When the goods are retuned in the factory in different situations, the assessee is faced with the problem as how to take credit on the returned goods. The problem has been compounded by various trade notices saying different things. Some of the trade notices have prescribed new conditions amounting to the legislation of rules. This paper is an attempt to simplify the issue as per the position of law.
Rule 16 reads as,
RULE 16. Credit of duty on goods brought to the factory. —?(1) Where any goods on which duty had been paid at the time of removal thereof are brought to any factory for being re-made, refined, re-conditioned or for any other reason, the assessee shall state the particulars of such receipt in his records and shall be entitled to take CENVAT credit of the duty paid as if such goods are received as inputs under the CENVAT Credit Rules, 2002 and utilise this credit according to the said rules.
(2) If the process to which the goods are subjected before being removed does not amount to manufacture, the manufacturer shall pay an amount equal to the CENVAT credit taken under sub-rule (1) and in any other case the manufacturer shall pay duty on goods received under sub-rule (1) at the rate applicable on the date of removal and on the value determined under sub-section (2) of section 3 or section 4 or section 4A of the Act, as the case may be.
[Explanation. – The amount paid under this sub-rule shall be allowed as CENVAT credit as if it was a duty paid by the manufacturer who removes the goods.]
(3) If there is any difficulty in following the provisions of sub-rule (1) and sub-rule (2), the assessee may receive the goods for being re-made, refined, re-conditioned or for any other reason and may remove the goods subsequently subject to such conditions as may be specified by the Commissioner.
A plain reading of Rule 16(1) and 16(2) means that whenever goods cleared from the factory is received again in the factory of the manufacturer, it is an deemed input for the manufacturer. The manufacturer is entitled to take credit on such returned goods. When such returned goods are again cleared from the factory, duty is required to paid if the process undertaken amounts to manufacture and credit reversal when such goods (deemed inputs) are cleared as such.
Such goods are required to be entered in the register maintained by the manufacturer- RG23A part-I and part-II register.
When such goods are returned with duty paying documents, i.e. invoices then there is no problem. The problem arises when such goods are returned without a duty paying documents. In this connection Mysore Commissionerate Trade Notice No. 21/2004 dated 11.05.2004 [2004 (168) ELT T14], explains the position that Cenvat Credit can be taken on the basis of office copy of the invoice after matching it with the serial number etc. When part consignment is received, credit can be taken on pro-rata basis.
Further it is not required that the goods are returned in the same factory where is it was manufactured. Board explained that position in Circular No. 607/44/2001-CX, dated 13-12-2001 vide F. No. 201/26/2001-CX.6, wherein it said,
“I am directed to say that doubts have arisen whether, as per Rule 16 of Central Excise (No. 2) Rules 2001, goods manufactured only by same manufacturer can be brought into the factory for refining, repair, re-making etc. The Board has also received representations from trade, especially the transformer manufacturers in this regard stating that they are no longer allowed to bring in duty paid transformers for repairs and reconditioning other than their own manufactured transformers which is creating difficulties.
2. The Board has examined the matter. The said Rule 16 provides for return of duty paid goods to the factory for being re-made, refined, reconditioned or for any other reason. It was in the context of the word ‘return’ that the Central Excise Manual issued on 1-9-2001 states that goods should return to the same factory in which they were manufactured. However, Board observes that under erstwhile Rule 173H of Central Excise Rules 1944, the facility of receipt of duty paid goods in a factory for purposes specified there in was available regardless of who manufactured the said goods.
3. Accordingly the Board has decided that the word ‘return’ in Rule 16 referred above need not be interpreted strictly. Receipt of duty paid goods in the factory of manufacturer for the purpose specified in said rule may be allowed even in respect of goods not manufactured by them subject to adherence of other conditions prescribed therein.”
There are various other trade notices issued by various commissionerates saying different things. Trade Notice Number 151/2003 dated 20.08.2003 [2003 (157) ELT T6] issued by Madurai Commissionerate stipuletaes a time limit of one year. It further stipulates that entire consignment should be returned. It also prescribed certain registers, intimations, returns etc. The commissioner has forgot that he has no right to legislate. Further such conditions result in mere nuisance value and fecilitate corruption. Similar is the situation in Trade Notice No. 72/2001 dated 01.08.2001 issued by Hyderabad-I, Trade Notice Number 21/2004 dated 08.10.2004 issued by Jamshedpur Commissionerate [2004 (173) ELT (T35)] and numerous other such trade notices. Physically it is not possible to follow all these notices. All the notices says different things and many a times contradictory to each other. Legally the assessee is not bound by these trade notices issued by any commissionerate.
The condition refers to Sub-Rule 3 of Rule 16 is that when there is any difficulty in following subrule 1 or 2. If there is no difficulty in following such sub rules, there is no question of any conditions.
The fundamental problem of these trade notices are that they have failed to forget the fact that erstwhile Rule 173H and 173L has been repealed and they do not exist anymore. At that point of time to bring into factory any goods even for repair or storage or trading, the assessee were required to seek permission of the department. Now no such permission is required and hence those rules have no meaning. At those times when no goods were brought in the factory, Rule 173H & 173L were trade fecilitation measures to allow the asessee to brought in goods for repair reconditioning etc. Now no such restriction is there so no such measure is required.
What Rule 16 does is to say the goods manufactured by an assessee, when returned to the factory is a deemed input in the factory and it is treated as in the same way as inputs are treated. When process applied on such inputs amounts to manufacture, pay duty and when such inputs are removes as such or after partial processing, credit taken must be reversed.
Here one legal position emerges- can a manufacturer take credit on the basis of his own invoice. The answer is YES. The tribunal has upheld this poison in various cases-
In Gujrat Containers Ltd. v. CCE [2000 (125) ELT 495], the Tribunal held that such credit is allowed. It may be mentioned that at that time of there was no Rule 16 permitting such credit and such credit was permitted even then. Same view in in Godawari Sugar Mills v. CCE [2006 (196) ELT 74]. This position has been reaffirmed in cases like BAPL Industries v. CCE [2006 (198) ELT 587], In Madhva Lakshmi Mills v. CCE [(2006) 3 STT 147] etc. In BAPL Industries the tribunal decided many things, like
(a) returned goods are deemed inputs.
(b) Credit can be taken even in triplicate copy.
(c) Trade Notice cannot affect the cenvatibility of the deemed inputs. It specifically decided that even when a trade notice is there to the contrary, cenvat cannot be denied.
Some of the trade notices stipulates condition like return within one year, clearance within 6 months etc. such conditions are illegal and the assessee are not bound by such conditions.
In view of these, assessee is required to develop a system to deal with the problem of returned goods.
Situation I: When the goods are returned by the buyer for repair/reconditioning etc. and after that the buyer shall take back the goods. The process applied on such goods does not amount to manufacturer.
In this situation, there is no need to take credit on the returned goods. The goods can be repaired/reconditioned and sent back on a challan. Credit on the spares etc. used in such repair should be reversed.
If such repair/reconditioning amounts to manufacture, then credit should be taken based on duty paying documents available or office copy of the duty paying documents and full duty should be paid at the time of clearance.
It may be noted that the assessee does not require any permission from the department to receive goods for repair etc.
Situation II: When the consignment is rejected by the buyer for any reason and he will not take back the consignment.
In such a situation credit should be taken and we should insist on return of duty paying documents with the consignment. This will safeguard us against any misuse of cenvat by the buyer. The returned goods should be used in the manufacturing process and duty should be paid as usual. They can be mixed with other goods and it is permissible as held in Supreme Industries Ltd. CCE [2005 (189) ELT 453]. In fact they can be treated in the same manner as any other input is treated. Normal production loss on these inputs is allowed as it is allowed in case of other inputs.
When such goods are rejected, and they are not used in the process of manufacture, credit should be reversed in he same manner as credit is reversed on rejected inputs.
In none of these situations any intimation to the department is required, despite various trade notices. The records maintained in the factory are sufficient for the purpose and no further records is required.
I hope the CBEC will take a comprehensive view of the issue and ask the Commissioners to withdraw trade notices, which are illegal and based on mis-application of law.
(Views expressed are personal views of the author.)
Written by:- Advocate Rajesh Kumar. The author can be contacted on The author can be contacted on [email protected] , Web: www.rajeshkumar.co.in