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    Reversal of Cenvat Credit when Goods are Removed as Such

    INTRODUCTION:

    The Manufacturer or Service Provider buys inputs and capital goods in order to use it for provision of taxable service or for manufacturing the final products. The assessee avails the credit of excise duty on such inputs/ capital goods which is utilised while making payment of output tax as per Rule 4 of CENVAT Credit Rules, 2004. 

    In manufacturing Industry, it is a common practice to remove goods (inputs/capital goods) from factory place without even using it in the manufacturing activity. There could be various reasons for clearing goods as it is from factory place. Few reasons are as follows: 

    1. Assessee buys inputs/ capital goods in order to sell them as it is, at higher amount and make profits, or
    2. The quality of goods might not be up to the mark for using it in manufacturing and so rejected it and return back or sell to another person or the goods might be sold as it is if it is not needed because of change in production plan etc. which occasionally happens; 
    • Goods sent outside to job-worker 

    REMOVAL OF INPUT/ CAPITAL GOODS “AS SUCH”: 

    Sub-Rule 5 of Rule 3 of CCR ,2004 is defined as follows; 

    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. 

    Provided that such payment shall not be required to be made where any inputs or capital goods are removed outside the premises of the provider of output service for providing the output service Provided further that such payment shall not be required to be made where any inputs are removed outside the factory for providing free warranty for final products 

    The manufacturer or Service provider might remove the goods as such i.e. the inputs/capital goods are removed without making any change or without using it at all, in providing service or in manufacturing activity then in such cases, it is as good as trading of such goods therefore no excise duty is leviable. In such cases, if the assessee has availed credit of excise duty at the time of purchase then s/he should reverse the credit to the extent of the value of excise duty paid at the time of purchase. The credit shall be reversed by reducing the credit balance by debiting the amount. Such reversal should be specified in the Excise invoice. 

    Excise Invoice: 

    It is a document which the manufacturer of excisable goods issues to customer while removing the goods from place of removal which states the list of excisable goods given to the customer, excise duty applicable on it and how much credit is reversed by manufacturer, if any. 

    Let us analyse the circumstances under which goods are removed ‘as such’: 

    1. Goods removed to job-worker premises by the manufacturer: 

    It is a common practice that principal manufacturer provides inputs/capital goods required for making the excisable product. In this case, principal manufacturer supplies goods to job-workers. 

    Inputs: The manufacturer can avail credit of the duty paid on the inputs supplied (as such) to job-worker under sub-rule 5 (a)(i) of Rule 4 of CCR,2004 provided the inputs are received back by manufacturer within 180 days of this being sent to job-worker. The period of 180 days shall be counted from the date goods being sent from factory or premises of output service provider.

    Initially, there was huge litigation going on in cases, where credit is availed without inputs being brought to the factory and directly being sent to premises of job worker. The credit on inputs shall be available only when such inputs reach the factory of the manufacturer. When the inputs were being directly sent to the premises of job worker without getting them to the factory of the manufacturer, the credit used to be denied. 

    To overcome this anomaly, recent changes are made to provisions such that credit can be availed even if the inputs are being sent directly to premises of job worker. However, the time limit of 180 days shall be still applicable and this period will be counted from the date of receipt of inputs by job-worker. Proper documents have to be prepared. 

    Capital goods: When the manufacturer purchases capital goods for sending it to Job-worker premise as such, the manufacturer can avail credit of the duty paid on capital goods provide proper challans are kept and the capital goods are received back from job-worker within 2yrs from the day of removing from factory. 

    Even capital goods can also be directly sent to the premises of job worker without receiving them in the factory of manufacturer. The credit shall be available even in such cases. However, the time limit of 2 years shall be still applicable and this period will be counted from the date of receipt of capital goods by job-worker. 

    1. Trading of goods: 

    The assesse (being service provider or manufacturer) might engage into trading of inputs which he also uses in manufacturing activity. In such case inputs are imported and then some are used in manufacturing and some are sold in domestic market at higher price in order to gain profit. The manufacturer charges higher amount from customer and collects excise duty. Usually, the assesse pays the excise duty to government by utilising the excess credit balance lying in the CENVAT credit account which is raised from the goods used in final product manufactured for export purpose. 

    Point to be noted is the sub-rule 5 doesn’t allow the assesse to collect excise duty from the customer since there is no manufacturing undertaken and should reverse the credit to the extent of credit amount availed and shouldn’t charge anything in the name of excise duty. This can be understood well with the Case Law “Commissioner of Central Excise, Ahmedabad-II v. Inductotherm (I) (P.) Ltd.”passed in favour of revenue on 28th June,2012. 

    “Commissioner of Central Excise, Ahmedabad-II v. Inductotherm (I) (P.) Ltd.” 

    Facts of the case: 

    Assessee was a manufacturer of induction furnace and other engineering goods. It was found that assessee was clearing certain parts of induction furnaces without any manufacturing activity on 'as such' basis at a higher value and was collecting excise duty thereon. The alleged excise duty was being paid by utilization of CENVAT Credit availed on the inputs used for export product. Thus, assessee was encashing unutilized CENVAT credit by raising value of the goods to be cleared as such and collecting the same from the buyers of such goods. The revenue objected the same and Commissioner confirmed the demand of such amountunder Section 11 D of Central Excise Act,1944 along with applicable interest and penalty. 

    Section 11D (1), it states that if there is any excess amount recovered from the customer in the name of duty of excise should be deposited to the credit of Central Government.

    The assessee file an appeal with Tribunal which was in assessee’s favour. The revenue was not satisfied with the decision and so filed the appeal before Gujarat High court. 

    Grounds of Gujarat High Court: 

    The Court gave judgement in favor of revenue on the grounds that;

    The assesse had cleared goods as such where no manufacturing activity is undertaken and so he shouldn’t charge anything in the name of excise duty as the Sub-rule 5 does not permit the collection of higher amount in the guise of duty of excise and deposit it to department. 

    Though the payment made through credit is as good as payment of duty but such utilization is not allowed for payment of duty which is not authorized as per the said rule.

    Where any duty has been collected in excess of excise duty required shall be paid to the government in cash only. 

    Inference: 

    This explains that this sub-rule restricts the manufacturer/Service provider to mint money by charging higher amount through representing it as excise duty and thereby encashing the unutilized credit early. 

    1. Removal of Capital Goods after being put to use: Sometimes the manufacturer/ service provider might remove the capital goods after being put to use. In such cases, the manufacturer/service provider shall pay excise duty/reverse the credit based provisions contained in Rule 3(5A). However, if capital goods are removed as scrap, then excise duty has to be paid on transaction value. 
    2. If capital goods/inputs before being put to use has been written off fully/partially: When the assessee writes off the value of goods in the books of accounts, on which credit is already taken, because the goods have become obsolete and the net realisable value is minimal. In such case, their value is assigned to zero in the balance sheet by writing off their value. Hence, the assessee shall pay the excise duty/ reverse the credit equivalent to the credit taken on such goods wholly or proportionately as the case may be, from the time the assessee starts writing off the value. 
    3. Remission of duty under Rule 21 of Central Excise Rules,2002 (for brevity “CER,2002”):If the manufacturer is getting remittance of excise duty payable on the finished goods which is claimed before the Principal Commissioner/Commissioner that the goods are unfit for consumption or sale and satisfies the provision given under Rule 21 of CER,2002. In such case, CENVAT credit taken on inputs and input services used in the manufacture of such goods shall be reversed. 
    4. Capital goods when removed as such in first year: Generally, credit on capital goods can be availed only up to 50% of the total duty paid in the first year. This implies that if the capital goods are removed as such then the assessee (both manufacturer as well as service provider) shall reverse only 50% of the total credit which is unfair benefit providing to the assessee. Hence proviso is inserted in sub-rule 2(b) of Rule 4 of CCR,2004 stating that;  “Provided that the CENVAT credit in respect of capital goods shall be allowed for the whole amount of the duty paid on such capital goods in the same financial year if such capital goods are cleared as such in the same financial year”

    So, if this proviso is read with the sub-rule 5 then the assessee in this case can avail 100% credit in the first year and shall be reversed at the time of removing the goods as such. 

    1. Capital Goods/Inputs removed by the Service provider for provision of output service: If the service provider removes any capital goods to any other place for the purpose of rendering service, in such case, the credit taken on such capital goods or inputs should not be reversed. The service provider is still eligible for utilising such credit. 

    TIME OF REVERSAL OF CREDIT OR PAYMENT F DUTY: 

    The reversal of credit of excise duty can be made by debiting the CENVAT credit. However, if the payment is made in cash then such payment shall be made by 5th of the following month except in the month of March, this payment shall be made by 31st March.

     

    Months

    Due date

     

     

    April to February

    5th of the following month

     

     

    March

    31st day of the month of March

     

     

     

    CONCLUSION: 

    This rule enables the buyer (manufacturer/service provider) to avail the credit when goods are purchased from the assessee so that there would not unjust enrichment on the part of utilisation of credit to the seller (assessee).

    "Great spirits have always faced violent opposition from mediocre minds”

     

    - Albert Einstein

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