Government of India
Ministry of Finance
Tax Research Unit, New Delhi
I am directed to refer to notification No. 14/98-CE (NT) and 21/98-CE (N.T.), both dated 2.6.98 whereby MODVAT credit of duty paid on inputs used in or in relation to the manufacture of final products was restricted to extent of 95% of such duty.
2. A number of representations have been received with regard to applicability of the above restriction to various provisions of the MODVAT rules. These representations have been considered and the following is clarified:-
a) Transaction under Rule 57 F(c) and (3)
In terms of Rules 57 F(2) and 57(3) of the Central Excise Rules, 1944 inputs can also be removed as such, on payment of duty equal to the credit availed in respect of such inputs when they were received in the factory. In such cases, if the inputs were received on or after 2nd day of June, 1998, the “credit taken” would be equal to 95% of the originally paid. The inputs could be cleared as such on payment of duty equal to the credit taken, i.e. 95% of the duty originally paid. The consignee of such inputs would in turn be eligible to take credit of 95% of the duty paid under Rule 57 F(3). To illustrate, assume that a factory “A” clears an input on payment of duty equal to Rs. 100, and sells to “B”. In this case “B” is allowed to take credit of Rs. 95. Assume that “B” sells this input as such to “C” . The credit allowed to “C” will be equal to 95% of Rs. 95, that is, Rs. 90.25.
b) Transactions under Rule 57 (F) (4), 57F (6) and 57 F (7)
In terms of Rule 57F(4) the inputs can be removed as such or after they have been partially processed to a place outside the factory under cover of a challan, for the purposes of test, refining, reconditioning etc. Rule 57F(6), however, requires that these goods can be so removed only after debiting an amount equal to ten percent, of the value of such goods, as declared on the challan. The amount so debited can be credited back when these goods are received back the factory.
The “amount debited” under Rule 57F(6) is not a payment of “specified duty” by is only debit of an amount. Similarity, the “credit” of such amount taken under Rule 57F(7) when the goods are received from the job-worker is only credit of this “amount” and not the credit of duty. Further, the challan on which goods are removed under Rule 57F(4) is not a document specified under Rule 57G (3) for the purpose of taking credit of duty and hence when the goods are received back under Rule 57F(6), the credit is not allowed under Rule 57A but under 57F (7) as the Credit of amount debited under 57F (6).
The aforementioned notification Nos. 14/98-CE(NT) and 21/98-CE (NT), both dated 2.6.98 restrict MODVAT credit to 95% of the duty paid on the inputs, only in case the credit is taken under Rule 57A or under Rule 57 B. It is clarified that in case of transactions under Rules 57F(4), 57F(6) and 57F(7) the restriction of 95% shall not apply.
c) Applicability of restriction of 95% on intra-unit transfer of a company
The afore-mentioned notifications (Nos. 14/98-CE (NT) and 21/98-CE (NT), both dated 2.6.98) restrict MODVAT credit to 95% of the duty paid on inputs used in the manufacture of final products. It is noteworthy that this restriction is not dependent on the fact, whether inputs are received by one unit of a company from the other sister unit of the same company or are received from some independent unit. The Central Excise Law also does not distinguish between an independent unit and different units of same company. The application of the Excise Law is related to each assessee i.e. to each licence, and not a business house as an independent entity. Hence, the restriction of 95% applicable to MODVAT credit would apply to each stage at which duty of excise is paid. It is therefore clarified that the restriction of MODVAT credit to 95% of the duty paid shall also apply to transactions between units of the same company.
d) Transactions under Rules 57E, 57G(9) and 57 H
A question has been raised regarding the extent of credit that would be available in respect of inputs under Rules 57E, 57G (a) and 57 H.
Rule 57 relates to situations where credit taken by a manufacturer of final products in respect of inputs received by him is subsequently required to be modified (decreased or increased) due to the manufacturer of the input getting a refund or having to pay additional duty in respect of the inputs cleared by him. In such circumstances if the inputs had been received in the factory on or before 1.6.98 then the manufacturer shall be entitled to credit to the extent of the duty suffered on these inputs, and even in respect of the subsequent adjustment in the credit amount under Rule 57E, the restriction of 95% shall not apply.
Rule 57G(9) deals with a situation where the manufacturer of the final products had received the inputs but had failed to make the declaration earlier. In such circumstances, by virtue of Rule 57G (9) the manufacturer can file the declaration subsequent to the receipt of the inputs in his factory and avail of the credit in respect of these inputs. If the inputs had been received in the factory of the manufacturer on or before 1.6.98, then even if he has filed the declaration later in terms of Rule 57G (9) he shall be entitled to credit to the extent of the duty paid on the inputs, and the restriction of 95% shall not apply. The restriction of 95% would apply only in case of inputs received in the factory of the manufacturer on or after 2nd June, 1998.
Rule 57H relates to transitional provisions to cover the availment of credit by a manufacturer of final products during the intervening period between his filing the declaration under Rule 57G(1) and getting the dated acknowledgment for the same. Here also, if the inputs had been received in the factory of the manufacturer of the final products on or before 1.6.98 then the credit shall be allowed to the extent of the duty paid on the inputs. The restriction or 95% shall apply only in the case of inputs received in the factory of the manufacturer of final goods on or after 2nd day of June, 1998.
In brief, therefore, the restriction of 95% in respect of MODVAT credit would apply only in case the inputs have been received in the factory of the manufacturer of final products on or after the 2nd day of June, 1998.
e) MODVAT restriction in respect of certain petroleum products
Notification No. 14/98-CE (NT) dated 2.6.98 which has amended notification 5/94-CE dated 1.3.94 restricts MODVAT credit on inputs to 95% of the duty paid on such inputs. A perusal of the notification 5/94-CEE (NT) dated 1.3.94, as amended, indicates that the restriction of 5% applies to all goods specified in the Table. However, by virtue of the last proviso in the notification no.5/94-CE (NT), in case of specified petroleum products the credit is restricted “to the extent of the amount of excise duty calculated at the rate of 10% ad valorem”. The specific provision in respect of petroleum products overrides the general provision in respect of all goods specified in the Table to the notification. It is therefore clarified that the restriction of credit to 95% of duty paid on inputs shall not apply in case of Petroleum products. In other words, in the case of specified petroleum products, the credit shall continue to be available to the extent of the amount of duty calculated at the rate of 10% ad valorem.