Vide Notification No. 6/2015-CE(NT) dated March 1, 2015, Explanation-I to Rule 6(1) of the Credit Rules have been inserted to state that w.e.f March 1, 2015, for the purpose of this Rule, exempted goods and final products shall include non-excisable goods cleared for a consideration from the factory:
“Explanation 1. – For the purposes of this rule, exempted goods or final products as defined in clauses (d) and (h) of rule 2 shall include non-excisable goods cleared for a consideration from the factory.
Further, by virtue of the Explanation-2 inserted in Rule 6(1) of the Credit Rules, the value of non-excisable goods shall be the invoice value and where such invoice value is not available, the value of non-excisable goods shall be determined by using reasonable means consistent with the principles of valuation contained in the Excise Act and the Rules made thereunder:
“Explanation 2. – Value of non-excisable goods for the purposes of this rule, shall be the invoice value and where such invoice value is not available, such value shall be determined by using reasonable means consistent with the principles of valuation contained in the Excise Act and the rules made thereunder.”
It is clear from the above Explanations that exempted goods and final products now include non-excisable goods also for the purpose of Rule 6 of the Credit Rules, which provides the mechanism for availment of Cenvat credit by a manufacturer of dutiable and exempted goods and providers of taxable and exempted services. In such cases, the manufacturer/ service provider has following four options, effective from April 1, 2011:
Option I: Maintain separate inventory and accounts of Inputs and Input services – Rule 6(2)
Option II: Pay prescribed ‘amount’ on value of exempted goods or exempted services if separate inventory and records not maintained – Rule 6(3)(i)
Option III: Proportionate reversal of Cenvat credit – Rule 6(3)(ii)
Option IV: Maintain Separate inventory and accounts of Inputs but common records of Input services – Rule 6(3)(iii)
The first point to be noted here is that the Explanation is applicable only for the purpose of Rule 6 and there is no amendment in the definition of ‘exempted goods’ or in the definition of ‘final product’ under the Credit Rules. Therefore, Rule 6 is now applicable for the manufacturer of dutiable goods and non-excisable goods also. Moreover, it is apposite to highlight that the achievement of the objective of insertion of the aforesaid Explanation, which was applicable for the provision relating to reversal for Cenvat credit in Rule 6 of the Credit Rules to non-excisable goods apart from existing applicability to exempted goods and services is at stake in the plight on certain issues, for which clarification is much needed:
- Whether reversal of Cenvat credit also requited for by-products and wastes: By-products and wastes arising in the manufacture due to the technological necessity are not treated as finished goods for the purpose of erstwhile Rule 57CC of erstwhile Central Excise Rules, 1944/ Rule 6 of the Credit Rules as held by the Hon’ble Supreme Court in case of Union of India Vs. Hindustan Zinc Ltd. [2014 (303) E.L.T. 321 (S.C.)]. Therefore, prior to March 1, 2015, Rule 6 of the Credit Rules was not applicable in case of by-products and wastes. But, now in view of Explanation-I inserted in Rule 6(1) of the Credit Rules, question may arise in this regard as to whether such by-products and waste arising out of the technological necessity shall be treated as non-excisable goods for the purpose of Rule 6 of Credit Rules.
- Fate of goods mentioned in CETA but without any rate of duty: It is imperative to state here that the term ‘non-excisable goods’ is not defined under the Excise Act. However, the definition of ‘excisable goods’ has been provided under Section 2(d) of the Excise Act to mean goods specified in first and second schedule to the Central Excise Tariff Act, 1985 (“CETA”) as being subject to a duty of Excise and includes salt.
Therefore goods which do not have any rate specified in the CETA are treated as non-excisable goods. E.g., electricity which is mentioned in the CETA but without any rate of duty, the same is considered to be non-excisable. Now, the question may arise on the fate of treatment of such goods.
- Whether reversal would be required in case of removal of used goods as scrap: It is a common practice of removing worn out goods, used furniture etc., as scrap from the factory along with dutiable goods. Now, again the issue may crop up as to whether such removal of scrap will also trigger reversal provisions under Rule 6 of the Credit Rules.
- Whether the Explanations also applicable for past period: Though the Insertion of Explanations should be applicable w.e.f March 1, 2015 but still calls for clarification regarding applicability of Rule 6 of the Credit Rules to non-excisable goods manufactured for the past periods also.
- Meaning of the term ‘Consideration’: Firstly, Explanation-I inserted in Rule 6(1) of the Credit Rules specifically includes “non-excisable goods cleared for a consideration”, implying that, if the non-excisable goods are cleared without any consideration, or not cleared from the factory, the same will result in redundancy of application of the Explanation so inserted.
Further, the word ‘Consideration’ has not been defined under the Credit Rules or in the Excise Act. In such a scenario, the same has been left open to multiple views and interpretations. Further, it is not made clear that whether the consideration will cover in its ambit only monetary consideration or both monetary and non-monetary consideration.
- Valuation related issues: Value of non-excisable goods shall be the invoice value in terms of Explanation-2 inserted to Rule 6(1) of the Credit Rules. But, there are chances that the Department may litigate the same on the grounds of invoice value being influenced by related party, lower than market value charged etc.
- Non-excisable goods equated with exempted goods, but only for the purpose of Rule 6 of the Credit Rules: The present Explanations inserted in Rule 6 of the Credit Rules very clearly states to be “for the purpose of this Rule”. In such a case, one may confront as to whether Rule 7 thereof is also to follow same provisions or an Input Service Distributor may ignore such provisions while distribution of Cenvat credit.
- Whether Total Turnover under Rule 5 of the Credit Rules would also include non-excisable goods: Again, with insertion of Explanations specifically for the purpose of Rule 6 of the Credit Rules, poses a question of its applicability while determining Total turnover under Rule 5 of the Credit Rules.
Conclusion: The clear clarification of the terms used and corresponding valuation in the stated Explanations to Rule 6(1) of the Credit Rules is very much required from the Board so as not to create another area of future litigation.
(Bimal Jain, FCA, FCS, LLB, B.Com (Hons), Mobile: +91 9810604563, Email: firstname.lastname@example.org)