex Court in “Ichalkaranchi Machine Centre Private Ltd Vs CCE (reported in 2004 174 ELT 417)” where it observed that “Modvat is basically a duty collecting procedure, which aims at allowing relief to manufacturer on the duty element borne by him in respect of inputs used by him”. The Court further observed that “The object of the Modvat (now Cenvat) scheme was to reduce cost of final product by taking credit for the duty paid on the inputs”
b) If Cenvat credit is not permitted, the cost of production of the final product would carry the proportionate tax element of the capital goods in the assessable value of the excisable goods produced out of such capital goods and the assessable value would then subjected to the excise duty.
c) The element of cenvat credit on capital goods originally availed had not been taken into account while fixing or finalizing the sale price of the excisable goods. This is because of the simple reason that the duty paid on such capital goods had been allowed as credit to adjust against the duty payable on the final products.
d) Now reversal of full credit on the removal of used / old capital goods would put the assesses into hardship.
e) Seeking reversal of full credit taken on old / used capital goods is against the spirit of Cenvat credit scheme and that is not the intention of the Government in as much as the Cenvat scheme is a beneficial scheme to the assessee.
f) The intention of the Government is not to burden the assessee by asking them for reversal of the entire credit taken, particularly when the capital goods on which credit is taken is removed after use in the production.
g) On the other hand, the Government has brought the method of allowing rebate of 2.5% duty amount for every quarter in the Cenvat Credit Rules in November 2007, which was prevailing when the Capital goods scheme was introduced in 1994. This clearly shows the intention of the Government that “in respect of used capital goods, the reversal is on pro-rata basis depending upon the usage of such capital goods in production right from the beginning”.
h) Further, removal of capital goods has been dealt in the erstwhile Central Excise Rules and also in the Cenvat Credit Rules 2001, 2002 and 2004. These are explained in the table given above
i) From the above, it can be seen that the requirement of reversal of credit either based on proportional credit depending upon the period of use (i.e. abatement of 2.5% for every quarter) OR on payment of duty on the transaction value had been in force till 28.2.2003 and again with effect from 13.11.2007, the proportionate credit depending upon the period of use (i.e. abatement of 2.5% for every quarter) has been inserted.
j) In respect of the period from 1.3.2003 to 12.11.2007, the computation of the amount to be reversed on used capital goods is not specifically mentioned.
k) During the period from 1.3.2003 to 12.11.2007, in the absence of any specific method of computation to reverse the credit on used capital goods, the appellant reversed the credit by paying duty on the Transaction value which was prevailing prior to 1.3.2003( based on the Board Circular dated 1.7.2002). The said circular clearly states that
“In respect of capital goods adequate depreciation may be given as per the rates fixed in letter F. No. 495/16/93- Cus.-VI, dated 26-5-93, issued on the Customs side”
l) The above Customs Circular prescribes the scale of depreciation for valuation of imported second hand machineries to avoid possible dispute.
(a) 4% for every quarter during 1st year
(b) 3% for every quarter during 2nd year
(c) 2.5% for evey quarter during 3rd year
(d) 2% and thereafter for every quarter during 4th year
Subject to an over all limit of 70%
m) In this connection, Hon’ble CESTAT has held in the following cases” the reversal of credit by way of payment of duty on the transaction value has been up-held during the period 1.3.2003 to 12.11.2007.
(i) CCE, Cochin Vs Teejan Foods P Ltd (2008-226-ELT 248
(ii) CCE Ludhiana Vs Nahar Fibres ( 2007-220-ELT 855)
In both the above cases, the depreciated value has been accepted by the Hon’ble Tribunal taking into account the amendment made in Notification No. 39/2007 CX NT dated 13.11.2007 (i.e. 2.5% deduction for each quarter of the usage of such capital goods).
n) Further, in respect of the period 1.3.2003 to 13.11.2007, in the absence of any specific provision in Cenvat Credit Rules to deal with reversal of credit when used / old capital goods are cleared, the Department Officers may accept reversal of credit after adjusting the depreciated value from the original credit taken. This is due the fact that ‘the method of reversal after adjusting the depreciated value from the original credit’ has been in force prior to 1.3.2003 and also after 13.11.2007. This is due to the following:
Rule 14 of CC Rules 2002 - Supplementary provision.
Any notification, circular, instruction, standing order, trade notice or other order issued under the CENVAT Credit Rules, 2001 by the Board, the Chief Commissioner or the Commissioner of Central Excise, and in force as on 28th February, 2002, shall, to the extent it is relevant and consistent with these rules, be deemed to be valid and issued under the corresponding provisions of these rules.
Section 38A of the CE Act, 1944:
Similarly, Section 38A of the CE Act specifically says that “where any rule, Notification or order made or issued under this Act or any Notification or order issued under such rule, is amended, repealed, superseded or rescinded, then, unless a different intention appears, such amendment, repeal, supersession or rescinding shall not affect the previous operation of any rule and shall not affect any right, privilege acquired, accrued or incurred under the earlier Central Excise Rules / Cenvat Credit Rules. The gist of Section 38A is below:
SECTION 38A. [Effect of amendments, etc., of rules, notifications or orders. — Where any rule, notification or order made or issued under this Act or any notification or order issued under such rule, is amended, repealed, superseded or rescinded, then, unless a different intention appears, such amendment, repeal, supersession or rescinding shall not -
(a) revive anything not in force or existing at the time at which the amendment, repeal, supersession or rescinding takes effect; or
(b) affect the previous operation of any rule, notification or order so amended, repealed, superseded or rescinded or anything duly done or suffered thereunder; or
( c ) affect any right, privilege, obligation or liability) acquired, accrued or incurred under any rule, notification or order so amended, repealed, superseded or rescinded; or
(d) affect any penalty, forfeiture or punishment incurred in respect of any offence committed under or in violation of any rule, notification or order so amended, repealed, superseded or rescinded; or
(e) affect any investigation, legal proceeding or remedy in (e) respect of any such right, privilege, obligation, liability, penalty forfeiture or punishment as aforesaid,
and any such investigation, legal proceeding or remedy may be instituted, continued or enforced and any such penalty, forfeiture or punishment may be imposed as if the rule, notification or order, as the case may be, had not been amended, repealed, superseded or rescinded.
o) The Assesses earned the credit on capital goods as per the provisions contained in Rule 57Q to 57U of the erstwhile Central Excise Rules, 1944. Further, during the period when the original credit was taken, the provision of reversal of credit after deduction 2.5% per quarter was in force when used capital goods are removed from the factory. In other words, both type of removals namely, used and without used (i.e. Capital goods as such without put into use and capital goods after put in to use) were available in the Rules.
p) Further, the capital goods were used in the factory of manufacture of excisable goods and the finished goods were cleared on payment of duty. The value of the capital goods (net of cenvat credit amount availed) had been proportionately amortised on the value of the finished goods to arrive at the sale price. Accordingly, excise duty had been paid on the transaction value of the finished goods . Moreover, the amount of credit availed on such capital goods had not been taken into consideration while computing the price, since Modvat scheme is a beneficial scheme extended to all manufacturers to avoid the cascading effect of the cost on the final products. Thus, it is unfair and unjust on the part of the Department to demand reversal of the entire 100% credit. Such demand is against the very purpose of Modvat scheme. That is not the intention of the Government.
q) The benefit of credit earned by us under the Modvat Scheme since 1994 can not be denied by way of demanding reversal of 100% credit taken when the used / old capital goods were removed. The assesses are entitled to retain the proportionate credit involved on the capital goods for the period such capital goods were retained and used in our factory in the manufacture of excisable goods. In other words, one needs to reverse the proportionate or depreciated credit amount for the remaining life period of such capital goods.
r) In this connection, Hon’ble High Court of Gujarat at Ahmedabad, in the case of ‘Vimal Enterprise Vs Union of India (reported in 2006-195-ELT 267) has stated in para 18 that
“…………Once the object for which a provision is enacted is satisfied merely venial or technical breach by itself should not permit the authorities to adopt a stand which frustrates the object for which the entire scheme of Modvat has been framed. The Endeavour must be to ensure that the scheme is made effective and not frustrated. In other words, the goods, which have been subjected, to duty when used as inputs for manufacture of final product, should not be made to bear duty once again as that would have a cascading effect not intended by legislature in so far as the ultimate consumer is concerned. Therefore, even approaching from the view point of ensuring that the object with which the provision has been enacted is satisfied, if the facts of the present case are tested, the answer would be that the petitioner was entitled to of the Modvat credit, the petitioner having done all that was possible within its powers and nothing further remained to be done so far as the petitioner was concerned”
s) In another decision of Hon’ble CESTAT (Mumbai) in the case of ‘CCE Nagpur Vs A.M.A. Extrusion (reported in 1999-112-ELT 506) . In the above case, the Hon’ble CESTAT held that
“the Commissioner (Appeals) has taken a broader view of the provisions of Rule 57H and we find no infirmity in such a view being taken having regard to the beneficial nature of the Modvat scheme to avoid the cascading effect of the input duties on the final products. We also note that the Government themselves have subsequently restored the provisions under Rule 57H which was deleted by the amendment on 5.5.1989”
t) In respect of clearance of used / capital goods, reversal of credit after deduction of 2.5% for every quarter was there in the Central Excise Rules 1944 during 1994. The same has been restored in November 2007 in the Cenvat Credit Rules, 2004. As such, the benefit of 2.5% for each quarter has to be extended during the material period between 1.3.2003 to 12.11.2007 as per the above decision since it is a beneficial scheme to the manufacturer. Further, the intention of the Legislature is proved by way of the latest amendment that ‘when used / old capital goods are cleared, 2.5% deduction per quarter to be allowed from the original credit taken.
u) Assuming two assesses namely, “A” and “B” had taken cenvat credit on capital goods to the extent of Rs. 1,00,000/- during October 1998. After put into use the capital goods in the production of excisable goods “A” sold the used goods on 1.11.2007 and “B” sold the used goods on 1.12.2007.
v) In the above example, the Department wants “A” to reverse the full credit of Rs. 1,00,000/- as per the rule prevailing on the date of clearance (i.e. 1.11.2007) and as per the recent decision of Larger Bench of Hon’ble CESTAT.
w) On the other hand, “B” is allowed to reverse the credit after adjusting 2.5% for every quarter (as depreciation for using such capital goods in production) as per the amended cenvat rule with effect from 13.11.2007. “B” has to reverse only a sum of Rs. 10,000/- only after adjusting Rs. 90,000/- as depreciated amount for 9 years usage.)
x) Here, “B” is put on more advantage than “A”. This is not correct and injustice is done to “A”.
In view of the above, I, on behalf of the industry, request the Hon’ble Finance Minister to consider the above submission and to amend the provisions of Cenvat Credit Rules with a view to avoid any hardship to the manufacturers in respect of used / capital goods cleared during the period 1.3.2003 to 12.11.2007 and thus render justice.
Thanks and Regards
S. Gokarnesan
Advocate, Chennai
Manideepam (Ground Floor)
10, Bagiathammal nagar
Padi, Chennai – 600 050
Phone 044 2625 1169
Mobile 098400 87349
Mail: s.gokarnesan@gmail.com
01.07.2009
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